Lyn Alden: The Fourth Turning, ‘Structurally Long’ Hard Assets, Oil and Gas and the US Dollar

[00:00] This period looks more like 1940s than 1970s. It's coming from a fiscal side, not from the bank lending side. I think that's kind of the closest parallel. That's what I've used for investing. Now, things aren't always the same. Like harder assets over softer assets. Uh, so basically if you bought equities, if you bought real estate, certain commodities, uh, commodity producers, um, those things, uh, did well. Gold was was tougher because it was pegged to currencies. What's what's new is that large institutions are talking about debasement and talking about the risks of sovereign debt, which would have been
[00:31] unthinkable a decade ago. So, it's kind of like the mainstreaming of concerns that that many investors have had for quite a while. Lyn Alden, engineer, financial analyst, author, and founder of Lyn Alden Investment Strategy. It's a true pleasure to host you on Palace Hills Gold Radio today. Happy to be here. Thank you. Excellent. Really excited for this chat. I would actually love to get started talking about your gradual print thesis that you have, which seems to be quite bullish for hard and scarce assets. Of course, we have already seen a
[01:01] phenomenal bull run in, for example, precious metals. And and gold more specifically is up over 60% year-to-date. However, might we just be in the first few innings of a secular or really long-term bull run for precious metals or scarce assets in general based on that gradual print thesis? Yeah, good question, Mayna. I I think the macro conditions that fuel this type of thing are going to be going on for quite a while, many many years. Uh, we're I would say we're in a state of fiscal dominance in the United States as
[01:31] well as many other developed countries. Uh, and so basically, um, we have very large structural deficits as far as the eye can see. Uh, we're probably shifting from a period of kind of monetary tightening to to monetary loosening in the coming months. Um, and individual assets can get ahead of themselves from time to time. You know, I think that gold and silver, uh, while attractive are now getting somewhat, you know, overbought in in maybe a tactical sense. Um, I don't view them as structurally overvalued. Uh, and so I think, you know, some combination of equities, real estate,
[02:01] precious metals, uh, Bitcoin, these kind of assets, um, they have their they have their, you know, individual years in the sun. Uh, but I think that continues to be the kind of, uh, assets that investors want to own over the long term. I think this fiscal dominance thesis of yours is incredibly interesting. And I think a lot of other analysts are also coming to a similar conclusion that these these government debts that we're seeing around the world, not just in the United States, are unsustainable. And the only way out is is to print. What makes you different in the sense that
[02:32] you think it's going to be a gradual process rather than a sudden one? Yeah, I mean, basically when developed markets go through debt crises, um, because they have One is the debt's in their own currency. Uh, and they, especially the United States, but even even, you know, many other developed countries, they have external demand for their debt. And so, you know, when a country like, say, Turkey has a debt crisis, there's there's very little external demand for their currency. Uh, and so when they run into a problem, you can get a very very very rapid, uh, period of inflation and currency
[03:02] debasement. Uh, but when you have a country like the United States, um, there's something like 18 trillion in dollar denominated debt, uh, held, you know, owned owned by offshore entities around the world. And that's mostly not owed to US entities. That's owed to other offshore entities. It's like this, you know, this big patchwork of, uh, existing, um, you know, kind of liabilities. And all of that represents inflexible demand for the currency. Uh, and it's a pretty large percentage of the money supply. Uh, it's much
[03:32] larger than the amount of base money in the system. Uh, so you have all those IOUs, plus you have, you know, other types of demand for the currency. Uh, and so basically you have this crazy amount of, you know, entrenched demand, the network effect. Uh, but then, uh, you have insolvent systems. Uh, we have a top-heavy entitlement system. Uh, we have interest expense that's now because we have over 100% debt to GDP with interest rates no longer structurally falling like they were for 40 years. Uh, we finally have interest expense becoming like a pretty, you know, material part of the budget, you know, bigger than defense. Uh, which is
[04:03] generally not a good sign as far as, uh, what stage you are in the empire. Uh, and so you have this kind of, you know, crazy amount of structural fiscal deficits as far as the eye can see with very few kind of realistic political levers to fix that in any time in an in an investable time horizon. Uh, and so I think that this is a a state that's going to go on for quite a while. Uh, and it's, you know, when people ask me things like, when does the debt matter? Uh, I would say it has mattered for five plus years now.
[04:33] Uh, you know, you can go back further and say aspects where it mattered, but especially the past five years. Um, where we have kind of record stock prices, but also near record low, um, uh, consumer sentiment in the US. Uh, so the median person is finding the economy to be rather sluggish, uh, especially at a cost of living sense cuz you have that more like stagflationary type of environment. So, not like a clear recession. Uh, and not really rapid inflation, but some kind of combination of, you know, kind of weak economic prospects out of AI and like
[05:04] outside of AI and out of, you know, kind of the the fiscal recipients, uh, combined with price increases that are coming from, uh, those fiscal injections. Uh, it it creates this mix that can go on for quite a while. Um, eventually it can snap politically. Uh, you know, there's obviously political turmoil in Europe. There's political turmoil in the US. Um, but I think these these states are going to go on for for quite a while structurally. Incredibly interesting. And and you mentioned earlier that there's very few
[05:34] realistic levers one can pull. Of course, one that's often often named is to outgrow this debt like the US did after the Second World War when it also had an incredibly high debt to GDP. Um, recently had Doomberg on the channel who referenced that the United States has incredibly fast, um, you know, gas, natural gas, and oil reserves that it has untapped thus far. Um, if energy is, you know, correlated with GDP or perhaps causal set as with GDP, is there a potential for the United States to outgrow its debt?
