Peter St Onge – A Look Ahead for 2025 - Porter & Co. Financial Face Off Podcast

Episode Transcript
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(00:00):
I think that the people who arebig fans of Trump and expect a

(00:03):
roaring stock market and acontinually strong economy are
gonna be very disappointed.
Government spending wasjust out of control. Mhmm.
All the different levers thatthe Biden administration could
pull to juice theeconomy got pulled.
A lot of the growth right now isbought by government spending.
We are in this volcaniceruption of the entire currency

(00:25):
world running intothe dollar right now.
How on earth can thedollar remain this strong?
Welcome to Financial Faceoff,
where perspectives clashand insights thrive.
With our host,Porter Stansberry,
and his guest, Peter St Onge,

(00:45):
we'll break down thestrategies shaping portfolios
and help you make senseof the market chaos.
Peter, great to see you again.
The last time we got together,it was before the election.
We were talking about the thecountry coming to a breaking point.
We both thought that Trumpwould win the election.

(01:07):
We were right.
Everyone's been euphoric.
Stocks have ralliedeven further.
The economy seemsremarkably strong.
And yet, I don't think that anyof the issues that we talked about
before have been resolved.
And so I think that the peoplewho are big fans of Trump and
expect a roaring stock marketand a continually strong

(01:28):
economy are gonna bevery disappointed.
And I wanted to talk to you now,
get an updateabout those issues,
and see how you've been.
Yeah.
Well, even though we boththought he would win,
I think it was still asurprise, you know, sort of,
PTSD from last timearound where, you know,
you went to sleep thinkingthat it was in the bag and the
election was done.

(01:48):
Then you wake up in the morningand you had all kinds of
interesting surprises on thecharts and overnight votes.
So, I mean, it wasstill, I think,
surprising for a lotof people that he won.
And probably the singlebiggest question in terms of
investing or lookingafter your assets
is that in late Biden,
we were sort of forming this

(02:11):
storm on the horizon.
Right?
So inflation's been rising overthe last couple of months that
was reversing the sortof gradual comedown
after the hugeburst back in '21.
Inflation was rising andthe economy was slowing.
So we had all these ridiculousrevisions where, you know, like,
the Bureau of Labor Statistics wouldlop off 800,000 jobs and say, hey.

(02:34):
Sorry, guys. We thoughtthey were there.
They weren't really there.But it was just obscene.
Well, I didn't meanto interrupt you.
Sorry.
I just wanted to say that,
I think that when thenumbers finally all come in,
what you're gonna see in2024 is very clear in the
economy, which was that governmentspending was just out of control.
Mhmm.

(02:54):
All the different levers thatthe Biden administration could
pull to juice theeconomy got pulled.
And I think if you look atthe end of the day at private
sector employment,
we're gonna find out that 2024was the beginning of a big
increase in risingunemployment rates.
And they covered that up byhaving enormous amounts of new

(03:14):
government jobs thatwere being added.
And of course, thisis gonna result
in a lot more inflation.
People haven'tfigured this out yet,
but it's not thathard to do the math.
When you're running sevenpercent of GDP deficit,
and you're hiring allthese government workers,
those folks are notvery productive,
and you're definitely going to havehigher than expected inflation.

(03:37):
And
that inflation is now pushinginterest rates much higher.
When's the last time yousaw the Federal Reserve begin to
cut interest rates on theshort term, and and yet,
you have seen the interest rateson the long term go vast higher.
We've seen, what are we now?
A hundred basis points upon the 10-year Treasury

(03:59):
from before the election.
That is a very big changein the bond market,
and yet the stock marketcontinues to go higher and higher.
And when you look,
the one thing I hope peoplewill take away from this
interview is this idea.
Peter, when you lookat the CAPE ratio,
and I know youknow what that is,
but to to explainit to the viewers,
this is a way of looking at how expensivestocks are over the very long term.

(04:22):
So you take the ten-yearaverage of all the
corporate earnings, youadjust it for inflation,
and then you measure whereall the stock prices are.
And that ratio historicallyhas bounced around between
around 10 and around 20.
Under 10, stocks are super cheaplike they were in the early 1980s.
Over 20, stocks get expensive.

(04:44):
And, typically, this CAPEratio peaks at around 30.
So if it goes over 30,you're gonna have a crash.
That's what happened in 1929.
In 2000, the CAPE ratiogot all the way over 40.
And, of course, we had a verybad following decade for stocks.
Stocks basically fell from 2000 allthe way to the end of 2008.

(05:06):
Well, we're back there. TheCAPE ratio is now 37, Peter.
And whether anybodywants to admit it or not,
this means we are goingto have a very poor
period, multipleyears, maybe a decade,
maybe more of poor equityperformance because stocks have
already priced in all of thepossible good news of this election.

(05:29):
And now, we've got interestrates marching higher.
And I don't know if you'llagree with me about this,
but that is a recipe for abig collapse in stock prices.
What do you think?
I think there's avery big risk to that.
As you say, the market's currentlysort of priced for perfection.

(05:49):
There's a lot of optimismafter the election because people saw
what happened inTrump 1.0, right,
which is that he putin this pro-growth agenda, tax cuts,
regulatory cuts, just takingthe sort of monkey off the back
of corporate America, theregulatory agencies, the EPA,
OSHA, SEC, all the rest of it.
Just getting rid of thatthreat grew the economy just amazingly

(06:13):
back in 2017.
But the question is, are weanywhere close to that right now?
Right?
So recession, for example,
they're currently runningabout one in four.
It's a pretty high number.
So the probability that we'regonna see a recession in 2025
is one in four.
Now that's a lot betterthan before the election.
Before the election, itwas one in two. Right?
Because everybody was expectingBiden or Kamala to run the

(06:35):
economy into the ground.
So things have improved.
But as you say, when you'vegot a CAPE ratio of 37,
you've got one in fourrecession odds, that
sounds out of whack.
And so then the question is,
is Trump gonna beable to pull off?
You know, is he gonna be able tosave the economy from Bidenflation?
Is he going to be able tolog the kind of gains that he did

(06:57):
in 2017 where people forget,
but the 2016 economy wasalso really sluggish.
Right?
We were all talking about howterrible the Obama recovery was.
We had this massivecrash in 2008.
It was just limping back.
And even that was runningout of steam in 2016.
So in in some ways, we'rein a similar spot. Right?

(07:17):
We've got this weak economy,
and then Trump's coming into it.
But, you know, we've gotmassively more debt today.
The economy...
I wanna get yourthoughts on this,
but is the economyfundamentally weaker partly for
the reasons you just mentioned thata lot of the growth right
now is bought bygovernment spending.
Right? It's government hires.
Biden hired over a milliongovernment workers.

(07:40):
You've got massive deficits,
especially going into the electionwhere they just dumped out money.
Janet Yellen was doingshort term bonds,
which gooses the markets.
There's all these kindof fake things in there.
So that's my question for you.
Like, are we alreadyin a recession?
Is this a question of Trump,you know, not riding the plane,
but, I mean, like,

(08:01):
the plane is already diving andTrump's gotta pull it out of that?
This whole scenario remindsme very much of 1972.
And in 1972, to win reelection,
which he won anoverwhelming landslide,
but Nixon was paranoid.
So he was pulling all the samelevers that Biden was pulling
to try to win reelection.
And Nixon grew thegovernment enormously in

(08:23):
'72, had a huge blowout deficit,
and he set the stage for abig increase to inflation.
And you saw our tradingpartners back then.
That was the Saudis, you know,
basically boycottingthe dollar saying, hey.
You guys are justprinting paper.
We're not gonna keep givingyou our oil just for paper.
The
the the Middle Eastblew up over it.

