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Ask The Expert

Ask The Expert - Brent Johnson - June 2022

ask the expert brent jonhson

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Brent Johnson is the founder and CEO of Santiago Capital. He manages $175 million for High Net Worth families and has over 20 years of financial experience. His knowledge of precious metals, currency markets & macroeconomic trends are have been renowned by many podcasts, along with tv and print media. In today’s edition of Ask the Expert, Brent answers seven of your questions, including:

  • Which precious metal is the best to own in the years ahead?
  • Do the Feds fear a soaring dollar due to the deflation it can cause?
  • What could possibly cause a FED pivot?

For the answers to these questions and more, listen here:

Man: You're listening to "Ask the Expert" on Sprott Money News.

Craig: Well, greetings again from Sprott Money News and sprottmoney.com. It is June 2022. And it's time for your "Ask the Expert" segment. I'm your host Craig Hemke. Joining us this month is a new guest, but an old friend, Brent Johnson, the founder and CEO of Santiago Capital. Thanks for joining us today, Brent.

Brent: Happy to be here, Craig. I don't know if I'm an expert or not, but I'm happy to answer your questions.

Craig: You're more of an expert than I am. So it's a pleasure to have you here. And again, Brent, obviously a great follow on Twitter. You can find him there. What is it? Brent, is it just @santiagocapital?

Brent: Well, you can do the search function, Santiago Capital. You can also...the actual handle is @SantiagoAUfund. But if you just go to the search thing and type in Santiago Capital, you'll find me there. It's a black seashell logo. Yeah. And I'm pretty active there and you can just do a YouTube search or a Google search as well, and you'll get plenty of links and plenty of information. So feel free to check that out.

Craig: Absolutely. And again, full of very good information, certainly a good follow on Twitter, and someone, if you didn't know Brent, before today, you're gonna wanna listen to this. Before we get going, for all the gold and silver investors out there, you always wanna stop by Sprott Money for any kind of precious metal that you might be in the market for. But if you're looking for a secure place to store your precious metal, Sprott Money has a special storage promotion right now where you can store all of your metals in our secured Canadian facilities for free, no charge until August 31st. That's a couple of months of free storage. If you wanna find out more, give Sprott Money, a call at 888-861-0775. And then as always, yeah, just thank them for putting this content out there. The easiest thing you can do to show your appreciation is to give us a like, maybe a share, or a subscribe on whichever channel you are listening to. All right. So Brent, with that again the format for "Ask the Expert" is we solicit questions on the internet from Sprott Money customers as well. And I've got seven of them for you today. If you are ready, shall we dive right in?

Brent: Let's do it.

Craig: All right. My friend, for those that follow you on Twitter or have seen you before, you now have the moniker of the "dollar milkshake" guy, right?

Brent: I do. For better or for worse, I do.

Craig: The first question is can you explain in English what your "dollar milkshake theory" is for those that don't quite know?

Brent: Yeah. So in very simple terms, I coined this because, you know, subsequent to the global financial crisis in 2008 and over the last 10 years, 12 years, 13 years, or whatever timeframe you wanna define that as the world was essentially flooded with liquidity by central banks, governments, and monetary authorities around the world. And for a variety of reasons, a number of which have to do with the fact that the U.S. has the global reserve currency, it's my belief that the U.S. is going to suck up all of that liquidity into the U.S. and the U.S. markets. And so, regardless of whether it was yen that was printed, yuan that was printed, Brazilian real, Australian dollars, euros, I think a lot of that's gonna get converted into dollars and sent into the United States. And I think that's going to make the U.S. dollar extremely strong versus other Fiat currencies.

Now, whether it is strong versus commodities and real assets, that I'm not sure. But I have a strong conviction that it's going to dramatically outperform other Fiat currencies. And as a result, I...it was kind of a play on this movie called "There Will Be Blood" where this, you know, oil baron was, you know, negotiating a piece of land with one of his neighboring competitors. And the guy was trying to get him to buy his land. And he said, "I don't really need to buy your land. All I got to do is stick a straw down in on my side of the fence, and I can drink all your oil, and I can drink your milkshake." And so that's kind of what I based it on. It was just kind of a simple way to explain what I think it's gonna happen as we move into what I believe will be sovereign debt and a sovereign currency crisis. So I hope that explains it. If not, people are feel free to, you know, shoot me an email or something, I can try to do a better one.