[06:04] Uh, in a sense. I mean, so after World War II, they partially outgrew the debt, but they also inflated the debt away. Uh, anyone who held bonds from the start of the 1940s, uh, through basically the '50s, um, you basically lost purchasing power, especially in the '40s. Uh, so I mean, they held interest rates at 2.5% on the long end, uh, while you had 19% year-over-year inflation at the peak. They did outright yield yield curve control. Uh, and you know, bond and currency holders pretty much got killed on a real basis. Uh, and then even after that, even when
[06:35] they got into the '50s, uh, while you no longer had the rapid falling of bond purchasing power, it still would have been better to own almost everything else, you know, especially equities at the time. Uh, and so basically harder assets. Uh, so it was that combination. Uh, they they had really fast productivity growth combined with inflating the debt away. Um, and so that's why you didn't get hyperinflation because they did have real productive growth. Um, but it's not as though, uh, bondholders were made whole. Uh, and you know, I think the best case
[07:06] scenario is something like that. Now, the issues of course, back then, the United States had a, uh, a trade surplus. They were a manufacturing powerhouse. Uh, we had very young, uh, demographics. Uh, now we're going into this as a trade deficit nation, hollowed-out industrial base, uh, with a much more top-heavy, uh, system, uh, demographically. Uh, and so the levers are harder. Obviously AI and technology in general is always a very strong, uh, lever to help with that as well as energy. Um, but it it it still comes with that
[07:37] degree of debasement. And so basically you want to own assets that are well positioned for that environment. And generally be cautious of assets that do get debased along the way. Because if you have something like, say, on average 7% money supply growth, uh, and you know, you're getting very low yields if anything on a checking or savings account, moderate yields on money markets and T-bills and thing and treasuries and and things like that. Uh, you're holding those assets and you're getting debased relatively speaking, especially compared to scarce things.
[08:08] Uh, and so when we when we look at the kind of the the spectrum of inflation, you know, it's reported as one number. You know, what is year-over-year CPI? That's how it's always presented to us. But really, it's a spectrum. There are assets that were not really, you know, the money supply is going up and we're not getting much better at making these things. You know, things like that are either labor intensive or or energy intensive or otherwise scarce. So, for example, fine art, waterfront property, gold, um, you know, to some extent things like beef, you know, like energy
[08:38] energy dense types of food, um, hospital services that are still very labor intensive and and of course technology intensive. Uh, those things tend to go up at or or close to the growth of the money supply over time. Uh, whereas things that we have gotten exponentially better at making, things like manufactured goods that we've outsourced and automated as much as possible, things like grains, you know, kind of the the less, um, nutritious dense foods, um, textiles. Uh, these things have fallen rapidly in price and they've
[09:08] given us a deflationary component that has offset some of those uh, faster moving areas. And when we look forward at what, you know, energy abundance and or AI can do, um, there's certain things that they can make more abundant. Maybe, for example, AI can automate some white collar work in a way that automation did for blue collar work. We can get certain certain services can get more abundant because of that and therefore their costs can be kept down. Um, but truly scarce things that are either energy or labor intensive, uh, while you have this period of pretty rapid, you know, money supply growth
[09:38] that continues, um, they still tend tend to go up in price. Maybe not every single year, but we look at a five, a 10, a 15-year snapshot, uh, you get that kind of widening differentiation between things on the higher end of that, you know, kind of labor and energy spectrum and things on the on the lower end that are able to be more automated and mass produced. Today's episode of Palisades Gold Radio is proudly brought to you by our parent company, Palisades Gold Corp, Canada's leading junior resource investment vehicle trading on the Toronto Venture
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[10:39] palisades.ca and join us in our mission to level the playing field for investors. Now, back to the show. Incredibly interesting. And And you mentioned earlier this hollowed-out industrial base that we've now seen in the United States. Of course, the the current president's trying to turn that ship around. However, that that is something that takes a while. Um could both be a headwind trying to turn that ship around because you're cutting yourself off from cheap goods that might, you know, cause inflation. However, from the other side, trying to
[11:10] restart this economy, this this industrial economy could be a boon and and cause significant growth. Well, so I do think that um it is worth uh trying to reshore some of this. Uh the the challenge, of course, is that the administration wants the cake and eat it, too, which is natural of politicians. You want all the good stuff, but none of the cost. So, one of the issues, of course, is that um part of why we're we're hollowed out is because we have the global reserve currency. Uh and and most people don't understand how how closely these are
[11:40] linked. It's It's been known since, you know, the days of Triffin and the Triffin dilemma. Um but it's a challenge, uh which is right now, kind of the whole world wants and needs dollars. I mentioned before they have dollar-denominated debts, but they also use it for for reserve assets. They also use it for international um pricing. They use it for exchange reserves, all these different things. So, there's all this extra demand for dollars. And the question is, how do they get all these dollars? You know, there's there's all this, you know, trillions of demand for dollars in the world. And the answer is, we send it out to them a trillion a year
