← Grant's Current Yield Podcast
Grant's Current Yield Podcast
A MATTER OF PERSPECTIVE
00:42:20
With special guest Sean Fieler, president and CIO of Equinox Partners.
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- [00:00]
A
Foreign. This is Current Yield Grant's Interest rate Observer of the air. And I am Jim Grant and with me, as always, is the great deputy editor of Grants, Evan Lorenz. Welcome, Evan. And Henry French, our sound engineer, who was wearing, if I may observe it, the Grants T shirt. And before Henry donned this thing, you wouldn't have guessed that he does 500 push ups in the morning along with 100 pull ups. But it's obvious now, once he dons the T shirt, that's what the drill is. So just keep wearing that thing, Henry. Don't change a thing. And we have a guest today too. We have last time, Evan, you and I was talking about.
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B
Well, we had Phil too.
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A
Yeah, also had Phil too. And we were talking about subscribing to Grants interest rate Observe, which our guest does. Thank you, Sean Filer, who is investor par excellence, family man and I don't know, we'll get around to more on Shawn's details in one moment. So Evan, do you know what has happened to the refuse of the FTX enterprise in the wake of the court action and the former crash, et cetera? What's happened to that workout situation?
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B
The founder stole billions of dollars and is in jail. So bad things?
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A
Nope.
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B
Good things.
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C
Yep.
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A
Yeah. So we had a piece, did we not, on the opportunity in cast off FTX debt.
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B
Yeah. About a year ago we pitched these claims that were trading appendies in the dollar. We didn't exactly expect them to recover everything, but now they're talking about them recovering more than everything.
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A
Like 115 or so, something like that.
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B
It's been an amazing turnaround.
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A
You can't keep a good asset class down, I always say.
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B
And on that note, on Monday the exchange was it Coinbase received a Wells notice and the stock rallied into the Wells notice, which is, I think. Or was it Robinhood? One or the other.
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A
Yeah. Yeah. Well, that's life. So money is yet tight, I'm told. I heard that from the Federal Reserve. Nevermind. It's a kind of a Soros topic around Grant's Interest Rate Observer. However. Sean, welcome.
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C
Thank you.
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A
Yeah, Sean, to elaborate on the very foreshortened introduction, is a Williams College man. He holds a degree in political economy and he is a well known byline around Wall Street Journal, Federalist, the Hill and other such forums in which you can read him promoting something called monetary reform. Now, Sean, you gave a talk at a grants conference, I think in the year 2011 perhaps, and you prop that monetary affairs in this country were going to take a turn for the better, owing to the pressure from states such as Virginia and perhaps Utah to allow the treatment of gold bullion not as property, but as the monetary asset it was from the founder founding, but is no longer owing to the arbitrariness of the tax code. Right, that was your thesis.
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C
Yeah, yeah.
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A
But what you didn't bargain with is that in this day and age, when the Fed set the A bomb, states rights aren't what they were. But anyway, you are a voice for all men. So, Evan, I'm going to put it this way. We were talking earlier about how to characterize your investment career. Apart from distinguished, and I would say I would draw a distinction, There is a kind of Wall street career that one might describe as kind of the 72 degrees Fahrenheit career. It involves obtaining of a CFA charter certificate. It involves perhaps a couple of years in the training program at Goldman Sachs onto one of the big management, mostly long, mostly the S&P 500, retiring at the age of 47 with about $65 million. That's one way to go. It's not the way for Sean Filer to go. Sean chooses another way, which is to pick the most obscure countries that you wouldn't want to visit, invest in them and buy gold bullion instead of Bitcoin. And then come on the Grants podcast. That's John Filer. Sean, welcome.
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C
Thank you. Thank you for having me. Jim. You're a, you're, you're an inspiration.
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A
This is the word for old, I.
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C
Think for the, for my career, for my investment strategy and I think for a lot of us contrarian sound money people. Oh, I'm blaming you. It's been up until 11 you were a genius. And now it's been a long 13 years, but.
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A
Well, you remember, you know Pierre Lassonde, don't you? Of course, one of the great figures in Canadian mining. Pierre was recently quoted, he was asking about gold bullion when it had its six or so eight weeks of upside drama recently. And somebody asked Pierre, what was it about gold? And he said, I like it because it induces serenity. I was thinking serenity, exasperation. Who says love, hate everything except serenity? I think he's talking about an early start on Franco Nevada mining. That introduces serenity.
