Brent Johnson

Brent Johnson can be counted among the greatest minds in macro and was the first person to coin the Dollar Milkshake Theory term, a very well known one.

In this interview, we talk about gold, purchasing power, stocks, inflation, portfolio diversification, and his interesting view of the U.S. dollar.

If you're looking to learn from the financial environment and how to manage your wealth and investment portfolio, he also gives a great piece of advice.

George: Brent Johnson from Santiago Capital is here.

We talk about interest rates, gold, the dollar, the stock market inflation, everything you need to know.

It was truly an honor for me to interview Brent, and I know for a fact, you're going to love this interview. So let's dive right in.

All right, I'm very excited to welcome someone to the show that I have a tremendous amount of respect for.

He's a guy that I've been following for a long, long time. His name is Brent Johnson with Santiago Capital.

Brent, thanks for being here.

Brent Johnson: Hey, thanks. Great to be here.

I appreciate you inviting me on and Happy New Year.

George: Happy New Year to you, too.

Brent Johnson's background

So for those of the people that are watching this, that might not know who you are, can you just give us kind of the Reader's Digest version of how you got into this business and what you specialize in now?

Brent Johnson: Sure, yeah.

So I started in this business back in the late '90s with a firm called Donaldson, Lufkin, & Jenrette, which was a boutique investment bank in New York City.

I transferred with them out to San Francisco kind of at the height of dot com boom about a month after I got out to San Francisco Credit Suisse bought DLJ.

And so I was with Credit Suisse and their high net worth group for 10 years.

Subsequent to the financial crisis, I, for a number of reasons, both internal and external, decided I could no longer work for a large Wall Street traditional firm.

And even though it's a great place to learn about how the world works and how the world of finance works, it wasn't someplace where I thought I could be a good fiduciary for my clients.

And so I left Credit Suisse and I joined a boutique investment bank or a boutique investment manager in San Francisco, and also set up Santiago Capital to do some alternative investments and precious metals investing and some advising work.

And then in the last year, I've set up Santiago Capital to encompass my overall Investment Management, high net worth, wealth management business. And also, we do private fund management as well.

So I do a little bit of financial advisory for lack of a better word.

George: Okay, fantastic.

The Dollar Milkshake Theory

Now, you're huge on Twitter, you're always on Real Vision and Macro Voices, all the places where I like to go and really learn about what's going on in the world.

But one of the things that you're really known for is this Dollar Milkshake theory.

I think you coined that term.

And so many of us, me included, and a lot of the viewers are really, let's say, apprehensive about the dollar, and the direction that the United States is going, and that the stock markets at all-time highs, they see the everything bubble.

But you've got a really interesting twist on that.

And it's not that you're super bullish on the fundamentals of the dollar or the stock market, but you do see it going up.

So since that's such a contrasting view, but it's one that's extremely well-thought-out and researched.

I'd love for you to explain that to the viewers in maybe like a third-grade level, if you possibly could.

And it's not because the viewers are at a third-grade level, it's mostly because I'm at a third-grade level.

Brent Johnson: Well, I'm only in fourth grade. So this will be a good conversation.

George: Fantastic.

Brent Johnson: Okay, so let me, it might take me a minute or two to kind of set it up. But I think I can do a good job of kind of setting the stage.

I think you really kind of have to go back 10 or 12 years to really kind of understand where all of this started.

I had met with a client who had just sold their company in Silicon Valley, and we brought them into Credit Suisse headquarters to meet with a number of different managing directors, chief investment officers.

And in this meeting, this was a very young couple who had sold their company and they proceeded to ask a number of kind of alternative questions to the Chief Investment Officer and the head of wealth management.

These managing directors couldn't answer these very simple questions and I was a little bit shocked that they could not answer these very simple questions.

They ask questions like, “What do you think the real rate of inflation is?

What do you think about the implications of the national debt?

What do you think about these derivatives that sit on the bank balance sheets?”

George: They couldn't answer those questions?

Brent Johnson: Well, they could but not in a deep way.

They would just they would kind of smoothed over it.

One of the questions was, well, they asked them about these derivatives on the bank balance sheets, and they said, “Well, yes, we have them, but we hedge them out to Goldman Sachs, and Merrill Lynch, and Morgan Stanley.

And I'll never forget. The wife said, “Well, that's interesting because we met with Goldman Sachs and Merrill Lynch and Morgan Stanley and they said they hedged it out with you.”

George: Oh, boy. (Laughs)

Brent Johnson: So long story short, this meeting did not go the way I anticipated it going.

After I left, and I walked to this couple to the elevator to leave the office, and I walked back in to do kind of a debrief of this meeting.

The Chief Investment Officer and the Head of Wealth Management and all these, the head of equities, they were laughing at this young couple who thought that they knew it all.

When in fact, that these guys couldn't answer their question.

It just didn't sit well with me. So I went back to my desk.

I've got to set the stage because it's kind of like it's just a crazy story to me.

Like I had this beautiful office overlooking San Francisco Bay.

It was a beautiful sunny day, and I'm sitting there at my computer, and I got a sheet of white paper and a pencil.

I went on to Google, and I looked up the national debt, and I wrote it out longhand because I wanted to see all the numbers in black and white.

And then I wrote down the national debt. I wrote down the rate of interest we were paying on the debt.

I looked up the revenues that we got from a tax basis.

Basically, I did a big analysis. Very simple, but quick, big analysis on the US and I realized, this is really bad.

Like this is not tenable.

That kind of started my journey and I literally had the light bulb moment like literally, you see it in the cartoons were all of a sudden, wow, right?

And that was it really was a light bulb moment for me, and that kind of started my journey of kind of self-discovery and self-education because I couldn't talk to anybody else about it at Credit Suisse.

Because I'd already talked to the top guys, and they didn't know what they were talking about.

George: That's unbelievable.

Brent Johnson: It just didn't sit well with me.

So that kind of started the progression that I eventually needed to leave Credit Suisse and I needed to kind of be independent and kind of not just take the expert's word for it.

