Episode 52: Macro, MMT, Gold and Inflation with Frank Holmes

Ben Lakoff, CFA
July 12, 2021
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Frank is the man, and he is really well known for Gold.

This was recorded around the first of march – but the macro and gold views here are evergreen and still valid. Macro, MMT, Gold, Inflation, the changing capital markets… We cover a lot.

If you’re a fan on the channel, you’ll notice that we cover quite a bit about alternative investments and this ends up covering gold quite a bit. But each guest really comes on with their own unique view that I find absolutely fascinating.

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Show Notes

0:00:00   Welcome and context

0:02:10   What is your background?

0:03:50   What is going on right now in the macro investment markets?

0:08:05   Why people don’t understand inflation?

0:09:50   What are your thoughts on MMT?

0:12:21   What does the world like 10 years from now?

0:17:40   What are your thoughts on gold?

0:20:58   What are your views on Bitcoin?

0:23:00   In what scenarios gold could outperform Bitcoin?

0:27:30   Where can people find out more about you?

Show Links

Frank’s Website

US Funds on YouTube

Episode Transcript

Ben: [00:00:00] Welcome to the alt asset allocation podcast, exploring alternative investment opportunities available to the everyday investor. Here’s your host Ben Lakoff.

Hello and welcome to the altar asset allocation podcast. Today’s interview is with Frank Holmes. Frank is the man and he’s really well known for.

This was recorded around the 1st of March, but the macro in gold views here, evergreen and still very, very valid. In this episode, we talk about macro MMT, gold inflation and the changing capital markets. We cover a lot. If you’re a fan of this channel, you’ll notice that we cover quite a bit about alternative investments in this always ends up covering gold quite a bit, but each guest really comes on with their own unique view.

And I find this absolutely fast. Before you listen, please don’t forget to like, or subscribe to the podcast or even better leave a review. If you’re watching this on YouTube, please subscribe to the channel or give it a little thumbs up. This really helps. And it really helps people find the podcast and keeps this thing going because I really love it.

And it really helps. So thank you. All right. Frank Holmes, enjoy.

Frank, super excited to have you on today. Welcome to the alt asset allocation podcast as Greg. Yeah, super excited. We had an interview scheduled earlier this week and you had a tire explode on your car. We’ll push this one in later on the week.

Glad, glad we could fit it

Frank: [00:01:27] going 70 miles an hour on that Texas road. Thank God. It’s a great one. Pop pop and have to skate over to the side. And you know what shocked me about it. Some guy pulls up behind me and the blue lights are going off. It’s not a policeman. I said, maybe someone wants to try to tow your car for $400 or something.

And it was a Texas road system that go around to help people if they have an accident. And I wanted to give the guy a chip and he said, no, it’s your tax dollars at work?

Ben: [00:01:54] Oh, look at that. Who says we don’t have good infrastructure? Look at that right there. Well, we’re short on time today and I know that.

We’ve got a ton of things we could cover, but before we jump in for my listeners who aren’t aware of who you are, can you give a brief background who we are and what you do?

Frank: [00:02:13] Well, I’m a text. Can, you can tell by my accent we all come back. 31 years ago, I moved down to Texas from Canada and I am a a full fledged Tekscan I, a dual passport American Canadian.

And with that, I was a research analyst when I first started the business in 1978. And it was a quantified approach to investing that I built at institutional desk for a gold star fund manager. And that’s what I became known for gold. I was the first public company to go public deal. I did was Franklin Nevada, which is the largest gold royalty company in the world.

And then I got sick and tired of cold weather. I don’t really like it to ski and the opportunity was moved to warm Texas. And in 1990, it looked down to here block control of us global. And we are a unique boutique that had the first Novo gold fund. We’re known for the world of golf. And then a couple of years ago, we launched the first public company that was mining Bitcoin, Ethereum, because we couldn’t launch it ETF.

And in the past 12 months I’ve had an incredible success as result fortunate with Jetsons.

Ben: [00:03:20] Oh, yeah. And these, these are words that should ring a bell and a lot of my listeners audience that’s for sure. And before we dive into those in much more detail I wanted to just start kind of setting the scene.

This is being recorded the 1st of March. As I told you, I’m a little bit behind with publishing these things, but paint me kind of a little bit of the macro picture what’s going on right now in the greater financial market.

Frank: [00:03:43] Every week we publish the investor alert. And as a theory that we have of lucky.

Capital markets like you look at Gainesville give me three strengths and three weaknesses that have affected a portfolio. So we have China Flon. We have Eastern Europe, we have global resources, we have gold and we have the only luxury mutual fund by the way, luxury goods is crushing the, and but coming back on this sort of process, and then we look at economic data points coming out next week, which could be either an opportunity or a threat.