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C
No, the royalty business has been home run. You know, for him, the mining business, you know, you could make mistakes. Going into 2011, there was a bull market there where there was somebody potentially dumber than, than you after, afterwards to come in and mop up the mistakes and not make it that painful for the last 13 years has really been, you know, there's some survivors, myself included, left that have figured out how to make money in this environment, but it has been a, you know, certainly a challenging 13 years in the space. GDXJ off peak in 2011 is still down 2/3, down 66%. Dividends reinvested over that 13 years.
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A
Yeah, I noticed the median mining Stock is down 70% from even 2020 perhaps, or 2021.
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C
I can vouch for that. You had the peak in 2020, 22, by the way.
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A
There's not a gray hair in this man's head. Just for the record, he can't be suffering that much. Yeah. So apropos of 13 years, that's pressing a little bit. But I recall so well some encouraging words given to me by a mentor of mine. I won't name him, not to incriminate him with his association with me, but he spoke English with a lovely Gaelic accent and spoke sometimes with a Gallic shrug, as when he told me I was reciting to him the difficulties that the late Alex Porter and I were having in Japan. We founded a fund in 1998 along with Ken Shirley to invest in net nets in Japan, meaning companies that were selling for less than the net cash on the balance sheet. What sense did that make? Anyway, ten years later they were approximately the same except for the dividends, which weren't so bad. But that wasn't what we had in mind. And my friend was an investor and he says, look at me, he says, sometimes you have a bad decayed. And I have, I love that idea. And you guys invest for the 5 and 10 year horizon, do you not?
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C
We do. Our average holding period is 5. We try for 10, but then things usually change and we wind up with five.
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A
Yeah. So 13 is pressing it, isn't it?
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C
Well, the 13 year, you know, we've, you know, we've done well. Not as well as we would have done if we just owned tech stocks, but we've done well over the last 13 years. And certainly as the, the mining stock, the market for mining stocks has become a lot less efficient. So we have bought like our best investment over the last year and a half was a net net. It was a company that we actually bought at a 30% discount to cash with no debt on the balance sheet. An actual attractive functioning mine. So that does exist, but only exists at the end of a very long bear market where you've really cleaned out.
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A
A lot of it. Reminds one a little bit these opportunities of the Kind of opportunity that New York City motorists are familiar with that you are driving around looking for a parking spot and there's one, except it can't be one because it's unoccupied. Right. So you don't think, ah, there's an opportunity to think, what's wrong with it? Must be a fire hydrant.
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C
Parking spots are probably safer than mining companies.
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A
Yeah. Well, tell us, tell us. We're focusing on somewhat sore topic in some quarters, but certainly one that prospectively is very interesting. But tell us, Sean, about what you do apart from gold and gold miners.
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C
So we do. We basically as investors, invest in resources, in emerging markets. And so we're invested in West Africa in the resource sector, both in mining and in oil and gas. But we're also looking at other operating businesses in those particular countries. So like in the case of Ghana, we're invested in the dominant telecom company. In the case of Nigeria, we're invested in the largest bank there, best run bank. And what we find is that if you have all these different perspectives on the same geography, on the same country, you really understand the operating environment. You understand whether it's the mining company or the offshore oil and gas company or the bank, what they're facing. And really there's a lot of benefits to looking at these geographies from all those different perspectives.
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A
There's an adage on Wall street that says you shouldn't invest in a country that you wouldn't want to visit. Do all of your countries meet the test of you not minding going there?
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C
So we have the rule, which is we won't invest if we won't go, as to whether we would want to go. So, like when you show up, when you show up in Lagos, right? Like, there's you. First of all, the visa on arrival is a super bad idea. But second of all, there's no possibility of checking the tourist boxes as an American showing up in. I mean, you're just not there for vacation, right? It's West Africa generally. There's some tourism in Ghana, but, you know, it's not the easiest, most pleasant place to go. But I think the continent of Africa in general, and West Africa in particular for the mining business, it can be a very rewarding place to go. There's a lot of really good investment opportunities, but you got to know your way around, and there's really no way to get to know your way around without spending time there.
