WBD514 Audio Transcription
The Crisis Across All Markets with Peter Doyle
Release date: Wednesday 15th June
Note: the following is a transcription of my interview with Peter Doyle. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
Peter Doyle is the Co-Founder and MD of Horizon Kinetics. In this interview, we discuss investment in an economic climate marked by accelerating inflation, a debt crisis, an energy crisis, war and the potential for Bitcoin to upend the monetary system.
“You could see how inflation could spin out of control under certain environments. Now, I’m not saying that’s going to happen, it’s not going to happen probably in the next several weeks. But it doesn’t take a lot, where the numbers that we saw that we’ve experienced in the recent past, would basically look like nothing compared to what we experience in the future.”
— Peter Doyle
Interview Transcription
Peter McCormack: Peter, good to see you again.
Peter Doyle: Nice to see you, Peter.
Peter McCormack: Nice to meet you in person.
Peter Doyle: Same.
Peter McCormack: Because, we did this last time during the lockdowns over Zoom.
Peter Doyle: Correct.
Peter McCormack: It was a very popular show. It was very good for us crazy Bitcoin people to hear about the environment, the macro environment, somebody who's more experienced, been doing this a long time. I think we sometimes are perhaps a bit naïve in our outlook, I certainly am, and it was very useful to hear from you.
But since we did that, the world's got a lot more crazy, and the economy seems to be, wherever you are, whether you're in the UK, whether you're here in the US, we're facing levels of inflation I've never experienced in my adult life; and I'm also seeing even worse conditions in places like Sri Lanka, we've seen in Lebanon, so there's a lot going on. There's a lot of people really nervous, and I guess today I'm going to look to you for how you seen things.
Peter Doyle: So, I don't know if we got into it the last time we spoke, but we were concerned about inflation, and we were early on recognising that was a problem. It's really a function of the supply, and it goes back probably 35, 40 years of underinvestment in various commodities, and particularly oil and gas, and I guess it got kicked into high gear around the year 2014. The problem is that demand continues to grow, but the supply's not there to meet the demand, and the correcting mechanism is the price, and that's what you're going to see.
Governments around the world are seeming to double down, ie destroy the supply, but not find a way to basically lessen the demand. So you're going to see, in my opinion, in our opinion, you're going to see higher prices even from here.
Peter McCormack: Have you experienced any similar times where this has happened before?
Peter Doyle: I guess the 1970s, but this is completely different. There was much more of an abundance, there was a lot less pushback from trying to get refining plants up, mining facilities up, etc. So here, there's a real concerted effort by governments around the world to prevent that from happening, and the demand continues to grow for those. So, it's worse than the 1970s, or is likely to be worse than the 1970s.
Peter McCormack: And I guess with energy, we would all love a good, continual of supply with energy, whether it's for fuelling your car or heating your home. But naturally, I expect energy markets have their own bull and bear markets, which sees the investment in finding new sources of energy, whether that is building out powerplants, building out nuclear facilities, whether it's finding new sources of oil and gas; but the problem with responding to supply and demand, is that takes a long time to build out this infrastructure?
Peter Doyle: Correct. So, even if we started today and said, "We're going to start building out this additional capacity", it will take five to ten years minimum, but we're not starting today, so that's why it's likely to get worse before it gets better.
Peter McCormack: Why was there so much underinvestment?
Peter Doyle: A variety of reasons. It's a boom-and-bust cycle, there's governments around the world don't want it, the returns on capital weren't particularly attractive, so investors started pulling money away; a variety of reasons. But most recently, it's been the governments around the world preventing that, and they just don't want refineries. I think there's only been one refinery built here in the United States since 1977, and I think at least six have shut down.
Peter McCormack: Is that due to concerns regarding global warming, climate change, and it's not politically desirable to build out these kinds of facilities?
Peter Doyle: Most recently, that's definitely been the fundamental reason.
Peter McCormack: Yeah, people won't know, but obviously we were discussing my interview with Alex Epstein before this, and for some people, Alex is not palatable, because he has a view that we should be burning more fossil fuels, and that's really important for humans to flourish and productivity. You can certainly see a side of his argument which is entirely valid here.
Peter Doyle: Yeah, well the consumption of energy typically is accompanied with the rising standard of living around the world, and there's 3-plus billion people that would love to live on a much higher standard of living, and the only way for them to do that is to consume more energy. So, I think his argument really has some validity in the sense that he's saying you have to weigh the detriments with the benefits, and there's a lot of benefits to basically more consumption of energy.
Now obviously, I think everybody, unless you're a psychopath, wants to have a cleaner world, and I think people are recognising that perhaps there is climate change that is happening as a result of the burning of fossil fuels, etc. But the problem is you can't go from this "renewable", even though there's no such thing as renewable energy, without basically a proper backup, and we don't have that. So, they're trying to kill the supply, but they're not killing the demand, and that's a real problem. And again, the correcting mechanism is the price.
Peter McCormack: How much has the war in Ukraine and Russia compounded this issue?
Peter Doyle: It just accelerated it months.
Peter McCormack: Oh, is that all it is?
Peter Doyle: That's all it is. This was coming whether that occurred or not. This just crystalised it and pushed it up six, seven months.
Peter McCormack: Oh, wow! So, these predictions I've seen of, say, $300 for a barrel of oil, is that highly possible?
Peter Doyle: Absolutely highly possible; possible for two reasons: one, supply and demand; and two, you keep debasing your currency, you want to get down to the base layer of what's important to run a society, and you're going to find it's oil and gas. So, if there's a lack of supply, people with the money will pay that price. So, it wouldn't shock me, and it wouldn't shock me if it happened in the not too distant future.
Peter McCormack: What role does someone like OPEC play in this, because they have the ability to increase production; but they also benefit from the higher prices? Do they play a role in this; do they have an incentive?