So that’s the SWOT model comprehensive, but concise. And we write about it every month is called PMI purchasing manufacturer’s index. It’s a very important leading indicator that we’ve done detailed regressional analysis for 20 years, that it is a good predictor of commodity demand. So at that impacts are our comments on gold at an oil, anything to do with commodity.

So what happened last year? When the money printing startup was first sort of China, their PMI was collapsed. And then all of a sudden it did a V-shape and can back over 50. And it’s in the high, high fifties America turn and Europe is still lying. So we saw this and what we said last summer was there’s a boom taking place in commodities.

Now we have copper at an eight year high and it’s because whenever the one month is above three months, that means commodity demand is picking up to make motors. So copper goes up or cars are on the road, whatever it is is that it’s a very helpful leading indicator. And we are still very robust and strong.

Europe has come off the tree. America’s robust and healthy. China’s healthy. So commodities as a whole are going to get tuned to be strong. And then because of our China bond, we believe that there’s tremendous logistic issues, huge problems. And so ships are waiting off shore in LA one month, it gets stuff loaded.

So we’re going to see supply restrictions. But demand rising again. So we’re going to get this inflation and we believe like John Williams and shuttle statistics. If you use the algorithm that was used in 1980, when gold hit eight 50 and oil at 50 bucks, an ounce and silver hit 50 to start $50 a barrel and silver hundred dollars an ounce.

If you look at that, algorithm has been changed several times and applied it. Inflation is. So I doing some renovations and guess what? The PROPRICER is up a hundred percent steel prices are up 70%. What do you mean? There’s no inflation? I can tell you there’s inflation everywhere. So we believe that at still rates are negative and that we’re in a trend where we’re living with negative, real interest rates.

And that’s what makes Gordon interesting asset class. The other thing we write a boat is MMT modern monetary theory. Which is being practiced by the G 20 central bankers. And you can see that for 20 years, gold has been up 80% of the time and always a negative narrative every time gold, correct string this pattern, but it’s been up because MMT is growing in presence and the, basically the central bankers have a country.

In a forms, a race like OPEC cartel, and they can turn a print money. So there’s money printing is different in South Korea versus Canada versus here, but it makes real assets very attractive and it makes disruptive items like Bitcoin extremely attractive.

Ben: [00:07:11] Yeah. And I think it was Jim Rogers that described MMT is more money today and that’s the perfect, better acronym than modern, modern monetary theory.

Frank: [00:07:21] I love that. I’m going to pull it up.

Ben: [00:07:23] It’s great. It’s because it’s, it’s completely accurate.  This inflation, why do you think most people don’t understand inflation? You know, this is touted as like the hidden tax. Why do people not understand that inflation is in fact here it’s just not evenly distributed.

It’s not showing up in the way that we expect it to show up. Why is this so confusing for people?

Frank: [00:07:47] Because if you buy TVs cheaper each year and they don’t realize that’s not happened with iPhone. There’s your inflation. It’s much more than 1.5%, 2%. And, and so it’s a bit delusional, but I think that people really want to trust the government CPI numbers and they don’t dig down and know there’s an algorithm behind it.

And the algorithm has his own narrative biases.

Ben: [00:08:10] Yeah, absolutely. It’s like this bucket is goods and services and goods have gone down in massive deflationary impacts in these services like healthcare or education have gone up exponentially. The whole thing kind of levels out in the middle.

And there’s not that much inflation.

Frank: [00:08:26] No. What shocks a lot of investors when I try to tell them that for the past 20 years, this century gold is up 250% over the S and P. No, no. Yes. It’s been a better asset class, better than buffet. It’s all performed by and the gold Welty companies, which I favor.

And we have a quantum gold ETF in New York called Galway, and it’s 30% wealthy companies. Well, Franklin Abada has in silver Wheaton. Now Wheaton precious. They’ve crushed per Chara.

Ben: [00:08:59] Right, right. Before we dive into gold in a little bit more detail, I mean, you mentioned MMT, you write about MMT. The enemy of MMT is inflation.

Just to tease out a little bit more thoughts on MMT. it’s inevitable at this point. I mean, that’s basically already here just in a, like we’re ramping up into it, but what does the world look like? That MMT is happening by, by real assets? Don’t hold on to dollars,

Frank: [00:09:27] buy real assets, buy real companies.