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A
Yeah, well, remember Samuel Johnson's remark when Boswell told him that he really ought to Visit Dublin and Dr. Johnson said it may be worth seeing, but I'm not sure it's worth going to see. Distinction. Yeah. Okay, so you're interested in emerging markets and frontier markets.
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C
Yeah.
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A
You started out in that endeavor in Asia and you have migrated to West Africa. Why?
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C
Well, let's see. Asia got a lot less cheap. So the generational opportunity in emerging and frontier markets was after the Asia crisis and then the Russia crisis in the late 90s. So Thailand went, Russia went. This is 97, 98 Indonesian stocks were down in dollar terms more than 98%. So at that point, by the time you got to the spring of 99, basically the entirety of the equity market had been wiped out. And you could go over there and buy a great company. We bought inco Indonesia at 2 times free cash flow. We bought Unilever on a single digit multiple to earnings that was growing, even growing through the Asia crisis and growing volumes through the Asia crisis. So there were just fantastic once in a generation opportunities at that period of time in Asia. By the time we got to middle point of the last decade, we were seeing really better opportunities and off the run markets is the way I would describe them. So place like Georgia, it's not in an index, it's emerging market. Ish.
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A
That's a National League west. Right. Or the different one.
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C
The different one. So you know, next to Russia. So wait, wait, wait, wait.
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A
They haven't moved. It's not a good place to.
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C
They lost part of it in 2008, which is a big issue for the, for the country. Obviously part of the current narrative around the valuations there, but it's just not on anybody's radar. They've got a great banking duopoly. It's a great investment opportunity. Same thing is true in West Africa. Like in West Africa. So the total turnover in the Ghanaian stock market today is a million dollars a day. One stock counts for the majority of that. There's nobody there. Same thing's true in Nigeria. It's $10 million a day turnover. Nobody's there. So these are two countries. Much worse than Georgia is that they messed up the convertibility of their currency. So you could put your money in but you couldn't get your money out. So the number of people that, that attract markets was, you can imagine, pretty limited. And so the valuations got just crazy.
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A
On the high side?
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C
No, on the low side.
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A
Well, I happen to be one of the only living Americans who has a personal experience with the Rhodesian stock market in the 1970s. And there's exactly the Opposite case there, you couldn't get the money out of the country. So the money that was in the country bought stocks and everything was like 25 times earnings. Not so in West Africa.
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C
So they have bitcoin. They have.
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A
Oh good. Yeah, that's.
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C
There is.
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A
Who says they're emerging?
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C
They've emerged and you know, they have inflation. So like even today, so Nigeria's got 30% inflation, Ghana's still at 20%. So a lot of financial repression and a lot of money lost both in the stock and the bond market. In the case of Ghana, they've actually defaulted.
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A
Evan was marveling at some of the valuations that these things have been trading for. Evan, would you care to remark on some of them?
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B
So reading your letter, you said that some of the emerging markets you're investing in now actually have valuations on par with what you were finding in Asia. In 97 and 98.
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C
Our PE and our EM fund is less than 5 at this point. Part of that has to be adjusted for investing in countries that have these inflation rates that are 20 and 30%, where a P E is a lot less meaningful than it would be in a lower inflationary context. But part of it is that these as you've had the move into passive money and you have some of these markets that are off the run are not getting passive flows and the active managers that have been in these spaces have underperformed everything else. Certainly the US stock indices, there hasn't been new capital committed. And you have some very liquid, very cheap markets where you can go in and not buy the third or fourth best bank or the second tier telecom company. You can buy the very best company in that country at a low single digit multiple to earnings, but you can't.
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A
Buy much of it. Now you said the markets were liquid, but what does that mean in this context?
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C
Well, let's say so talking specifics. So Guaranteed Trust bank in Nigeria is a billion and a half dollar bank. This is market cap dollars MTN, largest telephone company, largest company in Ghana, 1.1, $1.2 billion. So can you take a $10 million position? Yeah. Can you take $100 million position? Probably not. So we run just under $700 million. It works for us. Is it going to work for larger asset allocators? No.
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B
What has interest been like from other investors? I mean it's not been a good place to be in for the last decade, but now valuations are compelling, especially compared to the US which doesn't look cheap.
