Fed’s Next Move Revealed: When Is Rate Cut Coming? | Axel Merk

Powell doesn't leave by, I think, sometime in May. He's going to try to find a way to fire him. The reason why I think it's important for Kevin Walsh to come in, because there is substantial reform that's urgently necessary at the Fed. Gold tends to react positively to is the reaction that policymakers have to a supply shock. They don't have a framework to deal with it. And it's one of the key reasons why Powell must go. Gold investors probably always know why they had gold in the past, never quite know why they have it in the future. and it's often very, very frustrating to investors. I'm pleased to welcome back to the show Axel Merck, CIO and president of Merck Investments. On the agenda today, the future of monetary policy, how that's going to impact all asset classes, including precious metals, and how the future of the world order is going to impact markets. Are we entering a period of permanently higher geopolitical volatility and perhaps longer sustained conflicts globally? What should we do if that's the case? Axel, good to see you. It's been a long time. Welcome back to the show. Very simple questions. I'm sure we can answer them in a few seconds. Great to be with you again. Yeah, sometimes the easiest questions to answer are the most complex ones and vice versa. But you're an incredibly astute investor and smart person. So we're looking forward to your answers. I want to start by asking you some bigger picture questions first. The Merck Investment Fund is primarily focused, correct me if I'm wrong, on gold and precious metals stocks and the sector overall. Because of the way gold has performed in the last two years, your fund has grown tremendously. So congratulations. Now, I think many investors in your shoes, and perhaps even just retail investors following the gold space and investing on their own, want to look at bigger investors like yourself and funds like yourself as a guidepost on what to do next. So what do you do right now? Are you taking profits is my first question. Have you been taking profits? Are you rotating from one sector to another? Or are you just accumulating steadily? What does your fund look like right now? Great questions. And in that, it's always helpful to understand who you are talking to. In the case here, you're talking to somebody we manage just around $4.5 billion in, on the one hand, physical gold, but also in miners. And because of that, and I say that in the context of answering your question, we have a mandate, right? We have a mandate to be in the mining sector and say we might be taking some profits somewhere to reallocate it within the same sector. But investors pay us to be invested. They don't pay us to be hiding under a rock when there's a crisis somewhere. We manage risk, of course, ultimately, but we do it within the confines of our space. And one of the things we have always done is we've always looked for catalysts that go beyond the price of the metal and so we invest in management teams. But to answer your question, yes, we like that space. I am personally heavily invested in that space and late last year I sold a tiny, tiny bit. My wife earlier this year sold a tiny bit. I say that because there's some public disclosures in that space. But for the most part, I have been very eagerly invested. Indeed, I actually think there's good value in that space, despite the tremendous run-up we have seen. Do you have a mandate to change the weighting of your portfolio percentage of the portfolio allocated to equities versus gold versus cash, for example? Are you allowed to do that? We're precious metals fund. We can, of course, take defensive positions. We can manage risk through a variety of ways. We could hedge some of our positions if we wanted to. But for the most part, we believe that these markets, anybody who has been around precious metals knows they're extremely difficult to time. I mean, just in recent weeks, right? Five percent moves in a day are becoming almost common, right? And so if you know what the markets are going to do tomorrow, great. I see my role in talking to you and others in making people aware of things that they might not be thinking about, but ultimately every investor has to know what they're comfortable with and needs to have their own sort of risk management. By the way, risk management is a very fancy term that professionals use when they're overexposed and say, oh, I'm going to reduce my risk. When retail investors do it, they panic. But it's the same thing. And being a little cynical here. But as an investor, of course, what you want to do is during the good times, you want to somehow either rebalance or whatever your investment process may warrant or take chips off the table so that when the times are rougher, you have firing power. And importantly, as we've seen, not just in the precious metal space, volatility tends to surge during times of uncertainty. And so if you invest based on a certain risk profile, you want to make sure you're comfortable with that elevated risk profile and the better time to adjust is when the times are good. So what is gold right