So that started me down the track of the Austrian School of Investing and really understanding currencies and debt and fixed income at a national level.

What I came to realize was that the entire system is not sustainable.

And when I say the entire system, I don't just mean the US or Australia or Canada, the entire global monetary system just isn't tenable.

This was in 2007 that I had this light bulb.

And so when we got into 2008 and '09, when things really started to unravel, I had at least

… I'm not going to say I predicted it, because I didn't.

But I just felt like something was wrong.

I was able to understand it a little bit better than a lot of my colleagues who were just trying to figure out what the heck was going on.

So that kind of led me to believe that you can't just have the 60-40 fixed income equity portfolio and expect everything to be fine.

Because there's going to be these periods of times where you're going to have these booms and busts, and the experts who think that they know more than anybody else really don't know more than anybody else.

That's when it kind of pushed me into the gold and silver market.

I discovered that that's a good way to protect against the Fiat system.

Fiat money over time loses value.

I think everybody understands that. And so I think the most important part of anybody's portfolio and kind of the anchor of everybody's portfolio should be physical gold because I view it as insurance.

I don't necessarily view it as a way to get rich, I view it as portfolio insurance against the madness of crowds and the ridiculousness of politicians, for lack of a better word, right.

And the fact that the system itself is not long term sustainable, this system will reset.

Now, that doesn't mean it's going to reset today, it might take another 10 or 20 years before it resets, but it will reset.

When that day comes, I think you need to have insurance against that.

So that is initially what got me thinking about currencies, fiat currencies, and the system itself.

I, from 2009 to 2013, I was very bearish, and I was proud I was too bearish, right.

I understood what was happening.

I understood that they were bailing out all the bad actors. I understood there was a bunch of moral hazards.

I couldn't quite figure out why there wasn't any downside follow through on the financial markets.

George: Just to be clear, when you're talking about bearish you're bearish on stocks and the stock market?

Brent Johnson: I was bearish on stocks, right.

So we had exposure for our clients to equities, but we were very conservative.

We were probably underweight, there were times where we raise some cash or maybe we didn't need to.

So it wasn't until about 2000, probably '13, '14, where I finally just kind of stepped back and said.

“Listen, I know that long-term gold is going to pay off, but it's not paying off right now.

I know that this is going to end badly someday for stocks, but I it's not happening right now.”

And I had to really try to figure out why it wasn't happening right then.

I kind of just had to admit to myself that I was wrong.

That's kind of a hard thing to do, right?

Because you'd like to think that you're very smart and you're very well-thought-out and that you kind of know what you're doing.

So to admit that you're wrong, it's not an easy thing to do.

But once I did that and started really thinking about what is driving the economy, it made it much easier.

So now we're going to kind of get into this Dollar Milkshake theory.

So kind of fast forward two or three years, in 2016, I really did a deep dive.

So this started in about 2014. And over the next couple of years, I really did, trying to figure out what I was missing from 2010 to 2014.

I kind of came to the conclusion that while I was writing that the overall system is fundamentally unstable, one of the country's, one of those Fiat currencies, they're all unstable.

They're all made up of the same process.

They're all loaned into existence.

They all have central banks behind them. But relative to each other, one of them is going to do better than all of the others.

Now, they might all go down versus gold, they might all go down versus real assets, but one of them versus all of the … If you just look at 10 Fiat currencies, one of them is going to outperform the other nine.

And I realized what I had been doing, and it wasn't wrong, I had done good analysis on the US.

The problem was is I did it in a vacuum.

I just looked at the US.

I didn't also look at Europe, I didn't also look at China.

I didn't also look at Japan, I didn't also look at Argentina.

So when you realize that the money is going to flow somewhere, it's not all just going to come down at the same time, it's going to go somewhere.

And that's what made me realize that not everybody is going to just run to gold.

I think a lot of people, this is where I think a lot of people in the gold world they get it right that they should own gold, and I agree, everybody should own gold.

Brent Johnson: But what I think they get wrong is that they anticipate a negative event in the market, and then they think everybody's going to act exactly like they act.

But the thing is, most people don't even know about gold.

Most people's first action in the market is not to go buy gold.

Now, eventually, they might get there but that's not their first thought.

Their first thought is probably the buy treasury bonds, or their first thought maybe just go to cash.

George: To be clear, when you talk about everyone, you're not only talking about the retail investor, but you're talking about these fund managers or maybe pension fund managers that manage billions and billions.

So huge pools of capital that really have the ability to move the market.

If that pension fund manager who is no Stanley Druckenmiller, doesn't know anything about gold, to your point, they're just going to go into Treasury.

So that's kind of what you're referring to?

Brent Johnson: Yeah. And not only that, even if this portfolio manager does happen to like gold, his investment policy statement or his mandate is not going to let him go more than a half a percent or 1% in gold.

So even if they pile into gold, the other 99% is going to go somewhere else.

And I kind of came to the conclusion that as things start to break down in the years ahead, both dollars and gold would get a bid.

So in 2016, I did a presentation called Step Into Liquid where I went through these eight different factors that I thought were influencing dollars and gold, and why I thought they would both eventually go up together.

Which is kind of counterintuitive? You wouldn't think they could both go up together.

George: I was going to say that.

Just so the viewers know, that's a very contrarian view because the standard mindset, correct me if I'm wrong, is that there's almost an inverse correlation between the two.

Brent Johnson: Right. I go to a number of gold conferences, and I speak to a number of gold investors and kind of the standard mantra of the gold investor is that the dollar is a Ponzi Scheme.

It's going to be inflated away to zero, we borrowed more money than we can ever payback.

The only way out of it is inflation.

So the dollar is going to zero and the gold is going to $50,000.

That eventually may happen.

But in the meantime, Europe's got the same problem. Japan's got the same problem. China's got the same problem.

But what they don't have is they don't have the knock-on effect and the institutionalized effect of having the global reserve currency.

So for a number of people, even if they hate the dollar, their job mandates that they use it.

I don't really know how any better way to say it.

They might not like buying the dollar, but they have to.