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C
Yeah, you know, look, selling investments in West Africa is not a, it's not a. This. That would not be your, you know, obvious marketing opportunity, right? You're talking about people generally, Americans generally, even sophisticated investors that are investing globally aren't going to tend to have a lot of depth in terms of the region or the economics in the region or the politics in the region. And then you're going to tell them you're going to buy companies there that they've never heard of. You know, this is not the most obvious thing to sell, which is also part of the, part of the opportunity.
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A
I've got a little experience along those lines. I'm going to tell the people what they don't want to hear. In charge of a lot of money every year. Okay, so we've talked about emerging markets, frontier markets and gold. And there's a thread there, is there, there's a theme or a thesis among these three seemingly disparate ideas. And that would be don't do what others are doing.
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C
I think my whole career, you know, to get the combination of the quality of the business and the quality of the people at a really low valuation, right? That unique combination. Usually you don't find in the tip of tongue, most common investment. So there's usually going to be, in fact, usually there's a tip of tongue reason not to do it. And just like Americans didn't want to buy stocks in the early 80s because everybody knew, you know, that was a money losing proposition. The same thing is true with a lot of the spaces that we're invested in. A conventional tippettung reason not to do it. But then the issue is you got to dig deeper and figure out if that when that's wrong, that's where the real opportunity is.
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A
I was interested in something you wrote, Sean, that I thought was a very good essay, just as an essay, but the thesis was quite provocative, which was, is that the upcoming election is in many ways reminiscent of that of 1972, which pitted two people each in his own way, not universal appeal. Nixon versus George McGovern. George McGovern was very much a left wing liberal. And Nixon would say things like, this is the most important election in the history of the country if McGovern wins its curtains in socialism. And as sometimes happens, there was a monetary aspect that was personified in Arthur Burns, a somewhat professorial, pipe smoking, somewhat platitudinous fellow who was an authority in the business cycle and who didn't think that the Fed had much to do with inflation and who was susceptible to the flattery that Nixon laid on Him. And in the run up to the election a formerly percolating inflation problem became manifest. And from that observation you draw comparisons with the present day. And what are the comparisons and what course of action do they suggest to you as an investor?
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C
So one of the obvious comparisons is that just as in 72 today, in 24 you have we're a couple years away from a peak inflation. Cyclically inflation is stubbornly stuck just above 3% and policy rates are 5 and a half, 5 and a quarter to 5 and 3 quarters percent. To go back precisely and make the analogy with 72. And it's not restrictionary, right? It's not restrictive. And you see that in I think a lot of the economic data. I think similar to 72, you also have an administration that sees democracy on the ballot. President Biden's been very explicit about that. And I think because they view this election in that way, suppressing the oil price. So Lael Brainard now is on record saying this is what we're doing, right? We are going to, whether it's release oil from the SBR or participate in the futures market or make sure we don't sanction Iran's oil exports, we're going to do what needs to be done to keep that price down for the summer driving season into November to make sure that we get the electoral outcome that keeps America a democracy. Right. This is from the Brainard Biden perspective, which again I think is very analogous to 72. And what I take that as meaning is that we're likely to see higher inflation post election. I also think some of the deflation disinflationary tailwinds that we've seen for 30 years, a lot of those have run their course. And so it's not the same setup that we've had for my whole career, which is you more or less could do whatever is the craziest irresponsible fiscal monetary thing that you wanted and you were not really going to get structural inflation that now that's in the rearview mirror. And I think the Fed and the administration are really playing with fire here. And I don't think the stock market has really internalized what that's going to look like. If we have this amount of debt to GDP and we have an inflation problem that's persistent that we can, you can't really control.
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A
Yeah, one of the things about the 1972 era was the 1971 failed treasury auction. It was an issue of a 20 year bond. 20 years is kind of the red haired stepchild of the treasury yield curve. It's a very difficult security to find a, you know, an enthusiastic bid for in most circumstances. And one failed. What was it? Recall the date.
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B
I don't remember the date off the top of my head.
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A
It failed in that. I think it. I'm almost certain it failed. 1971, that fateful year that Bretton woods ended. Any case, the Fed came in very quietly and fixed that and bonds lifted magically in the day after. But it's not clear that the Fed has that freedom of action now with the inflation problem in front of it.
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C
Yeah, presumably less so than they did in 19 when we had the massive $600 billion of reverse repos come in to make sure that. That a fragile treasury market was less fragile. Right.
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A
You mean the most liquid market in the world.