Peter Doyle: So, nobody can really get behind the curtain in the way that you can determine whether or not they truly have the capacity. So, they've been underproducing for the last year-plus, and it's not clear that they actually can turn on the spigots and get it going that much greater than it currently is. I think Saudi Arabia probably could do some, but my guess is that basically they're operating at capacity now, and that's really the problem.
The United States probably could increase production, but the current Administration really seems to be against that, so in addition to that, the valuations for a lot of the oil and gas companies are so low, their best use of capital really is to pay down their debt, buy back their shares, and I think that's what the shareholders are demanding. So, unless the stocks get re-rated in the market, they're not going to go out and explore for more oil and gas; their best investment is just sitting right in front of them in their own stock.
Peter McCormack: Interesting, there's another potential compounding effect in the UK specifically, I'm not sure if you've seen this, but we're facing much higher energy prices. My electricity and gas bills have essentially tripled, quadrupled over the last year. There's a lot of people who are in fuel poverty now and cannot afford to pay their bills, and the government is looking to fund essentially a stimulus cheque to cover energy payments through a windfall tax on energy companies, to the tune of, was it £15 billion, did we look?
Danny Knowles: I can't remember.
Peter McCormack: But I mean, it's a number, it's a very high number. But by taking that money off the energy companies, that's actually going to take away from them being able to invest further in energy.
Peter Doyle: It completely disincentivises them, it will basically compound the problem, so it's definitely not a solution. Longer term, it's just creating more of a problem.
Peter McCormack: Well, it's a real wake-up call to me, Peter, in realising how intrinsic energy prices are, or commodity prices are, to the functioning of the economy, it just never crossed my mind. I made a show the other day. Do you know Lyn Alden?
Peter Doyle: I do.
Peter McCormack: Yeah, so I made a show with her the other day, and I mentioned that a news story came out with regards to swimming pools in the UK, and they're facing a crisis, because one of their biggest costs is heating the pools, and so they're facing three choices: do they close; do they reduce their opening times; or do they keep the pools cooler? Actually, there's a fourth one, where they have less staff. I mean obviously, they can also raise their price. But that itself to me is just one example of probably tens of thousands whereby high energy prices have a massive hit on how businesses function.
Peter Doyle: Absolutely. I mean, you can't function without basically crude oil, and there's something like 6,500 different products that use crude as a base. So, all the plastics, you want to hit a golf ball, the asphalt roads that you drive on, etc; it's vital to the global economy and I don't think people have an appreciation for that. So, they want to move away from it; you can't just move away from it. You've spent the last 160 years building an infrastructure that's based on hydrocarbons. You don't move away from it in two years or five years of ten years; it's going to take a long period of time. That's the real problem.
The policies currently in place, largely in the developed world, is they're moving away from it and they're trying to limit the supply of it coming onto the market, and the demand continues to grow and the demand's not going away, so that's a real problem.
Peter McCormack: So, I wonder why, policy-wise, they're not dealing with this?
Peter Doyle: I think they are. Either (1) they don't understand the science behind it or the importance of it; or (2) they don't care and this is a way to create an inflationary environment to basically grow themselves out of their debt problems.
Peter McCormack: I see. Yeah, I spoke to Lyn about this as well. There's so much debt in the system. They can pay the debt off nominally, but if they create inflation, it obviously wipes away a lot of the debt.
Peter Doyle: You're correct. They did something like that in the 1970s, they let inflation run hot. And here, it may spin out of control, because the policies have been so far gone that it's really -- but you let it go too far, you start seeing civil unrest; and people can't put food on their table, they're going to be pretty unhappy. And I have concerns about that, even here in the United States.
Peter McCormack: So, inflation is essentially the corrective mechanism for the state to pay off their debt?
Peter Doyle: Well, it's a corrective measure for bad policies and excessive spending in the past, and that's kind of the least onerous way out of it. So, you can default on your debt, but then you'll have a hard time basically ever raising capital again, people trusting you, etc. So, the best thing to do is basically debase your currency and pay back in cheaper dollars.
Peter McCormack: It sounds like theft.
Peter Doyle: It is theft, it really is theft.
Peter McCormack: And you and I talked about inflation last time, and we were all aware it was coming, and we were all aware inflation was growing, plus-9% in the UK; was it 9%? 9.1% in Europe, 8.3% here. Is this as you expected?
Peter Doyle: Well, that's the recorded government CPI numbers.
Peter McCormack: Yeah!
Peter Doyle: Inflation is not a single number, so it's a basket, and somebody's inflation could be 7%, somebody else's inflation could be 22%. So, it's a problem, whatever the number is. My best guess is probably upwards of 12%, 15% actually.
Peter McCormack: Wow. Okay, so everyone's is different, but generally speaking the CPI number which they're using is probably very few people's real inflation?
Peter Doyle: Correct. My colleague, and I think he's correct in his thinking along these lines, he thinks the better measure of inflation is the growth of money supply, and that's been over 36% over the last two years, so that's 18% per annum. His reason for that is you inject more money into the system, but you don't produce that much more goods and services; that's very inflationary.
Peter McCormack: Right, okay. So, do you think there's a lag with that, therefore we may see 36% over a stretched period?
Peter Doyle: Yeah, I do. I think the compounding effect of whatever reported government numbers of 8% this year, 12% next year, 7% the year after, etc, I think they're going to have a hard time bringing inflation down. I think it's primarily going to be because it's going to be commodity-driven, and the shortages of commodities. So, even if you want to buy an electric car, lithium's up 170% year-over-year. Whatever the number is, it's a big number.
Peter McCormack: Let's talk a little bit about the civil unrest, because you say you have concerns about that?