Craig: But again, it's kind of a dollar relative to all the other Fiat, the dollar soaring, not necessarily collapsing.

Brent: That's exactly right. I think there's this popular thesis out there, especially among gold and silver investors, which makes sense. If you've studied Fiat currencies, you know that over long periods of time, the purchasing power of Fiat currency is horrible, right? It loses its purchasing power. And you know, many people have seen these charts that go back 50 years or 100 years and, you know, 80%, 90% of the purchasing power of the dollar has been inflated away. And the thing is similar things happen to other Fiat currencies. It's not a unique situation to the dollar. And so that's one of the biggest arguments for owning gold and silver, and I'm a huge proponent for having gold and silver in your portfolio. But I think you gotta be careful when you say that the dollar's gonna go to zero or the dollar's gonna lose all this value because we do still live in a Fiat world. And these other currencies, in my opinion, are even worse than the dollar. And if the dollar goes up versus these other Fiat currencies, really bad things are gonna happen in financial markets. So I think you gotta be careful when you...rather than saying the dollar's going to zero, maybe just say, "Gold's gonna go higher."

Craig: Well, that's a pretty good segue into the next two questions I have for you, Brent. Question number two is, do you think the Fed actually might end up fearing a soaring dollar due to the deflation the debt often presents?

Brent: Well, in short, yes, I absolutely do. And then this is another point that I try to make quite often. So I'm gonna give you a longer-term answer, and then I'm gonna give you a shorter-term answer as well. But you know, a lot of people will again...when they're arguing that the dollar's gonna lose value and the reason you have to get outta the dollar is that they will say that the Fed is going lose control. And my point to them was always the Fed losing control is not the dollar going lower. The dollar kind of going lower in a managed fashion, that's exactly what the central bank, the Fed wants, right? They want to do that. The dollar getting away and the Fed losing control is the dollar going higher.

That is the whole reason that the Fed was put in place in the first place was to be a lender of last resort and to counteract the deflationary pressure of a rapidly rising currency. So, number one, yes. I absolutely believe they fear a dollar that rises out of control. Now, in the very short term, I actually believe that the Fed wants a stronger dollar. I think that they are kind of using that as a way to tamp down the inflationary pressures that we've seen. And I believe that it's being used...Well, whether it's its primary reason they're doing it or whether it's just a knock-on effect, you know, the dollar going up puts extreme pressure on other countries around the world. And I think the U.S. can use that to its advantage when it's trying to negotiate either geopolitical deals or trade deals or whatever it is. So I think they're trying to put, you know, the rest of the world under pressure so that they can extract, you know, better terms of either trade geopolitics, you know, treaties, alliances, all that kinda stuff. So I think in the short term, they want a stronger dollar, but in the long term, they certainly don't.

Craig: All right. Well, then that then leads us to question number three. You mentioned the issues that the stronger dollar causes, not only to other major Fiat but to emerging markets as well. And as we record this here in June of 2022, the Japanese yen is just collapsing versus the dollar to levels not seen in 20 years. And that has impact for Japan, but other markets as well. And so I guess the actual question is will the falling yen force the Chinese and the people's Bank of China to devalue the yuan as well?

Brent: So again, in short, yes. And it's funny, it's nice that somebody asked this question. I was at a conference in, it was either March or April and somebody asked, what was the thing I was most focused on? And my answer was the Japanese yen. And the reason is for that exact reason, which you just brought up Craig is, you know, the yen has fallen 15% year to date and 20% over the last year. That is an incredible move for a non-emerging market currency. I mean, the yen is one of the biggest, if not the second biggest currency in the world. That is an enormous move for a currency. That is a big deal. And it puts a lot of pressure on other Asian currencies because, you know, they're competing, you know, regionally with the Japanese yen and as, you know, yen goods become more competitive, it puts pressure on China.