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C
Yeah. This is the question. What happened in the fall of 19 all of a sudden that this market was fragile? When Yellen decided to term in the debt issuance over the last year and that's now started to reverse, was that something that was just a voluntary decision based on what she thought was the right maturity schedule for America's debt, or was that something that was really driven by the market and there just wasn't the demand at the long end of the curve to issue that 9, $10 trillion every year with the same maturity schedule that we'd had going into the last year or so. So these are some imponderables. I think treasury and the Fed have become very adept firemen. I think their ability to go paper over anything looks like it's going to go wrong right away, even before it happens, even before we see it. They've gotten very good at that. And I think inflation is ultimately the check against that. And that's the world I think we're moving into. And I don't think markets have priced that.
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B
And the latest tool they're deploying, the treasury, which is issuing trillions of dollars of new debt each year, is buying back select issues on the longer term. The treasury buybacks is one of those just strange things when you think about it.
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A
Yeah, it's a kind of homage to William Pitt the Younger's sinking fund. The Brits started a sinking fund late in the 18th century. And in fact the United States had a Treasury sinking fund. You know this in both the last security, like 1961, Hamilton started a sinking fund around the time of the 1792 Currency Act. And. But the buybacks are something. It's something entirely different. It's the treasury explains it and the Fed explains it as A device to promote the smooth functioning of the treasury market. And my approach to the smooth functioning of the treasury market, it ought not to function smoothly if the supply of securities is greater than the demand for securities at prevailing yields. It ought to sell off thereby to clear the market and to send a message to the people who are doing the borrowing. But that is not the approach. Everyone wants to make it nice to borrow a word that Donald Trump is fond of. Nice.
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C
And why not? If there's no right, if there's no price to pay. Right. If you can. If you can paper over every hiccup in the market and make sure there's that, you know, it's. The third mandate is stability. Right. So I think ultimately there's going to have to be a constraint that forces them not to do that. I don't see a Fed or Secretary of the treasury that's going to voluntarily introduce volatility back into the treasury market to create a truer pricing that's going to force the US Government to behave differently. I think the market will eventually force that, but not for lack of trying on the part of Treasury.
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B
Can I ask you about a country that you don't invest in, but does impact kind of the gold market and frontier?
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A
Sure.
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B
So China, China right now is driving the gold price because Chinese citizens who can't get around capital controls and are kind of worried about the renminbi or kind of reinvestment opportunities in China are buying gold in mass. China is also the largest importer of most commodities and a lot of frontier markets are large exporters. How do you think about China and kind of the risk and opportunities it creates in kind of the markets you do participate in.
- [24:39]
C
So from the gold market perspective, as a country is the largest producer in the world of gold. As a region, West Africa is larger, but as a single country, China the largest. It's a black hole of gold. Right. The gold produced there is bought and retained locally and they also buy gold from overseas, which again is then held captive in China. I think that makes a lot of sense for China geopolitically. I wrote a piece in the Hill going back four or five years ago saying that America should adopt a similar policy to what China has and that we should not only purchase gold federally, but we should encourage American citizens to purchase gold just like China's encouraged her citizens to purchase gold. Obviously, we haven't adopted that policy, so I think it makes a lot of sense for China from a company perspective, company specific perspective, having we used to do some company investing in China we had a Chinese national on staff. We did a lot of work. We could never really get comfortable with the. At the governance level with Chinese companies. And now one of the interesting things we're seeing is Chinese not just buying gold, but Chinese companies buying gold mines. Not in North America where they're not allowed to, but increasingly in Africa. And they have become kind of the precipitating bid in a lot of cases to put companies into play. As an owner of mining companies, we're not going to really own Chinese controlled mining companies. But it's interesting that they're starting to move. Move. They're the first government to be doing that.
- [26:10]
A
Do you even want some of your mines to be taken over at prevailing prices, even if they doubled? Thinking about Thesis, for example, it's one of your favorites, right? 3% position. I mean, it's a 50 cent stock Canadian. Would it be a good thing for your investors if it were taken out at a buck? It would be nice for the start, for the time being. But what kind of upside might there be in a true bull market in gold from mines depressed at these levels?
