Private Briefing with Alasdair Macleod, Part Two

Biden will not want to bookend his Presidency with a second failure on Ukraine. So this is what makes me think that from the American side there is a political reason for escalating the situation.

Friday, July 12, 2024
Laramie, Wyoming

Is there a political reason American elites might want a war before the November election?

That’s just one of subjects we take up in Part Two of my Private Briefing with Alasdair Macleod from Macleod Finance. You can read Part One here if you missed it (if you’d rather watch than read, I’ve embedded the whole video at the bottom of today’s letter).

Just a reminder that Bill Bonner, our fearless leader, will return on Monday. He’s enjoying a short vacation visiting with his grandchildren in France. And later today I’ll have my regular Friday research note. In the meantime, one quick chart before we get into Part Two of the Private Briefing.

The 10-year/2-year yield curve has been inverted for over two years. For new readers, that means short-term interest rates are higher than long-term rates. That’s not usually the case. And as you can see from the chart above, this current inversion is the longest since the one that ended in May of 1980. So what?

The grey lines on the chart are recessions. As the chart shows, it’s the UN-inversion of the yield curve that precedes the recession. This is why the inverted yield curve has been such a reliable indicator of recessions (so far). If the Federal Reserve cuts interest rates because it believes the fight against inflation is won (based on yesterday’s dubious CPI number and today’s soft PPI numbers), then short-term rates will fall, the yield curve will uninvert…and the recession will begin.

What that means for stocks and bonds and gold is something I’ll write about later today. In the meantime, enjoy Alasdair’s insights below. This Private Briefing was a bit longer than we normally do. But the issues are important for investors and the stakes are very high right now. I hope you found it as useful and thought-provoking as I did.

Until later,

Dan

PS Alasdair mentions what may have been a coup in Saudi Arabia a few years. I’ll double check with him today. But I believe he’s referring to this event that took place in November of 2017.

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TRANSCRIPT BEGINS HERE

Dan Denning: You mentioned the ‘brown stuff’ and some geopolitical risks. This was also something you wrote recently that I wanted to ask you about. Earlier today, I saw a story online that the NATO summit in Washington is taking place and that U.S. Secretary of State, Antony Blinken, said that F-16s from the Netherlands and from Denmark are on their way to Ukraine. They'll be used primarily, he says, for defensive purposes to deter Russian aggression or a Russian invasion of Ukraine. That was today. Last week you mentioned the possibility that elections in the United States in November could be postponed by an escalation of the war in Ukraine, which might even bring NATO into the conflict. So two questions for you. And I know this is a big question, but how likely do you think that is?  And what do you think it would mean for financial assets on the one hand and gold on the other hand?

Alasdair Macleod: Okay. Well, I think the first thing is that the Ukrainian situation, which isn't really in our headlines very much, is a very serious situation. And we are beset with propaganda on this whole thing. I try and cut through the propaganda as much as possible. I'm not necessarily successful.

But the indications that I see is that Russia actually is winning this war. Now, if I'm right in that analysis, then this creates huge problems for the incumbent American President Joe Biden. And there is a question as to exactly how he's going to deal with this situation. Well, probably more accurately, those around him will deal with this situation. And there is potentially an avenue  where the situation might be escalated for essentially American political reasons.

The alternative to Biden is Trump  and it looks like Trump is becoming a bit more of a shoe-in as the next President. Trump believes that Russia does not want to take over the world, which is basically the Biden administration's approach to this, and they've got to be stopped. 

So Trump is likely to back down and say, "Look, this is a European problem. It's not an American problem. You guys in Europe have not been stepping up to the plate in terms of armaments and all the rest of it, defense spending, you have been relying on us. That's not fair on America. It's your problem, we're going to withdraw." 

It wouldn't be as dramatic as that. But you can see that it would be a very, very different policy from Biden's. Biden also has the problem that the first action in terms of foreign affairs in his Presidency was this rather hasty withdrawal from Afghanistan, which was demonstrably a huge failure of American and allied policy.

He will not want to bookend his Presidency with a second failure on Ukraine. So this is what makes me think that from the American side there is a political reason for escalating the situation. 