Peter Doyle: Yeah, so I think governments get themselves into problems in a debt crisis and debt burden, and this is true globally, including the developed worlds, and people can't afford that, because they're inflating that and you're on a fixed wage. Suddenly, you were able to eat, put five, seven meals on the table a week; and suddenly, now you're only able to do four, you become pretty ornery, you get upset over something like that. That's going on in other places in the world, and you mentioned Sri Lanka before we talked about that.
Peter McCormack: Yeah, they're burning the houses down.
Peter Doyle: They're burning the houses down, and you'll see it here if it ever gets that bad. The great thing about looking solely from the United States, we do have a lot of natural resources, and this is correctible. But you have to have the will behind that in order for that to happen.
Peter McCormack: And you have a stronger currency and good reserves.
Peter Doyle: Well, we have the currency that's likely to be the last one standing. I wouldn't say it's a good one, I think the debasement has been just staggering over the last several years. It started in 2008 and to me, it seems like if you want to talk about theft, they keep debasing the money that way, they're stealing your time, your efforts, etc, because your labour's buying less and less goods and services.
Obviously, there's a demand, because oil and commodities are priced in dollars, etc, because there's a global demand; but you can see countries are starting to pull away from that. So, China, Russia, etc, would like to not have that system in place anymore. My guess is that sometime, knock wood, in my lifetime, you'll see that the dollar may not be the reserve currency in the future.
Peter McCormack: It might be Bitcoin?
Peter Doyle: It might be Bitcoin!
Peter McCormack: So, in terms of yourself, you're looking at this inflation number, do you think we still might go higher, or do you think we're going to maybe level out, but at a high number?
Peter Doyle: You know, Lyn makes some good points about base effects, etc, but I think that you could see -- the Middle East is not exactly a very stable region of the world, so you could see that it could be a change of the regime in Saudi Arabia, and supply of oil coming out of there could be disrupted, etc. You see what's happening in Russia that's being disrupted. So, you could see how inflation could spin out of control under certain environments.
Now, I'm not saying that's going to happen, it's not going to happen probably in the next several weeks, but it doesn't take a lot where the numbers that we saw, that we experienced in the recent past, would basically look like nothing compared to what we experience in the future.
Peter McCormack: And if it's all down to the vagaries of the money supply, you talked about going back to 2008; obviously, I remember that well, but I'm pretty sure when I researched the numbers, the creation of money supply in 2008, 2009 relative to now was actually much smaller. Was it less than $1 trillion?
Peter Doyle: Much smaller. I think it was somewhere right around that number.
Peter McCormack: Yeah, I seem to remember $800 billion, or something, is the number. But that was rescuing a global financial crisis. And now, we're not in a global financial crisis for the same kind of situation, but they printed trillions in one go.
Peter Doyle: Well, the global economy shut down. In COVID, we were travelling at 60 mph and we hit a brick wall, so it actually was even more devastating in terms of how it skidded to a halt. So, the need for printing that is questionable in my opinion, and they kicked it into hyperdrive. So, from a monetary standpoint, it really had an inflationary effect. Then you couple that with the commodity shortages that we were talking about earlier and it's created a real problem.
Peter McCormack: Was there malinvestment? Did they create way too much money? I still can't get my head around the numbers.
Peter Doyle: 100%. I mean obviously, some of it was needed probably to put things on track. But if you're going to set up programmes and have it administered by the government, and we're talking hundreds of billions of dollars, you're talking there's going to be plenty of waste there, and people taking loans that they weren't entitled to, undeserving, etc. So, yes, to answer your question.
Now the fact that I think early on, we probably knew that people under the age of 40 that were in a reasonably healthy condition didn't need to be locked down in the way that they were, so probably the economy could have opened up a lot sooner and things could have functioned a lot better.
Peter McCormack: It seems to me that the biggest problem with a functioning economy is the politicians!
Peter Doyle: They realised you can generate money, create money, and not have people understand how it's debasing their currency and taking them -- it's a form of taxation, and people aren't going to fight it because they don't understand it. So, you debase the money supply through various programmes, you're basically taxing people, and that's really what has been going on.
Peter McCormack: So, what do you think the Fed should or shouldn't be doing now?
Peter Doyle: They have to show that they're serious about inflation, because it's a real problem. The problem is that if they're too aggressive, then the stock market, capital markets, will roll over very aggressively, and the government derives a lot of their revenue from that. So, my guess is that they're going to take it to a point and then they're going to stop, and they're going to create some other -- or, some crisis, I won't even say the government's going to create it, but some crisis will come about, and they will ultimately start printing again.
Then, the dollar will get debased and other currencies around the world would get debased even more than the dollar, but they're on the path to zero.
Peter McCormack: So, as the government creates more money and debases the currency, are you saying that has a triggering effect for other currencies?
Peter Doyle: I think other currencies are doing the same thing. So various, whether it's the Eurozone, Asia, etc, Japan's doing it at an alarming rate as well, so they're doing the same thing.
Peter McCormack: It feels like quite a scary cocktail of problems that every economy is facing globally.
Peter Doyle: I think Lyn and you probably discussed it, you have a debt crisis, you have a global debt crisis, you have a global confidence crisis in most of the major institutions, whether it's politicians, the media, etc, so it's a troubling time. And right now, from a financial standpoint, you're trying to play "run for your life", and you're trying to find investments that are going to be able to grow their cashflow faster than the rate of inflation, and it's a challenging task.
Peter McCormack: What's been going into your newsletter? What are you doing; how are you planning?
Peter Doyle: So, we are trying to find companies that have really very low capital expenditures, ongoing costs, expenses, that have the ability to pass along price increases, so you can grow your revenues but your expenses are not going to grow nearly as much, and you'll either expand your margins and you'll grow your cash flows faster than the rate of inflation. So, that's largely how we've been positioned for the last two-plus years, in anticipation of something like this.