- [26:37]
C
Yeah, now's not the time to sell. Right. So these are in the case of our exploricos in Canada and Thesis is one of the larger ones in British Columbia. That way they have 4.7 million ounces measured and indicated. The market cap is just over 100 million bucks. So call it low 20s per ounce. One of the most interesting metrics on a company like Thesis is the to look at what it trades at in relationship to how much money they had to discover and prove up that ore body. So it used to be the case if you were looking for gold. The problem was you probably weren't going to find it. And if you did find it, what you found was probably not going to be economic and you were going to spend more than what the value would create.
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A
That's the business model.
- [27:19]
C
Well, unfortunately that was the business model for most people. But now the business model has gotten worse. And here's the latest twist. If you're a company like Thesis and you identify a large, highly economic resource in a very investable country like Canada, you still trade it less than what that asset costs to discover and prove up. So they traded a 30 to 40% discount to the capital spent on that asset thus far. So it should be worth multiples of where it is today. If you go back to M and a valuations 13 years ago, $150 to $200 an ounce. So that's eight times where it's trading today. So I think a bid today is not attractive. Bid at the right price for a very unique asset and a very good geography. That's part of the reason to stay invested.
- [28:07]
A
Yeah. Sean, a moment ago you said that you had advocated a policy that would encourage Americans to own gold, own individual citizens to own gold. Why?
- [28:18]
C
Well, I just think it would be good for America as a country. We as a country, just like China knows it's good for China as a country to have gold not just in the government's hands, but also to have gold in private citizens hands on. The idea that China eventually is going to back the RMB with gold or reintroduce gold into the monetary system. The more gold held domestically in China is going to put China in a better position globally from a macroeconomic geopolitical perspective to make that switch. If America was encouraging Americans to buy gold and hold it here domestically, that would also put America in a better position should that monetary, should gold eventually be remonetized, which I think is very likely. So the policy we have today, which is most Americans that are buying gold are investing in gold through ETFs, and that those ounces are held in London or Switzerland or offshore, that just seems to me imprudent policy. There's a much better way to go about it.
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B
Most of those ETFs, at least the ones owned by Wesner's, have actually been selling gold. But in one of your letters you actually wrote something interesting, at least I thought was you're actually receiving more inbound calls than you've seen in a decade from investors interested in gold mining stocks. What's driving this? What is the cadence and what are you hearing from the prospective investors that they come to your fund?
- [29:36]
C
So we're seeing generalists that have benefited from the long term appreciation of US Stocks and they've seen the extent of that run over the last 13 years. They worry that it's not sustainable or it won't continue in perpetuity. They're looking to diversify. They're looking for an asset class that's uncorrelated and kudos to them. They haven't been here for the last 13 years. If they're smart enough now to now is the moment, right. You know, they're a better investor than I am. And you know, most investors know very little about mining, very little about gold mining or silver mining or the gold or silver markets. And so we're at a point where we're getting the inbound calls because they're looking to get up to speed on the institutional side. They're like, there's this thing that you do that we don't have any of, that we didn't have any of for 13 years because we're smart, but we institutionally don't really know what this is. Let's have a conversation and you explain to us what you're doing and why it makes sense. There's still no fomo. There's still no I've got to sell what I have to own what you own, because what you have is going to really do well. I think that's still ahead of us, but we are seeing a change in interest. And I think there's just a general recognition that the political environment is changing, the macroeconomic environment is changing, that some of these unsustainable trends are maybe less sustainable than they have been for a long time, and that's piquing people's interest and creating conversations.
- [31:04]
A
Is the problem with the upcoming election, the fact that somebody's going to win it?
- [31:09]
C
Well, trust me, somebody winning the election is much better than the alternative of an ambiguous outcome. I think that would probably be much worse for America. I think Americans are skeptical of the idea that an election is going to matter that much to financial assets. I think there's a deep skepticism that bad news is actually bad news for financial markets. Maybe this goes all the way back to 9, 11. You have these horrible events, tragic events, and they just weren't bad for asset prices. And so convincing the average investor that they want to be sensitive to the political realities and the macroeconomic factors that are now ascended in America is a hard sell. Right. Whereas you go to the countries that we deal in, you go to Ghana and you say, you know what, it's going to be bad for you when your government goes bankrupt and doesn't pay its bills and steals working capital from the people and crams down the debt and all the banks are bankrupt and inflation's 30%. They all go, yeah. Why do you keep talking? Right. You know, so everybody knows. Right. But in America, the idea that.