We've also got the problem in the Middle East. So far I think that the Americans have been sensible in terms of not trying to get involved with this and escalating it. But obviously there is the historic link between America and Israel and an awful lot of money is involved as well. I don't mean that in a corrupt sense, thought there could well be. But you can see that the relationship between America and Israel is extremely strong on commercial and on personal levels as well. And the idea that America can walk away from this is extremely hard to swallow. And we understand that a carrier fleet is now being sent to the Eastern Mediterranean, presumably to deal with the threat from Hezbollah.

Now, I don't think Hezbollah would actually back off from its attacking Israel and I think that Iran won't back off from supplying Hezbollah. So this to me is feeding into a real escalation of potentially a nuclear problem. 

And I can see that if this does escalate, which it's hard to see how it won't, but if it does escalate, this will drive a wedge between Iran and the Gulf Cooperation Council, which is basically the other Arab oil exporters around the region led by Saudi Arabia. They're all buddy buddies now because they've got a shared commercial interest and so on and so forth. But when Iran is attacked or when Iran's close allies are attacked, that relationship could rapidly become secondary. Now what this means is that Iran would have absolutely no compunction of closing the straits of Hamas and then what price oil?

$200, $300, I don't know, I don't know. But you can see that there then becomes a real, really nasty situation, which could only be dealt with by a further escalation of action against Iran in response. That would be the likely response. 

Now with these situations both in the Ukraine and also in the Middle East, it just seems to me that there may be an attempt by the administration to delay. Now, I'm not an expert on the American constitution or anything like that. But I can just imagine in any other country that there would be an attempt to delay such an important presidential election on the basis that this is an emergency. In this country (the United Kingdom) we have on the statute book emergency legislation, which means that all sorts of normal democratic activity can be suspended for a period of time by the government.

We've used it in our colonies. I was born and brought up in the Mau Mau in Kenya when the emergency started from 1952 and ran through to about 1960. So this is something we're familiar with. 

It would be unprecedented in America because I don't think it's ever happened before. So when I mentioned that it could lead to possibly the deferral of the election, I was putting that in basically as, if you like, a sort of a condition which I could see would potentially affect things. But I don't really see how it can happen. I think if they tried to do that, the uproar would be just simply unbelievable in America. I really do think. So this is one which, Dan, I think is over to you guys, if you see what I mean. But you can understand why I mentioned it as a possibility.

Dan Denning: Yes, I think it was a really good point. That's why I brought it up because we sort of take it for granted and there's this phrase that's constantly repeated about the peaceful transfer of power. That's one of the hallmarks of a democracy is that no matter how much acrimony there is between political parties or whatever the social conditions are, the show must go on. 

Of course, right now we're also discussing whether the 25th amendment to the constitution should be invoked to remove the current President from power. And if anything, that probably exacerbates the geopolitical anxiety about, "Well, who's the President? Who's the commander in chief? Who's making the decisions? What happens if the president's removed?"

So we don't really know how they're going to play out, and that's something we'll continue to look at at Bonner Private Research in terms of what the processes are. But I think it's a really important point and I wanted to follow up with another country that you mentioned in your remarks, and that's Saudi Arabia. 

So an interesting thing was published in Bloomberg today, which I wasn't able to investigate in depth. But the crux of the report was that when the G7 seven nations discussed in May and June, not only  had they already frozen $300 billion in Russian assets in most of the European banks. But they discussed actually selling those assets to finance the government in Ukraine or the war with Russia. So not just seizing and freezing the assets, but selling them and taking the proceeds.

The Bloomberg report that came out today said Saudi Arabia very quietly said, "If you do that, then we'll sell perhaps French bonds or the sovereign bonds of other European governments." So in other words, the Saudis exercised some kind of veto on this decision by western governments to take credit, which I think is what you described it as earlier and turn it into a liquid asset for the Ukrainians.

Does this all get to the point that you were making in the beginning that sovereign bonds, whether it's US government bonds, French bonds, British bonds are just credit and that gold is money. And really gold is the only reliable reserve asset for central banks and governments that has no counterparty risk, has no default risk and can't be seized and sold by another government?