Peter McCormack: So, you were prepared?
Peter Doyle: We were prepared. We started an ETF called The Inflation Beneficiary's ETF back in January 2021, and it's done very well and it's done what it's supposed to do. It's a hedge against basically inflation.
Peter McCormack: Where can we buy that ETF?
Peter Doyle: It's traded on the New York Stock Exchange, INFL is the symbol; inflation. I think it's not really necessarily a binary bet, I don't want it being invested in that way. It's meant to be, if inflation is a real problem, these are the companies that are likely to benefit the most. And inflation is not, and we're wrong, these companies will do reasonably well on an operational basis, just from the underlying business dynamic of the stocks themselves.
Peter McCormack: So, it's more kind of low-risk?
Peter Doyle: Capital-light, asset-light type businesses, where you don't require a lot of capital to make these things go. And if you're in a position where you're have to pass along cost increases, you're going to be able to do that, but you're not going to get tagged on it. So, just as an example, various exchanges around the world, right. An exchange is essentially computers talking to one another, bringing buyers and sellers. They generally have an oligarchical position from the government.
More money flows into the system, more people trading; more volatility, more people trading; you need to expand your trading capability, you buy a new computer, a super-computer. You're not really adding new people for that, you're just getting more commissions on more volume and your expenses aren't going up.
Peter McCormack: Sounds like Bitcoin mining companies, within that category!
Peter Doyle: Well, it can work that way absolutely. So, if Bitcoin continues to rise and you buy the machine at the right place, it will work out that way.
Peter McCormack: Okay, but what about traditional energy companies; is that a sound area of investment then?
Peter Doyle: To answer your question, we are not necessarily doing that professionally. We've been trying to get our exposure through the royalty companies, and our biggest position by far is a company called Texas Pacific Land Trust, and they essentially allow people to -- they collect royalties for people that have drilled on their land. The price of oil goes higher, they just collect bigger and bigger cheques. They're based in the western part of Texas, and they have a chequerboard pattern of land out there. So, if you want to put a pipeline there, you want to basically put a road in, etc, chances are you're going to have to give them a royalty cheque.
It's a great, great business, one of the best-performing stocks on the New York Stock Exchange, going back many, many decades, that nobody really knows about. So, it's something that we've been involved with professionally for 40 years.
Peter McCormack: You see, I'm not a professional investor, I just buy Bitcoin.
Peter Doyle: I will say, on a personal level, I've been buying some of the Canadian oil companies.
Peter McCormack: Okay.
Peter Doyle: The reason, I listened to a podcast of an analyst, a guy named Josh Young, and he was talking about a particular company and he said, "It was trading at one time or one-and-a-half times free cash flow", and I said, "That seems ridiculous to me". Then I started looking at it and sure enough, virtually the entire industry was trading at a very low multiple, and the stocks had run up very substantially. And, even though the stocks had been up 100%, 150% year-over-year, the operations had grown by that amount, so the valuations were actually still, and as we speak today, are still very compelling; so, a lot of them are trading at two or three times cash flow, and you're talking about the company would be able to pay you back in full in three or four years, and it has maybe 15 years of reserve life there, so you're getting 11 years for free.
That's what I mentioned earlier, that those companies are not going to go out and explore for more oil and gas if their stocks are that cheap. Their best investment is basically taking their cash flow and paying a dividend to their shareholders, which is what the shareholders want, and buying back their shares, because their return is just so compelling.
Peter McCormack: It feels like a very distorted market though, because you really want these companies investing.
Peter Doyle: You do, but the capital, through ESG movements and various organisations, endowments, pensions, etc, are moving away from oil and gas. They took the money away, they took the capital away, the overinvestment then and lack of return that went on in the 2014 period, now the shareholders are demanding, "Give me back the money and take that cashflow and buy your stock back, shrink your share account and give me a big dividend", and that's what they're doing.
Until they change that, or those stocks get re-rated in the marketplace, they're not going to aggressively expand their production capacity.
Peter McCormack: And what is your read of ESG; I don't want to lead you in any direction?
Peter Doyle: I think it's largely dysfunctional. I think there's no rhyme or reason to it. I think it's become an industry to collect fees for certain people, and how they rate companies has no rhyme or reason. Again, I think unless you're truly crazy, you want to leave the world a better place, and you want to leave the environment a better place for your children, your grandchildren, etc. Through ESG movement is not doing that; they're making the problem worse, to be honest with you.
Peter McCormack: They're making it worse?
Peter Doyle: They're making it worse, because they have no set policy on how they analyse these companies, and who's truly putting a negative footprint onto the world.
Peter McCormack: Yeah, for me, ESG seems to only really actually focus on the E. It seems that everybody is focused on the environmental side, and their expectation is that the ESG movement is all about trying to curtail the growth in the carbon in the atmosphere; but no one ever talks about the S and the G. But at the same time, it feels like the S and the G are used as excuses to promote companies who fail on the E. I mean we saw it, I'm pretty sure it was ExxonMobil who went onto that index when Tesla was removed, and it feels like that was the reason.
But it's a weird thing to actually have ESG together, because that feels almost like some sort of societal control grouping; whereas, you can understand some desire to try and make the environment better. But to group them together and create a scorecard, you could destroy the environment, whilst protecting the S and the G.
Peter Doyle: Right, you get good marks and be included in all the ETFs, so yeah, I don't know.
Peter McCormack: Okay, so there's ESG ETFs?
Peter Doyle: Yeah, correct! And there's ratings, so every stock now has a rating. So, as an example, Texas Pacific Land Trust has a very high score, because they don't do any of the drilling, even though they derive a lot of their revenue from the companies that are doing the drilling. So, you can't assign the "negative imprint" to two companies, so they assign it to Chevron, for example, who might drill on Texas Pacific Land, and even though Texas Pacific Land Trust is getting the cash from that.