now relative to the other assets? Is it a safe haven asset or is it a risk on asset? I'm not talking about gold miners and equities. I'm talking about just the physical gold. What is it right now? Because ultimately, if you think the world's getting better or worse, you want to buy risk on or risk off. You have to decide how to categorize this asset. Yes, it's an asset that has always and will always exert the maximum frustration on investors. And I say that because if you long term, since the price of gold has been free-floating in the early 70s, the price of gold is uncorrelated to equities. Now we say that, but it doesn't mean there's no correlation. Correlation is morphing in and out. It's sometimes positively correlated to equities. Sometimes it's negatively correlated. I was talking about the S&P 500. And many people were surprised that when the war in Iran broke out that it was correlated with equities. Well, the reason for that was that ultimately what gold competes with is this boring thing called cash. Cash in the long run. If in the long run your purchasing power is preserved by holding cash, why do you hold gold? And I say that in the context of what happened in Iran. is when the Iran war started, bond yields went up, but inflation expectations didn't budge. And so even though nobody knows what inflation will be in 10 years, if you just do the math, real interest rates rose, and that meant cash in the long run was more valuable. So just based on those technicalities, it was natural for the price of gold to come down a little bit. The other side effect though of any crisis is that markets are getting used to it. And we can talk about Iran more, but ultimately the markets are getting used to it and so that sort of short-term shock has gone out. And the other thing that gold tends to react positively to is the reaction that policymakers have to a supply shock. I think price controls in the early 70s, I think checks during the pandemic, the economically sound reaction to a supply shock tends to be political suicide. And so we tend to get, quote unquote, bad economic reactions to supply shocks. And that's when the price of gold tends to do well. But in the short run, yes, gold investors probably always know why they had gold in the past, never quite know why they have it in the future. And it's often very, very frustrating to investors. Before we continue with the video, let's talk about a topic that's been on a lot of precious metals investors' minds, How to generate income with your gold holdings. Most assets either generate income or rely on price appreciation. Gold has traditionally fallen into the second category. Our sponsor today, Monetary Metals, has found a way that lets gold do both. Instead of just holding gold and waiting for price moves, investors can now earn a yield on it paid in physical gold. Through the leasing platform, investors can earn up to 4% annually with yield paid monthly in ounces. That means your holding is increasing gold over time. The metal remains in your asset base and can be redeemed at any time. Thousands of investors are already earning monthly interest in gold through monetary metals. So visit monetary-metals.com slash Lynn in the link down below or scan the QR code here on the screen and make the most out of your gold today. What is gold's relationship with oil directly and indirectly? Well, they all have their own microcosms, right? Gold is the simplest of all assets, right? We talk about it a lot, but it's the purest indicator of the madness of monetary policy, I sometimes say. And obviously, it relates to the purchasing power of the currency, whereas oil is an asset that is very heavily influenced by supply and demand. And there's immediate urgent use by many actors around the world. I think the Australian prime minister came out and said, we secure two ships with 100 million liters, they use liters, of diesel to secure our supply. Well, Australia uses 100 million liters a day. And so oil is a hugely important asset. in the US, obviously, we are an energy exporter, but the price of oil is set on a global stage, and the Strait of Hormuz tends to be super important. I mean, we had a little flare-up when there was the potential threat of tariffs being imposed in a blanket fashion on the UK, and so gold made it from the UK to the US because of fears of supply issues, And we had some tension in that market. But ultimately, these markets are very different. And you can't say that, oh, just because there's a correlation, there's a causation between the price of oil and the price of gold. Let me show you something interesting. Well, I find it interesting. I don't know if other people find it interesting. This is the price of oil going back to 1986 on this particular chart. You'll see that in the last couple of instances when oil spiked, it usually, it has in the past, either led a recession or coincided with a recession. Case in point, right up to 2007, oil spiked and peaked right before the financial crisis happened when Lehman collapsed. June 2008 was the peak of oil back then. 1990, the Gulf War, first Gulf War. 2001 was not that particular case. And 2020 