[12:11] in in structural trade deficits. We just keep flowing dollars out there. And the mechanism for that is that because there's so much demand for the dollar, they overvalue it compared to what it would trade purely on an interest rate and kind of trade balance differential. So, they have this extra monetary demand for the dollar. It boosts our import power. It hurts our export competitiveness. Now, higher margin areas like tech and healthcare and financial services, we can still we can still export quite well. Um but lower margin things, that's where
[12:41] we we, you know, pretty much get killed, and that's our manufacturing base. Uh and so, kind of the cost of running the world's ledger and and having to, you know, I I support all the demand for uses of that lever let ledger is we basically outsource our industrial base. And I I do think it's it's time to bring some of that back, uh but but that's actually going to come at the cost of being able to run the whole world's ledger and being able to, you know, to sanction anyone and and kind of do whatever you want in that sense. Uh
[13:11] and so, I don't think that those those can be separated. Uh and, you know, if you look at at the this year, I mean, manufacturing jobs in the US are down slightly compared to start of the year. Uh so, it's not even like we're slowly uh kind of trending in this in a certain direction. We're it's still pretty much, if you look at a chart, you can't really tell that there was any sort of reindustrialization. Manufacturing spending uh on new new manufacturing facilities is not really a it's a it's a blip on the on the macro scale. Uh industrial
[13:41] production is flatish. Uh manufacturing PMI, so purchasing manager indices, have shown weaknesses all year. I mean, they showed weaknesses the year before, too. So, it's not like a new thing. Uh and so, um it's it's not a easy issue. At best, it's a multi multi multi-year endeavor uh that you can start. Uh but at worst, uh you fail to start it. Uh or you kind of do optics and and fail to get substance. Uh because these are very intertwined complex issues.
[14:11] Uh so, uh we are getting, you know, the the the private market it is doing a good job of building out AI, uh data centers, and trying to get the power to support all that. Uh there is clear demand for it. They launch these AI apps, and, you know, 200 million people sign up and start using them in in the US and globally. Um whereas manufacturing facilities are kind of a different story. Uh and so, you know, I I think that while the the kind of the diagnosis of the issue is real, and I do think that while after having been ignored in US politics for for
[14:42] decades, that the trade deficit, I do think it's right to be kind of front and center. Uh the question is, how is it addressed? And I think that nobody We're at a stage where no one really wants to pay the cost. And that's also why the fiscal deficit in the US and many other countries is not going down anytime soon. Uh nobody wants to pay the cost of getting that down. No one actually wants to cut the programs that are popular. Nobody wants to raise taxes uh you know, where it's unpopular. Um you get pushback on that. And then similarly, uh you know, politicians don't really
[15:12] want to do the cost of of reshoring things. Uh there's there's environmental impacts that is often they run into not in my backyard syndrome, where people say they like it in their country, but not near me. So, then you have this kind of uh fractured state of where where do you put these things? How do you power them? Uh and then even if you try that, it's like, well, you're going to have an issue with the dollar system. Uh and so, I think this is a a long-term trend that is usually not resolved smoothly.
[15:43] Incredibly interesting, Lynn. Um do you think a Treasury auction that fails, you know, that doesn't get a bid, is something that's in the cards on the short term? Uh not in the short term, no. Um so, the prime prime prime dealers are pretty much required to bid. Um and whenever they get too full, uh that's where the Fed bids. Uh the Fed can, you know, but they can buy Treasuries from them uh and basically refill their liquidity. Um so, I don't really see that anytime
[16:13] um in the kind of investable time horizon. Now, you could have a technical glitch of some sort or some sort of like kind of liquidity pop like we saw, for example, in September uh 2019, there was that repo spike, uh which, you know, by the next day, they printed money and put out. So, a lot of these little issues can be resolved by printing money. Um you get these little fires that pop up. I mean, people probably remember the 2022 UK gilt crisis. Uh you know, that was a little mini crisis that happened. Uh they they put
[16:43] out a little bit of money printing. Um and it's not, you know, obviously the UK has issues now economically. Um and and these things they they keep getting put out by, you know, you put out the immediate fire with a little bit of money printing, and you kick the can down the road. Uh and I think the US is going to keep doing that. So, no, I don't view a kind of a persistently failed auction as anything that's like investable. When do you think kicking the can down the road will finally, you know, bite the US in the United States um as as a
[17:14] proverb? Uh when do you think it will finally become a true problem that might not be solvable anymore by kicking it further down the road? I would say there's two answers to that. I think one is that there's already a problem. It It already impacted I mean, it that's why like voter sentiment uh consumer sentiment both for the prior administration and the current administration are low because it's the the core issues just not being tackled. Uh and so, and that's why, you know, even despite the fact that stocks are up and gold is up, uh the median uh household in the US is struggling.