(08:44):
You had the Seven-Day War.
Or was that in '67?Whatever the conflict was.
I can't remember all of them.
The one in '73, you hadthe stock market fall by
50%, and you didn't necessarilyhave a typical recession.
But you had thisemergence of stagflation,
where you had a very weakprivate sector economy,
and you had a hugedecline in the dollar.

(09:06):
And right now, we're inthe opposite of that.
We're in
this volcanic eruption ofthe entire currency world
running into thedollar right now.
We have this unbelievable aggregationof wealth that has occurred in U.S.
stocks and U.S.
bonds and the dollar.

(09:27):
Look at the collapse in thepound just this week. You know?
Look at the euro.
Look at the yen.
You have all this incredible
influx of value andwealth into America.
Look at the collapsein the Canadian dollar.
I was traveling in NewZealand over the holidays.
New Zealand dollar isat basically all-time lows,
and that goes across the board.

(09:48):
So you have everybody whohas come to believe in this
American exceptionalism.
Meanwhile, you've gotinflation approaching 4%.
And there isn't a time in thehistory of our stock market
where stock prices don'tgo down when inflation remains
above 4%.
Can Trump keep allthose balls in the air?

(10:09):
I really don't think so.
I can't tell you whichone's gonna blow up,
but he is playing witha lot of big fireballs.
He is threatening Panama.
He's threatening ourtrading partners.
It's not gonna take much forone of these things to spill
out of control andgo the wrong way.
And then maybe his airof invincibility will

(10:30):
shift.
And if there is ashift, you've got what?
40% of the valueof the S&P 500 in
about seven or 10 stocks.
You've got moreaggregated values
[inaudible] foreign investors inthe U.S. than ever before.
You've got more householdwealth invested in stock market
than ever before, and you'vegot a collapsing bond market.

(10:56):
So you explain this to me.
How on earth can thedollar remain this strong when the
losses for bondinvestors are horrendous?
You know, we're looking at somethinglike on the order of $500 billion in
unrecognized bond marketlosses in our banking system.
Explain to me how Bank ofAmerica is gonna pay a 4% rate

(11:17):
of interest on its deposits.
And explain to me how peopleare gonna keep their money in a
bank where they're losing 4% ofthe value to inflation every day.
It just doesn't makeany sense to me.
I can't tell youwhat's gonna break,
but something's gonna break.
What do you think ismost likely to break?
Where will the confidence inthe dollar and the markets be

(11:38):
shaken loose in 2025?
Yeah.
So one of the big issuesright now is that the federal
government is facingjust about $10 trilllion
in financing needsin the coming year.
So they're gonna have to goout to financial markets,
so they're gonna have tosell $10 trillion in debt,
which is about a third of it.

(11:59):
Now keep in mind,the entire U.S.
banking system, including yourgrandmother, is $20 trillion.
Okay?
So half of that is what they're gonnahave to flog out into the bond markets.
And the problem, just as yousaid a minute ago, right,
all these other countries,they're all having trouble.
Right?
We've never been in a situationlike this where we were kind of

(12:21):
on the edge of stagnation, andeverybody else is in trouble.
Right?
So China's inoutright deflation.
Their economy is is collapsing.
Right. Right.
China's in trouble for thefirst time since, what, 1990.
Europe...
you know, many countries inEurope are already in recession.
The other ones areare right on the edge.

(12:42):
So places like Germany,which is industrializing.
Yeah. Italy's been in recessionfor 25 years now, by the way.
Exactly. Yeah.
And, you know, Britain hasjust been an absolute mess.
France is a mess now.
And speaking of Europe,
have you figured out yet thatif they stop buying natural gas
from Russia, that thelights are gonna go out.

(13:02):
There is no way to powerEurope without Russian gas.
Has anybody done this math yet?
Yeah. No.
It's pure hopes
and prayers, unicorn farts.
What's amazing in Europe,what they're doing now,
I think you already know this,
but they've got thiscategory of renewables.
K?
So they all haveto burn renewables.

(13:23):
I think I know whatyou're about to say,
and it makes mesick to my stomach.
They literally go to Romania,
and they find these oldgrowth trees because they're nice and
big, and they justlevel the entire thing.
They grind them up intopellets, and they burn that.
So instead of burning coal,
which is much cleanerthan wood, by the way.

(13:44):
It has twice the energyquotient per pound.
Yeah.
And
people forget this, but oiland coal, they're pollutants.
Yeah.
Peter, it's evenworse than that.
There is a British companycalled called Drax,
d r a x.
Have you heard of this?

(14:04):
I haven't heard of it.
What they're doingis cutting down
longleaf pine forestsin the American South.
So huge swaths of pineforests in Alabama, Georgia,
South Carolina, North Florida.They chop them all up.
They put them oncontainer ships.
They ship them to England,they convert them into pellets,

(14:27):
and then they burnthem for electricity.
Think about carbon footprints.
So Peter, you do realize thatEngland started the Industrial
Revolution in the 1600sprimarily by switching from
timber to coal as the primaryenergy source of that country.
And that increase in

(14:47):
efficiency is whatled to the railroad.
It's what led tomanufacturing textiles.
It's what created
the steamships that guardedthe world and that built the
British Empire.
And you have these same peoplein Europe who are deciding that
they're gonna go back to timber.

(15:11):
I just don't think that's gonnabe good for per capita GDP,
but I have been wrong before.
It's like the cuck version ofeconomic management where just
any choice you make is
what can destroy usmost efficiently.
It's just astounding.
And thank God for Europebecause they can kinda act as a

(15:33):
canary in the coal mine for us.
Now, of course, Biden wascopying them as fast as he
could, but you know,
at least for the rest ofus who still have a brain.
I was as I mentioned,
I was in New Zealand overthe holidays for two weeks,
and New Zealand hasenormous coal resources.
They've completelyshut them down.
By the way, the last coal-firedpower plant in England closed last
September.

(15:54):
And meanwhile, China is now consuming morecoal than the rest of the world combined.
In fact, China consumes 30% more coalthan the rest of the world combined.
And what do you thinkall the developed economies are gonna
do over the next 50 years?
They're going to build enormous amountsof cheap energy mainly through coal,
but also with natural gasand eventually with nuclear.

(16:15):
And it's amazing how thedeveloped world has has
willingly given up itsgreatest economic advantage,
which is low-cost electricity.
It's just,
if Putin did not engineerthe entire climate
hysteria, he should've.

(16:35):
The
benefits to Russia from allof this nonsense are legion.
And, I think at sooner or later,
it's gonna come out that allof this climate stuff was just
Russian disinformationfrom the very beginning,
because it's led to thedestruction of much of the
western world's economies.
But getting back to ourpoint. Yeah. Europe's in big trouble.

(16:58):
China's in free fall.
Emerging markets are actually growingand becoming more and more powerful,
but something is gonna haveto break in the United States
because you can't
have
real interest ratesin the United States.
And we have 4% inflation,say, 3% growth.
That's gonna give you a10-year Treasury yield of 7%.

(17:21):
You're gonna have7% bonds from here.
That's another 30, 40%decline in the bond market.
You're gonna have complete breakdownof the banking system because of that.
And meanwhile, you've got stocks that aretrading at all-time high CAPE ratio numbers.
So, man,

(17:42):
watching Trump handle thiseconomy is like watching a guy
juggling dynamitewalking through
a live nuclear reactor.
Something bad is gonna happen,
and I can't tell youwhat it is for sure.
But I've got threepossible triggers,
and I wonder what youthink about these.
Trigger number one, andit's the biggest risk,
is that all the spendingwe have seen on AI doesn't

(18:05):
actually lead to any revenueor profit growth at Microsoft,
Amazon, or Facebook.
And they're talking abouthundreds of billions in further
AI infrastructure construction.
But what if that doesn't work?
And we'll know that bythe end of this year.
So that's one big risk becauseI don't think there is a
business model yet for AI.