Alasdair Macleod: Well, it's property. Government bonds are actually debt rather than credit. But every debt is balanced by a credit. I mean it's simple accounting. And being transferable, it has a value and therefore is included in wealth. You can have it in a portfolio, whatever, whatever. So yes, I mean basically that is credit and your ownership of government bonds is credit. And when you sell them, you get paid in not money but credit because you get paid out of a bank deposit as it were, or it's added to your bank deposits. That again is credit.

And even if you took delivery in dollar notes, that again is credit because there is a counter entry, there's a counterpart entry if you like, on the central bank's balance sheet saying liabilities, currency an issue. So it is all credit. 

The point about Saudi Arabia, I think it's worth amplifying on that a little bit. I think what we're talking about is the notional interest earned on the frozen assets, I mean financial assets, bonds, and all the rest of it held in Euro clear. Now-

Dan Denning: I had seen that story too, that they were just going to take the accrued interest and fork it over to the Ukrainians. This other discussion, if I read the article correctly, was an escalation of that, as if they're going to actually sell the assets.

Alasdair Macleod: Well, as I understand it, the Europeans have agreed that they will deploy the interest on that. Now, I haven't seen that they are prepared to deploy the principle.

You can look at it either two ways. This is either the debt issuers default, and in this case we're looking at US treasury debt or French bonds or whatever. It is effectively a default from those countries refusing to honor those debts. Or alternatively, it is seen as the theft of property, so whichever way. 

Now it's not just Saudi Arabia. At the various economic forum meetings in St. Petersburg, Putin has made it absolutely clear that governments should not have any reserves held in the currencies of the central banks because they can just steal them at will.

This has been proved, and furthermore, I think it was back in 2022 at that meeting, June 2022, he told the 80 odd governments who had turned up for that meeting that you should move your gold out from under their custody as well. So this is something which Saudi Arabia is well aware of because they have been at these meetings, they have had official representation at these meetings. They have had discussions at these meetings. 

It's on the agenda of BRICS, of which Saudi Arabia is now a member. Saudi Arabia has, if you like, broken the longstanding agreement going back to, I think it was 197, whereby they agreed that they would take payment for oil in dollars. They’ve been accepting Yuan from China. The point is that Saudi Arabia doesn't export any oil worth talking about to America anyway. All its business is pretty much in Asia, Europe and Africa. So they've got no interest in America anymore.

But so many other governments in the region have to tread very carefully because the Americans wave a very big stick. And if you're not careful, you can find that you get yourself into financial difficulties like the Asian crisis back in the late 1990s, or alternatively, as John Bolton himself actually confirmed, they can arrange for regime change. And I suspect that this is precisely what happened with Pakistan. 

So all these guys are treading very, very carefully. But I can see that the Saudis under Mohamed Bin Salman (MBS)  have taken a far more anti-American stance. America has no friends in the region. I mean they are infidels, they are not sympathetic to Islam. And so consequently, having this sort of outside imperial power calling the shots in the region is not something that makes the Americans popular in the region.

And I think that the MBS is the first leader to actually be prepared to stand up and be counted against American influence. After all, he engineered a coup d'état basically by taking out all the CIA placements. That's actually what that was about. 

So this is a continuation, I think, of something that has been developing. And there is also the most recent development in this, talking about the Shanghai Cooperation Organization, of which the Saudis are now a member. But I suspect that the whole of the BRICS SCO thing will be rolled into one organization in the fullness of time. 

The Shanghai Cooperation Organization has now agreed on a mutual defense stance, which basically means that they will defend each other rather like NATO has this commitment that if one of their members is attacked, then the others come and defend it. 

Now, I don't think it's as cast down as tha. But I can see that Russia has been very keen to get this support around it to counter the Western alliance with an Asian alliance, which isn't just commercial, isn't just financial, but is also military. So we're looking, I think, at a larger picture within which the Saudis have been prepared to make the statement, which you referred to on Bloomberg.

Dan Denning: That's a fantastic answer. We could probably spend another hour talking about Mohammad bin Salman and what's happening there, and maybe we'll come back to you in a couple months and talk to you again about it. I had two final questions for you because I don't want to keep you longer than an hour. One is related to gold and then one is a quick one about politics.