[17:45] Um and so, it all it already matters. Uh we're already paying the price for these policies. Um but that doesn't mean it stops, right? So, the second answer to the question is, I I think not for a very long time. Uh like I think earliest is 2030s. Uh but it could go on a a lot further than that. Uh that's kind of where certain big decisions get made. For example, the Social Security Trust Fund runs out in the 20 in the mid-2030s. So, that'll be kind of decision point to see how they handle that. Uh cuz that has various political ramifications. Uh but between now and
[18:16] then, um I I think they can they will keep pushing this down, and they will keep paying the price for it. It's not a costless uh can kicking. Um and, you know, a lot of people when they when they think of like things like failed auctions or crises, they often look at this in a vacuum. I mean, I you know, I spend part of each year in Egypt. They were dealing with It was a couple years ago, it was 38% inflation. Um uh and, you know, the currency crisis all over the place and and issues like that. They weren't having failed bond
[18:46] auctions. Uh they, you know, it's like there's the US like we consider 9% inflation a an absolute crisis. Uh many parts of the world, that's like a normal Tuesday. Um and these systems can, you know, often keep the the wheels on the car more than you'd think. Uh and the US has a lot of runway. Uh but what snaps, I think, is is before the number snap, I I think the politics snap in in the sense that you have these kind
[19:16] of rising um populism both on the left and the right. Uh increasing discontent with how things are going. Everyone No one's really It is because it's a complex topic, you know, no one no one talks about Triffin's dilemma when they're talking like angry about politics, and no one's talking about, you know, when they think, why why is the deficit so big? People say, is it is it Trump's fault or Biden's fault? No one says, well, you know, maybe maybe we're still paying interest on the Iraq war from decades ago. Or maybe we didn't set our entitlement systems up
[19:47] uh well decades ago. And then and then, you know, they're basically very top-heavy now because they always expected to have the next generation be larger than the current generation. And none of these systems make sense when you get a generation that's smaller than the prior generation. And people live longer. So, you have these kind of structural issues that have been building for for decades. And so, you get these these kind of rising problems. But then, yeah, when it whenever you do have a little mini crises,
[20:17] they can put it out for a good period of time and keep pushing it. That almost sounds like a fourth turning type style thesis where, you know, political discontent would just increase due to these problems that we're looking at, and that could cause a certain type of cycle. Yeah, I think that I mean, I've read the fourth turning. I think that's what we're in. Um Now, the fourth turnings, they have a quantifiable aspect to them because they coincide with debt crises, long-term debt crises.
[20:48] And so, I mean, I think we're going through that similar environment now, except in the US. I mean, back when we went through the prior fourth turning, we had an external enemy to focus on. We were very unified as a country. And now, there's really there's no external enemy to blame, whether it's the US trying to figure out who to blame or parts of Europe trying to figure out who to blame. The the calls are inside the house. Is the problem. We just mismanage our ledgers. We've got demographic
[21:18] challenges. In some cases, more more so Europe than the US, but there's been energy mismanagement issues. And these things, you know, the the the price that the bill slowly coming due. It's not that there's one, you know, day of reckoning where it just hits all at once. It's already hitting, and the consequences are already being felt, and I think they're going to continue to be. And it is hard to say ahead of where this resolves. I mean, do does it kind of swing does one of the popular sides eventually get kind of a decisive victory and a persistence and a kind of
[21:50] a cultural realignment around that new approach like we saw in the prior fourth turning? Probably eventually. I still think that's probably got a longer way to go because we still have very high signs of populism, very high signs of both trying to struggle with the existing system and trying to figure out what the next system would look like. And it is, you know, it's hard it's hard times for kind of broadly speaking the the Western world. No, definitely. And you mentioned incredibly interesting point there, demographics for a second. Of course, if
[22:21] you have declining birth rates or, you know, a population that's decreasing in size due to the birth rates that you have, that only makes the mismanagement or at least the high debt to GDP that you have that much harder to handle. Yeah, I mean, there there used to be this kind of the idea that that aging demographics was deflationary. But that's only generally true if you don't really have entitlement support systems. So, I mean, if you look at, you know, many many years and decades ago, many elders were impoverished.
[22:52] And now, in many, you know, Western countries, you know, elders are not impoverished. They they, you know, they they consume a lot of health care. They have support. And all that is consumption. And they're they're past their their productive years in most cases, not all cases. Individuals differ. But they, you know, they stopped working, they're still consuming. And when you have that kind of very top-heavy environment, that can actually be kind of inflationary. And I think Japan has given some people in the world a little bit too much complacency because they aged first. And it for them
[23:26] it was rather disinflationary. But there's a couple things to keep in mind. When they're first, they had the whole rest of the world that wasn't in that state yet. So, they they, you know, they while they're still exporting kind of complex goods, I mean, they were benefiting from having China as their neighbor right next door, this this huge labor pool to make, you know, goods and services for them. They had, you know, all these other things going on. They, you know, they had this the whole world is not a closed system, in other words. They also had
[23:56] certain things like they had so many decades of so high productivity that much like a retiree, the whole country had a big stored up nest egg, and they still do. They they have over, you know, a trillion dollar in in, you know, foreign exchange reserves and and and things like that. So, they, you know, even though they have a lot of public debt, they actually also have a lot of assets. They own, you know, financial things around the world that provide them interest and dividends to kind of support their expenses. They also have a huge amount of social
[24:27] capital in the sense they have a very harmonious society that is oddly resistant to kind of political polarization and deterioration. It's not immune, but it's it's just very resistant to it. And so, and that's a type of capital because, you know, if you don't have people breaking things, you don't have if everybody kind of doing their role in a sense, it limits how much you have to expend on just keeping the the wheels going. Now, when the whole world gets to Japan's level, which is kind of in the
[24:58] cards over the next decade or so, there's there's no like other entity that is going to support us. Like we the whole world is kind of Japanifying, except in many cases doing it without the giant nest egg that Japan has. And they're doing it without another giant labor pool anywhere to kind of be part of the the next stage of the pyramid. And so, it'll on average I think be a lot more inflationary for the world as we go through that.