(18:25):
I haven't seen one.
I'm not saying thatthere won't be,
and I'm not sayingthat over 10 years,
it won't beincredibly important.
What I'm saying is that theinitial build-out of these new
tech infrastructure projectsalways leads to disappointment.
Look at the big Internetbuild out in 2000.
Same exact story.
The second thing is that II believe there will be a huge
problem in the banking system.
I don't understand how WellsFargo and Bank of America are

(18:49):
going to be able tokeep their depositors because they cannot
afford to pay a marketrate of interest.
And that problem has beenswept under the rug now for two
years, but it's gettingbigger, not better.
And then the third thing is,
I think there is a substantial riskto something breaking internationally.
China invading Taiwanis a constant risk.
Something happening reallybad in the Middle East,

(19:11):
a nuclear bombgoing off in Iran.
Any of those kind of thingsthat could happen would really,
really shake the stock market becausestocks are so expensive right now.
Anything that threatens thecredibility of the dollar could
lead to a really,
really big change in thecurrency markets because the
dollar has almost never beenthis strong versus all the
other currencies in the world.

(19:32):
So just a lot of things,
a lot of tipping pointsthat are out there.
What do you see?
Yeah.
I think those
are things that peopleneed to worry about.
You know, taking the AI,
you made the pointearlier that the U.S.
stock markets are largelyholding up the entire world.
I think most of the stockmarket equity on Earth at this

(19:52):
point is actually in the U.S.
The U.S. is 5% ofworld population.
It's maybe a quarterof world GDP.
It's most of thestock market. Yep.
But you made the point earlierthat that is overwhelmingly
concentrated in theso-called Magnificent Seven.
Right?
So you got seven mega stockslike Nvidia and Google and
Apple, and that has madeup at least 40% of the

(20:14):
stock gains this year.
Now on the flip side of that,
over 40% of publicly traded U.S.
companies lost money last year.
In other words, theyshould be wound up. Right?
If your company is losing money,
you need to give the capitalback to investors and go find a
new line of work.
Right?
40%. So that is ahistorically high number.

(20:38):
So when you look atthe stock market,
you look at the total returns,
it looks likeeverything's going great.
But, you know, like everythingto do with the economy right now,
some of the thingsyou're talking about,
the surface looks amazing.
Right? American banks'stock prices are up.
You know, they're doingfantastic, of course,
because they got bailed out... 2023.
But, anyway, on the surface,everything looks fantastic.

(20:58):
If we talk about theMagnificent Seven holding up
the entire market,the tip of the spear,
the tip of the hypeaside from fartcoin,
is artificial intelligence.
Right?
NVIDIA has been one of the bestperforming stocks, I think,
over the past 20 years,
but certainly overthe past five years.
It's been absolutely on fire.
One of the most valuable stocksin the world, Jensen Huang,

(21:19):
their CEO, is out signing boobs,
which is the mark ofgreatness in Silicon Valley.
But you raised animportant point,
which is that when you'vegot a new technology,
even if it's completelyworld-changing,
something like AIor the Internet,
it doesn't necessarilylead to profits.
Right?
So one of my favorite examplesis there was this technology

(21:41):
that Google came outwith around 1999.
And I was working in marketingin a toy company up in New
York, and they came out withsomething called a Google
Alert, which, you know,
you put your company name in thereand you sign up for the alert.
And then whenever youappear in the newspaper,
it sends you a little thing.
It's like a clipping service.
It was a clipping service.Completely inconsequential.

(22:02):
Nobody even thinks about it.
The most minor thing youcould possibly imagine.
But you know because you werein the business back then,
there was an entireindustry of news clippers,
people who would sit there and goaround and cut through newspapers.
Right? That industry gotwiped out. Good riddance.
I mean, it's a goofyindustry, but, anyway,
they got wiped out.
Right? Probably thousandsof jobs got let go.

(22:22):
Now how much money did Googlemake off Google alerts?
Nothing. Nothing.
Right. Absolutely nothing.
And so a lot of what happenedwith the Internet is that it
took billion-dollar businessesand turned them into
million-dollar businesses.
Took, you know, millionsdown to thousands.
K? Google Maps, how much moneythey make off that. Right?
Now how much value iscreated from Google Maps?

(22:45):
Yeah. It's probablyin the trillions.
I mean, all of us use it. Right?
Think of how much time ifyou're sitting there with the
Rand McNally Atlas trying tofigure out where to go. Right?
Massive value. How muchof it has captured?
Almost nothing.
So when we talk aboutartificial intelligence,
is it game-changing?
Yes. Is it as bigas the Internet?
It's probably gonnabe bigger. Right?
Massive, massive technology.

(23:07):
Already today, I use Grok the way thatI used to use Google search. Right?
Massive technology. Butwill it lead to profits?
And that, nobody reallyknows. Right? We don't.
Probably the closest thingwe have is the Internet that
ultimately led to profits, butthat took a very long time.
You had the boomand bust in between.

(23:28):
A lot of people got wiped out.
I'll give you a great exampleabout all that is eBay.
So eBay came along,
and it was a replacementfor classified ads.
People probablydon't remember this,
but it used to be you hadto call the newspaper.
You had to dictate the classifiedad to some person on the phone,
and they would put it inthe newspaper for you for a week
for 10 or 15 or 20or whatever dollars.

(23:49):
And nobody realized thisexcept for newspaper industry
insiders, but that was where60% of newspaper revenues came
from, and it's where probably 75or 80% of their profits came from.
So eBay came along with onelittle piece of software,
and over the next decade,
put every newspaper in thecountry out of business.
And those newspaper revenuesdidn't accrue to eBay.

(24:11):
You know, eBay is getting a cut of thethe sellers fees or the buyers fees.
I'm not quite surehow exactly it works.
But it wasn't anything likewhat the entire newspaper
industry revenues were.
And so those technologies don'tnecessarily build profits for investors.
You just said, yeah,I'm using Grok now,
which is an AI device that'sowned by Elon Musk's X unit,

(24:31):
used to be called Twitter.
And I think thatthings like that, AI,
like Grok and others,
are gonna really have abig impact on Google's AdWords.
And nobody really thinksabout this, but, you know,
90% of Google's revenues andall of their profits come from
AdWords.
And so if AI actually changesthe way people use search,

(24:53):
AdWords is gonna get verysignificantly impacted.
And look, Google's hadother great businesses.
I'm not saying Google'sgonna go out of business.
I'm just saying, you couldeasily see a case where for the
next 10 years, theirearnings decrease.
And that is not a part of theircurrent stock price. Trust me.
So I think it's a greatexample that big technological

(25:14):
innovations cause a lotof good economic things.
You know, we all exist in thiscompeting world of creative destruction,
and that's greatfor our economy.
But it isn't necessarily great forthe leading companies of the day.
One other story about allof this that I think really
explains where I believe we are in themarket cycle in regards to stock prices.

