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in the normal world on at normal times the way the system works is central banks put money on deposit and banks come along and they borrow that money and lend it to those who they expect will pay back and that then passes through the credit system and then all financial assets compete with each other and it spreads out credit gets expanded and then there's the issue of payback and then we have the cycles money's too loose inflation rises central banks put money on the pause uh titan money and it slows down and we go through our cycles that's no longer the case for the most part today the economy and the markets are driven by the central banks and the coordination with the central government what i mean by that is the purchases right now of financial assets by the federal reserve or the purchases by the federal reserve of government securities are the drivers of that market so the production of the money if you look at money and you look at who is in the market so the federal reserve for example will set an interest rate that for different types of creditors based on its economic objective in the old days let's say when we had the 2008 financial crisis we needed to protect banks because they were systemically important and then money market funds and and commercial paper and the like now it's much broader than that the whole economy is systemically important if they didn't go out and make lending to uh companies including what we call fallen angels those that were just above investment grade and fell into investment grade we would lose large parts of our economy and so we're in a situation now where the they're the market makers take the market out take the central banks out and you have a different story um including the value of money what is the value of money i mean think about it in europe for example the central bank will lend to banks at a minus one percent so that means you don't have interest payments in fact you have interest credits and the central banks will take that debt on they'll own it and they have a political agenda not a economic agenda in which um they'll determine whether they'll be paid back or when they want to be paid back based on how the economy is doing and what will happen so in that case like example in europe and the similar situations in the united states and japan in varying degrees they will make loans that will have um interest credits almost or let's say zero you don't have to pay interest back and you may not have to pay principal back it depends on what the conditions are at the time so those are markets which are driven by central banks not only their actions but their desire to be an owner of those assets and their priorities about that ownership when they buy and when they sell are not the same as the classic free market allocations and as a result the capital markets are not free markets allocating resources in the traditional ways central banks are willing to go and eat and need to go as far as it takes in order to keep the system afloat and because we're in the late this late stages where we have a lot of debt you are going to see central bank's balance sheets explode they have to because the choice is the sinking chip um i've studied um the rises in decline of reserve currencies because i i think we're at an uh a key moment i studied the rise and decline of the dutch gilder the rise and decline of the british pound the rise and decline of currencies throughout history and the track record um is a perfect track record when the time comes where you're faced with political disruptions is there enough money the question will be what the value of the money is and how far they can go what are the limits to that and so when we look at the limits we can discuss with the limits but the you know what are the market limits or how does that become manifest i can describe that but what's their willingness to go their willingness to go is enough to keep uh order uh which means uh acceptable economic conditions yeah they don't apply i think the important thing to understand is that um there's a a real economy and then there that has a supply demand of stuff there's a financial economy that has its supply demand of money and credit and that the price of an asset will equal the risk-free return which you can see is something close to zero a risk premium so when you're looking at a bond and let's say in the united states treasury bond less than one percent or if you take a corporate bond a good quality corporate bond slightly more than one percent and you look at that or you go to uh other countries and it's essentially zero that is the return that investors are getting for the risk-free return in terms of equities you have to ask yourself what will the premium be for equities and the central bank has the capacity to put money in the system and the money uh competes for getting returns and so if you ask yourself what could the risk premium b or what would the expected excess return for equities be over cash and they put they buy assets that number could go from four percent uh let's say to two percent the p e is just the inverse of that so just by way of example you could make uh the p e go from 20 or 25 times up to 40 or 50 times by the demand that may seem implausible that's just because people have sticker shock but it's it's no less implausible than the zero interest rates so the risk premium will be uh driven by the amount of liquidity put in and multiples are not shouldn't be used as um in the traditional way of a frame of reference i think you have to understand that the capital markets drive the economy and the pes and the risk premiums more than the real economy drives the capital markets um think of it this way you don't want cash because and i don't think you want bonds um because you get no interest rate you get a negative real rate so you get taxed at that negative real rate and then so from a holding point of view it's it's it's got no return and then the central bank is going to print plenty more of it and produce its supply so there's a move to what is a storehold of wealth you know think about it you know like all of us what is a good storehold of wealth and if you look at history through times it's basically almost the reciprocal of the value of money and and we see that from financing you know when you think um a company or an individual thinks i can borrow money at this level and i can lend it at that level or i could buy my stock back at that level you see that kind of movement and so um you one through history sees that uh there are different storeholds of wealth that are basically almost the mirror image or the reciprocal of the value of money and so that storehold of wealth is equities in other words um if you were to think about certain types of equities that are not let's say economically sensitive but if you just buy a company and and so on and you think it's the reciprocal of that and you think that the and you realize that they have to put liquidity in the system um then it's equities it's gold it's it it is what is the thing that is the reciprocal of the value of money that you have to hold uh hold you know your wealth in and so that's what we're seeing and you see it if you've seen it through history at the you can go to the dates it's happened march 1933.
um same thing august 15 1971 um nixon same thing to values um you could see it um when mario draghi in 2012 said we'll do whatever we it takes you produce liquidity and you produce money and that creates the bottoms in those markets because really you're dealing with a liquidity issue the same in 2008 um in november of 2008 it was the the top plan and quantitative easing so through history i can take you back to the dutch and and so on that decision that they're going to print money and buy financial assets and lend money to the government which will also disperse money to the poor to those who need money in the companies that process has happened over and over and over again in history and it means that you know what do you hold during such things you hold reflation assets doesn't mean inflation assets what i mean is um where there's inflation in goods and services let's put that aside for a moment but there's first the inflation in financial assets as those risk premiums are put are driven down and that liquidity is put into the system and there's the competition for trying to get returns you
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