[25:28] A lot more inflationary, well understood. And I guess now that the inflationary, you know, genie is almost out of the bottle, it's definitely entered into the public zeitgeist. It's no longer just money printing, we're expecting prices to rise. It's almost a self-fulfilling prophecy at that point, isn't it? Well, to some extent, I think that that's um I mean, inflate like price inflation is very closely aligned with money supply growth with somewhat of a lag. It's not like it's not like on a year-to-year basis, but if you take any sort of like five-year rolling period, usually money
[26:00] supply growth and price inflation are heavily correlated. And so, when you don't have rapid money supply growth, psychology doesn't really do a lot to boost prices. You can get little shortages in certain areas, people hoard things and things like that, but it's not really structural. I think it's more like you get money supply growth without enough productivity to offset it, and then people start to realize it. And and so, you know, they they start to try to demand the wage increases to keep up with inflation rather than kind of
[26:31] get left behind. So, you know, psychology can contribute can contribute to it. But I think politicians often use that as a cop-out. I think it ultimately at the end of the day comes down to are you growing money supply a lot faster than productivity growth? And if so, you're you're going to get inflation that's going to over time kind of trickle through the economy. And again, inflation's not really one number. There are certain things you can get wildly better at making. You know, over the past 25 years, you've gotten wildly more productive at making plastic toys, electronics,
[27:01] textiles, things like that. We've automated and offshored those things. We're not way better at making gold and, you know, waterfront property and even normal property, beef, you know, kind of grass-fed beef or hospital services. These things have pretty substantial cost to them. And so, they tend to reflect the money supply growth a lot more than some of those mass-producible goods and services. Now, again, I think in the in the next several years, some of the things that we're able to mass produce
[27:31] will be a little bit different than it has been in the past 15 years. I mean, maybe we can mass produce accounting services because AI can, you know, let the let the one account do the work of 10 accounts, for example, or five accounts, whatever the case may be. Some of these more repetitive white-collar services can be, you know, made more productive. Not by necessarily eliminating those workers, but by making each remaining worker basically a manager able to kind of use tools, in this case AI tools, to do more than they otherwise
[28:02] would have, which is a form of productivity growth. Kind of like how if you give a farmer a tractor, he can do, you know, the work of 10 farmers by hand or more. And I, you know, I think you can get that that kind of mass production of certain services over time. You know, mass production of art, mass production or at least of, you know, mid-quality art. Mass production eventually of a video, which is slowly kind of gaining quality. These things and and editing services and translation services. Certain things can get more productive, but that doesn't really, you know, get
[28:33] get meat on the table and things like that. Well understood. Lynn, what are some historical historical parallels that you are able to draw upon to try to look out, you know, how does this fiscal dominance end game might look like? Well, by examining prior long-term debt cycles. So, I've pointed out for a while that, again, like this this period looks more like the 1940s than the 1970s because of the the source of the money creation
[29:05] and how it's ultimately addressed. And so, basically it's coming from the fiscal side, not from the bank lending side. And so, I think that's kind of the closest parallel. That's what I've used for investing. Now, things aren't always the same. Again, in in the 1940s, the US obviously there was a war, first of all. And also, the US had very strong demographics. We had a trade surplus. In many ways now, the US looks like the UK did in the '40s, which is we were the incumbent power, the incumbent reserve
[29:35] currency with a trade deficit. In some cases, China's now the US because they're the ones with the really big industrial base. They're the one with the really big trade surplus. with the difference being that they're entering it already old. They already have a age demographics, which is a a very different situation than the US had in the '40s. So, you never have kind of a an apples-to-apples comparison. You can't just say it happened like this, it's going to happen again. Obviously, also technology's way different. Back then, when they inflated away the debt,
[30:06] um information was very slow. Information was very centralized. Uh now you have social media. Now people can meme about the debasement in real time as it happens. Um and so it's hard to kind of keep the social wheels on the cart um in this environment. Uh so, there are a lot of differences, too. Uh but basically, um the things you can look at are one, what happens in emerging market recession because a developed market in fiscal dominance has certain emerging market
[30:37] characteristics. It's not exactly the same, but there's certain directional similarities that you can learn from. And then two, you can look at developed countries in the last time they were in fiscal dominance, which was the, you know, the '40s and '50s. Uh and see how, you know, what assets did good, what assets did bad, what were the social ramifications. And then you can you can kind of map that all out and think, okay, well, what's different now? How does technology and and today's culture change how some of that's likely to play out. So, what was the answer to this question
[31:07] then? What assets did well in the 1940s? And and what what do you learn from that for a portfolio allocation today? Well, so harder assets over softer assets. Uh so, basically, if you bought equities, if you bought real estate, um if you bought, you know, certain commodities, uh commodity producers, um those things uh did well. Gold was was tougher because it was pegged to currencies. And in the United States, I mean, it was literally illegal to to own gold, uh which is crazy. Um
[31:37] and so you have to kind of adjust things to the the the current era. Uh but yeah, the short answer is you um you know, avoid currency and and bonds other than your kind of the amount you need to to function. Um and and for like volatility reduction or trading potentially. Um but you you stay structurally long those scarcer things. And then the only caveat is you avoid bubbles where possible. So, if something gets radically overvalued, it can still underperform bonds uh because, you know, if you pay 50 times earnings for a stock that's not
[32:08] growing very quickly, uh nothing stops it from falling to 25 times earnings, for example. Um in in a more kind of after the bubble kind of rolls over. So, you still want to be careful about valuations. Um but in general, you want to own scarcer things. Um and uh and then some degree of diversification helps because an investor can have a really strong thesis and then the government can say, well, okay, we're banning that thing. Uh so, like, you know, investors like, well, I'm going to buy gold. And they're like,
[32:38] okay, cool story, we're going to make that illegal to do. So, we're going to hurt the liquidity in the market and push that all in the gray market, the black market. Um and same thing can happen today with certain industries uh they like nations can national national like um nationalize things. Uh they can try to restrict things. So, they can You have You have to expect curveballs to assets that you think are going to do well. Uh and that's generally why you want a handful of bets. Um and to kind of a adjust accordingly.
