The Debasement Trade Isn't Dead It's Been Repriced

Speaker A: Foreign. This week, a permanent peace deal designed to last into infinity and maybe beyond only made it a few days before a container ship called the Other Lovely received an incoming Iranian attack drone. Apple lost a quarter of a trillion dollars because memory chips got expensive, and a chorus of clever people declared the death of the debasement trade welcome to a hypernormal weekly roundup where I attempt to pull my jumbled thoughts into some joined up logic and into the investment themes that run below the noise. Let's see if they can rhyme. I'm Jeremy McKeown and this is in the Company of Mavericks, a podcast where we help serious, active investors navigate market volatility, protect capital, and uncover new ways to confidently grow wealth in these radically uncertain times. However, what you're about to hear is not any kind of advice but but just for your information and hopefully your entertainment, I'm not your advisor. You should take responsibility for the decisions you take about your wealth. Brought to you by Progressive Equity I'm going to begin with the trade that was buried this week. Appropriately in the week that Alan Greenspan passed away at 100. Others said it's fitting he made it to par. However, the debasement trade isn't dead, it's just on sale. But on Thursday the obituaries arrived gold back below $4,000. Bitcoin roughly halved the dollar at a 14 month high. JP Morgan pronounced the debasement trade a bit dead, maybe covert acknowledgement that they didn't really understand what had made the number go up in the first place. But John authors on Bloomberg and Ed Yardeni both filed their respective eulogies assuring us that Kevin Walsh had slain the inflation dragon with a single press conference by saying very little, announcing some task force which will likely redefine the problem and the objectives, while telling us he works very well with the man in the Treasury Department. And that last bit is supposed to reassure U.S. debt holders. So let me ask the question that matters to your portfolio. What has actually changed? Well, one thing that definitely has not changed is the fiscal arithmetic. The U.S. budget deficit is still running at near 6% of GDP. The Congressional Budget Office sits at a $1.9 trillion hole, and the direction is worse than the level, climbing towards 6.7% over the decade as net interest on a $40 trillion debt pile quietly eats the budget alive. Scott Besant's pledge to get that to 3% rests on a 333 bet that AI and deregulation lift growth to a sustained 3% and the revenue then floods in. The market needs to decide who to believe. But for now, Walsh is the new thing and offers hope to the bulls. But to put it into the World cup vernacular, debasement starts and ends with fiscal monetary just provides the assist. Walsh can be hawkish as he likes while he is busy changing the goalposts, but he doesn't get a vote on the borrowing. He's in charge of cleaning up after the party. So nothing structural changed this week. What changed was the price and vibe. A hawkish Fed plus Middle east ceasefire and we'll come to how durable that turned out to be, shortly shook the froth of last year's excitement and handed the dollar a cyclical bid. That is a sentiment reset, not a solvency fix. And here's the part the obituary writers skipped. As Ned Naylor Leyland put it in a podcast this week, owning unimpeachably scarce assets such as gold and silver is really just shorting your government. It's a legitimate trade, but it never going to be a comfortable one. When shorting anything, you must respect the counterparty, and in this instance the counterparty has effectively unlimited power. If you listen to serious bear market operators like Mark Cohodes or Carson Block, you know that correctly identifying a Ponzi is often the easy bit. Making money out of this knowledge is often the more challenging part. Take Wirecard, read Dan McCrum's account. Several early bird shorters knew the fraud and the fraudsters. Several were threatened with criminal prosecution and worse by German regulators and others, and lost money on the trade despite in some cases being short for the best part of a decade in a business with a terminal value of 0. Another example of being right too early is the same as being wrong. So no, the debasement trade isn't dead, it's just on sale. As Stonex reckons inflation will settle on a sticky 3.5% to 4% plateau, and Apollo's Thorsten slok warns that cheaper oil could act like a tax cut and re overheat the global economy. While Ray Dalio and Ken Griffin haven't changed their minds, they still think gold will prove safer than the dollar over the longer term. Um, they've just got handed a better entry point. And this is why I spent much of the last couple of weeks talking to wealth managers and high net worth investors about capital preservation and about restoring one of the UK's oldest listed investment trusts, the investment company to its founding principle, preserving purchasing power over the longer term. Um, by owning assets with unimpeachable scarcity. As Warren has told us, the Market is a voting machine in the short run and a weighing machine in the long run. US$40 trillion is a weighty number however you weigh it. And