So in some kind of in a global downturn, I think the dollar will get a bid, I think gold will get a bid, too.

Gold doesn't need to get nearly the amount of flows that everything else does, because Gold's a fairly small market.

So if just 1% or 2% of global assets get pushed into gold, you're going to see gold go to 2,500 or $3,000, or something.

But I think as people move and look for a safe haven, it will be a combination, I think gold will get flows too, but I think the dollar will be the main beneficiary.

And when that happens, I think it's going to have incredible knock-on effects for a number of markets around the world.

Namely, the fact that the rest of the world also is in trouble from a debt perspective.

But not just that they owe debt in dollars.

So as the dollar gets stronger, it becomes even harder for them to manage that debt and service that debt.

And the more the dollar goes up, and the more interest rates go up.

If interest rates start to rise, a bigger portion of those foreign countries or those foreign entities that have this dollar debt, the bigger portion of their revenues go to just servicing the debt.

George: Yeah, and I want to just interject something right there if I could.

But just to explain to everyone watching, when you think about the debt that's denominated in dollars in foreign countries…

Well, that's a sovereign entity or a corporation, anything like that, you got to keep in mind they don't have a 30-year fixed-rate mortgage on their debt.

Their debt rolls over, I'm guessing maybe every two years, three years, something like that.

So when Brent is saying that it's very sensitive to dollar interest rates, that's because that if a country has $100 billion dollars in US debt, let's say that's Colombia, and their currency is the peso, well, if they've got a 4% interest rate, they could have to roll that over at a 10% interest rate.

In which case, they would need to somehow come up with more dollars.

And that would usually mean printing more of their currency which would devalue their currency against it.

Exactly. Exactly.

So that's the thing is people often cite the amount of dollar debt as a negative for the dollar.

The reality is, is until there's another system to replace it.

And listen, the world is not going to switch overnight to a gold standard.

It might eventually happen.

But right now the gold standard does not exist, the system does not exist to send gold around the world as far as and making payments.

So the dollar debt that exists in the world while it is long term negative for the dollar, in the short term that is demand for dollars.

The interest to service the debt on a global basis, is, if you want to be extremely conservative, it's a trillion dollars a year.

You don't have to be too loose with the numbers to say it's $2 trillion a year in demand for dollars just to service the dollar debt.

A lot of people will focus on the US dollar debt that we owe as being 20 to 23 trillion.

And that's, listen, it's a ridiculous amount of money.

But what if I told you that the rest of the world owes $15 trillion, and they can't print it?

Right? It becomes a bigger issue for them than it is for us.

George: Right, and to your earlier point, that if it's one trillion or two trillion, that they owe in interest, meaning demand for dollars.

If the interest rates go up the next time they roll that up it could be four or five trillion on interest.

So that's an additional $2 trillion or $3 trillion in demand for those dollars to pay off that debt or that just that interest on the debt.

Brent Johnson: Right.

So, the point that I make is until it blows up, it's actually very bullish for the dollar.

You'll get into this short squeeze on the dollar where everybody hates the dollar, but they don't have any choice but to pay it.

And then I hear people will say, as they scramble to get the dollars that pushes the price up.

Now, a lot of times I'll hear people say, “Well, you know what, they're just going to default on it.”

The world is sick of the US being a bully.

They don't like the weaponization of the dollar, they'll just default on the debt.

And as a result of them defaulting on the debt, that will decrease demand for the dollar.

That is true, that will decrease demand for the dollar.

But because of the nature of the system, the way it's designed, money is loaned into existence.

So when this debt is defaulted on, it causes a chain reaction where the supply of money evaporates.

So while demand might be falling, because debt is falling, the supply is falling even faster than demand.

As a result, the price of the commodity, in this case, the dollar, goes up.

Now and that's exactly what you saw in 2008.

The reason the dollar went up in 2008 was because of the cascade of all these negative loans were going bad and the mortgages were failing.

And so even though there was less demand because the mortgages were failing, the supply of dollars was evaporating.

Brent Johnson: The whole point of QE, whether it's being done in Japan, or Europe or here is to supply currency to the market.

If nobody wanted the dollar, and there was no demand for the dollar, there would be no need to do QE.

The reason they need to do QE and the reason they need to do these repo transactions is that there's a huge demand for the dollar.

They're supplying dollars that the market is demanding.

So when people tell me the repo market is proof that nobody wants the dollar, they have it completely backward.

It's the fact that the people want dollars so badly, that nobody wants to loan them to anybody else.

It shows huge demand and not a huge disservice or rejection of it.

George: All right.

I was just going to say, and just to unpack that just a little bit for everyone.

So the repo market is people recall from watching my videos, it really spiked September 17, up to 10%.

So what Brent's saying is that the fact that the interest rates went up means that there's not enough supply of dollars.

Therefore, the demand increased so substantially, that it took the repo rates from 2% all the way up to 10%.

So if there wasn't any demand for dollars or cash in dollars, then you wouldn't have seen that spike.

Also, I'd like to add to that, that the Fed has had to stay in the repo market.

I mean, I would guess that it will be permanent.

A permanent thing where they'll have to supply this liquidity and if there was no demand for dollars, the Fed wouldn't need to be there not only on September 17th, but on an ongoing basis.

Brent Johnson: Right.

So, I think when people analyze the dollar, I think it's very good that they analyze the dollar.

I think it's very good that they understand that, ultimately, the dollar is going to lose value, and it will need to be inflated away.

It's good to have that fundamental understanding.

But what I think people need to do is understand that the same thing exists to the Euro, the same thing exists to the Yen, the same thing exists to the Yuan, the Australian Dollar, the Argentinian Peso, the Colombian …

I don't even … The peso, yeah.

So they're all in the same boat.

So, even though you understand that the dollar on an overall long term basis is going to go down…

There are many reasons that in the short term, or maybe not in the six-week term, but over the next two or three years, I think the dollar is going to go up dramatically versus all these other currencies because of the inherent demand for it.

I'm not telling people not to own gold.

I'm just saying understand that this can happen.

So that if it starts to happen, you understand why it's happening.