China is already having to deal with a number of pressures because their import costs are going up because they have to import a lot of their food and a lot of their energy, those are priced in dollars. So not only is the price of them high, but the dollar is high. So, they're kind of getting double screwed, for lack of a better word, on their import costs. Their top-line revenue is down because they're having deflationary pressures from their overpriced real estate market, etc., etc. So they're really getting squeezed. And now one of their competitors, the Japanese yen, is losing value and becoming even more competitive than theirs. So I think it puts enormous pressure on China and Hong Kong. And I think it will ultimately lead to both the yuan and the Hong Kong dollar losing their peg and depreciating versus the U.S. dollar.

Craig: And I guess just in layman's terms for people listening, I mean, when I think about it, I remember the last time that Chinese devalued officially, it took a couple of days, but then the U.S. stock market fell about 10% in 2 weeks. Is that the kind of thing we might expect again?

Brent: Yeah. Exactly. Because let's think about why China would do this. The reason that you would devalue your currency is because of the deflationary pressure that you're feeling and you're trying to stoke inflation, right? So if you devalue your currency, that's an inflationary move. So they probably don't want to do that because if they devalue their currency, then their commodity price costs are gonna be even higher, but to save the banking system, they might have to do it, right? So if you are devaluing your currency, that means you're pulling inflation into your country in order to offset that deflationary pressure. Well, if you are pulling that inflation in, then what you're doing is you're pushing the deflation out, right? And so if you push that deflation out of China, it sends a shock wave to the rest of the world. If the Chinese yuan falls a lot that, you know, kind of conversely means the U.S. dollar is rallying a lot. If the U.S. dollar is rallying a lot, that's probably putting pressure on asset prices, right? And so you could definitely get to whether it's a crash or a collapse, you know, perhaps it isn't that severe, but I can tell you with...I'm not certain of anything, Craig, but I have a high degree of confidence that if the Chinese yuan were to be devalued, it would create a lot of volatility in global markets.

Craig: Which is why I'm sure you were discussing it back in March, right? That's why it's been on your radar.

Brent: Exactly. Exactly.

Craig: All right. The next couple of questions you have to deal with metals. Question four. This is just kind of a wide-open question, which precious metal, I guess gold or silver, do you think is best to own in the years ahead?

Brent: Well, I think that the way I would answer that if you're asking me personally, I would say gold, but if it's a more general question, I think it depends on what you're trying to accomplish. If you are swinging for the fences and you're trying to generate a huge speculative return that gets you 10X, then you go with silver. But you're gonna have a hell of a ride and, you know, it's not gonna be easy and you better have some you know, what do you call it, Pepto Bismol by your bedside to ride that thing. But if you're trying to protect your wealth, if you're trying to survive this, what I believe will be a crisis ahead and you wanna come out the other side of it with some capital intact and some purchasing power intact, then I think gold is your better bet. It's the more certain of the two. You know, and I think anybody who's listening to this is familiar with all the reasons why gold holds its value over long periods of time and why it's a good store value, and why it's always seen as a good form of capital. So if you're looking as portfolio insurance or some kind of a store of wealth, I think there's few things better, maybe nothing better than gold.

Craig: All right. Well, Brent, we're already more than halfway done. Brother, we're having so much fun.

Brent: It is easy.

Craig: All right. Question five. Do you have any thoughts on platinum and palladium?

Brent: Well, nothing specific, I don't. So I'm not gonna sit here and pretend that I'm a platinum and palladium expert. I'm not, although, you know, for years, it...and I remember years ago, it was probably right around the time when Sprott bought Rick Rule's firm. Rick was, you know, talking to me about platinum and palladium and I don't remember all the details, but what I remember...First of all, you know, I love Rick, you know, there's few people in the world that are smarter than Rick when it comes to natural resources. So, you know, he's the expert and I'm just gonna parrot what he told me, but he basically made the argument that the platinum and palladium is not an if question, it's a when question. And it's just a matter of time. And I think what he was getting at was a lot of the stuff that we're starting to see now with supply chains and, you know, energy crisis and, you know, political idiocy, all that kinda stuff. You know, when all of that stuff meets together in singularity, platinum and palladium probably go a lot higher. And so, I think we probably getting pretty close to that is not already in it.