[33:09] >> [laughter] >> Expect curveballs. Incredibly interesting. What do you think of this concept of a debasement trade? Um that kind of implies getting out at some point again for fiat. Um you mentioned earlier being structurally long hard assets. That kind of implies staying the course and staying within these hard assets. Well, yeah, so the debasement trade is term that became popular just recently. Uh it's funny cuz many of us have been talking about it for for quite a while. Um
[33:39] I I mean, basically, it's like you have I think what's what's new is that large institutions are talking about debasement and talking about the risks of sovereign debt, which would have been unthinkable a decade ago, pretty much. Um and so it's kind of the mainstreaming of of concerns that that many investors have had for quite a while. And you know, in some cases, they're late to the party. I mean, basically, you know, when people were talking about that when when Bitcoin was worth a tenth of what it is now and gold was worth third of what it is now,
[34:09] uh and stocks were half of what they are now and bonds were worth, you know, 50% more than they are now. Um a lot of the money was already made in the past five, six, you know, seven, eight years of um just being in the right side of all this debasement. Uh if anything, I think some of it could slow down in the sense that um because of how high stocks are priced, I'm less confident that they're going to outperform bonds over the next three to five years. Uh if you had like, you know, in 2019, I was like, sure,
[34:40] stocks are a little expensive, but I'd much rather own them than bonds. Um and they absolutely killed bonds in that period. Now going forward, I I view it I still lean toward equities over bonds, uh but I'm a lot more picky on what equities because, you know, uh if you have like I I used Costco as an example, they're, you know, they were trading at 55 times earnings earlier this year. Now they're in the upper '40s. You know, nothing really stops that from potentially going down to 30 times earnings.
[35:11] Um and so even if bonds get debased, you can still have very high-flying equities just kind of roll over and and sag. You take on that risk, at least. So, I think you want to be picky about valuations. Uh and then it's less clear that you just buy a stock index over a over a bond index. Um but I I still in general, you still want to be structurally long things that are scarce, uh meaning that they're, you know, they're resistant to being eroded by AI. Um they're resistant to just printing more and more of that good. So, if you
[35:42] own currency, it's like a good that can just be printed. If you own bonds, they're just printed. Uh but if you own gold, um you know, you want to you want to avoid buying into a bubble spike, uh and kind of, you know, make sure your timelines and and volatilities in check, but you don't you don't have to worry about money printing per se. Uh and the same thing is is true for other kind of assets that have an economic moat, a network effect, uh something that kind of keeps them scarce, pretty pretty durably scarce, uh while also being not a very crowded
[36:12] trade. So, assets that are on average under-owned or average-owned, um and that are that are going to be in demand for 5, 10, 15 years in the future. We oftentimes hear arguments regarding the commodity complex as a whole that it's been underinvested in for the last few decades. If you look at, for example, copper discoveries, large copper discoveries, there haven't really been any the last few years. Um is this a place to be looking for assets that are under-owned like you described? I think so. I mean, I I think you want
[36:42] to be careful because I mean, I I I've heard this story five years ago, too. Uh and then, you know, so it's like it still wouldn't really play out in in a strong sense. Um you know, I I do think Okay, we don't really have like major shortages right now of most things. Obviously, rare earths have become a lot more politically charged, not because there's not enough of them, but because the border suddenly matter. Um uh energy is on the cheaper side uh because at the current time, there's still plenty of it relative to demand. Um but I do think that when you look out several years, uh I think US shale uh is
[37:15] kind of gradually rolling over because it's got a it's got a high depletion rate and not a lot of reason to invest at these prices. As you mentioned, copper mines, I mean, they take a very long time to bring online. Um And there's fewer discoveries and and kind of less willingness to, you know, all all the all the permitting and all the setting up of a a very large mine over the long term. Uh so, I think when you can find these things at good prices, uh they're attractive. So, I like energy infrastructure. Um I do like energy and and like oil and gas producers, especially the larger
[37:46] ones that are able to kind of weather these these longer bear markets and have good balance sheets and, you know, can get through things. Uh but that's certainly one of the key slices in my portfolio is to own uh the commodity complex. For some of the commodities, I prefer to own the underlying. So, I've I've owned gold and uranium more so than gold and uranium producers, for example. Uh but on the other hand, uh I've generally owned energy producers rather than, you know, energy futures, for example. Uh and that's been the
[38:16] better play to to be in the producers. So, it depends on the asset, um but there are there are pockets of attractiveness there, yeah. All right, well understood. And we were talking about a a wider index of stocks, for example, S&P 500 earlier. Howard Marks, of course, well-renowned investor, recently made a interesting argument, I think, where he argued that the companies that are constituents of the S&P 500 are higher quality than ever and they're also growing faster than ever. So, while valuations are