And as this float of dollars happens, I don't think it will just sit in dollars, I think it will get invested into dollar assets, I think it will get invested into treasury bonds.

So I don't think Treasury bonds are necessarily going to spike.

I think we'll have a flow of capital that will demand them and I think that will help us fund this ridiculous $3 trillion fortress, whatever our negative budget goes to.

Whatever our budget deficit goes to, I think we will be able to fund our budget deficit easier than Europe will be able to fund their budget deficit or Japan-funded budget deficit.

So I think those capital flows will help US treasuries on a relative basis.

I also think it'll find its way into the stock market because what I think will ultimately happen is interest rates will start to rise around the world.

Not because things are getting better, not because of inflation, but because of the counterparty concern.

Brent Johnson: Eventually, people will realize that you're not going to get paid back by owning an Italian Treasury, you're not going to get paid back by owning a French treasury, you're not going to get back by owning the Japanese Treasury.

So eventually the yields will rise because people want to get paid more in order to own these risky bonds.

And as that happens, I think that as capital flows out of sovereign bonds, I think, again, on a relative basis, US equities will look pretty good because you get US dollar exposure.

You can put it in US rates at 2% a year or whatever it is, or you can buy Philip Morris that pays you 4% a year or you buy another blue chip that's paying two or 3% a year.

If you're sitting in Colombia, as an example, and you've got some money to allocate and the dollar's going up versus the Colombian peso by 5%, and you can buy a stock that goes up three or 4% and it pays three or 4%, all of a sudden you're getting a 10% return.

That doesn't look so bad, right?

And you're already starting to see this happen in Europe.

I talked about, I use the example of an Italian pension fund manager a year ago.

Well, three or four months ago, we saw that the pension fund of Norway is doing exactly that.

They have recommended to the government of Norway to decrease their allocation to Europe, and increase their allocation to the United States, including US equities.

So I think you're starting to see that now.

It's not going to happen right in a straight line.

A lot of times when I talk about this Dollar Milkshake theory, I say it in a very linear fashion, because in order to explain a complex subject in a simple fashion, you kind of has to tell like a linear story.

But the fact is in macro, nothing is ever linear.

It's not always going to go to chapter one, chapter two, chapter three, chapter four.

Sometimes chapter four is going to come before chapter two, sometimes chapter three may take longer, and then chapter five goes really quickly.

But I think over time, this is what we're going to see.

We're going to see a flow of capital to the US that's going to push prices up in the US.

It's going to starve the rest of the world of capital.

It's going to put downward pressure on their economies, which kind of leads to a vicious cycle where the US dollar then becomes seen as a safe haven, it gets even more flows, it puts even more pressure, and eventually, it will all blow up.

George: So a melt-up in the dollar.

Brent Johnson: It's a melt-up, that's exactly right.

I think that we're going to have a melt-up in the dollar.

I think it'll eventually get so strong that they'll have to write it down in some kind of a plaza accord or devaluation or whatever it is.

But one thing to remember is the monetary authorities, they always react to a crisis, they're not going to do it ahead of time.

They're not going to do anything until the problem happens.

They didn't come up with this repo facility until rates spiked to 10%.

And then they reacted.

They didn't do QE in 2008, ahead of time, they did it after the bank started collapsing.

So I think what will happen is this dollar moving higher, this is the crisis.

A lot of people say that they're contrarians because they're negative on the dollar.

Well, you know what I want to be very clear.

This is not to make anybody look bad or anything but being negative on the dollar is not a contrarian position.

The whole world thinks the dollar is going to go lower because it has to for the system to survive.

You look at every bank in the world right now thinks that the dollar is going to go lower over the next couple of years.

Everybody says if the dollar starts to get stronger, the Fed provide all the liquidity it needs, and it's going to go lower.

So the dollar going lower, that's the Fed winning.

The dollar going lower and the system continues, that's the central bankers winning. That's not the crisis.

The crisis is of it goes against them.

George: Right. And I want to be clear, Brent.

When you say that if the dollar going higher is a crisis, or if the dollar going lower is kind of the savior for the entire monetary system, you're saying that just because there is so much foreign dollar-denominated debt, that if they can adjust that adjustable rate mortgage, which basically they have, at a lower interest or when the dollar is cheaper or less, and then that takes all the pressure off them.

But if they have to adjust when the dollar is higher, then that increases their load, and then the whole system just kind of collapses in on itself.

Brent Johnson: Yeah. So then people will say, “Well, if that's the case, the Fed will just keep rates low.

They will do whatever they need to do.”

I think that that is true unless something happens that makes it hard for them to do that.

So what could make it hard for them to do that?

Well, as the rest of the world starts to break down from the strong dollar, as the US gets the flow of capital as a safe haven bid, or however you want to see it.

That starts to push asset prices up, makes the stock market go even higher, it becomes harder for the Fed to lower rates.

I'm not saying they're not going to do it.

They may very well do it.

But if they keep rates low in the US and all that capital comes in, then you really get the blow-off top in the dollar and equities.

Do you see what I'm saying?

So it makes it harder for the Fed to supply all the liquidity.

It doesn't mean that they can't, it doesn't mean that they won't, it just makes it harder for them to do it.

Because now you've got the battle between Main Street and Wall Street.

As inflation picks up in the US, and things cost more, it's not as easy for the Fed to just continue these easy money policies where the wealth inequality just continues to widen and the billionaires become trillionaires.

Meanwhile, nobody on Main Street's gotten a raise.

So I don't know how this is all going to play out.

I can't predict it in a perfectly linear fashion.

If I even get it a little bit right, I think we're going to do pretty well.

But there's no way I'm going to get it 100% right.

I'm not so naive to think that I have this down perfectly.

This is kind of how I see it playing out over the next couple of years.

The Dollar Milkshake where it got its name was from 2015 to 2019, we raised interest rates nine times.

Most people didn't think we'd be able to even raise rates once.

I thought we would be able to raise them, I actually thought we'd be able to raise it a few more times before it all had to reverse and it reversed a little bit earlier than I thought it would.