Craig: All Right. Question six gets to your day job managing money at Santiago Capital. What are your thoughts on the mining sector? It's been a pretty tough couple of months. And then additionally, you mentioned Rick Rule. Do you own any uranium shares?

Brent: I don't own any uranium shares. We do have a small exposure to some, just the underlying commodity, and that's via ETFs. And so it's something that we've been watching and, you know, we probably should have been heavier in than we were. Again, I think for all the reasons that we just related to platinum and palladium in, you know, this energy crisis and these, you know, idiotic, for lack of a better word, regulations that have, you know, put us into this potential energy crisis that we're at, I expect uranium to go much, much higher in the years ahead. And I don't know if you saw this morning or not, but Germany, you know, they've already started back up their coal plants, even the ones they shut a year ago, now they're starting those up again. But they're still shutting nuclear plants, which it's mind-boggling. Yeah. I mean, what can I say that hasn't been said before with that? So I think the same thing will happen with these nuclear plants that are being shuttered, that are happening with full plants. They'll shut them down and then they'll realize we made a really bad mistake and, you know, we've gotta reverse this, you know, and when that happens, uranium will go through the roof.

Craig: Yes. You know, I, I tell people, and you probably agree with this, you know, back in the day, which is as recently as 10 or 12 years ago maybe, people would look at a uranium plant and think, "You know, that's a great deal. You know, over the next five years, those shares might double." But today, if they don't double in the next month, people don't wanna own it.

Brent: Yep. Well, and it's one of these things, you know, you probably don't have time to get into this, but you know, the rise of passive investments has really changed the way things trade. And once something starts trending in a direction, the passive investments will drive it in that direction. And it takes a lot to turn the battleship, so to speak. Now, once it turns, it typically, you know, will go in that direction for a long time. And, you know, we've had a couple of these turns in uranium over the last couple years, you know, had a big run-up in '21 and then it kind of came back, and then it had a big run-up in the spring here, and now it's pulled back.

And, you know, like, I said, we, we own a little bit, we've been looking to add. And you know, I should probably kind of focus on that over here over the next couple weeks or couple months because, you know, like I said, in the years ahead, I think it's gonna go a lot higher. In the very short term, I don't know, maybe we have another pullback. You know, with what the Fed is doing and, you know, raising rates, it's very possible that they push us into some kind of a recession or something. And so I'm not saying to go out and back up the truck on uranium here, but I certainly think it has a place in the portfolio.

Craig: How about gold and silver miners? Are you nibbling here after the couple of months we've had?

Brent: You know, I'm not yet. And, again, it's part of the reason of why I own gold in the portfolio and what I'm trying to accomplish. The reason I own gold is for kind of portfolio insurance, political insurance, and kind of overall capital market insurance, for lack of a better word, right? The gold portion of my portfolio is not trying to generate a high degree of alpha. We have other trades that we're doing that we think have even better asymmetry. So we are not currently in the mining stocks. Now, that's not me going out there and telling everybody that mining stocks are a bad idea. I'm just telling you I don't personally, you know, look for that area of my...I don't look to that industry for my alpha generators. You know, if that is an area that you're looking for alpha generators, I think that's perfectly appropriate.

Along with potential alpha comes a potential downside, right? And, you know, again, we had a nice run in the spring in the miners, and now they've pulled back here. A lot of times in my history is that these mining stocks and even gold and silver tend to bottom over the summer and then make a run in the third quarter. And so I think that that's very possible again here now. Whether it starts today or whether it starts in July or August, I don't know, but you know, I'll definitely be watching. And if we get more downside from here, I probably will be niggling. I don't if we will or not, but if we do, I probably will be.

Craig: Well, my friend, we've come to the end of the road. I only have one last question for you. And so let me lay this one on you with question seven. There's a presumption in the question that at some point the Fed will pivot again away from tightening and back toward easing and QE. If you believe in that, what then would be more likely to drive that pivot? Would it be an economic collapse in recession or a stock market collapse and bear market?