(25:35):
In 1972, Warren Buffettheld a meeting at the Colony
Hotel in Palm Beach.
This is for what hecalled the Buffett Group.
This was the couple dozen of hisfriends from back when he was working
at Ben Graham's firm.
Newman Graham wasthe firm's name.
So colleagues from NewmanGraham plus Munger and his

(25:57):
group from Blue Chip Stampsout one the West Coast,
the West Coast bank guys,
they're friends who they'dall done business with.
They had a couple differentbusinesses at that time.
Diversified Retailingwas one of them.
Anyways, they got a couple dozenreally smart investors together at the
Colony Hotel inPalm Beach in 1972.
This was the eraof the Nifty Fifty.
And Buffett said,

(26:17):
pretend you're gonna be stuck on adesert island for the next decade.
Tell me one stock you'd be willingto have all of your money in.
And you wouldn't be surprisedto know the names, Polaroid,
IBM, GM, GE.
Well, if you look atall of those stocks,
the annualized returns over thenext 10 years for all of those

(26:38):
stocks was negative.
Mhmm. Nobody could imaginea decade like was coming.
Nobody could imaginethe amount of inflation.
Nobody could imagine how highinterest rates were gonna go.
And as interest rates gohigher and higher and higher,
the multiple on stocks have togo lower and lower and lower.
And by 1982, theCAPE ratio on the S&P

(26:59):
500 was seven, which isthe hundred-year low.
So people went from being morebullish and more greedy than
they had ever been.
1972 was the Dow high.
You had a CAPEratio of around 25.
That was an extremelybullish environment,
and yet they were sleepwalkinginto the worst decade for U.S.

(27:20):
stocks ever.
And I believe we're inexactly that same scenario.
People are so bullish rightnow on Nvidia and on Tesla
and on Apple thatit is inconceivable
to them that there could bea period of declining stock
prices that is meaningfuland that has a long duration.
And yet we know from history,

(27:41):
we know that that's what has tohappen when stocks are this expensive.
Yeah.
You get a reversion to the mean,
and that then sort of tricklesdown through the rest of the
economy because, if welook at wages, for example,
they have not beenkeeping up with inflation.
The job pictureis not that great.
The one thing that's beenholding up is consumer spending.

(28:01):
What's holdingconsumer spending up?
A lot of that isgrowth. Exactly.
So, you know, there wasa point in 2022 when
one in three dollars hadbeen freshly printed.
I mean, it's just an absolute orgyof money printing during COVID.
It was done worldwide.
There was somethinglike $9 trillion
printed up on a worldwide basis,

(28:23):
and that sent assetprices soaring.
Right? It sent houses soaring.
It sent stocks soaring.
It sent Bitcoin. It sentany asset out there soaring.
That wealth effect from that
kept people spending.
But the thing is,
it's not just the wealtheffect that already happened.
People expect stocksto keep going up.

(28:44):
If they expect themto keep going up,
then they keep spending.
They keep borrowing.
They keep redoing the kitcheneven though they don't make
enough at work to keepup with inflation.
So when the comeuppance comes,that becomes catastrophic.
Right? At that point, you couldbe looking at a 1970s scenario.
Yeah.
It's very clear to me thatwe're in the midst of the

(29:05):
greatest inflationary boom inUnited States history and maybe
even in world history.
And you're exactly right.
If you look at M-2,
it goes from something around$4 trillion to something over
$20 trillion in abouteighteen months.
And all of thatfinancial money printing,
all those financial assets thatboomed are still hugely inflated,

(29:27):
but the the resulting earningswill not be enough to maintain
those valuations becauseit is so inflationary.
And what will happen is,purchasing power will decline,
and then eventually,earnings will decline,
and then eventually,defaults will rise.
And eventually, you will havewhat's happening in China,
you will have a deflation ofthose assets because they are

(29:47):
just hugely inflated.
I don't know if you saw thisor not, but just yesterday,
some credit card default datacame out that was truly shocking.
So, consumer credit defaults now
are larger than they were atthe bottom of the 2008 crash.
So there is a huge weaknessin the fundamental part of the

(30:09):
U.S. economy, which has alwaysbeen driven by the consumer.
Have you seen that data,
and and did youfind that alarming?
Oh, for sure. It'salarming. Yeah.
They were up 50% year on year.
And, of course, as always,
they've been calling ita K-shaped recovery is what
they've been callingit since COVID.
So just like the letter K,

(30:30):
you've got some people on the topwho are doing absolutely amazing.
And all the peoplewho own assets.
Exactly it. Right?
Their banks are gettingpumped by Jerome Powell.
You've got everybody else onthe bottom who just voted for
Trump because they'renot seeing it.
Right? They've got twojobs. They got three jobs.
Maybe they're drivingfor Uber at night.
They're sellingoff their assets.

(30:51):
There's an expressionfor that in Japanese.
They call it the onionlifestyle where you peel off
layer by layer.
You know, first, yousell the ski equipment,
and then you sell some of thefurniture you're not using.
You just reduce, and that's thereality for a lot of people.
And, you know,
that is going to tricklethrough to all the rest of it.
Right? They can'tspend at some point.

(31:11):
They're already defaultingon their credit card debts.
That hits banks. Banks arealready in a world of trouble.
You know, what did them in in2023 was interest rates coming up.
Because if interestrates come up,
then your bond values go down.
Most of what U.S. banksown is bonds. Bonds. Right?
And so they're likelyto get hit again.
You mentioned earlier that thelong term rates have been going

(31:35):
up since the election by a hundredbasis points, full percent.
In fact, they're up since theFed started cutting rates.
Right?
So the Fed lopped125 basis points off,
and we've got mortgagesalmost back to that level.
So the market hascompletely ignored
the Fed cutting rates.
Yeah.
And by the way,
the only the only time that'sever happened before was during

(31:57):
the Volcker period.
When Volcker first startedcutting rates in 1982,
that's the only other timewhere long term rates just went
higher because the market had noconfidence that inflation had been beaten.
Yeah.
And, you know, one wetalked earlier about,
sort of Trumpspinning plates or no.

(32:17):
It was juggling dynamite.
Dynamite. Yeah. That'smy metaphor. Reactor.
No. It's just more colorful.
So, you know, one ofthe big pushes here,
is on the Department ofGovernment Efficiency with Elon
Musk, and he's very,very interested in that.
You know, part ofthat is deregulation,

(32:38):
which Elon is veryconcerned with.
Trump was concernedwith it as well.
In his first term,when he took out, like,
eight regulations forevery one that came in,
that's very good for growth,
but the other part ofit is spending cuts.
Now there's a lot of people whoare skeptical whether they can
get that throughbecause, of course,
Congress is gonna fight like hellto keep all those spending cuts.

(32:59):
But there's an interesting sortof data point if we talk about
economic risks and thelikelihood of recession,
which is that we can look atwhat happened in Argentina.
Alright?
So Javier Milei in Argentina,
he slashed government spendingsomething like a third.
That lopped about 5%, oh, sorry,
6% of GDP out. Okay?

(33:20):
So he just cut that muchgovernment spending.
Absolute massive.
But the thing is, the private sectordid immediately start growing.
It's pretty stunning.
Almost overnight, the privatesector started growing.
But even so, I mean, ifyou cut out 6% of GDP,
China in the good olddays barely managed 6%.

(33:40):
Six is a lot.
And how about this, Peter?
Even if he does do that, whichI don't think is possible,
we'd still be running a deficit.
We would. That'sthe thing. Right?
We would barely break even.
It's amazing. The only way...
you know this as well as I do.
The only way you can controlinflation is if you get serious
about reforming theentitlement programs,

(34:02):
which are completelyuntouchable politically.
And anything else that DOGE orwhatever we're gonna call it,
the Department of GovernmentEfficiency talks about is
meaningless in terms of thescope of the problems that we
have financially with ourgovernment's tax and spend.
Yeah.
You could get probably about atrillion or a trillion and a half out.
It wouldn't be that hard.

(34:23):
You can
sort of change the militaryso it's focused on actually
defending the country asopposed to projecting force,
going and abatingother countries.
You could probably squeeze $4or $500 billion out of that.
Pure fraud and wasteis, according to GAO,
is close to $500 billion.
You got a lot of cronystuff, drag queen story hour.