- [32:24]
A
It sounds bullish, doesn't it?
- [32:26]
C
It's just not what people believe. And so, yeah, that's. I mean, I think, just think that's where we are. And I do feel like Biden has put. And his administration has put so much, is manipulating so much going into the selection. They're gonna have a hard time managing it post election. If Trump wins, which he's up in six of the seven swing states, I think that's the far more Likely outcome. I do feel like he's definitely, it's a poison chalice. Right. This is a, it's broken, it's manipulated, it's over indebted. A lot of the government workers are gonna be, you know, just as though Liz Truss has gone around and talked about he's gonna have a lot of active opposition within the government and it's going to be, I think it's going to be messy. Right. And there are going to be real effects on the stock market and the bond market when we get to that point.
- [33:17]
A
Yeah. The Wall Street Journal wrote a couple 10 days ago about Donald Trump's supposed plans for dealing with the Fed after he is restored to office. And that would, that took the form of an attack on the independence of the Federal Reserve System. Is that bullish or bearish for gold bullion?
- [33:37]
C
You know, if Trump removes the independence of the Fed as the article or changes the chairmanship, changes the terms, I think that would be $bearish. Bad for the Fed's credibility. It would be good for gold. I think what you saw is that that statement didn't come out of the campaign. It came out of some Trump related entities and the campaign, Chris Lacvita came out right away and he said, and Suzy Wiles said no, in fact we're going to do the opposite. And so I think the campaign and Trump understand that they need a credible Fed and that the high road and the right road politically, and you see this in Trump's speeches recently, is to be the candidate of price stability, to be the candidate against inflation, to be the candidate against the IRA and crazy spending that the Biden administration has done, that's the, that's the path to the White House. And if you come out and you say I want to be in the FOMC decisions about interest rates, that's the path to losing. So I think his campaign gets it. I think the politics of it are going to make him a much better actor when it comes to the Fed than the academics that made a proposal that I think is not going anywhere.
- [34:48]
A
So they're not going to admit they're going to take over the Fed.
- [34:52]
C
This is a, that would be a cynical take, I think, I think the.
- [34:58]
A
I, I, I'm a little bit of a ringer on this question because the issue of Grant's interest rate observer that went to bed last night late, it stayed up late. You know, ever had that experience with your kids? It should go to bed. It doesn't the issue did not want to go to bed and she totally Brushed his teeth and lie down, didn't. Okay, so we had a late closing, but in this issue there is an essay on, on the intermittent independence of the Fed. And some great Democrats have run roughshod over this incident. I'm thinking about Andy Jackson, who put the Second bank of the United States, a forerunner to the Fed, out of its misery by denying it a charter. I'm thinking of what, I'm thinking of fdr, whose Secretary of the Treasury, Henry Morgenthau, manipulated the Fed by controlling the Exchange Stable fund in the 1930s and he admitted it at the time into his diary. More interestingly, I'm thinking of Harry Truman, under whose presidency the Fed was a bond selling vassal of the treasury and they suppressed the funds rate and the long bond rate until 1951. I'm thinking of Lyndon Johnson, who browbeat William McChesney Martin and then of course, Nixon browbeat or flattered Arthur Burns. So the independence of the Fed is a little bit of a meme. It is a kind of a logo or a, I don't know of an aspiration on the part of the people who've run this, the Fed. But I mean, money is inherently political. It's as political as the New York City Council. And you know, Congress is. I'm here in my soapbox, but my damn podcast, come to think of it. So the Fed. Sean, as a reader of Grants, you are well aware, are you not, the Fed is broke.
- [37:09]
C
I heard they made some bad bond investments. What I would say is that if you take. Go back to where we started, if 1972 is the right analogy, Trump needs to get out ahead of inflation. Right. And so to the extent that he wants to attack the Fed.
- [37:29]
A
Right.
- [37:29]
C
And there is, I think, a case for doing it. It has to be done from the high ground, Right. It can't be done from the, you need me in the room so I can keep interest rates low, which would be his track record. If you go back to his first real estate promoter. Real estate promoter, beating up Jay Powell for raising rates. Right. So to the extent that he's going to go in and talk about the Fed and talk about the Fed's credibility, he has to do it. And you see this now in the way he's campaigning.
- [37:53]
A
He has to.