The other thing is that a lot of people really don’t get it, that the Swiss motor bond, no one buys it. So they buy it themselves. They take this money and they buy Microsoft or you buy Facebook. They buy real businesses and they buy and they own 50% of their own markets. You look at Japan, they’ve used ETFs.

Do this. And that, that to me is most interesting to see how that’s taking place, that they own 50%. So what we see here take place in the us is that the federal reserve this past year has used ETFs to go and, and massage where the yield curve. And so they can’t directly go and buy. So they bought junk bonds through an ETF and they bought corporates.

So when rates collapsed they didn’t happen in that secondary market and munies, the grow over cost resorts are burdened. So they came in, they bought tax-free muni bonds and bought EDU. So that’s another form of more money today going into massaging work. The interest rate scenario is and, and I think that investors are really only sophisticated at that lends itself, that this phenomenon that’s happening with Reddits or these other platforms.

If there are so many young people that worked at city group banks of the world and got their series seven, or took an investment course or now changed their jobs, but they have all this. They have been going on the internet and they have been turned around and doing all their research. Something like 50% of the research comes from the internet they learn from, and also podcasts.

So they’re listening to podcasts that theater shows and YouTube, and they’re going out and they’re trading markets. So I think that that’s another really important part of price discovery that helped capital markets are changing positively.

Ben: [00:11:18] Yeah. They certainly are changing. And with all of these. These other macro things at play.

Obviously you don’t have a crystal ball. None of us do. And there’s buyers and sellers on every market and the market has this way of proving you, making you feel stupid all the time. Right. But where, what does the world look like in 10 years with MMT, more prevalent? Massive funds, scraping Reddit and Robin hood data and front running link.

Like what does the world look like in your view?

Frank: [00:11:51] Well, I think you have to take a look at where the biggest disruption is going to take place. And I think that that will continue the success of Kathy woods arc ETS. It’s just a normal, their active ETFs is focused on five different asset classes that are being very disruptive and blockchain is basically the theme that she has in Bitcoin is a subset of that.

Along with robotics, along with space. And I, and, and storing of energy. So I think our global resource fund made a big pivot, a focus not on, on, on the big index of oil stocks, and we don’t sort of energy. And we’ve been able to question all the other indexes in performance. So it’s being able to recognize what is going to be disrupted.

And have that first mover advantage will be very important. And we’re, and who’s going to be the leader. Remember when we first got the internet was asked James, what would happen to him? You’re just gone. Then it was Yahoo, but what happened at Yahoo? Google basically displaced them. So we don’t know where it’s going to be.

Exactly. But you have to recognize that there is a disruptor transformation going on. And I think it’s great for your brain to be analyzing and asking questions. And they say, that’s the biggest way to not get Alzheimer’s. You know, if you challenge your brain and the look at these things. So Katherine Woods, she takes her ETFs that go from a couple of hundred million to 3 billion, and then they go exponential to 15 billion.

Now, 60 years. And she’s focused on these disruptive industries. So I think that’s important. I also think that you have to look on the element table and say, where are the shortages of what commodity. And positioning yourself because the ESG, which is a new phenomenon, is making it much more expensive to explore, to develop, to produce the ship, any type of a commodity, and you need commodities.

You need that. The, for those. And if you want to have a supercharged battery, you’re going to need other types of elements of the periodic table to enhance that, that conductivity. And they’re not there. So why do you, what happens when we take a look at hopper? Oh, we’re going to have to spend a trillion dollars in infrastructure.

Guess what copper is going to double from here? Why? Because of supply of copper out of Chile is dropping and unions, they’re making it more disruptive. The world is churning. And I think a trillion dollars came out of Europe or bonds that are to try to stimulate the economy if they were carbon neutral footprint.

So these are, and we say there’s an odd prospectuses government policies are a precursor to change. Thus, we monitor both fiscal and monetary policy. And they are bifurcate either as monetary. If the circle monitor is money printing or real interest rates and fiscal is regulations or taxes. So you can see where the funds will go and where people will go by just simply creating a, a macro model.

But most people get caught up. I’m a Democrat or Republican. I can’t say what that person said. They miss it it’s has nothing to do is government policies, a Bama care? Oh, it’s so bad. It’s so bad. You have want to run out and buy the healthcare stocks. They grew at a 40% CAGR for eight years. You made a ton of money on the neck.

And, and along comes Trump and everyone’s negative on Trump, et cetera. But guess what? Everyone discovered the stock market, that’s what they did. And and he turned around and said, you can’t come up with a new regulations, much. You drop your regulations. And so policies that Obama brought in under crowded funding, such as SPACs got elevated, never took off.