was at the exact opposite because of the global pandemic Oil went to near zero for a short amount of time My point is there been a historical precedent for spiking oil prices causing a recession and inducing much looser monetary policy Is that what's happening right now, Axel? Well, it, quote unquote, can happen. I know that's not a very helpful answer. In the early parts of last decade, keep in mind that, quote unquote, everything was done to boost economic growth. China was added to the world stage. After 9-11, George W. Bush talked about keeping America rolling. And so when you keep the economy at full throttle, you push up commodity prices. Obviously, things were happening in housing as well to try to have people exert cash from their homes. And at some point, that had come to an end and came out with a blowout top in oil. We have an economy that's mostly a service economy these days. We produce much more energy these days. We have a rest of the world that's pretty fragile, but you could have many arguments why we should have a recession. But we also have administration that's cutting red tape left and right to boost economic growth and potential. We have an incoming Fed share, possibly incoming anyway, who is believing in a productivity boom. We have massive investments in AI. And so timing any of this, of course we will get a recession at some point. But when? When is the good question. Having a war in Iran where the price of oil spikes is obviously a very good candidate. We've had many good candidates why we could have had a recession. One reason why we haven't had a recession is because the Federal Reserve has been ever more micromanaging the economy. Remember how banks, was it two years ago now, mismanaged interest rate risks and the Fed said, oh never mind, we'll give you another program so you can push that can down the road, right? So if you bail everybody out, you're not going to have a recession. It's a, it's, at this stage, I think it's, it's a fool's errand to, to predict when exactly we, we might have a recession. If you just take, think about what's happening in Iran, we don't know the outcome, you don't, I don't. But what I do think, the market at least believes, is that it's a temporary shock. And the reason why I think the market believes it's only a temporary shock is that take the, take a quote-unquote bad case scenario where the Iranians seize the control of the Strait of Hamus and charge a million or even two million dollars for each vessel. Well, that's a dollar or two dollars a barrel of oil that they would be charging. And to a significant extent that might be absorbed by the producers locally because the price is set at the world stage. So the global economy will hum along even if there's some nasty people in charge in Iran. And I don't say that to downplay what's happening in Iran, but as far as the overall economy is concerned, yes, Australia in particular is hugely dependent on oil from there. In Europe, they're thinking maybe they're running out of jet fuel and the like. And obviously, if we had big chunks of the world economy in recession, the US would probably as well. You can make a good case for a recession, but the other end of the spectrum, let them find a resolution. We have a midterm election coming up. We have a tax reform last year that gives checks to a lot of low-end consumers in particular for them to keep spending. It's very difficult to say how that's going to play out. And a lot of the economy is driven by the upper end of the K-shaped economy. And if markets hold up, they might have enough cash in their pockets to keep spending. Wait a minute, Axel, why did you say earlier we might have a new Fed chair? We're speaking on the 20th of April. And let's talk about that tomorrow. And by the time I guess this interview airs, it will be tomorrow. But anyway, on the 21st is when we have a hearing with Kevin Warsh, who is nominated to be the Fed chair to replace Powell? Why maybe? I thought the White House already confirmed that they really want Kevin Walsh to be the next Fed chair. And in fact, President Trump has said if Powell doesn't leave by, I think, sometime in May, he's going to try to find a way to fire him. Well, the White House also said the Iran war is over type of thing, right? I would say, yes, if things were normal, we would have Kevin Wargiel Lefebvre soon. I do think it's super important that he comes in soon, but there are obviously numerous sideshows going on. You mentioned to the drama of Powell resigning or not resigning. I'm not sure how many hours we have to discuss this, but it is Congress that sets the value of the currency and manages the currency and not the executive. And that's what makes the Federal Reserve unique and why the president may not, I say may not because the Supreme Court will likely have to decide on that, will not decide. that one of the challenges is that the Federal Reserve does more than just functions about regulating the value of the currency because they have the banking supervision role as well, and arguably that is subject to executive supervision. So the Supreme Court will need to kind of sort that out and