(34:45):
Like, the entire professionalleft is funded by taxes. Right?
So you just take outgovernment grants.
You can probably take about$500 billion out between the
crony green crap, you know,
the Chips Act where they just handmoney to semiconductor companies.
There's a lot to cut. Buteven so, you put all that together.
I mean, you

(35:07):
would pretty much have to putCongress in prison because they
would never ever agree.
You would take allof their toys away
just to balance the budget.
So if you actually wanted toget back to a surplus like we
had in the nineties withClinton and Gingrich,
if you actually wantedto do that, then, yes,
you'd have to go after
the entitlements.

(35:27):
And, you know, thebiggest issue on the entitlements,
I think, is really two areas.
One of them is that thesort of political coalition
behind Social Security hasunderstood the importance of
having everybodyin the same boat.
And, of course, you could cut costsby just getting rid of rich people.
Right?
Say, you know, if you make more than a hundredand twenty thousand a year, then, you know,

(35:49):
we're gonna start pinchingyour Social Security check,
but that would erodesupport for it.
That's one area.
The other big one, whichnobody wants to talk about,
probably because voters hatethe topic, is health costs.
Right?
So the way that it works inAmerica, if you get sick,
you have the right tohave a Lamborghini.
Okay? Nobody is ever told...

(36:09):
Like, if I gotta go todrive to buy groceries,
I don't automatically geta government Lamborghini.
But if I get cancerand I go on Medicaid,
I get a government Lamborghini.
Okay? That is not sustainable.
And that is going to be areally difficult conversation.
Nobody wants to havethat conversation
because the voters and peoplein general are not ready for it.

(36:31):
But the way that you have asustainable medical system is,
for example, whatSingapore does.
Many countries do it this way.You have a two-tier system.
You have one systemwhich is free.
You get basic care if youget in a car accident,
go to a hospital,
you're in a group wardwith eight other people,
you got the curtains aroundyou, absolute basic care.

(36:52):
Your family's gotta cook upyour lunch, okay, the minimum.
That's free. And thenyou've got another one.
That's the Lamborghinis.
But with the Lamborghini system,
you gotta pay part of it.
Right? So in Singapore,it's 10%, 20, 30%..
It's a climbing scale dependingon how extravagant we want it.
But if you want thetop cancer doctor,
if you want a privateroom in the hospital,

(37:14):
then you've gotta actuallyhave skin in the game.
That's fundamentally whatwe're gonna have to get to,
but nobody wants tohave that conversation.
I agree with all of that.I've got a prediction for you.
Whatever it is that Elon Muskis able to cut out of the
government spend next yearwill be immediately replaced by
soaring interest costs on thenational debt because we are

(37:37):
going to default.
There is no way thatwe can ever repay $36
trillion or evencontinue to finance it.
As you pointed out,
Yellen financed everything ontwo and three year terms to
minimize the costs.
As that stuff getsrolled, right now,
there is no difference betweenthe two and three year rate and

(37:58):
the 10-year or 20-year rate.
It's 4% and 4.5%.
Well, by this time next year,rates will be closer to 7%.
And if you're tryingto roll that paper,
you gotta finance $10trillion of it at, let's say,
an average cost now of 6%.
And then you know that wepaid a trillion dollars in

(38:20):
interest this year.
Those interest costs are gonnagrow 30 or 40% in the next year.
So whatever Elon takes out,
we're going to have to spendmore because of rising interest.
Now, here's a reallytough question to answer,
which is what is thevalue of the U.S.
stock market when theTreasury defaults?

(38:44):
Yeah. So there's afascinating moment in history.
It wasn't even that long ago,
and I think you'refamiliar with it.
The European debt crisis.
So that was kicked off byGreece back in 2011, 2012.
And what's fascinating is that whenGreece started threatening to default,
the amount of debt interestcoming out of Greece was lower

(39:05):
than it was coming outof the U.S. at the time.
Alright?
The point being that you don'tdefault because you can't pay it.
You default because somepolitical entrepreneur shows
up, and he starts talkingabout greedy German bankers or,
in our case, WallStreet and China.
It's very

(39:26):
easy to sell voters on theconcept of defaulting on the debt.
What's shocking to me is whywe haven't defaulted yet.
It's a hundred-dollarbill lying on the ground.
If you wanna run for president,
just promise Americansa quick $36 trillion.
Just walk away from the debt.
Replace it with new debt whereyou're taking care of the

(39:47):
widows and orphans,
the people who don't look goodin the newspapers, you know,
so, pensions, things like that.
Maybe you're talkingabout $9 trillion.
You booked a $27trillion profit.
Too bad for Wall Street.
They can go bust,
then they can get boughtup by Warren Buffett,
which he offered todo in 2008, of course.
So just flog them onthe bankruptcy markets.
China gets stiffed.Foreigners get stiffed.

(40:09):
I think that is a veryattractive idea to many
Americans.
And, you know, will you havea catastrophic recession?
That's the big question,
and you've got kindatwo data points there.
The bad one is WeimarRepublic Germany, you know,
which is kind of thego-to for hyperinflation.
But you've got aninteresting counterpoint,

(40:31):
which is Brazil andArgentina in the 1980s.
They were not eating their pets.
They were not eating each other.
They did not start a world war.
It was not all that badcompared to what people imagine
hyperinflation to be.
Well, you've alsogot Iceland in 2008,
and they had a severetwo-year recession,
and they came out with a muchbetter, much more equitable,

(40:53):
stronger economy.
And in the U.S., the lasttime we defaulted was
1933.
And at that point,
you'd seen stocks decline by90% because it was very obvious
that that was going to happen.
So I think the next four yearsis gonna be a lot different
than than the Trumpbackers expect.
You and I are sitting heretalking about the inevitability

(41:15):
of a Treasury default,and I promise you,
if anybody from Wall Streethears this conversation,
they're going to absolutelyspit up their soup.
They cannot imaginethat, and yet it is,
if you understandmath, it is absolutely,
positively inevitable.
It will either happen throughinflation or it will happen
through an outright default.

(41:36):
And either way, stocks are notgonna trade at a CAPE ratio of
37.
And
the inevitability of thatdefault is gonna become very
crystal clear duringthis presidency.
The runaway spending of Medicare
and Social Security is nota problem for our grandkids.
It's a problem for us.

(41:59):
By the end of this decade,so that's five years,
it will be impossible tofinance our government spending,
and there is no political wayto stop the spending no matter
what Elon Musk says.
So let me ask you.
So if we get into a collapse,if we look at the fall,
if they hyperinflatetheir way out of it,
if one way or the other,
the world loses faith in thedollar, are we going to gold,

(42:22):
Bitcoin, something else?
Are we going to reestablish...
Well, look what the
central banks are doing.
They're buying goldlike it is no tomorrow.
I think that a lot of central bankersaround the world can do basic math,
and you you can look at theirgold buying and see that.
I also just heard from a

(42:43):
very reliable source that JimRogers has gone one hundred
percent into silver.
He has sold everything andgone completely long silver.
That's a guy I respect who alsoknows how to do basic math.
So I think that we areon the cusp of a big,
big change in theworld's monetary system where the
dollar really losesall of its credibility,

(43:04):
and people will flee intogold, they'll flee into silver,
and they will nowflee into Bitcoin.
And I don't think youhave to make a choice.
I think that all threeare good solutions.
What I don't know and what youcan't know is what the real
value of Bitcoin is because itdepends so much on the hash rate.

(43:25):
In other words, if morepeople wanna buy Bitcoin,
then the price will go up.
If suddenly peoplearen't interested in it,
the price could govery, very far down.
And so in thatregard, it's not like
a real tangible asset valuelike gold and silver is.
You know, gold and silver have avery well defined cost of production.
It takes energyand it takes ore.