But we still had nine rate hikes while the rest of the world was doing rate cuts and had negative rates.

So on a relative basis, we were raising interest rates while they were dropping interest rates.

And so I use the analogy that it's like we had a straw, the rest of the world is still mixing this milkshake. They're injecting all this liquidity.

George: And they're printing money, they're printing more of their currency.

Brent Johnson: They're printing more of their currency, through QE or through bailouts or whatever you want to talk about.

And we stuck a straw down in that milkshake and started sucking it up with our relatively higher interest rates.

Now, in the last year, our interest rates have come back down, but on a relative basis, they're still higher than everywhere else.

We, on a relative basis, we still look pretty good versus everybody else.

So we're drinking the rest of the world's milkshake.

That's where the whole Dollar Milkshake theory came from.

George: Yeah. Again, just to clarify for everyone, that milkshake or that substance coming through the straw is capital in all of these other countries where they can't get a return.

You think we can't get a return in the United States, China, and Europe or Japan, they've got negative interest rates.

And it's all these pension funds or large institutions that say, “You know what, I've got to put this money somewhere.

So it might as well be in the United States.” That's the capital moving from Europe to the United States.

And that's that straw type of effect, or what Brent says it's sucking capital from all these other countries.

That's what he's or I'm assuming that's what you're referring to.

Brent Johnson: No, that's exactly right.

In a good way, two good examples.

I've used these examples a lot, but I use them because they're a very good example.

As you can look at Venezuela, you can look at Argentina, and you can look at Turkey.

Look and see what's happened to their stock markets and their currencies over the last two or three years.

These are three countries that had a lot of dollar-denominated debt, and the fact is that whether they like it or not countries need dollars to operate.

If you don't believe that, you got to ask yourself, why did Venezuela sell billions of dollars worth of gold in order to get dollars in order to operate their country?

I don't think that they wanted to sell their gold.

Nobody wants their client to sell their insurance policy.

But when you get into a crisis, that's what you do.

And so as much as they may hate dollars or as much as they might love gold, they had to get dollars and so they sold their gold in order to do it.

George: I'm sorry, just to unpack that a little bit for everyone.

Correct me if I'm wrong.

But in that case, Venezuela said, “Listen, we've got all this dollar-denominated debt, and so we've got a choice, either we pay our dollar-denominated debt with our gold, by selling our gold, or we keep our gold and default on that dollar-denominated debt, in which case we wouldn't be able to go back into the bond market and borrow more money.”

Brent Johnson: Or even import commodities or whatever it is.

Get good stuff coming into the country.

The world still operates on dollars and that's the point I want to make.

I think one thing that a lot of times people don't realize when I talk about this is that I don't particularly like this theory.

I don't even particularly think … I don't think it's moral.

It's not the way I would design it.

I don't think it's the right way things should be. I just think this is the way it is.

And so I think one mistake a lot of people make when they invest is they invest based on what they would like to see rather than investing in what's actually going to happen.

It kind of goes back to that old saying that do you want to be right, or do you want to make money?

If you want to just be right and argue things, then you go work for a think tank or you write opinion pieces, or whatever it is.

But if you're in the business of managing money and trying to increase capital, you don't get to just invest based on what you'd like to see.

You have to place capital based on what you think is going to happen.

This is what I think is going to happen over the next couple of years.

I don't really especially like it. I don't think it's necessarily justice being done.

I just think it's going to happen.

I talked to a lot of people in the gold world who just don't think it can happen.

And so part of the reason I've probably been so forthright or adamant about it is I just want people to realize this can happen.

Maybe it won't, maybe I'm wrong.

But to think it can't happen I think is doing yourself a disservice. S

o if you have a big portfolio of gold, and you're doing it based on the dollar falling, just have a long time horizon, because it might not happen right away.

The U.S. dollar will go up, but so will inflation, why and how?

George: Yeah, and Brent so I think one thing that I'd love for you to explain if you can, is you're talking about the dollar going up, but yet inflation still rising in the United States.

And when you talk about inflation, I'm assuming you're talking about the CPI. Is that correct? Or just asset prices?

Brent Johnson: Both. I think potentially both.

In the US, you could see both.

I think a lot of people base their inflation expectations on the dollar losing value because that's typically what you think.

The currency loses value versus real thing, that's inflation.

Well, that can happen.

I'm not saying that that's impossible, and I think that eventually will happen.

But in the short term, I think you could see a period where the dollar gets stronger and inflation picks up as well.

Again, it hasn't started happening yet.

Until the rest of the world's trying to starts to go into contraction, and the US starts to get these flows, I don't think you're going to see it in a big way.

But once it starts to happen, I think it'll develop rather quickly, and it'll become a vicious cycle very quickly.

So again, it's a little, I realized, this is a little kind of an alternative theory and maybe not mainstream and maybe a little bit hard to accept. It took me a while to accept it, as well.

I didn't just come up with this idea overnight like I did a lot of thinking about it.

I kind of went through a number of different scenarios.

And I just kept coming back to this. And I finally just said as much as it sounds crazy, and I know I'm going to get ridiculed to a certain extent for saying it, this is what I think is going to happen.

So I think that I am prepared to be wrong on this.

I don't think I'm going to be wrong, but I'm prepared to be wrong.

So when I talk to people, I tell them, “It's okay if you don't believe me, but just be prepared to be wrong.

All I'm asking is for you to be prepared to be wrong.

Because if it starts to happen, I think you may need to react relatively quickly in order to save your portfolio.”

George: Yeah. And so I think what a lot of people are going to struggle with is…

This gets a little complex here.

I'm trying to figure out how to explain this in simple terms.

But, they see inflation being synonymous with the dollar losing value.

And when you say that the dollar is losing value, or excuse me, going up in value, but yet we're having inflation locally, I think it would help if people see these as two completely separate markets.

So you've got a market for the dollar outside of the United States.

Looking at it actually as three separate markets, you've got a market for the dollar outside of the United States, you've got a market in the US, that's the financial economy, and then you have the real economy.

George: So the financial economy, inflation or deflation, would represent asset prices.