figure out what can and cannot be done because Powell has said he's not on a resign. Powell is the Fed share, his term is Fed shares coming to an end. However, he also has a term as a Fed governor and that is not coming to an end. And so it's all something that's super confusing to the outsiders. As far as the markets are concerned, a few things. First of all, Fed independence from a monetary policy point of view is important because it's more efficient. It lowers the cost of borrowing. If your monetary decision is second guessed by somebody influential, a few words cannot move the markets, but you might need to intervene or change rates. And so it's a cheaper monetary policy when monetary policy is effective. Now, as far as the practicalities is concerned, anybody who's watching these markets closely may have noticed that what is priced in as far as the rate curve is concerned does actually not change dramatically based on the tweet of the day or the mood of the day on when Kevin Walsh is coming in. And if you look closely, I think Jeremy Powell has actually been trying to present the Fed to Walsh on a silver platter. And last December, for example, Powell started talking about productivity boom. And that is exactly what Kevin Walsh has been talking about. In a productivity boom, you could have lower rates. Another thing that Kevin Walsh talks about a lot is communication strategy. And so at the last press conference, Powell was asked, whatever happened to your reform of the communication strategy? Didn't you have some grand plans? And he said, not much. And then he expanded that he tried, but he couldn't convince his colleagues, basically telling Kevin, yeah, good luck with that. But there has been behind the scenes and in code words, so to speak, some interaction and communication to ease the transition. And so in the meantime, like so many things on Wall Street or in at the White House, there is some drama, but at the end of the day it's a lot of noise. The reason why I think it's important for Kevin Walsh to come in sooner rather than later is not because interest rates will be at basis points higher or lower, but because there is substantial reform that's urgently necessary at the Fed. And even if Walsh can't implement all of them. He's been a critic of what the Fed has been doing ever since he resigned out of protest against Bernanke's ongoing crisis intervention. He was part of the initial bailout, but then demanded that bailouts be wound down and emergency measures were wound down immediately. That didn't happen. He resigned. And he's been a critic of the Fed ever since. and he's been very consistent in that. Many people have criticized him that he only talks up because he wants the job, but he has been very consistent and it's the little stuff that matters. And the Fed has become a debating club in no insignificant part because of the steps that the Fed has undertaken. To maybe just expand on these things, to take one little thing, because for most people what the Fed does is very arcane. The Federal Reserve is supposed to worry about monetary policy. Monetary policy is about the amount of credit in the economy. It's about interest rates. It's not about allocating that credit. That's the role of a politician. The Federal Reserve is not supposed to choose winners and losers. And I'm a purist in that. So when the Federal Reserve started buying mortgage-backed securities. That's already a valuation of that concept because you're allocating money to the mortgage sector. It was understandable, of course, and yes, Fannie and Freddie is quasi-government cape and all that, but the Fed, obviously during the pandemic, was writing checks to businesses. That stuff is absolutely not acceptable, and when that happens, you attract the ire of politicians because you have unelected politicians, unelected policymakers step on the turf of politicians. And that is one of the reasons why President Trump has intervened with the Fed. Now, most presidents have done it in one way or the other. Obviously, Trump has his unique style, but the Federal Reserve has contributed to that to a significant degree. What is Walsh's attitude towards quantitative tightening? You recall that QT ended last year. The Fed's balance sheet has been stabilizing. The reduction in the size of the balance sheet has been ending. And so the question remains as to whether or not the QT will stay as a policy or perhaps we can see the balance sheet expand again. Kevin Walsh is on the record for saying the balance sheet is too large. He has not said how he wants to shrink the balance sheet. the reason why the balance sheet is so large is because the Federal Reserve doesn't know how large a balance sheet should be and likes to expand the balance sheet once in a while, but doesn't really have any use for contracting it. And in my view, what he should be asking for, and he very well might but he hasn articulated that he may want to go back to the channeling system before the financial crisis What the Federal Reserve does nowadays is the Federal Reserve pays interest on reserves and basically through that pays tens of billions every year to banks