I want to first ask about just a price forecast. I think the inflation adjusted high for gold in 1980 was around $3,431. So it's currently around $2,427. There's a lot of discussion in the gold circles of gold price targets on the basis of physical gold backing US monetary reserves at some percentage, 10, 15, 20, 30%. 

So depending on which percentage you use, you get a gold price target of $8,000. Is that the sort of thing you look at when you're talking to people about why they should buy gold? Do you have a price target or is it something that you think matters? And maybe just to add to it, when you talk about Dow Theory is the primary trend for gold up regardless of whether the dollar is backed by it at any percentage?

Alasdair Macleod: The answer is I don't make price forecasts, and I'll tell you why. It's not gold going up, it's the dollar going down. 

The only forecast I will make is that the dollar is on a slippery slope, which is leading to its eventual extinction. How long that will take, only time will tell. And we cannot know at this stage, with so many variables in this deteriorating situation, how long that time will be. 

But unless the American administration, the American federal government manages to stabilize the dollar, which basically means cutting its spending hugely, to the point where it's actually got a surplus on its budget and a continuing surplus on its budget, and is, therefore, able to introduce a gold standard, freely exchanging the dollar for gold on demand, then the dollar is dead. It's as simple as that.

Looking at Dow Theory, it's just one sort of fact to which people follow. I would follow technical analysis on the basis that other people follow it. That gives you some sort of framework within which you can expect things. But the important point, I think really is to understand the economics behind the relationship between money and credit. That is the real key.

And remember that when we had gold standards, it wasn't a question. You'd have, for example, there were $20.67 to the ounce of gold. That wasn't how it was defined, it was actually defined a dollar is worth so many grains of gold. That was the way round it was, not the way in which we commonly describe it. 

The way we commonly describe it is because it is easier for us to understand it. But, of course, that feeds into the error of thinking that it is the gold price rising because, of course, the dollar is the same, the same, the same, the same. It's the gold going up.

No, it is not. It is the dollar going down. And the dollar is the king rat of fiat currencies, so where that goes, all the other currencies go as well.

Dan Denning: Great answer. We often, one of the key things that our investment director Tom Dyson brought in, when we started on Substack a couple of years ago, was looking at stock prices in gold terms. 

So the Dow/Gold ratio to us was telling us not whether financial assets were generating more earnings or more cashflow, or were just getting more expensive, but where were they relative to gold? So that's right in tune with what we've been doing. 

One final question, and it's a bit of a wild card because politics is out of our control, but you had a really interesting, surprising election in France, to American observers, that this weird system where all these French prefectures voted for Marine Le Pen's party, but then in the second round of elections, they actually got a smaller representation than people thought. 

So now you've got this lurch to the left in France where these pseudo-communists are talking again about a 90% wealth tax. So France seems to have gone to the Left with a huge amount of debt. And in the UK, same thing. You've got the Labour Party having its largest majority since 1997, but only 34% of the vote.

So one of our old colleagues at The Fleet Street Letter was Nigel Farage. And, of course, his Reform Party polled really well. They, again, were very popular, didn't get as many seats in parliament. But Farage has the ear of Donald Trump, and, of course, the US election is on Guy Fawkes Day this year. Your election was on Independence Day here.

You had mentioned this before, but can you say a little bit about what you think the relationship between Trump and Farage is like? And then maybe how that might give you an insight into what will happen in the US in November?

Alasdair Macleod: Yeah, it is fascinating. I think it was about a week before the general election, Nigel made this comment about Russia and Putin and all the rest of it, which basically he said that while he doesn't support Putin at all, Russia has a right to defend its own territory. And I can't remember quite what he said, but to the effect that we started it, sort of thing. And that is true, that is absolutely true.

But, of course, this created uproar. It created uproar in the mainstream media and also in parliamentary circles. Both Keir Starmer and Rishi Sunak were very, very quick to condemn him, as were all the ministers and all the rest of it questioned on this, saying, he doesn't know what he's talking about, all this sort of stuff. But this is precisely the line that Donald Trump has taken on his public statements.