Brent: I think it may be a culmination of those two, and I think there's a third option as well. A lot of people don't realize this, and this is...and part of the reason people don't realize it, it's not really talked about that much. It's being talked about more now in the last few years than it was for a long time, but there's two different dollar markets. And what I mean by that is there's the domestic U.S. dollar market and then there's all the dollars that exist outside the United States around the world. And the dollar market outside the United States is even bigger than the dollar market inside the United States. And so, you know, if there's a crisis outside the United States, it will eventually blow back into the United States because of this Eurodollar market, you know, there's so much need for dollar funding outside the United States.

If that comes into trouble, it will eventually cause the Fed to react to it. Now, having said that, this kind of goes what I was talking earlier is I think in the short term, the U.S. wants a stronger dollar because I think that they believe that...a couple of things. Number one, I think the Fed is arrogant enough that they think that they can cause a recession and then just turn around and go back to QE or whatever it is and save it, right? So, I don't think that there are these idiots that don't see a recession as a possibility. They're not gonna go out there and say that, but of course, they see that as a possibility. But again, I just think they're, you know, arrogant enough that they think that they can counteract it when it happens. That's number one. Number two is that, again, I think that they want a stronger dollar to put this pressure on the rest of the world.

But then the third thing is I think it's very possible that what happens outside the United States is what would cause them to ultimately have to react. And in that scenario though, I still think the U.S. would be a better place to be than these other countries or out in international investments. The other thing I would say is I don't...And listen, I can be wrong here, but I don't think that the Fed cares if the S&P goes down another 10% or 15%, 20%, as long as the credit markets and the dollar funding markets and the treasury markets are still functioning okay. Because I think that they believe if they can get asset prices down, then that will, you know, translate into lower consumer price inflation, right? And that's what they want to do. They want to counteract this consumer price inflation.

The biggest knock on Biden right now is that he hasn't done enough to fight inflation. And it's screwing the little guy, right? And it's an election year. It's not...now, Biden's not up for election, but the Democrats are, and it's a big one, right? Because if they lose control of Congress, then you know, Biden is just, you know, behind an eight ball, so to speak. I mean, think about it, all the things he's tried to accomplish and hasn't, and he has a fully Democratic Congress. So now imagine he's got a Republican Congress, right? And I think that this idea that the Fed and these other central banks are independent to government, I think is perhaps the biggest myth ever, you know, perpetuated. I think they're inherently political.

And I don't think that they're just a little bit political. I think they're very political and I think they want to get Biden reelected. I think the last thing that Fed wants is Trump to be back in power or the Republicans to be back in power. And so I think that they really do want to get inflation down by, you know, kinda election time so that they can say, "Listen, we've got this under control." And as a result, I think that they might have to accept lower asset prices, which means a lower stock market. Now, that having said, they still need the treasury market to function. They still need money markets to function. They can't have run on the bank and all that kind of stuff, right? So again, it's kind of this delicate dance that they're doing, but I think that they're okay with lower asset prices as long as it doesn't totally screw up the monetary system or the plumbing of the monetary system.

Craig: It's that reverse wealth effect that Bill Dudley talked about a couple of months ago.

Brent: Yes, exactly. Yeah. I mean, that's a good example. I mean, he just came out and said it, right? I mean, that wasn't even cloaked in any central bank. It's amazing how, when these guys leave their post, they all of a sudden speak in normal English, right?

Craig: It's like they learn and relearn the language.

Brent: Yeah, exactly. Exactly.

Craig: Well, Brent, this has been awesome. Again, we've been speaking with Brent Johnson, founder and CEO of Santiago Capital. This, of course, is all brought to you by Sprott Money and sprottmoney.com. Again, we just ask you to please like, share, or subscribe to whichever channel you're listening to. That helps us cast a wider distribution net going forward. And of course, anytime you're in the market for precious metal or storing that metal, go to sprottmoney.com or give them a call at 888-861-0775. Brent, my friend, thank you for your time. This has been fantastic and very informative. I very much appreciate it.

Brent: Awesome. Well, I appreciate you calling me or reaching out. It's always fun to talk to you and happy to do it anytime.

Craig: We'll have to do it again sometime soon. And thank you, everyone, for listening. Please check back again in July for another edition of the Sprott Money "Ask the Expert."

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About the Author

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.

Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.


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