(43:47):
And you can know what thosethings are worth in terms of
labor and other ways ofvaluing in real terms.
It's much harder todo that with Bitcoin,
which is why it's so trickyto know when to buy it.
Yeah. Yeah.
I think
gold is a lot trickier
than people normally recognize.
And the reason...
so I did analysis a coupleyears ago where I looked at

(44:08):
gold versus other metals thathave similar supply dynamics
and concluded that about90% of gold's value
is speculation that it couldultimately be remonetized.
Right?
So if you compare gold tosimilar industrial metals,
it's way out of whack.
I mean, it should be, like,maybe $200 or maybe $50,

(44:30):
not $2500.
I think almost allthat is monetary.
And at which point, it'spretty easy to value it.
Right?
You can just take the amountof money currently in the world to
something like $100 trillion,
divide that by the numberof ounces in existence,
and of course, gold is minedevery year at, what, a percent,
percent and a half.
So it's pretty straightforward.

(44:51):
So the best model that thatI've seen to try to assess
Bitcoin's value basicallydoes the same thing.
So, you know, Bitcoinis not 90% speculation.
It's 100% speculation. Right?
There's nothing else you can do withBitcoin but try to become a money.
But even there, right, youcan take all the money in the
world, hundred trillion, dividethat by the number of Bitcoin.

(45:12):
And then, you come outto about $5 million.
Now, of course, you have to discount thatbecause who knows when this is gonna happen.
Is it gonna happen in 50 years?
Is it gonna happen in 100 years?
Is it gonna be some othercryptocurrency that comes along?
Are they gonnamanage to kill it,
somewhere between now and then?
But, you know, Ithink, fundamentally,
when we're valuing the numbers,for me as an economist, anyway,

(45:33):
comes down to pointone, will fiat die?
I think there's verygood odds of that.
It has historically,time and time again.
Number two, if that happens,when will it happen?
Because as you know,net present value,
you have to discount everythingin the present terms.
You know, if you're betting thatNVIDIA is gonna make a profit 500
years from now, that'snot worth very much.

(45:53):
So when will it happen?
And then pointthree, if it happens,
who is gonna replace it?
And I think you make agood point about silver.
I had never looked at silver,but it's held up very well.
I mean, if you go back to Nixon,
silver has held up just as wellas gold, maybe surprisingly.
What do you have anythoughts on why that is?

(46:14):
Yeah. I do.
Of course, as you know, forall of recorded human history,
gold has been themoney for rich people,
and silver has been themoney for the working class.
And that's, of course,
because of the relative valueand the relative scarcity of
those metals inthe Earth's crust.
There's also historically beena a pretty firm ratio between
silver and gold where,you know, traditionally,

(46:36):
gold was worth about 16times more than silver.
And now that numberis way higher.
I forget exactly where we arein silver to gold ratio today.
You can do some basic math.
It's not hard to figure out.It's somewhere like 50 to 70.
And there's a lot of speculationthat that will change,
that as those metals becomemonetized again in a lot of
places around the world,
that that silver ratio givesinvestors a lot more leverage.

(47:00):
So
there's a lot of peopleprobably watching us who have
never bought precious metals,but they have bought cryptos.
And so, if you think of gold,that's like the Bitcoin,
that's like the standard,
and then you've got somethinglike Solana, you know,
that has a lot more volatility,that's more like the silver.
And so I think that if you
believe

(47:21):
what I believe, and I wanna be reallyclear about what I believe because I
don't want people to say that I washedging or that I didn't see this coming.
There is no way that we canstop the spending in our
current political system.
It cannot stop.
And we know that because ofthe power of the bankers,
we are not going to default.
That's not goingto actually happen.
What will happen is the kindof default that we had in

(47:43):
1973, '74.
You will just haverunaway inflation in this country.
You'll have monetary repression.
You'll have inflation that'srunning at 6 or 8% a year,
and you will have manipulationof the bond market so that
there is no way to protect yoursavings if you're in the dollar.
And that will forcepeople to go into Bitcoin,
to go into gold, andto go into silver.

(48:05):
And that's alreadyhappening, by the way.
If you look at any centralbank around the world,
they're all getting out ofthe dollar as fast as they can
because everybody cando the basic math.
What's gonna be interesting isthis will be the first time you
see the United Statesgovernment actively defaulting
through inflation where wehave a genuinely free press.

(48:25):
The last time thishappened in the
'70s, there were three networks.
They were all controlledby government regulators.
No one was ableto tell the truth.
But now you've got Twitter,
and you've got all kinds of thingslike YouTube and, by the way,
this kind of discussion that's nowgonna be reaching millions of people.
So the stampede out ofthe dollar could really be
something we'venever seen before,
and that's the only thing thatcould limit the government's

(48:47):
ability to print.
That's the only thing thatcould lead to an outright
default only because,as, by the way,
is happening rightnow in Britain,
there is simply a completestampede out of the currency,
and no one will hold it anymore.
Anyways, all these thingswe're talking about,
they are the real crux ofwhat's happening in the economy.
They are what's really happeningif you don't understand math.

(49:09):
And none of this ispriced into a U.S.
stock market that'strading at all-time,
100-year peaks in valuation.
So regardless of whatexactly happens next,
it is going to bea very rocky ride.
And the people who've gotten usedto making 13% a year in
the S&P are about to geta very cold bucket of

(49:30):
water to the face.
You make some greatpoints on the question of
how fast
this information spreads now.
Right?
This is something that theFederal Reserve was worried
about this in 2023 whenthe bank runs were running,
and they said, look.
In the old days, bank runsused to take months and months.
Even in 2008, Silicon ValleyBank was, like, 72 hours.

(49:53):
Right?
And the reason is social media,
especially now thatwe have free speech.
So we're havingthis conversation.
The LA fires aregoing on right now.
And you can go onto Twitter or X,
and you can get everylast bit of information.
Which street? What's causing it?
You know, they don't have water andthe fire hydrant and all this crap
the LA government pulled.

(50:13):
And then you go tothe mainstream press,
and it's just garbage.
They have no ideawhat's happening.
Yeah.
They're feeding youthese stupid canned lies
about global warming.
Right?
I mean, the contrast between nightand day and so just like you say,
in the 1970s, that mainstreampress could keep a lid on stuff.
Right?
They could tell you that bankswere safe when they're not.

(50:34):
I mean, of course,
fractional reserve bankingmeans the entire banking system
is always bankrupt.
They never have the money inthe vault, but they hide that.
As you say, now that we have thissocial media age where the truth gets
out there, and I wanna sharesomething related to that.
This was a analysis that the FinancialTimes just reported last week.
They said out of the 12elections last year in

(50:58):
developed countries,every single one,
the ruling partylost vote share.
And that was the first timethat that happened since 1900.
Alright? And they're callingthat a crisis of democracy.
Point being that everybodyhates their government.
It's not a crisis of democracy.
It's a crisis of paper money.

(51:20):
The entire
international financial system iscrumbling because it is not capable
of maintaining productivityfor wage earners.
And that has been goingon now for 50 years,
and the wage earnersare sick of it.
You know, if you are notwealthy enough to buy gold,
to buy silver, to buy Bitcoin,

(51:41):
to invest in real estateon a leverage basis,
over the last 25 years,
you have seen your standardof living get destroyed
to the point where in manydeveloped countries like New
Zealand, like Argentina,like in Great Britain,
the wage earner is notcapable of buying a home.
It's not possible.
It's not possiblefor them to save.

(52:03):
And so you will see all thesesocieties on the cusp of
revolution overthe next five years
because just electing the other partyis not going to solve these problems.
And it doesn't matter what Trumppromises or what Milei promises.
If you do not restorethe financial order,

(52:24):
there is going to be ahuge problem in the world.
And how ironic will it be thata country like El Salvador ends
up becoming one of thewealthiest societies in the
world in the next decadebecause they have Bitcoin and
because they have gold mines.
And they justannounced, by the way,
they have found a gold minethat they estimate has a
trillion dollars of goldin it in El Salvador.