that park cash at the Fed. Politically, again, looks super bad. What the Federal Reserve used to do is the New York desk of the New York Federal Reserve, the markets desk, used to intervene in the markets to drive the federal funds rate to be in a certain range. And for that, you can have a minimal balance sheet. The problem with today's system is that you don't see the granularity of everything that can potentially go wrong with the old system. The folks who worked at the New York desk, they say the old system is arcane it's much easier but the advantage and the beauty of the old system is that if there is an issue you see it you see it when banks have problems and so you have an early warning system of where there might be an issue whereas today you have an array of of conflicting regulations that nobody quite knows how much money there should be in the system as the minimum safe level and and so I think Kevin Walsh will want to simplify a lot of what the Fed does. I hope he goes back to the channeling system. Whether he succeeds with that, I don't know, if not for another reason that the New York Fed will probably have a lot of pushback because the new system is much cozier for them. I wonder why the bond market, CMA, FedWatch tool, is not pricing in any chance of a Fed cut. When you think about it, the recent spike in the CPI, headline CPI in particular, was caused primarily by the rise in oil prices so it has nothing to do with monetary policy according to some economists it does but according to others it doesn't um what is your view on the primary causes of inflation right now and where i'm going with this axel is if oil is a primary cause of inflation then why does the federal reserve need to worry about keeping rates higher for longer they can lower rates because either way it's not going to make a difference on inflation they don't control the price of oil Yes. The reason I was just shaking my head here a little bit or moving around is I was just trying to get you a live quote on that. We're getting above a 50% chance of a rate cut in December now, 75% chance of a rate cut next March. That's as of 90% June of next year. So quite far out, right? um steve miran the uh the fairly new addition to the fed he is in favor of cutting now um the a lot of people agree that the increased inflation is due to the oil shock what a central bank is concerned about is the second round effects is there spillover effects from higher oil prices. You'll see it in airline tickets. It says, okay, well, that's temporary, but is it going to translate to higher wage demands? Is it going to translate to this or that? Stephen Brown says, oh, we can deal with it when it comes. The more classic view for a Fed economist is you don't want to let it come to that. At that stage, it's too late. The monetary policy acts with a lag, you got to preempt that. And so in part because the Federal Reserve is a debating club, that's my technical term for what they do, they don't have, if they had a reaction function, a quantitative way of saying, hey, this is what's going to happen, they could justify and adjust things, but they don't. And so they're like deer in the headlight. They say there's a crisis. Okay, we can't do anything right now. If the crisis is over, we'll revisit. Whereas one of the things I would hope to see from a Kevin Walsh Fed is that he comes up with something like a Taylor rule, and he says, okay, I am not going to, I would prefer if he did, but I'm not going to say, I'm going to exactly adhere to this Taylor rule. A Taylor rule is a function that was created in the early 90s, there are many variations that basically say based on unemployment inflation, this is where interest rates should be. And then you have a reference point and you say, okay, relative to this, I want to be a little higher or lower. And these are the reasons why. That's not what we're seeing. We're seeing a debating club where at the end of the debating session, Powell comes to the microphone and is stumbling and stuttering as to why they didn't do anything or why they did something. And that is, they control the bazooka and they can do that, but it's not a very efficient way of conducting monetary policy and will make them always be reactive. And so similarly, they will have to wait until this crisis is over where they can move down. Whereas if you move to something that's more rules-based, and Kevin Walsh is in the rules-based camp, you can project something because ultimately the question is always, you don't want to necessarily reverse course. But the more quantitative you are, the more you can just say, all right, the model said we needed to change and the data changed and therefore we're changing. And it makes it easier to adjust your opinion when the data change. Jerome Powell did say at the last FOMC meeting that the Federal Reserve should not be making policy based on short-term, what he believes is short-term shocks to the price of oil. In other words, geopolitical shocks, as he alluded to in the press conference, these shocks have historically not lasted very long. So being that monetary policy has a lag, if you're making policy