The real economy would represent consumer prices, and this market outside of the United States would represent the dollar relative to other currencies.

So that's why you can get an appreciation of the dollar and inflation because inflation is happening in basically a separate type of economy or a separate market.

Am I explaining that close to it?

Brent Johnson: Yeah, I think that's a perfect way to explain it.

If you need a little bit more proof, do this, go back and look where the dollar index was 10 years ago, and look where it is now.

It's 10 or 15% higher than it was a decade ago.

Now, go into your own life.

Look at the Dow, the Dow is up three times in the last 10 years.

So there you've got asset price inflation. Now, if you don't think there's any CPI inflation, just go look at your own life.

Are your health insurance bills higher? Is gas higher? Do the groceries cost more?

I mean, it doesn't take too much analysis to realize that it costs more today to live than it did 10 or 15 years ago, but yet the dollar's gone up 10 or 15%.

So that right there shows you that you can have an appreciating dollar along with inflation.

Once you step back and look at it, if you divorce yourself of your preconceived notion of you get inflation by the dollar falling, and you just look at the facts of the matter.

I think everybody's life is more expensive today than it was 12 years ago, and yet the dollar's up 10 or 15%. I mean that's just a fact.

When to buy, when to sell, and how to manage your money

George: Yeah, that's a great way that you just described it right there when you look at the DXY, and then you look at your own personal life or look at shadow stats.

Or even look at the CPI or asset prices.

That really displays those three different economies that I was talking about.

That's great.

One of the things that I wanted to touch on because obviously, you're a pro.

And I think one of the things that really differentiates the professionals from the retail investor is their ability to know when they're correct when they're not correct, and therefore when to buy, and when to sell.

So that would be my first question.

If you have any tips just for the average Joe that's maybe buying gold or buying the dollar or any type of assets, stocks, maybe bonds.

And then a side question would be money management.

And what we talked about before went on air is guys like Jim Rogers and Stanley Druckenmiller and Jeff Gundlach those guys really only get it right.

You know better than I would.

But maybe 55% of the time, 60, but they throw out 20, 30% returns because not that they're getting it right 100% of the time, but they know how to cut their losers short, ride their winners, and it's all about that timing in the money management.

And I know that is very professional stuff. Maybe you got some tips for just the average guy.

Brent Johnson: Well, I'll make a few comments on it and listen, I'm going to say right up front, I am no Jim Rogers.

I am no Stanley Druckenmiller. Those guys are the legends.

If you find 2% of what those guys are, then maybe I'll be okay in this business.

But what I'll say is this, is that you can do very well by just following trends.

So if you're not a big risk-taker, and you want to just kind of do okay, and you're not trying to become, Stanley Druckenmiller, and you're not trying to get 50% returns, just find the meat of the move and just kind of stay with the trend.

Now, those trends are eventually going to come to an end.

So you can't just do that all the time, but in general, stocks go up over the long term.

That doesn't mean they're going to go up over the next decade, but stocks go up over the long term.

Gold holds its purchasing power over the long term, real estate appreciates over the long term.

So you don't have to try to time the market and go big and then go to cash.

It's possible to just to have a diversified portfolio and play the trends.

But if you want to try to outperform a little bit or try to optimize your returns a little bit more, I think the way to do it is there are a couple of things you can think about, is you can't do what everybody else is doing and make a big outperformance.

It's just it's mathematically impossible. Okay?

So I'm going to give you two examples.

And so what I think what happens is once a year, once every 12, 18 months, an opportunity will come along that is so obvious.

If you have the guts, that's when you want to go overweigh it.

It's going to be scary when you do it, but that's the only way for it to work.

And I'll give you an example.

A year ago, I sent out a tweet where I said, “Here are my ideas for the next year.”

I got three out of eight right. So I was wrong.

So what is that? 40%, 35 or 40%?

But the things that I was wrong about didn't hurt me because I didn't have exposure to them.

One of the things I didn't think was going to pay off last year was gold, but I do own gold so that helped.

But where I was really, really confident was US equities.

The reason I was really, really confident a year ago is everybody else was absolutely scared the hell out of them.

So we had the huge sell-off in Q4.

George: Meaning, and just to be clear, guys, the market went down by almost 20%.

So what Brent is talking about is a sell-off, that's when everyone is afraid, to say the least.

Brent Johnson: Yeah.

So I had this Dollar Milkshake theory, the flow of assets into the dollar push US asset prices up. I had this theory last year.

So when we had that big sell-off in the fourth quarter, I actually saw it as a gift.

I mean, we got to a day where sentiment was literally lower than the worst days of 2008.

But I was looking around, I'm saying, “Look, we're not in 2008. We may eventually be but a year ago, we were not in 2008.”

Prices had come down 20%, everybody was scared to death.

So I bet really big on equities at the beginning of last year.

So we had a really good Q1 coming out of that so then I was able to be conservative in the latter half of the year when equities are at their all-time highs.

I was able to reduce exposure a little bit. I still have exposure to equities, but I was able to reduce my exposure because I took overexposure when nobody else wanted it.

So now when exposure is at an all time high, or when the sentiments at an all time high, and we're at all time high in the equities, I don't have to be as aggressive now because I was aggressive earlier.

So I guess my point is diversification is a great way to protect yourself and not make any big mistakes.

But when you see the opportunity, that's an … Again, to me, it was an obvious opportunity.

You have to bet big or at least bigger than you normally would.

I think another example is that people are going to absolutely hate me saying this, but I'm going to say it anyway.

Right now, the sentiment on gold is as high as it's been in 10 years. It doesn't mean like …

George: So it's positive.

Brent Johnson: Yeah, it's positive.

The relative strength of gold right now is in the mid-80s.

It hasn't been in the mid-80s since 2016.

And before that, it wasn't in the mid-80s until 2011.

Now, that doesn't mean that gold's not going higher.

Maybe gold will go higher. But the point is, is gold is not unloved right now.

If you look at the bullish percent on the miners, it's like 88 or 90%.

That very rarely happens to get that high.