(52:45):
It's amazing what happens whenyou fix your economy and you
start paying realwages to people.
All of a sudden,
it gets very productive andlots of things can happen.
And thank God that we've gotrulers out there who actually
care about growth, whocare about the countries.
That's the savinggrace, fundamentally.
Like, if you look at thefall of the Soviet Union,
if the Soviet Unionwere alone, like,
if they had won and the entireworld were part of the Soviet

(53:08):
Union, it probably neverwould have collapsed. Right?
The key to it was that theycould see what's happening in
these other countries.
They could see that you canhave blue jeans in the west and
blue collar constructionworkers can own a car.
They can go onvacation, on airplanes,
all these amazing things.
And so that countrieslike El Salvador,

(53:29):
more and more countries in thewest as they start to go populist,
we've got maybe some rightpopulist parties in Europe who
might take power this year.
Those are gonnaserve as examples
for the people who arestill trapped in the prison,
and this kind of processwe're talking about,
it could snowball.
Right? It could become thisself reinforcing process.

(53:51):
And in terms of investments,
that then makes it interesting becausethe voter enters the conversation.
Right?
It's no longer the elitescovering each other's butts,
pretending that thebanks are solvent,
the Fed feeding in enoughliquidity to put out the fire
so that nobodycan see the smoke.
They don't actuallyfix the problem.
They just cover up the problem.

(54:13):
Once the people enterthe conversation,
you are looking at long term.
It's a good thing. Right?
They can fix the problems.
But short term,
you've massively raised your oddsof some sort of crisis,
especially with a financialsystem that, as you know,
is so overleveragedas ours is today.

(54:33):
I'll tell you one lastthing, before I let you go,
about the the Russian collapse.
It wasn't even the blue jeans.
What really did itwas the cigarettes.
Russia was so badly run,
and there was no productivityto the point where they
couldn't even manufacturetheir own crappy cigarettes.

(54:54):
And Gorbachev, shortlybefore he was deposed,
begged Philip Morris to sendhim enough cigarettes to quell
the unrest, and PhilipMorris, to its credit, did.
It sent Russia a billiondollars' worth of cigarettes.
And to this day, the leading brandof cigarette in Russia is Marlboro.

(55:14):
Yeah. Okay.
And most people don'trealize this, but,
in most places around the world,
cigarette usagecontinues to increase.
So everyone thinks of thatas a dying or dead business,
but it's not in manyplaces, including Russia.
So, I don't know what thattipping point will be.
I can't imagine what it'll bein America that finally gets

(55:35):
people to realize, oh, crap.
This paper in my walletisn't worth anything.
And by the way,
all the money that I have in Bank ofAmerica isn't worth anything either.
I better go do something.
But because of electronicnetworks and because of
Twitter, when that moment hits,
it is going to be unlike any othercrisis that anyone's ever seen.

(55:55):
So my advice to everybodyis, if you act first,
you're not panicking.
And what did they say inthe movie, Margin Call?
In this business, youcan win by being smart,
you can win by cheating, oryou can win by being first.
I suggest being first.
Yeah. Absolutely.
You've gotta beaware, and, you know,
the last person holding the bag is theone who's gonna pay for the whole thing.

(56:18):
So, I mean, at leaststart making moves early. Right?
Psychologically, you'regonna sleep better at night.
And if the worst casescenario happens,
then that's really whatyou're buying insurance for.
That's right.
My advice is have at least25% of your net worth in
Bitcoin and gold and have atleast 25% of your net worth

(56:38):
in high yielding short termpaper because you're gonna want
to be liquid when stocks crash.
And that can happen at any time.
You could wake up tomorrow morningand stocks could be down 50%.
And when thathappens, of course,
you wanna buy Coca Cola,you wanna buy McDonald's,
you wanna buy Philip Morris.
But if you buy thesestocks right now trading at

(56:59):
multiple decades of high price,
you're bound for disappointment.
So that's where we are today.
A lot of people don'tlike hearing bad news,
but I certainly would ratherhear it while I could still
take advantage of theseopportunities instead of afterwards.
So I hope if you guys are arewatching us or are bullish and
you think we're completelyout to lunch, great.
I honestly hopethat you're right.

(57:19):
Meanwhile, I'd suggesta remedial math course.
Yep. No. Spot on. Spot on.
We've got so much happeningtoday that if you are just
leaving your portfolio be,
doing the whole Warren Buffettbuy and hold thing, honestly,
it's irresponsibleat this moment.
We got a lot of stuffgoing either directions.
Will it turn into theboom of the century,

(57:42):
Trump 2.0?
Maybe. Will it turninto a disaster?
There's a possibility.
But either way,this is, I think,
not a buy and hold economy.
You gotta be active right now.
You gotta have your hands on it,
and you gotta keep powder dry.
Look what Buffetthimself has done. Right?
He's put roughly a third ofhis portfolio into short term
Treasuries for exactly thereasons that I'm talking about.

(58:03):
I don't think Buffettwill ever buy gold.
I don't think he'llever buy Bitcoin.
So this is as conservative anallocation as you'll see him take.
And this is, of course, exactlywhat he did in 2000 when he...
Most people don'tunderstand this,
but Buffett went to cash in'98 when he bought General Re.
Because doing so had theimpact of putting about 30% of
Berkshire's networth into bonds,

(58:24):
which is what General Re, abig insurance company. owned.
And, of course, he did this famously atthe top of the market in '69 as well.
He he gave all ofthe money back to his
investors, and he boughtNational Indemnity,
which was a huge pile of bonds.
So he's very good attiming the market,
and even though hewill never admit it,
if you watch what he does, youwill see that in his portfolio.

(58:48):
Meanwhile, he'll always say, youknow, we buy and hold, which he does,
but he also has been very good atmarket timing throughout his career.
So even if you don'ttake our word for it,
look at how much cashBuffett's now holding.
He was amazing in 2008.
There was a minute therewhere I was rooting for him.
He wanted to buy upthese failed banks.

(59:10):
Right? I mean, I waslike, let them go under.
Let Citibank gounder. Let Lehman.
Let all these guysgo under. Yeah.
Their shareholders shouldbe wiped out for their sins,
and then they could'vegotten picked up by a song.
They might've been guys likeBuffett, guys like BB&T Bank.
Now that's interesting becausea lot of these scenarios that
we talk about here, almostevery single one of them,

(59:31):
the banking system doesnot come out alive.
No.
You know, when my kidwas eight, you know,
he was getting into astronomy,
and he would ask questions like,
what if the mooncrashed into the Earth?
And I would say, well,everybody would die.
And say, okay.
Well, what if the Earth spun out andand got further away from the sun?
I say, well, everybodywould die. Right?

(59:52):
Like, the punchline onevery single astronomical
interesting questionis everybody dies.
On the economy, the punchline onanything interesting that happens,
the banking system dies.
Right?
And there, I think asin terms of the economy,
that's actually awonderful thing.
I would love the banking systemto die and to be picked up for

(01:00:13):
a song by new managementwho's more prudent.
You also wanna be aware of thatif you're an investor. Right?
So if you're just buying anETF like SPY and you think that
you're passive investing,well, you're not.
Because big chunk ofthat, I think 10 or 15%,
something like that, is goingto be in a Ponzi banking system
that anythinginteresting happens,

(01:00:34):
they're gonna takeit right on the chin.
They'll probably only getwiped out and bailed out.
Sure. But I can give peoplereal numbers about this. Right?
So what's the largestdepository institution
in the United States?
It's Bank of America.
Alright?
But more more Americans have achecking account with Bank of
America than any otherbank by a wide margin.
Something like 40% of all thedeposits in the banking system
are in Bank of America.