however Walsh Besant and whoever succeeds them can manage the pain when that amount of debt falls due, one thing can be sure of is that it can reach par as Greenspan did, but not in real terms, only in nominal terms, not in terms of what it actually buys you. And the message has been that those involved in managing generational wealth are exploring alternative ways to preserve long term immutable purchasing power. If that isn't the debasement trade alive and well, well, I don't know what is. But as Bloomberg and others celebrated its demise, the Wall Street Journal reported on a special investigation of the thing that's supposed to make the dollar special. For decades, American financial power has rested on a single lever. Misbehave and Washington cuts you your access to dollars. The Journal, however, found that across four months of their naval blockade, Iran quietly cleared $43 billion of oil revenue without ever touching the U.S. banking system. Its customers, Chinese refineries and others settled in wat yuan rooted through Beijing's Enbridge network, their central bank digital currency platform that lets countries settle on a blockchain. The US banks never saw it happen, neither did the Treasury. And you cannot sanction a flow you cannot see, but it doesn't stop at the plumbing. Beijing also slapped 10 US defence contractors, including critical rare earth miners, onto an export control list. So oil can, we are told, flow through Hormuz. But the raw materials for the West's robot army still require Chinese customs approval. Another quiet reminder of who won last year's trade war and this year's hot war. Now layer on what happened to oil itself, because the petrodollar has a demand problem as well as a settlement problem. The ceasefire, meant to last into infinity, lasted in practice until the ever lovely container ship that had waited out the entire war inside the Gulf finally made a run for open water using official UN routes and promptly took a one way Revolutionary Guard drone into its bridge. The UN suspended its evacuation operation. The White House said it was looking into it. And yet despite the fireworks, Brent fell further to $74, roughly the level it was before the war with Iran started. Think about that. A drone strike on um, shipping in the Persian Gulf and ah, the oil price goes down. Saudi Aramco restarted its Ras Tanura export terminal after a four month shutdown. And China's crude imports hit a decade low, 6.4 million barrels a day. The question is, what is Structural and what is cyclical or even tactical? Is this about China's stagnating economy? Or about an aggressive pivot to EVs and high speed rail permanently damaging its oil appetite? We'll have to wait and see. However, if the world's largest oil importer is quietly leaving the building, the petrobid that has helped underwrite the dollar these past 50 years is leaking from both ends, settlement and demand. So to recap, the reserve currency is being rerouted in plain sight. The energy that backs it is losing its biggest customer. And some chose this exact moment to sound the all clear on the dollar debasement trade. So Next up is AI CapEx, which met the consumer this week head on. Artificial intelligence remains simultaneously the most valuable thing in the world and possibly its most fragile. And this week the fragility began to show up in places we can actually now measure. Start with how flimsy the valuations turned out to be. Google DeepMind suffered a talent heist. John Jumper jumped. The mobile laureate behind AlphaFold defected to anthropic days after Gemini's engineering VP left for OpenAI. The market's verdict? $225 billion off Alphabet's market cap in a single afternoon. When a few employees walking out of the door can move a quarter of a trillion dollars, you're not looking at a fortress. You're looking for talent agency that would make a World cup soccer team blush. Then the bill landed on the doormat. It turns out that when the hyperscalers spend hundreds of billions hoovering up the world's memory chip supply, the chips for everything else get scarce and expensive. Who'd have guessed? So Apple was forced to raise prices across the MacBook and iPad range, blaming memory costs it could no longer absorb. And Wall street wiped $250 billion off Apple as well. Microsoft followed suit, raising its Xbox price by as much as $150. The AI tax is no longer an abstraction on a Capex slide. It's being passed directly to the consumer in the form of an enforced upgrade cycle. And investors are suddenly asking one of the most basic questions in economics. How elastic is demand when you make people pay more for a thing they didn't ask to upgrade? And the funding side is wobbling too. Reports surfaced, uh, that OpenAI is leaning toward delaying its IPO to 2027. And in Tokyo, SoftBank, which had pinned its hope on a near term liquidity on the OpenAI payday, fell 14%. The Korean Kospi tripped an intraday circuit breaker, down 9% before closing off nearly 6. Earlier in the week, the same index had swung 6% in a session. Micron's earnings were treated as a referendum on whether the whole revolution is actually real. And it's not just in public markets. In private markets, the bubble remains in good health. Gantz is in talks to borrow 20 billion for AI