We're at seven-year highs in gold.

If you're at a seven-year high, the asset is not unloved.

Now, again, most of the world does not own gold.

So if the rest of the world decides, “This is the time to own gold,” gold is going higher.

But that doesn't mean that there won't be a better opportunity to buy it.

As an example, let's pretend gold goes higher, and it goes from it's at $1570 today.

Let's pretend it goes to $1650 and then $1700. And then it pulls back to $1600.

So $25 higher than here, but when it pulls back from $1700 to $1600, the sentiment comes down to 50% or 40%, or whatever it is.

I would rather buy something a little bit more expensive, but when sentiment is not just off the charts.

The risk you have right now is that you get a very strong pullback.

So now you come in right at the high when everybody is as bullish as they can be, and then you get a pullback from $1575 to $1450.

Now again, if you have a long time horizon, that's fine.

Gold is eventually going to pay off.

But if you're worried about a pullback and you're trying to outperform and you're trying to make big profits, I don't think that's the way to do it.

Now, some people do that. Some people buy the breakouts and ride trend.

That's not how I do it.

I think you got to buy when everybody else is selling, and I think you got to sell when everybody else is buying.

And I think if you do that on a regular basis, you're going to do pretty well.

George: Yeah, let me ask you what you think about this.

This is what I do for my own portfolio.

So whenever I get a question on this, this is what I suggest just the average Joe guy kind of think about.

I like to compartmentalize my portfolio.

So the first rule that I have for myself is I like to buy things when they're cheap, and sell them when they're expensive.

Let's keep it simple. As far as investments, I like to own things that pay me to own them.

I like to have some diversification. And for me, that means insurance.

It means diversifying my political risk and my currency risk as much as I can.

George: So then I compartmentalize and have a section of the portfolio for insurance.

Again, for me, it's about five to 7%.

The only insurance that I know of or I'm comfortable with is just precious metals or gold.

And in the middle of that, let's say 80%, I like to own something that pays me every single month, that's cash flow.

And it can be different for different people. But for me, it's just cash flowing real estate.

And then I leave another 10% for speculation.

So that would be an investment that I think is going up or down, and not necessarily it's going to pay me so that's how I differentiate between the two.

Investment portfolios

George: So when I hear you talking about the dollar going up, or stocks going up or when you went in, after that 20% sell-off, and had the guts to pull the trigger.

For me, I would do that with just that 10% of my portfolio or a portion of that I had allocated to speculation.

So regardless of, because the average Joe and me, I know I'm not as good as you, I'm not as good as the professionals.

But if I just do that with a small portion of my portfolio, as long as I've got that insurance, as long as I've got assets, they're paying me monthly positive cash flow, then I'm not going to get too hurt.

But I can still go in and try to make that play to turn a 15% annual return for my year into maybe a 20 or 25.

Does that make sense?

Brent Johnson: Absolutely.

So I think that's a great way to do it.

I think everybody should have a very conservative portion of their portfolio.

A lot of this depends on who you are, what your age is, what your income level is, are you retired, do you have a job?

Are you supporting 10 people or do you live alone?

There's a number of factors that go into this.

But I think, in general, your idea of having a very safe part of the portfolio kind of a mixed portion of the portfolio and then a speculative portion of the portfolio, that's how I manage portfolios for clients, quite honestly.

And everybody's a little bit different.

We don't have one portfolio for everybody.

But I'm okay taking some outsized risks on a portion of the portfolio.

As an example, as part of our wealth management practice, I manage a private fund as well.

And in that private fund, we make asymmetric plays that are very unexpected to happen.

We happen to think the dollar is going to get stronger, we think there will be a number of knock-on effects of that happening.

The market thinks the likelihood of these things happening is extremely low because the market doesn't think the dollar is going to get stronger.

So the pricing of the securities that we buy is very low.

So if we're right, the payoff is extremely high.

So we can take one or 2% of the portfolio, allocate to these asymmetric trades.

If we're wrong, and you lose 2%, well, the other 98% of the portfolio must be doing pretty well.

More than makes up for this one or 2% that you're not doing well on.

But if you're right that one or 2% can literally become five or 10% of the overall portfolio.

So it can either act as a hedge for the rest of the portfolio or it can act as an alpha producer for the portfolio.

But you can only do that if you've taken care of the rest of the portfolio in a more conservative manner.

Otherwise, you're just a pure speculator.

If you wanted to speculate with all your money, that's your business, it's your money.

But I think as far as building capital over the long term, you don't want to be speculating with all your capital.


Yeah, I totally agree.

I see so many people do that. It's such a huge mistake.

A lot of the viewers they'll say, “Well, I've got 100% of my net worth in gold or 100% of my net worth, even in real estate with the stocks or in a 401(k) or something like that.

Oh my gosh, yikes.

Brent Johnson: Yeah. No, exactly, exactly.

Gold and purchasing power

George: I had a conversation with our buddy, Erik Townsend, the host of Macro Voices the other day, and he pointed out that if gold does go to, let's say, $15,000 an ounce, that it most likely will do that as a result of inflation.

If it does just go up with inflation, so just going up in nominal terms, if you went to sell that gold, you would have a capital gain if you're buying at 1500.

And if you have a capital gain, that's a tax that goes out.

So your purchasing power in real terms would actually go down a little bit.

So what are your thoughts on that?

And then I'd also love your thoughts on how to avoid or how you personally avoid a confiscation risk with your personal gold by the US government.

Brent Johnson: Yeah. So I look at gold a couple of different ways.

I look at gold as insurance.

I'm talking about physical gold here.

It's a good way to protect your purchasing power over time.

One thing I will say is another kind of hallmark of all the gold conferences is that the dollar is going to zero and the S&P 500 is going to zero, and that's because we're going to have hyperinflation in the dollar.

Well, if we have hyperinflation in the dollar, the Dow is going to go to 100,000.

Show me a country where they went through hyperinflation and the stock market went to zero.

It doesn't work that way. I'm sorry, it just it does not work that way.

George: So in nominal terms. Even the Venezuelan stock market has not gone up in nominal terms, right?