(01:00:55):
Bank of America has$200 billion in equity,
which sounds like a lot,
but really isn't when you look atthe size of the total balance sheet.
They also have roughly,
and I'm making this up becauseI don't have an exact number
because I don't publish it.
They have roughly $100 billion currentlyin losses on their bond portfolio.
So they've lost roughly halfof their equity in the last

(01:01:16):
two-and-a-half years totheir decision to put $500
billion into bonds at theabsolute market peak in the
summer of 2020.
Meanwhile, they haven't taken asingle charge against earnings from
any of those losses,and they have, in some,
paid their CEO $125million in compensation

(01:01:37):
since that investment.
That investment, Peter, willgo down as the single worst
capital markets investment in thehistory of the capital markets.
Bank of America is gonna losesomething on the order of $100
to $200 billion from one trade.
And they gave the guy whoput the trade on $125 million

(01:01:58):
in compensation for doing so.
Trust me.
That will eventuallycome out in the wash.
That you can't justcover up $100 billion,
half your equity in losses.
And until they bite that bullet,
Bank of America is uninvestable.
You cannot ownthat stock at all.
And if I were you, I wouldn'thave a single account there.

(01:02:20):
Because Bank of America rightnow can only afford to pay
.01% interest on its savingsand checking accounts,
which means you're going tolose about 4% of your money
there to inflation every year.
At the very least,
if you don't do anythingelse from this conversation,
get your money into a bankthat will pay you interest.
I'm getting paid something like4.5% percent right now on all

(01:02:43):
the cash that's in myInteractive Brokers account.
That's all you need.
That'll at least protectyou from inflation.
But if you're doing businesswith Bank of America,
you're doing business witha whole bunch of crooks.
And eventually,one day, people are
gonna wake up and go, holy hell.
What happened? And alltheir money will be gone.
Don't be that person.
I'm actually surprised peoplestill put money in banks.

(01:03:05):
You know, I've used Schwabas my bank since I was 20.
You put your money over there.
You invest it in stuff.
If you don't wanna invest youcan just leave it as cash.
They'll pay you roughly thesame interest as the bank.
Well, I don't even know whypeople use banks, at this point,
but I think what you'redescribing for Bank of America,
I think that all thelarge banks in America,

(01:03:27):
they may not be as badas Bank of America,
but they're all up there.
They've all been playingthe exact same game.
Yep. They were lemmings intobonds, commercial real estate.
Yeah. They play games.
Yeah.
We haven't eventalked about that.
We haven't talked about 90%default rate on every single
office commercial realestate loan out there.
We're not eventalking about that.

(01:03:48):
We're talking about the mistakesthey made five years ago,
not the mistakes that theyhaven't even begun to recognize.
And all that commercialreal estate, by the way,
gets reset this year.
There's an enormousamount of office re
that's going to fail this year.
But that's notreally the problem.
The problem is reallyrising inflation,
the inability of thegovernment to stop spending,

(01:04:08):
and the resulting lossesin the bond market,
which will be catastrophicfor the banking system.
Peter, listen. It's beengreat talking to you.
I hope that we can get together likethis every now and again and catch up.
We should do that, we shouldmake some predictions.
Where
will stocks end the yearin 2025 in terms of percentage

(01:04:28):
gain or loss on the S&P 500?
Oh, man. You got me on the spot.
Alright. I'm gonna gowith the optimistic call.
I am gonna say that Trumpis gonna get growth going.
Inflation is gonnabe relatively muted
because we're gonnahave enough growth to

(01:04:49):
absorb the new money.
And so I'm gonna gowith a 15% gain on the
S&P.
You're embracing thebubble just like Barron's.
I'm embracing the bubble.
I have visions right now of mebeing so laughably wrong at the
end of the year, but, anyway,I'm gonna go with 15%.
I'm gonna go, minus 20%.

(01:05:12):
Minus 25.
I think by the way,
it's more likely thatstocks will simply be flat.
It's gonna take a whilefor the worm to turn,
but I'm gonna make a predictionof minus 20% because I really
do believe there is going to bea big hiccup in the bond market.
I think you're going to seeinflation that's way stronger
than anybody expects.
I think we'll end the yearwith the CPI somewhere between 6 and

(01:05:36):
8%.
And I think you're gonnahave the long bond, say,
20-year paper, the yieldon TNT, TLT, the ETF,
the 20-year Treasuries.
I think you'll havethat well above 6%.
And I think that's just gonna absolutelyput a pin in the stock market,
especially in situations thatare speculative like Tesla.

(01:05:56):
Tesla is a great business.
Sure.
They build great cars, buttheir earnings are very weak.
And as China rolls outessentially free electric
vehicles for the whole world,
I think that's gonna be verybad for Tesla's margins.
And any company that stumbleson its revenue or its earnings
in an environment where there's a 6%bond out there is gonna get slammed.

(01:06:17):
So I think you'll...
and so remember justhow concentrated the S&P is.
Those big cap stocksare trading crazy multiples,
and I don't think it'd be hardat all to have a 20% correction
in the stock marketas yields go higher.
One other prediction. So Isaid, long bond at over six.
What's your long bond forecastfor the end of the year?

(01:06:40):
I actually think the longbond's gonna come down.
I think that what we're lookingat right now is a lot of
concern over Trump chaos.
I think the biggest tell onthat has been Bessent, right,
the new Treasury Secretary.
So he did not go withthe bomb thrower,
the sort of agent ofdisruption who was Lutnick.

(01:07:00):
He went with the relativelyconservative guy,
and I think that's becauseTrump is aware that bond
markets, cannot be trifled with,
and he's tryingto calm them down.
A lot of the fiscal stuffthat he's doing, you know,
you've mentioned a couple timesthat he talks at a certain scale,
and then the reality tends tonot necessarily be that scale.

(01:07:22):
If you combine that with the choice ofpercent and the sort of priorities...
that that implies that Trumpis focused on stability.
You know, he's beenin real estate.
He's been in the bankingworld for a very long time.
He does understand howthese things work, I think,
a heck of a lot more thanreally any president since
Calvin Coolidge.
So, yeah, I think thatbond yields come down.

(01:07:44):
I think a certain amount of it rightnow is just fear of the unknown.
Well, I certainlyhope you're right.
Any other predictions in markets
that we wanna goon the record with?
Just stocks and bondsare pretty important.
Yeah. Wow. I mean, DOGE.
So, you know, that'sthe the big question.
Is DOGE actuallygonna cut anything?
Okay. That's a good one.
Will

(01:08:05):
federal government spendingactually decrease in 2025?
Okay. I'm gonna putthat down $300 billion.
Not down nearlyenough as it should,
but I think that there'sactually many cuts in that.
And the reason is because
public opinion pollshave about 75% of

(01:08:25):
Americans want cuts. In fact,there was a poll recently.
A majority of Kamala voterswant federal spending cut.
But nobody wants theirfederal spending cut.
True. But I'll goplus $300 billion.
Alright. So you're plus 300.
Yeah. You're atminus 300. I'm at 6%.

(01:08:48):
You are
basically 4.5 or loweron the long bond.
And you're plus 15% onstocks. I'm minus 20.
Yeah.
So we have a real goodbull and bear case here.
What's the stakes here?
Alcohol or cigars?
If I'm in Orlando, you'lltake me out to Charlie's.

(01:09:11):
And if you're in Baltimore,
I'll take you outto the Prime Rib.
That'll work. Perfect.
Okay, buddy. Thanks somuch for the time today.
Alright. Yeah. Definitely.See you next time.

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Peter St Onge – A Look Ahead for 2025

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.css-14f5ked{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:2;overflow:hidden;}Peter St Onge – A Look Ahead for 2025