So, that's what I mean. There's not a really good yardstick for how it's being applied across the various industries and across stocks.
Peter McCormack: Do you know what that reminds me of, Danny?
Danny Knowles: What's that?
Peter McCormack: It reminds me of Web3. Do you know why?
Danny Knowles: Go on?
Peter McCormack: Do you follow this Web3 stuff?
Peter Doyle: Some.
Peter McCormack: So for me, Web3 is essentially a scam term used by those with a self-interest, such as a fund, say, a Silicon Valley Fund, I won't name any names, a16z! But they have an interest in marketing a term which gets people to invest in those companies, but gaslight people into thinking this is where the internet is going. Web2 was just about experience, it was just about a better experience for you and I as a user, or a change in habits.
They've actually marketed a whole concept of selling tokens, of which they benefit from, and putting it under the name, Web3. For me, it's just a marketing term that a small group of people get to benefit from. I've taken some time with ESG to really try and understand it and consider it. But all I can see is that it is a marketing term which can be used by a small group of people to line their own pockets.
Peter Doyle: I'm in complete agreement with that, 100%.
Danny Knowles: I just had a question. So, if we take it back to inflation, the Fed started tightening today. Do you think that will impact quickly?
Peter Doyle: I do.
Danny Knowles: In fact, can you explain what tightening is, because everyone knows what QE is?
Peter Doyle: So, they're just going to allow their bonds to run off and they're not going to go into the marketplace and buy more mortgage-backed bonds, or other types of bonds in the marketplace. So, there's a $9 trillion balance sheet that they now, and they're starting, effectively today, they're going to reduce their balance sheet by $47.5 billion a month, and then ramp that up to $90 billion in September of this year. So, it's one less buyer in the marketplace for those bonds, and yields are likely to go higher. And if there's not a market, yields could go considerably higher, and then you have a problem.
Peter McCormack: Could we go back even another step and explain the whole process of what's happening there? So, some people listening will be like, "I don't even understand what is going on here. Who's buying what, why?!"
Peter Doyle: So, the Federal Reserve expanded their balance sheet very substantially in the recent past, so they would go out and be a buyer of various fixed income securities in the marketplace, particularly mortgage-backed securities; so, the housing industry, because it's such a critical part of our economy. They would go out there and bid for them, those bonds.
Peter McCormack: Why though; why would they bid for them?
Peter Doyle: To create a market to lower interest rates, to put people into homes, etc, all of the things. Interest rates got down to very low, you get a 30-year fixed mortgage, you could have got like 2.5% not too long ago, now it's over 5%. So, they were trying to drive down rates to stimulate economic activity.
Peter McCormack: But to do that, they're literally printing money?
Peter Doyle: They're literally printing money. They print money and go and buy the bonds.
Peter McCormack: And that money goes to who?
Peter Doyle: It goes to whoever is the dealer of those securities, so the big money centre banks and the investment banks on Wall Street.
Peter McCormack: And then they end up owning those securities. Do they ever get paid back?
Peter Doyle: They're supposed get paid back, they're supposed to let them roll off now. So, let's say there's going to be a maturity -- I think the first maturity of 15 June, they're going to not take any capital that they get, and they're going to basically not go back into the market to buy.
Peter McCormack: But not until September?
Peter Doyle: No, starting now, and the first maturities, I think, are 15 June.
Peter McCormack: But you said they're going to start buying back again --
Peter Doyle: No, they're going to allow more to roll off. So, starting with $47.5 billion, starting today, come September, they're going to allow that to increase to $90 billion.
Peter McCormack: Oh, increase to $90 billion. Do we know how much they're holding?
Peter Doyle: Trillions.
Peter McCormack: Right, and the impact of doing that will be rising interest rates?
Peter Doyle: Likely to be rising interest rates. They don't know, in fact Jerome Powell says they're uncertain what the impact is going to be, but they said that it could be as much as a quarter of a point; the equivalent of the Federal Reserve raising the Fud funds rate by a quarter of a point.
Peter McCormack: Is this what you meant when you said they're going to push it as far as they can; so this is a test to see if interest rates rise, but if interest rates rise too much, they'll have to stop, because they can't have interest rates too high?
Peter Doyle: Yeah, well if interest rates rise too much, it brings down the capital markets, stock market, bond market sells off, they derive a lot of revenues from that, the government derives a lot, they'll basically stop it; it will create some crisis. The debt burden in the system that you and Lyn talked about will show up somewhere. There'll be some crisis that will basically require capital infusion and they'll stop themselves.
Peter McCormack: It feels like they're having to thread the finest thread through the smallest hole, followed by another hole by another hole. I don't know why Jerome Powell wants this job!
Peter Doyle: It's funny you say that; I said he's unqualified, because the fact that he wanted to be Chairman again means that he didn't appreciate what position we're in.
Peter McCormack: Unless he's a psychopath!
Peter Doyle: I don't know that he is! I think he could probably go down as the worst Fed Chairman of all time, things could unravel.
Danny Knowles: And when you say, another crisis will mean they'll probably have to start QE again, do you think that could be energy prices getting so high that they have to subsidise energy costs?
Peter Doyle: Well, that's another reason to continue spending. So, Danny and I were speaking, before you came down, federal, state and local spending is 40% of the GDP of the United States.
Peter McCormack: Hold on, just go back a step. What was that?
Peter Doyle: Federal, state and local spending is 40% of the GDP of the United States.
Peter McCormack: So, 40% of all productivity is government spending?