now, you're going to cause inflation 12 years, or sorry, 12 months later. And by then, the crisis in Iran may already be fixed. Is he right? Well, what he really was trying to express is that, oh my God, why am I standing up here? I don't really want to say anything. And the, well, you're chuckling, but why are they talking in the press conference after every meeting? We've gotten used to that. But if there is nothing to say, why speak? If the only thing he does is give you some many, many words and do Fedspeak about nothing. And he is, of course, technically correct, but at the same time they are haunted by the supply shock of the 70s and the supply shock of the pandemic that they screwed it up, that they were too easy when faced with a supply shock. And an oil shock is a supply shock. And so they must not appear to be making that same mistake again. And that's why they're not doing anything, even though you're absolutely right that if it's a short-term shock, they shouldn't bother and just move on. But they painted themselves into that corner, and they don't have a framework to deal with it. And it's one of the key reasons why Powell must go, not because of the political pressure, but because it's time for the succession. What if we're living in an era of fiscal dominance, where central bank policy is driven by the government's spending, by the level of debt, by the rate of change of the deficit, etc. And maybe that's even more important than price action of oil. Well, we live in an era of fiscal dominance. Kevin Walsh, again, he has accused the Fed of having enabled that. By having rates near zero for an extended period, the Fed literally egged on Congress to go on a lavish spending spree. And he's absolutely right. And he says the only way to get out of that is through a productivity boom. And he wants to help to facilitate that. But yes, we are spending over a trillion on interest and that is very, very relevant. There is no credible force in Congress to rein in deficits. The math just doesn't work on deficit sustainability. And so one of the good things is, now we spent several minutes talking about the Fed, but the market focuses much more on other things right now and doesn't talk as much about the Fed other than when there's another thing of whether Powell gets indicted maybe or this or that or whether he's going to resign. But we are mostly talking about fiscal policy and what's happening in Iran and the like. And I think that's a good thing. And if anything, I am hoping from a WASH Fed that after some initial reforms that we will be hearing less of the Fed. That would be good. Where do you think the 10-year yield is headed by the end of the year? It's currently at 4.25. I make a fool of myself plenty all the time. It is. There are so many scenarios in which this can play out, right? You'd say that the odds of gridlock in Congress are very high at the midterm election, which is historically a good thing for deficits because they don't get anything done. And then somebody corrects me and says, why? The way you get things done in the gridlock is you promise everything to everybody, right? And so that's what's going to happen at the end of the day. Real yields were spiking, as I mentioned earlier, because of the Iran war. They have come back down. What we need is sustainable monetary policy, sustainable fiscal policy. And I'm almost quoting Paul Volcker here. The third thing we need is sound institutions. we might take a step in the right direction on the monetary policy side. One thing, by the way, that has driven up long-term rates is tariffs. When you have tariffs in place, you're not just throwing a monkey wrench into global trade, you're also throwing a wrench into the flow of currency back into the U.S. And that is an upward pressure on yields. Now, that said, first of all, the very high tariffs that were threatened last year are off the table for the time being anyway. And so things are settling in at a more predictable path. And so there's room for where we are right now for a quote unquote improvement. I wouldn't underestimate more deregulatory pushes ahead of the midterms to boost the economy. That could be good for yields. But with what's happening in Iran, it's very, very difficult to predict what precisely is going to happen to bonds. The one thing I can say is I would discourage anybody who believes yields should be higher to be shorting the long bond. Those who have done it, not just talked about it, you have to continuously pay the interest. And so it's a trading position. It's not a long-term hold position because it's just such a negative carry trade. And so it's just something to be very, very careful about. There are other ways of playing that theme that are less risky or less costly. Yeah. Well, the other issue I want to bring up is the demand for the dollar. The DXY has climbed since the beginning of March It actually come down a little bit since the beginning of April But for the first month of the Iran war there was tremendous capital inflows into the dollar. Do you think this enthusiasm for the dollar as a safe haven asset will continue throughout this year as the Iran