[38:46] definitely historically, uh you know, elevated, one might argue that these companies also warrant a higher valuation. And he says they're probably still overvalued, but perhaps lesser than you would initially think. What do you think of that? I mean, I think there's reason to that. I mean, I've been long US equities for for quite a while. Um and they've done they've done well. and so it you have to kind of look at an individual individual by individual basis. I I do think some of that is changing in the sense that especially the big tech stocks, they had very kind of
[39:16] like growth without a lot of capital intensity because they had big network effects, right? So, things like Google, Facebook, um uh you know, and these others, uh they've had these really big network effects, Microsoft, uh where they don't require a lot of capex. They've got a lot of trapped users, basically. Uh and so they they were just kind of grow with these network effects, high ROI, um and and just be able to, you know, kind of grow their balance sheets and and the whole time and buy back a ton of shares. Now they're entering a more
[39:46] capital intensive environment where they're now they're fighting over GPUs and now they're actually doing a lot of hardware investments to try to retain a lot of their customers and stay competitive. So that kind of that can actually start eating into their margins and eating into their quality metrics. They kind of are like kind of almost like reentering the real world here where there's like hardware spending. Um and so I I still think you want to be careful about valuations. But yeah, when I look at either value stocks or growth stocks, US stocks,
[40:17] foreign stocks, I always take quality into account when assessing them. You know, there's some things that are lower quality I want to pay eight times earnings for and there are other things that I am willing to pay 30 times earnings for because, you know, they're they're growing at 20% a year, they have a wide economic moat, they have very high ROI. In general, I think that, you know, US kind of tech companies are very high quality, but many of them are also very very expensive. So I think you want to kind of invest cautiously.
[40:48] What are you seeing on the international equity front? For example, Asia or Europe? Are you able to find interesting value propositions over there? Uh to some extent. I've been bullish on Japan and Latin America and that trade has worked out very well in in recent years. I continue to be kind of bullish on those regions. Certain parts of Southeast Asia are attractive. India lagged in 2025 and I think that they, you know, over the next two years, I think they're pretty well positioned. Some of the valuation pressure went down. That's an example of, you know, people say like So the thing about
[41:19] India, of course, they have really good demographics. A lot of things are going to be high quality, but you can still overpay for high quality and growth. So I think they're kind of after a little bit of a kind of weaker market. They're entering potentially a better two years. China is very cheap, but you have to price, you know, the risk of you know, getting zeroed out at some point because of geopolitical concerns and they have in general slower growth, but but it's a cheap market. Um And so I think there are pockets around
[41:49] the world. I've invested in kind of various foreign banks, for example, that have done quite well. Um and so there yeah, there are pockets. Um And I in general, I think that, you know, Chinese currency right now is very undervalued. And if there is some sort of revaluation at some point, those could do very well in dollar terms. But with all these types of plays, you have to kind of price it accordingly because, unlike gold in your possession or unlike Bitcoin you have the private keys to, you could wake up one morning
[42:20] and just like your ownership of these assets is just not yours anymore. That happened to a lot of investors in Russian assets a handful of years ago where they owned a bunch of undervalued things, including some that are that were quite well managed and that because of things just outside of their control, it's like, well, that thing in your brokerage account is not really fully yours anymore. And so there are kind of pockets to be careful of, but I think it going back to my prior statement that you want to be diversified because governments can throw curveballs at you
[42:51] in a geopolitically challenging or fiscally dominant environment. So you want to find things that are cheap and doing well, but, you know, spread your bets out a little bit. Spread your bets out well understood. Beginning of this year, the yen carry trade was an incredibly, you know, important thing. It was a wave in the in the mainstream media that we heard a lot about. Do you believe there's potential to, you know, get a second episode of that yen carry trade unwind? I mean, I think so far that's got a lot more noise than the outcome. I mean, US
[43:23] stocks are high and Japanese stocks are so that got a lot of noise and and you know, it had these little moments. Um In general, I I think that I'm less bullish on the Japanese stock market than I was before just because it's done so well. So it's not it's not quite as cheap as it was before. They have rising bond yields. And I think at some point there the lever that they can still pull is that they can print money, buy back their own bonds, but then also sell some of their
[43:53] reserves to buy back their own currency. So they can stop too much currency weakness. And that would if they do that, that would impact US bond markets because that's primarily the assets they'd be selling and that could force the Fed to, you know, step in with some liquidity moves. So I think much like the UK guilt crisis in 2022, I think there there will be episodes where all this matters. Um I I don't think it's like one big thing you base your portfolio around unless you're an active trader, perhaps.