Peter Doyle: As measured by the Gross Domestic Product, yeah, it's government spending. Now, the COVID stimulus, the government transfer payments, supplemental insurance payments, etc, those are all running off, so you can watch in real time, the GDP is actually going lower. The government still spends more than they bring in from revenues, so the debt burden is going higher.
That's a situation that cannot endure, and the reason that I'm not so enthusiastic about the economy is, if 40% of your economy is contracting, the government's spending less money, what is going to make up that and grow of the other 60%? Is it going to be the medical industry, the oil and gas industry, etc? Not likely to see that grow in any way. So, my guess is that if we're not in a recession, we're very close to it and things could get worse.
Peter McCormack: 40%, that's blown my mind! I mean, this makes me think of what happened, I know it's an extreme example, but it makes me think of what happened under Chávez in Venezuela, where I think at one point, one-third of all employees worked for the government. And once they ran out of money, or once the price of oil dropped, which was the dominant part of the Venezuelan economy, they didn't fire anyone and that led to printing money and inflation.
Peter Doyle: Right, so unless the government picks up spending, it's going to be very challenging to see how the economy's going to grow. So, that's why I'm saying, they're going to need to find some way to inject more money into the system in order for basically the economy not to roll over.
Peter McCormack: How do they do that; print more money?
Peter Doyle: No, there'll be some reason to do it, "Let's send this stimulus cheque for people to buy gas, because the price of oil is high", those types of things.
Peter McCormack: I do hope it's not a war.
Peter Doyle: No, possibly. It does feel like we're being led down that path. We barely got out of Afghanistan and now we're involved in Ukraine, and sending missiles to the Ukraine. I don't understand, if I was Russia, how that's not viewed as an act of war against Russia by the United States.
Peter McCormack: I think it's one of those things, it's testing how much can you get away with, "Let's push against the edge of it, see how we can test people". Hold on, 40%, I still can't get over that number. Why can't government reduce the size of government? We had in the UK recently, one of the ways to curb inflation was, the government was discussing ways of reducing the size of government, which to me blew my mind that they would actually consider that. They were considering something like 90,000 jobs. I don't know what percent of the government workforce that was, but essentially that equated to the increase in government workers over the last four years. It was something like 20% of workers. Can you look those numbers up?
Danny Knowles: Yeah.
Peter McCormack: I'll get Danny to check that, because the numbers will be important. But how did the government grow by 20%, 30% over that period?
Peter Doyle: So, that's one of the problems. My colleague calls it "the administrative state", and how do you get rid of the administrative state? You're in there for a short period of time and they're working against you, or if you're not aligned with them, they're going to be working against you. It's very challenging to do that. And once government grows in that way, there are programmes that were meant to last two or three years and 40 years hence, they're still in place with 10,000 people working for that programme that should have been shut down in the 1970s, or something like that.
It's very challenging, it becomes cumbersome and bloated, and society and your debt burden rises, etc, and this is all the stuff that we're seeing right now. That's why it's by far the most challenging time that I've seen in my investment career. And I think even when I was a kid in the 1970s, I think it's much more challenging than that period of time. Back then, the debt burden of the percentage of the economy was a lot lower. You could raise rates to basically bring down inflation without impacting it in a severe way. So, I don't think they have those options anymore. Their best option is to continue to debase.
Peter McCormack: Okay, but what's the endgame there?
Peter Doyle: The endgame is to grow, in nominal terms, the economy and to basically pay back your debt in cheaper and cheaper currency.
Peter McCormack: So, who's getting screwed in this scenario?
Peter Doyle: Anyone who's on a fixed income, anyone that's on a fixed salary, etc, that's getting screwed by that. That's why I'm saying, if you're on a pension and your food bill went up 18%, so you thought you were going to be able to live on your pension and suddenly, "Oh, my dollar doesn't go nearly as much. The meat cost me twice as much and now I can't eat meat. I'm going to find us a lesser substitute and get to the point where I'm not able to afford the things that allow me to live and exist and have a life".
Peter McCormack: I mean, that means the wealth divide will grow though, in this scenario?
Peter Doyle: 100%. Inflationary period of time, the wealth divide grows dramatically. When you debase the money, the Cantillon effect. You debase the money, the people that are closer to the spigot benefit the most, and the people that are furthest away get hurt the most, and that's what we're seeing in real time.
Peter McCormack: Did you find it?
Danny Knowles: Yeah. So they want to cut 91,000 jobs to get back to 2016 staffing levels.
Peter McCormack: Yeah, so 90,000, 2016 staffing levels. Does it say what percentage of staff that is?
Danny Knowles: Not here, though.
Peter Doyle: Let me know how they deal with that!
Peter McCormack: Well, I interviewed a chap called Erik Voorhees years ago, a libertarian, and we were discussing the idea of -- I was trying to get him to explain to me, "How does a society operate with no government?" He said, "I don't even care about that right now, I just want to reduce the size of government, 1%, 5%, every year just reduce a bit", but he said it never does, it just gets bigger.
Peter Doyle: It gets bigger.
Peter McCormack: It gets bigger and in getting bigger, you have all these other effects. You have the fact that they think of programmes, come up with ideas and probably think of other ideas that curtail our freedoms that go with that.
Peter Doyle: Regulations, licences that you need, forms that you need to fill out; exactly. You're spending three-quarters of your life basically just trying to comply. And things that we formerly didn't need licences for, now you need a licence, etc. So, that's a problem. And they have a vested interest in staying in those positions; that's where they derive their income, so it continues to grow. So, it's virtually impossible to really chop it in any meaningful way.
Peter McCormack: Yeah. When I was up in Wyoming, I was with Tyler Lindholm, and he was talking to me about all the licences they're trying to get rid of. He explained something like, there was a licence to be a hairdresser, a licence to do this, a licence to do that. It's form-filling, it's fees, it pays for bean pushers, bean counters. I feel like government should have a budget; I feel like government should just have a budget.