Brent Johnson: Exactly. So you're not going to have a situation where both the dollar and the Dow go to zero, it does not work that way.

I'm sorry. Now, it doesn't mean you shouldn't own gold, it just means that the dollar and the Dow are not going to zero.

But if we do go into hyperinflation, and the dollar goes down dramatically, and gold goes to 15,000.

Well, then I think the Dow is going to 70 or 80 or 100,000, as well.

So it doesn't mean that you shouldn't own gold, you should own gold, but you got to understand that if the Dow's at 100,000, and the dollar's at zero, and gold's at 15,000, you are not flying around in a private jet and going to private country clubs and shopping in Beverly Hills.

It just so happens that your gold may allow you to buy toilet paper and bread and pay your rent, right.

So maybe it's going to protect your lifestyle but it's not gonna turn you into Warren Buffett.

Now, where it could maybe turn you into the next John Paulson or Kyle bass or whoever it is if the mining stocks really take off.

But this is speculative capital, this is not insurance.

Mining companies are horrible businesses.

Every time you pull gold out of the ground, you're depleting the resource of that company.

I can't go into all the reasons why mining companies are bad businesses.

But that does not mean that you can't get rich if you time it right.

So if you want to take some of your speculative capital and you buy gold mines, those might go up five or 600%, 1,000% in some cases.

There you can really make some alpha and maybe there you can actually increase your level of wealth rather than just protecting it, so to speak.

So, again, I think it depends.

I think you need to understand what's in your portfolio and why you own it.

I don't personally own any mining stocks right now.

I am not yet convinced that the breakout for gold is here, and as a result that the miners are going to go up five or 600% or not.

If I'm wrong, I think I will have time to get in.

Am I going to get in 50% higher or 100% higher?

Sure, but I don't know anybody that's owning gold because they think it's going to $2,000.

Most people I talk to don't own gold because they think it's going to 5,000 or 10,000 or whatever the number is, and we're going to be in a decade long gold bull market.

Well, if that's the case, and I buy mining equities higher from here, I think I'm still going to have some time to make money on it, right?

George: Because you still have a core position of physical as insurance.

Brent Johnson: Exactly, exactly.

Now, as far as owning physical, and we got to get into this kind of a gray area here, right?

You own physical because you want to not only protect your purchasing power, but you kind of want to protect yourself from political risks.

So I'm not going to tell you … If the government decides they want your gold, they want your gold.

They're going to be able to take it unless you have prepared ahead of time.

Now, I'm not telling anybody to disobey a directive from the US government or the Colombian government or the Chinese.

I'm not telling anybody to do that.

But you don't have to make it easy for them either.

So I would recommend that you have some of your gold in some different political jurisdictions, I would suggest that you have it in some different geographic locations.

I think the first thing that everybody should do when they own physical gold is they should own gold coins that they can access within an hour or two hours.

Now, I'm not going to tell you where to put them.

Figure out someplace to put them that you can access them relatively quickly.

Let's say you have 10% of your portfolio in physical gold, maybe you take 2% of that 10% and you buy coins, and you keep those close.

Then the other 8% maybe you spread it around in two or three locations, different political jurisdictions, some safe warehouses or vaults or whatever the case may be.

I think that's the smart way to do it. That's what I do.

I think that's what most people should do. That doesn't mean that it's going to be safe.

If you have your gold stored in London and whoever drops an atomic bomb on London, your gold's probably not going to be a lot of good, right?

But if that happens, then the gold price of your gold in Singapore or Cayman Islands or Zurich may be worth a lot more.

So I think that's another reason to diversify.

The other thing, I think you should own some miners because miners have properties in South America and Africa and Australia and Canada.

That's a good way to diversify your political risk, but I wouldn't have all your money in those because maybe Australia decides to nationalize their minds or maybe Canada does.

Canada doesn't have any gold nationally. So maybe they just decided to nationalize all the mines in Canada, and all of a sudden they've got gold, right?

George: Great point.

Brent Johnson: So when I think about gold, I think about diversification, diversification, diversification.

Have it in many different forms in many different areas under many different political jurisdictions.

George: Do you have any retail products, Brent?

Brent Johnson: Not really.

Mainly I do an overall customized comprehensive wealth management.

And then as part of that, I also manage a fund displaying asymmetric ideas on the dollar, as on the dollar getting stronger.

George: Okay, so just the reason I say that is because I do consultations.

I'll probably do three or four of them a week and every single person has an investable portfolio of between a million and 10 million.

Brent Johnson: Yeah, that'd be perfect.

So just so you know, so what I do is I do kind of comprehensive wealth management, very diversified traditional assets.

Because we see so many asymmetric opportunities around the world.

As a result, if the dollar does what we think it will do, we think the knock-on effects have so many asymmetric responses that you can put a little bit of capital out.

Very similar to 2008, the people that shorted housing or shorted the banks in 2008, you didn't have to outlay a lot of capital to get a very big return.

So that's what we're doing. I hope that makes sense.

George: I think that's a fantastic answer, and it's a great way to end it, Brent.

I want to again, really, really, thank you for your time.

This is really an honor for me to get the opportunity to sit and talk to you and ask you a few questions.

I've been such a fan of yours for a long, long time.

So for those of the people out there that would like to find out more information, or maybe contact you directly or one of your representatives. How would you suggest doing that?

Brent Johnson: The easiest thing to do is you can go to

It's really just a landing page with my address and my email and my phone number.

You can call me, you can email me.

My email is [email protected]

I'm pretty active on Twitter, you can find me at Santiago capital on Twitter or you can type in Santiago Au Fund on Twitter.

I will do my best to get back to you. I don't always get back to you right away.

But if you send me an email, and I don't get back to you right away, feel free to send me an email again just as a reminder. Again, I'm more than happy to talk to people.

Sometimes I do get a little bogged down, but I appreciate everybody listening.

I appreciate you having me on. And I'm happy to come back.

George: Awesome. Brent, we'll see you again soon.

Brent Johnson: Okay, great.


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