[44:23] But I think that there will be little hiccups along the way and I think the the ones I'm watching for 2026 are basically what's going to happen to Fed balance sheet because we're ending we're ending quantitative tightening and we're probably going to be shifting to gradual balance sheet increases and and I think the timing and magnitude is still an open question. And then likewise, what's going to happen with Japan when they they want to keep running these pretty big fiscal deficits. They also, much like the US, they have some tension between their government and their central bank. They've got rising bond yields
[44:55] and, you know, there could be pretty pretty decisive moves. And and going back to the debasement thing, the way this the way this always plays out is that investors are not going to get yields that fully compensate them for the amount of money creation that's happening. And that could be outright yield curve control. That could be softer forms of yield curve control, basically central bank support for the for these bond markets. It could be financial repression where they kind of force certain pools of capital to own bonds and take the hit on
[45:25] purchasing power. There's lots of different levers that I think are going to play out in in the US and Japan in the years ahead and there will be little mini crises. It's just that things that make headlines are often not what make money. Much like over the past year, people talked about the yen carry trade. Um And I think we things are structurally changing. It's we've had this kind of 40-year period of you you you borrow currency, you're basically shorting that because the yields just keep going down
[45:55] and you and you buy equities, you buy other currencies and things like that. And I do think that we are entering a period where that's going to be less attractive to do and therefore that can put some downward pressure on these assets. But I don't think it's like a one-time event that's going to play out. I think it'll be a punctuated by many little mini crises over the next 1 3 5 10 years. Well understood, Lynn. Thank you for breaking that down. I would love to take you back to gold and the debasement trade for just a second. You know, one
[46:25] potential outcome that we hear quite often in this sphere of the internet is a potential remonetization of gold. Incentives for governments would be there because it would clean up their balance sheets almost overnight. However, one of the, you know, consequences could be inflation. Do you think a partial revaluation, partial remonetization either in the West or through, for example, a BRICS, you know, trading currency that they're floating the idea around of, is within the cards anytime soon? Well, I don't think that politicians want to constrain themselves.
[46:56] So I think that that's that's not something they're going to turn to anytime soon. I do think that um it is in a lot of their interest now for the price of gold to go up. For a while it was in your interest for price of gold not to go up. But now, as gold goes up, it it kind of strengthens some of their sovereign balance sheets. You know, they're they're basically short their own currency and they're long gold. And and we've already seen a pretty big move there. And I think that move still has legs to it. Um I think you'd have to hit a a bigger
[47:26] crisis before politicians are kind of forced to do something like that. Basically, if their currency is failing and interest rate hikes are not really addressing it because they just blow out the deficit even more. And they need a mechanism to to reestablish faith in their currency. Um there are ways to kind of bring back gold in the system and kind of do a quicker one-time devaluation and then kind of back it up with with more gold backing to to kind of reestablish a baseline. It's hard to do that until you also fix the entitlement systems. If you're you know, it's like it's like you can get a blood
[47:57] transfusion, but if you're still bleeding rapidly, that's not going to last very long. It's not like a it's not like a solution. It's only like a temporary fix. So I think it's going to be paired with something like that, but I don't think we're anywhere close to that yet. I think that the crisis has has longer to go before moves like that are are considered. So, you know, part of why I like to be long just unlevered gold and other scarce assets is because I'd rather be on the right side of that when that one day comes, even though I don't really plan for it in advance
[48:27] because anyone who tries to plan that in advance always kind of expects it around the corner and then five or 10 years go by and they're they're still expecting it. Um And so I'd rather be surprised to the upside with something like that versus expect it. Surprise of the upside. All right. Lynn, what are some of the most obvious or, you know, most investable trends that you foresee for 2026, perhaps 2027, 2028? Um I think right now I mean, the unpopular
[48:58] view in the market, I think I think regional banks are actually pretty cheap in in the US and no one no one really wants to own them, but they're they're cheap and I think that they are probably going to surprise the upside over the next couple years in terms of performance. Um I I think that Bitcoin is is cheap right now. I think it's probably got a good two-year performance ahead of it. Um I think that energy is cheap. Energy infrastructure, energy producers, I think those are cheap. Um
[49:28] I I think certain Latin American, Indian assets are inexpensive and are and are pretty well positioned. And I think, you know, looking back two years from now, I think, you know, some subset of that will probably have disappointed and another big subset will have probably done well. Uh which again is why I want to spread my my bets out so that, you know, I can I can take a hit on an asset that has been a little bit disappointing. For example, the past two years energy producers uh and service companies have been kind of disappointing after a really good run in
[49:59] in 2022. Um uh but generally thinking I I there are these pockets that are still uh attractively priced uh and that I don't think they're going to be hit by major crises uh in the next kind of investable time horizon. Definitely a honeypot of insights there and a great place to start doing some research. And perhaps you can talk about Lynn Alden investment strategy for a second. Uh sure. So, I I run LynAlden.com. I have public uh free newsletters and occasionally public articles. And I also have a low-cost research service that
[50:29] goes over macro conditions, uh investment ideas, uh and and model portfolios and and things like that. And perhaps you can also quickly talk about your book, Lynn. Uh sure. So, I I I wrote Broken Money. Uh came out in 2023. Uh and it covers uh kind of the history and the future of money through the lens of technology. So, uh how changing technology has impacted money in the past, uh kind of explores a pretty deep nature of what money is, how it changes, uh and uh people have liked it from
[50:59] retail investors all the way up to to some central bankers have read it. Um and so, people can people can check it out. Lynn Alden, thank you so much for your generosity with your time and insights today. Really appreciate it. Thank you. This podcast is for general information purposes only and does not constitute investment advice, an offer, or solicitation to buy or sell any securities. The views expressed are those of the host and guest and are not necessarily reflect the views of the company or their affiliates. Guests on the show are not compensated
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