- [37:53]
C
He has to do it from the perspective of price stability. So my proposal would be that he take the 2% inflation target, which is a 2012 vintage Ben Bernanke. Right. Only. And then utterly arbitrary. Utterly arbitrary. But then Lael Brainard got the Fed and Jay Powell Included to double down in 2020 when they added the catch up clause. Right. So if inflation, God forbid, runs below 2%, don't worry, we'll run it hot for a while. To get back to that is, Trump should start with that. He should say, look, price stability is not 2%.
- [38:24]
A
Right.
- [38:24]
C
Price stability is zero. We're gonna go for actual price stability. And to the extent that you, the Fed won't help me get there where the American people, what the American people need and want, this would be the electoral popular thing to do, then I'm going to go after you in public and I'm gonna force you to get there. If he comes in from a perspective of, I'm a real estate guy, I want higher stock prices and I wanna see it on the fomc, he's gonna, he'll blow up the ocean and make his presidency miserable.
- [38:49]
A
That is Sean Faler's idealized view of Donald Trump.
- [38:55]
C
I'm just saying the smart thing to do politically. Right. What I'm saying is what Chris Lacivita and Suzy Wiles got right away. They understood it right away.
- [39:03]
A
Right. Yeah. But here's what he did say when he was in office. The Fed ought to give us negative interest rates because we're the best country in the world and we deserve to have negative interest rates.
- [39:13]
C
That was Trump 1.0. This, I mean, it's a different moment.
- [39:16]
A
Different. Right?
- [39:16]
C
It's got, got to be. Right. I mean, well, he's going to be different on a lot of things. It's a different moment.
- [39:21]
A
Huh.
- [39:21]
C
Unless you are a believer that he has his fixed convictions, Right? I think he has some fixed convictions about immigration and trade. I think the other family life. Yeah, you're gonna have to put that on your podcast, not me.
- [39:35]
A
All right, Sean, I've got two words to say to you. Private equity.
- [39:39]
C
Oh, it's been a, it's been a juggernaut. It's been a fantastic success. We're not involved, skeptical of some of the things I see in private credit seem like it's gotten too big too fast. But you know, on the mining side and the, the EM markets we're in, it's, we're just in public markets. So we are really taking advantage of the price, price inefficiencies in public markets. Private equity is very much parallel to what we do.
- [40:06]
A
Yeah. Could it be the precipitating force to a new recession, a new crash? He asked hopefully.
- [40:13]
C
I don't know enough about private credit to know. It seems like there's a lot of It. You're more expert.
- [40:20]
A
Did I say private? I meant private equity.
- [40:22]
C
You said private equity.
- [40:22]
A
Yeah, private equity. And you said private credit.
- [40:24]
C
Yeah. Because I'm reducing the subset of activities to something that seems a little riskier. I don't know. I just don't. I think there's, you know, are there real advantages to taking public companies private? Yes. Is there a lot of dysfunction?
- [40:37]
A
Well, at a price. Right. And at a balance sheet, but not at every price and not with every balance sheet structure.
- [40:43]
C
Not at every price, not with every balance sheet structure. We don't see private equity in the markets that we're in. So in EM Frontier, we see relatively little private equity activity. And then in the mining space, gold mining, silver mining, there's not a lot of free cash flow. Hasn't been. And so we have not attracted either activists, except for a few cases, and we've attracted very little private equity. So what I know about private equity and private credit is what I read, not what I've lived in terms of my career.
- [41:14]
B
I do want to take a problem with one of the things you said, which is there's a benefit to taking companies private. The pitch of private equity is we will take companies private and we. And we'll make the tough choices. That's hard to do under the limelight of the public stock market, and those include cutting cost, doing investments that pay off over multiple years and boost margins and increase operating income. The only problem is Bain, which is a private equity firm and puts out an annual report, has done studies on the buyouts that actually promise margin improvement, and they found that largely they don't happen.
- [41:46]
A
How about the ad backs?
- [41:48]
B
Oh, ad backs. Oh, I think Moody's has said that they're largely aspirational.
- [41:53]
A
What a delight this has been. Thank you, Sean.
- [41:54]
C
Jim, it's been great. I enjoyed it.
- [41:56]
A
Yeah. Coming at it again. Until next time, ladies and gentlemen, this is current Neil Grant's interest rate observer of the air.