conflict unfolds? That impacts gold. Well, the U.S. has a funding currency. The U.S. is a giant hedge fund. You borrow cheaper in the U.S. to invest for higher returns abroad. Foreigners borrow in U.S. dollars as well. And so when you have a global shock, that is a short squeeze on those because selling, buying things abroad, funding in U.S. dollars is akin to a short on the dollar. And when you have a short squeeze, meaning a volatility going up, that all else equal means a stronger currency. And what has happened since the beginning of the month is that we've had some unwinding of the biggest fear factor. VIX index has come down as well. And so those, in many ways, Iran war is noise in that. The dollar has weakened since, quote unquote, liberation day at the onset of the tariffs, because that global machinery, the global hedge fund, exorbitant privilege, whatever you want to call it, has had some sand in its machinery. It doesn't mean it's broken, but it's a bit inhibited. And so there are a lot of forces. And then the U.S. had, of course, outperformed for many years quite dramatically in various markets. And so there's a rebalancing happening in that sense as well. In the long run, the U.S. is better positioned than many other countries but has that deficit issue. And that is very, very willing to use. And so we might be getting the best growth that debt can buy, and that can be associated with a weaker currency. And that would be my baseline scenario in the medium term. Has the world fundamentally shifted in the last couple of years such that the Pax Americana world that we experienced post-World War II is coming to an end? It has ended, yes. I've talked about that for some time. The Ukraine war was a symptom. the garlic crisis is the symptom. And by the way, what's happening in Iran is but a symptom also of a new era. There are plenty of other choke points other than the Strait of Hamus in the world where there will be some local power place. And what those mean just from an investor's point of view, it means we will have more nationalist policies, we will have more defense spending, we'll have more deficits, we'll have a quote unquote less efficient way of conducting business. And we can never work on that. And by the way, when we talk about the dollar weakening or losing its status of the reserve currency in the medium or long term, people say, oh, it can't happen because there's no alternative. There does not need to be an alternative. The alternative is fragmentation. Fragmentation is a world where it'll have less growth. And with an aging society and a bunch of other things that are very expensive, lots of welfare spending, it again means more deficits. And it's one of the reasons why people come back to precious metals. Precious metals is not the answer, the only answer that there is, but it is on the margin a beneficiary. And because that space is quite small, you can have disproportionate reaction. The other thing we haven't talked about, but been implicit in some of this is we have incentivized the rest of the world to diversify its reserve holdings out of the dollar. They still use the dollar because it's suitable to them. But on the margin, again, gold has been a beneficiary in that trend. One of the dominant themes of the last 70 years is that the U.S. has spent money to protect not only its own borders, but the borders of its allies. The last 70 years was marked by U.S. naval dominance that protected global trade and more than 700 military bases around the world to enforce global stability. Now Donald Trump wants other countries to pay for their own defense. So the question is, why does the U.S. need to spend more on defense, as you said, if Donald Trump wants his allies to pay for that? Everybody needs to spend more on it. I mean, look at what's happening around, right? I mean, how good is the U.S. on drone warfare? And it's nice to have these amazingly expensive weapons, but you need new weapons for a new war. and there's also you want to sell lots of weapons to Europe and others that are by the way rapidly building up their defense and they'll always be in the shadow of the US but there's a lot happening on that front but yes the biggest threat by the way to national security is the deficit because you need to have strong finances to have a proper defense but yes there's a lot that's needed. And the argument is, yeah, can you afford to have all these bases around the world, right? They're very expensive to have. The U.S. used to have as its mantra that you can fight two major wars, then one and a half, now one major war as its dogma. In the meantime, China is rising, or at least the military might of China is rising. Russia has indicated that they're very willing to cause trouble. We've seen in Iran that there is, and the great thing about the U.S. is that we have a very self-contained economy. When there's trouble in the rest of the world, of course we're impacted somewhat, but much less so than most of the rest of the world. So what does the future look like the next 50 years? Well, less stability. We've seen that the Pax Americana is over, which means tensions that regional