I have a budget, you have a budget. What happens to you or me or Danny if we can't hit our budget? We have to sell something, or we lose our house; we have to make a decision. I would love to have up in my bedroom a printer, and when I've overspent this month and I've gone out too much, had too many dinners, okay, I can go upstairs and print some money. I'd love to have that, but none of us have that, but for some reason government does, and that's a big problem.
Peter Doyle: Some governments have that.
Peter McCormack: They do.
Peter Doyle: Obviously the United States has that, and you push it too far and you debase your currency down to zero, and that's why most currencies are valued at zero within 26, 27 years. So, the United States has lost 99%, 98% of its value since the Federal Reserve started in 1913. It just happens to be the best of the worst. My guess if that you keep doing this, and now you have this thing called Bitcoin, where there actually is an alternative, there's a finite number and you know what that number's going to be in perpetuity; that's a real option. It frightens, I think, governments around the world.
Peter McCormack: How much of a Bitcoin bull have you become?
Peter Doyle: I understood it almost immediately. Maybe I had the benefit of my colleague, who has a computer science background, and he explained it to me in terms. He said, "One, I think the blockchain itself is not going to be hacked, I think the security's going to be strong enough. And two", he said, "the supply is going to be 21 million".
I said, "Well, based on supply and demand, the demand is likely to grow exponentially and supply is not going to grow exponentially; that's the correcting mechanism, the same with oil and gas, is you limit the supply, grow demand, you're going to correct it with the price". So, I said immediately, literally within 90 seconds, I said I want in. As I studied it further, I realised the benefits that it could have and the role of money in society. I've become much more just hopeful. I'd give up any gains that I ever had in Bitcoin for it to succeed in society, to get on that system.
Peter McCormack: Okay, that's a very interesting way to think about it, because I'm an investor, like yourself, in Bitcoin, I want it to succeed. But when I'm trying to explain to people, a lot of people, when I talk to them about it, most early people worry about, "Will I lose some money? Will I lose it? Have I got in at the right time?"
One of the things I'm trying to encourage people to think about is, it's not just about the money you make, it's becoming part of something that will be better. Just buy a little bit and understand it and realise, if you do it and your friends do it and their friends do it and enough of us do it, with critical mass we can create a system that's better and fairer.
Have you spent much time thinking about the long-term implications of it becoming the dominant reserve currency?
Peter Doyle: I have, and I've thought about it, and I think it solves a lot of the world's problems. You take the money out of the hands, you put it on to a mathematical basis, it's much sounder, people can plan for that in a much more logical way, know that they're not going to be debased out of their wealth, etc. So, I think it's an important invention. I think it truly is a real zero-to-one moment, it's kind of the wheel. So, I'm rooting for it in a way, and I think there's a lot of very powerful forces that are not aligned with that, that would love to see that go away.
I think the benefit of time is probably with Bitcoin, because the younger generation is going to be more accepting of it, new politicians, more and more politicians are going to embrace it; it's becoming a voter block, etc.
Peter McCormack: Yeah, definite voter block; there's a real hack. I mean, how many politicians have we had reach out to us?
Danny Knowles: It's probably double digits now.
Peter McCormack: Now, we turn them pretty much all down now. Well, I say politicians; these are people running for either local -- this is me not understanding US politics too well -- running for Congress or Senate. And they've realised, if they put Bitcoin in their description and they tweet about Bitcoin, it's a bit of a hack, and they've asked to come on the show. But we don't have them, because they always want to tell the same story.
But then, it could become a kind of self-fulfilling prophecy. And one of the things I'm grateful for is Republicans at the moment, because Republicans seem to support this a bit better, and that's useful for Bitcoin. It gives a certain amount of regulatory protection, and I just hope it continues long enough to give it enough regulatory protection.
Peter Doyle: Yeah, you hope it's not going to be political. I mean, it seems to line up more with the libertarian type of view of the world, but I don't think it needs to. I think it really has to do with, if you study money and the way it can be debased and the way you can be cheated out of your efforts, I think whether you're on the left or the right, you'll say, "You know what, this thing is worth looking into and worth owning some of".
Peter McCormack: Are a lot of people asking you about it?
Peter Doyle: Not as much as before. I continue to go around and tell people that I meet, "You should own a little bit". Our philosophy was that the asymmetric nature of it was so great that you didn't need to make a big bet initially. You put 1% or 2% in it, and that 1% or 2% could basically hedge out really the risk of 99% of your other assets, and just leave it alone. I still tell that story. Now personally, I have more exposure than that and I've been in since the end of 2015.
Peter McCormack: That was a good time.
Peter Doyle: It was a good time; but again, I would happily give up any appreciation that I have, or exposure to it, for it to succeed and basically for us to put a global monetary standard based on Bitcoin. I'd be happy for that to happen.
Danny Knowles: And with Bitcoin, it's obviously at the moment quite closely tied to equities, in terms of what it does with the price. Do you think that will change and it will become more tied to commodities over the next decade?
Peter Doyle: Yeah, I do. I think people that make that correlation issue, it's correlated for nine months, and that's a permanent feature! So, it's not a permanent feature, I think it will change radically and I think it's going to have its moment where it will uncorrelate and it will make your head spin.
I think the only thing that we actually slightly disagreed with the last time we spoke was, you didn't the dollar had collapsed against Bitcoin and I said it had. The reason I said that was, back when it was a penny, and now it's $30,000 and obviously it was as high as $69,000, that to me is a collapse. So, you're going to see it at some point, in my opinion, some point well into the many millions of dollars, it's going to cost to buy a single Bitcoin at some point in the future.
Peter McCormack: Well, that would be truly incredible; that would help me with my football club. And I'm guessing, you don't really look at the other cryptocurrencies, right?