infrastructure. Not to be left out. Recently, IPO'd SpaceX is pitching for another 20 billion in debt because once your investors own enough of your equity, you ask them to lend you the money instead. Instead, Chinese model maker Zhipu is plotting a Hong Kong listing after a 2000% valuation move since January and LG up 13% on a rumor its executives were visiting Nvidia to discuss physical AI and robotics. When you have Jensen Huang/ Robotics in your corporate comms word bingo card, you know it has to be value accretive. So a boom funded by debt, held together by a few defectable geniuses, priced on a rumor and a resignation is now sending its bill to consumers via Apple and Microsoft. At the same time, its marquee IPO has slipped a year. This kind of volatility cannot persist. The question is whether it spreads to adjacent markets or just quietly fades. I wouldn't bet the house on the quietly bit. Finally this week, the most parochial of investment themes perhaps, but it's about the UK's sovereign risk and what my podcast guest this week called its buffoonocracy. The facts. Briefly, because politics is really just the wrapper here. Geir Starmer is gone, pushed out by his own party, and Labour has skipped the inconvenience of a contest in favour of a coronation of king Andy, Britain's seventh prime minister in 10 years, by way of benchmark. Italy has only managed four. But the investment signal wasn't in the drama, it was in the price. Gilts rallied on the news. Not relief at a new direction, but relief at swift coup was affected over weeks of awkwardness and democratic process. That is the the bond market pricing a swift governance action, not a new policy that has yet to come. And, um, governance is exactly Douglas Carswell's argument in the podcast. The Vote Leave campaigner I spoke to, now running a think tank in Mississippi, claims that 30 years ago the powers of the Prime Minister's office were quietly handed over to the judges, the Civil Service, the Bank of England, the quangocracy. So whoever arrives at number 10 finds they are in office but not in power. The levers in number 10 aren't connected to anything. Hence it's not a serious country run by serious people. For this reason, Carswell thinks the catalyst for real reform won't be political. It will be financial. It will be in the form of a guilt crisis. The moment international lenders say no or yes, but at a punishing price, the maths forces a 5 to 10% cut across the board in fiscal spending. He calls it the least bad option. A 1979 moment that finally lets someone tell truth to the public. His analogy is that it's Dragon's den for governments. The moment a stranger who owes you nothing decides whether your numbers add up, there's no point in blaming the Dragons for not investing in you. As he said, his evidence that policy actually moves the needle is Mississippi itself. The old punchline state, now growing roughly three times as fast as the UK and ahead on GDP per capita. On the back of deregulation, a flat tax phasing to zero and energy, a third of UK pricing. Mississippi and Alabama now build more cars than Britain. His blunt message back home, the laws of physics aren't different. Here you abandon the free market. We embraced it. A simple but uncomfortable message. The asset the entire financial system calls risk free. The government bond, um, is the one asset whose issuer this week looked least capable of governing. Ultimately, as with any falling indebted entity, the lenders will ultimately have to take charge. The irony is that the man who last year said we should not be in hock to the bond markets will now have to confront them head on. So there it is. A debasement trade that's been declared dead while the debt that justifies it grows. A reserve currency being bypassed in its plumbing and abandoned by the world's biggest oil customer. An AI boom funded by debt and now taxing the consumer to stay airborne. A sovereign bond complex whose issuers can no longer actually govern. The assumption sitting silently underneath every discounted cash flow, every credit rating, every risk free rate that the existing order holds is the assumption now under quiet repricing, that is the whole game. Not which asset goes up next quarter, but whether the thing you're using as your yardstick is still a yardstick. The very nature of our money and what it buys you, however, the system will likely hold through this parliament. It took Argentina decades of decay before it reached for a chainsaw, and we're not quite there yet. But the direction of travel could not be clearer. Uh, in times like these, the boring discipline of preserving purchasing power by owning what is genuinely scarce stops being an outlier for the conspiratorial loons. It becomes a core thesis of preserving your purchasing power. Thanks for listening. If you're still listening, you might like what I post on Substack, where I write hypernormal times or One Word and post other content for subscribers. I dive a bit deeper into the financial world we inhabit and uh, attempt some joined up thinking about how we investors might gain fresh insights into what it all means. Please check it out and subscribe. It only takes a few seconds. Thanks for listening and hope to see you over there soon. Brought to you by Progressive Equity.