tensions we used to have flare up again. And so having a strong military is absolutely essential in that. But we will struggle with spending, which means we'll increase taxes on various constituents. We We see it in various states. I live in California. And one of the hallmarks in California, we just saw it in New York as well, property taxes in Manhattan go up on second homes or proposed to go up. It's one of the things that's popular. You're not going to raise enough revenue. I mean, what you need to do is you've got to cut spending. But politically, that's not attractive. So there will be a lot of tension on that. what we can hope for is that we're going to have an environment where innovation is still welcome. And in the US, luckily, that is still, we like to complain about regulation, but it's still a lot less regulated than most other countries in the world. And so as long as that engine is kept alive, I think that the future is bright. But at the same time, when your purchasing power gets eroded because government has too much debt. The interests of government are not aligned with those of savers. And so from an investment point of view, there are some challenges ahead. I can't give you any timeline on any of this because as anybody who has watched the Eurozone debt crisis will remember, politicians are fabulous at kicking the can down the road. So if we think that deficits are not sustainable, just wait with whatever idea they come up with next as to why we can do yet another year of deficit spending and why not monetize yet another something. Final topic, we'll end the discussion here today, Axel. Have monetary conditions and macro conditions shifted to shift your portfolio of gold miners? In other words, have certain conditions impacted the way you've invested miners in the last two years, let's say? I know obviously gold going up was a major contributing factor to some people buying or selling certain gold stocks. But other than that, anything else? Well, a few years ago, we had the higher for longer environment at the Federal Reserve. Higher for longer environment is poison to junior miners because it means tight credit conditions. And even though juniors have very little debt to do a lot of equity financing, it is tight credit conditions affect the ability to raise money. It's like venture capital light investing in junior miners. and so the environment we have now where you have potentially lower rates, you don't even need to have lower rates, that is a very favorable environment. And so, yes, that does affect how we invest and the like. Ultimately, what we focus on is to invest in the best management teams, and that's pretty agnostic as to what the monetary policy actually is around it. I see. And the fact that gold has pretty much doubled since a year and a half ago, probably more, has that changed your priorities on certain mining subsectors more focused on the juniors versus the seniors let's say or the other way around? Well it affects of course of who can raise money but also what sort of projects to go after sometimes people say oh you're only supposed to invest in the safest jurisdictions and where the cost of mining is the lowest well it's all reflected in the price if you have some dictatorship you actually get stuff done in that country because you have a central command. In the US sometimes the approval process can take forever. Similarly if you have a higher cost project the the leverage implicit leverage on the upside can be much higher. That's based on what is priced in so it all it all depends on the circumstances. You don't want to invest in a project that relies on $5,000 gold because obviously there is no guarantee it will be there. And indeed, one of the reasons why I think there's good value in the sector is because the market is pricing in substantially lower precious metals prices. And that means the margins are good. Now, clearly there's going to be some cost headwind with higher energy prices, but still the margins are great. And so what you're looking for is management teams that really understand operations. And regardless of where the price of gold is going to be specifically, that they're going to make very good money. Excellent. Thank you very much, Axel. Where can we follow you? Merkinvestments.com is our website. We have a free newsletter. You'll see a little bit more about the products that we manage. On Twitter, at Axel Merk is my handle. I can't talk about products there, but I am musing about various things, macro, about Kevin Walsh, presumably as well. For full disclosure, I have known Kevin Walsh for quite a few years, and I'm rooting for him. So it's the first guy at the Fed that I'm actually rooting for because I do think he stands for a lot of the things that need to happen at the Fed. And so during the confirmation hearings and the like, I may well be active on social media and chiming in on those things. Okay, good. We'll look forward to your commentary as the nomination unfolds. Thank you very much for your commentary today, Axel. we'll look forward to next time take care for now my pleasure thank you for watching don't forget to like subscribe