Peter Doyle: Not really. So again, I think Bitcoin is the wheel. The other 19,000-plus cryptocurrencies, you know, there's just too many; I could spend the rest of my life and I wouldn't get my arms around most of them. And it's like what you said, they're meant to enrich a handful of people.
Peter McCormack: Yeah. I mean, I'm a Bitcoin maxi, that's the only one I own. I don't mind this one called Monero, I'm kind of okay with that, I'm interested in that. We've got an interview with somebody regarding that soon, because it has a different set of privacy trade-offs from Bitcoin, and I'm interested in that. I don't really understand Bitcoin privacy. I know what it is, but I don't understand how to manage my privacy. But with something like Monero, it's really taken out of my hands. But there are the other 19,000, 20,000, I just think it's all nonsense, and I wish the money people were putting into that, they would put it into Bitcoin.
Peter Doyle: I think you're seeing with the shakeout that we've had more recently, I think more and more people are being converted, because unfortunately they got hurt, because they didn't fully understand what Bitcoin is and the monetary policy behind that. And if you can create an unlimited supply, why is that any different than Jerome Powell and the European Central Bank being able to print money at will.
So, the great thing about Bitcoin is, it's finite and you're up against assets that are going to continue to expand. So at some point, in dollar terms, in euro terms, in yen terms, Bitcoin's going to be priced at a much, much higher level.
Peter McCormack: Well, I take a different level of risk, because something like 95% of my money is in Bitcoin! If I wanted to divest out a little bit, just to spread my risk a little bit, where would you tell me to put a bit of money?
Peter Doyle: So, I would be still very concerned about inflation and you need to find those companies that are going to grow their cash flow faster than inflation. Our product, I'll give a little plug --
Peter McCormack: Please give it a plug.
Peter Doyle: INFL, it's an exchange-rated fund, it's going to be a nice hedge for it. It's not a binary bet. I don't sit here and I'm all doom and gloom. If inflation subsided tomorrow, that fund will get you an adequate rate of return, because the underlying companies themselves are going to. In an inflation environment, you're likely to do extraordinarily well.
Peter McCormack: Is that ETF looking to outperform CPI, or is it looking to outperform the other number that you think you have?
Peter Doyle: The other number that I'm thinking about, the M2 number.
Peter McCormack: Can I buy that from the UK?
Peter Doyle: I don't know, but we're likely to be starting a USIT fund in the not too distant future that will be available to European investors.
Peter McCormack: Anything else? What about gold; is gold something you think people should be having?
Peter Doyle: Not the miners. We have exposure to some of the royalty companies. They're similar to characteristics that TPL has. So, they buy a royalty stream in various mines, a company called Franco Nevada, that we've owned for a long period of time, it's been a great investment. I can see personally that gold could become demonetised as a result of the rise of Bitcoin.
Peter McCormack: Peter Schiff won't like that!
Peter Doyle: He may not like that. I don't know that it's going to entirely, because there are uses where --
Peter McCormack: Industrial, yeah.
Peter Doyle: But the industrial's different than the monetary. I can see that in times of real physical unrest, gold might be a pretty good option for people. So, maybe it's never going to be demonetised completely. I would say oil and gas companies, particularly the Canadian ones, they're still very attractive, trading at ridiculously low, generational low cashflow multiples. I think they're going to do incredibly well; they'll outrun inflation. So, the exchanges that I mentioned also.
Peter McCormack: So, if I was reading your newsletter regularly, I'd know all this?
Peter Doyle: You certainly would have been aware of inflation, and it's coming with a vengeance; we would have made that call for you. And in our opinion, it's not only not transitory, it's here and it could in theory get much, much worse. And I'm an optimistic guy!
Peter McCormack: What are you optimistic about? You can't say Bitcoin, we've covered that.
Peter Doyle: I'm optimistic that we'll end up navigating this. I think cryptocurrency, in the sense that there's now this new technology; that is the zero to one moment. There's a real option there to change the way that the world operates and it functions for the better, so I'm sorry I'm going to go back to Bitcoin on that; so, I'm optimistic about that. And I think longer term, the availability of information is making society better, it has its fits and starts, and I think people basically can ferret out information better than they ever could.
I think that governments around the world can't quite keep up the clandestine operations they have without being exposed, and I think more and more people are waking up to that.
Peter McCormack: Well, the Bitcoin mirror I think's a good thing. I'm optimistic with Bitcoin. I look forward to seeing the things it does that I'm not even prepared for, the unknown unknowns with Bitcoin. What do you want to plug while you're here; anything else?
Peter Doyle: Nothing!
Peter McCormack: How do people sign up to the newsletter?
Peter Doyle: So, they can go to our website, horizonkinetics.com, and we have various products. We have mutual funds, we have the Inflation Beneficiary fund that I mentioned to you, so they can sign up and buy some of the research. Actually, we give away a lot of that research for free, so just go there and read some of that. I tell people that if you read the research and you don't find it of interest, it makes it easy for you to make a decision about who we are. But people find us, I'm not too worried about that.
Peter McCormack: Well, thank you. I'm going to definitely check out your ETF and see if I can invest from the UK. If I can't, I'll have to wait until you have a launch, but appreciate you coming on. It's some scary things happening, but there is stuff to be optimistic about still.
Peter Doyle: Yeah, 100%. I think you just need to be vigilant about it, you need to be paying attention about the types of investment. I would say stay away from these high-multiple growth companies; I think they have very suspect accounting, I think the P/E multiples are likely to contract in a way that's going to make people's head spin.
Peter McCormack: All right, Peter. Well listen, appreciate you coming in for this.
Peter Doyle: Peter, thank you very much.
Peter McCormack: Thank you.