So I put these two things together, and I can see that on the back benches, we have this tiny little party of reform, which has got five members with a six who's taken the whip, who actually wasn't part of reform in Northern Ireland, led by Nigel. And you've got Donald Trump, who is very likely to become the next president.

I've only met Farage once. And I knew his father actually, quite well because he was a fellow stockbroker. I met Nigel once. He looks exactly like his father, by the way. It's like father, like son. And I found him to be extremely personable.

I have watched the way he operates and he has got substantial political skills. And he will deploy, in my view, his maverick approach from inside the establishment, which the establishment are already dismissing. But you've got to think in these terms. You have lobby correspondents in and the House of Parliament. And these guys, these hacks will find that the stuff coming out of the Tories and the stuff coming out of the Labour Party is just boring. It's all gray, bureaucratic rubbish, basically. And then there's Nigel, who's quite happy to stand around and have a pint or two with you guys and give them copy.

I think that that is where he's going to make his mark. Partly that, also on social media, also presumably through GB News. He is going to have platforms which do not require him to make speeches in the House of Commons. 

Now, this is very important because the way the system works in the House is that if you are the leader of a tiny, tiny party, you get very little speaking time. So he won't have the ability even to stand up and demolish the establishment in the way he did when he was a member of the European Parliament, which he was for many years.

This is a very skilled politician with a line which actually is very close to the majority of people in this country who are not really aligned, and don't care about politics one way or the other. But they see immigration, they understand that's a problem. They want that stopped. I'm not saying that Nigel could stop it, but my God, that gives him a lever against the establishment, that is for sure. They've seen how we've messed up with Brexit.

And it seems to me that the support that Nigel is getting is from, it's a sort of cross-party support. The young are supporting him. They like this guy because he's not a gray man, and he says what he thinks and what he thinks is probably what you think as well. So this is a very interesting situation.

I think that the Tories, they're going to be going through the process of electing a new leader. I think the odds are that that leader will be more to the right, if you like, than Sunak. It'll probably be someone like Suella Braverman, Kemi Badenoch is sort of meant to be in the frame, and so on. But the problem they have, the Tories have is that over the years, they have taken on as MPs in the parliamentary party people who basically are socialists. This is the sort of, they've tried to appeal to the middle ground. They have selected middle ground people.

So all they have got really are a bunch of, I don't know, social workers, if you like, for MPs. That's really what they are. And the idea that these guys have got an ounce of brains in the political sense, forget it. They just do not understand free markets, they do not understand what socialism actually does. They're actually socialists themselves.

This is a Party which really does need reforming, and I think Nigel's calculations have been fascinating on this because he very suddenly decided to stand for Clacton, to take over effectively the leadership of the party from Tice, stand up for Clacton.

Now, I think when he did that, he finally concluded that the Tories hadn't got a hope in hell. It was getting too close to the date of the election, and their fortunes weren't improving. That was the window for him to get in. He wasn't going to come to a deal with the Tories at all. That was the point where that was just ruled out. When that's ruled out, then he stands.

I think that his relationship with Trump, if Trump gets elected, actually makes him probably the most important person on the back benches in the whole of the House of Commons. That is what he has played for, and brilliantly so. How it develops from there, it'll be in the lap of, I think, probably more in the lap of Nigel than the Gods actually. He's no fool.

Dan Denning: That's fascinating. Well, I tell you what, you've given us a lot to think about, so I want to say thank you for making the time to talk to us. And maybe in September or October before the US election, we can talk again because by then, we'll have seen what transpires over the summer in Ukraine, and we'll have a clearer picture of who the Democratic candidate is going to be. Right now, the prediction markets have Trump winning the election at 61%, Biden at 24, Harris at 19, but that's today. 24 hours is a long time in politics.

Alasdair Macleod, just again to remind people, go to his Substack. You'll get more of this, which I think is some of the best top-down analysis of the gold market, with some geopolitics, that you can get from the other side of the Atlantic Ocean. Alasdair, thanks again so much for making the time, and we'll talk to you soon.

Alasdair Macleod: That's my pleasure, Dan.