I can take a look at other formations of capital, but under Trump they told me. So it’s we want to be negative on them. Okay. Do the opposite. There’s a hurricane hitting Florida do not buy insurance stocks. What do you want to buy? Housing stocks, Rebuilders buildings, docs. There’s a, whatever, there’s a crisis or a big negative narrative.

There is an opposite positive. That’s what your brain to do. That’s what Charlie Munger calls. Second level thinking. And that’s what makes it.

Ben: [00:15:58] Second level thinking is very, very important. And another Jim Rogers is an, I guess is white. Why G where the Chinese word for crisis is the same as opportunity.

Right. And I think of that. Second time I’ve thought about that, that w during this, during this interview. I think it’s important to think about these a second order. Decision-making with all of this. And then the disruptive new technologies. I think this is very valid, but I kind of want to take the reverse now and, and go a non.

Not very disruptive, not very new technology and get your views on gold. We talked about commodity shortage and all of these things, but what about the asset? That’s maintained a stored value for thousands of years? What are, what are your views there?

Frank: [00:16:49] One of the big parts of gold, it’s a bite.

Once again, it bifurcates for demand. We look at demand and I’ve characterized it as love, trait and fear. The love trade is, is jewelry demand, but there’s a lot of emotional attachment, not just getting married, like the wedding season. So prominent as a big demand in India. But this is the year of the ox.

So the year the bull. So if you’re born in this period, every 12 years, they’ll use a year of the bull. Well, guess what? You’re going to get a gold, gold bull and in China, and if you’re a very wealthy family, you’re going to get a bigger gold bull. So there’s an interesting phenomenon took place that we go back 30 years ago, shouldn’t be that China and India is actually known for 40% of the world’s population.

Back 30 years ago, India, wasn’t a bigger consumer of gold from. And when we look at the two countries, there were 10% of all demand for adults today. They’re almost 60%. Why because the GDP per capita has it’s bloated that China and India, 30 years ago, didn’t even register in the top 10. And now it’s China, India, America, and then Japan.

And then you see Germany. So they’re rising GDP per capita means they buy more gold for love. They buy more grams of it and different reasons for it, but that’s, what’s important. So every time vocalists were a big correction, the love trade. Every time it goes up because of the fear trade dramatically, a slow down in their buying.

What happened last year or the year before we had the six month runs where gold made new highs and it would predominantly fear. Well, what drives the fear? Negative real interest rates is a shortest thing that in a quite a day, negative real interest rates. So last year, this time rates are almost 2%.

They followed a 50 basis point. So I tend your government bond is is yielding you at the same 10 50 basis points. But inflation is running at one and a half percent. So you’re losing a hundred basis points. Gold starts taking off. And, and so now we see that the 10 year government bonds elevated back to almost one 50.

So what does that mean? It puts pressure on Gorge, gold shorts. But this is just the, the Gary’s of the market. But this short term, longterm is a massive 40% money printing and not just by America, but rest of the countries of the world. And historically it shows up about three years later. So after 2008, 2009, the federal reserve expanded his balance sheet by, by $3 trillion.

Now we’re talking about $6 trillion after this is all finished. There’ll be a trend $10 trillion expansion. You’re going to see gold and it’s going to double from these levels. And we’re going to see, I think go to 4,000. It just doesn’t go straight.

Ben: [00:19:36] Yeah, that’s a bit of those short-term nature and sh instant gratification world that we live in.

Right. I bought it now. I thought it was going to go up, but a love or fear driving this. I love it. I love it, but yeah, the macro factors at play here, you kinda gotta be bullish. I’d be curious. I mean, you talked a bit about Bitcoin and Ethereum mining. But I’d be curious, your views on Bitcoin.

Is it a, just a higher beta play on the gold inflation narrative or is this, does this kind of fall into the disruptive new technology bucket?

Frank: [00:20:10] Well, it’s an alternative asset. There’s no doubt. Just like artists too. So you can, there’s many different types of categories and subsets of what alternative assets then the normal bonds and equity.

And Bitcoin, you know, evolved because of the money printing. So do you have the protests on wall street? The AOC crowd protesting across America and then the opposite side where the geeks and they said, okay, we’re going to go create a digital money. But what’s interesting is they were used to digital money.

Like I said earlier, I was sharing with. That’s so many, these kids grew up being successful like gaming, and each of the software providers have different games gave you rewards, if you good and you can upgrade it. So there’s an inborn that they’re so used to it. I think the other phenomena is the idea of digital wallets, digital a of experience.

One of our endless last year was in China or 18 months ago, and he was commenting that credit card didn’t work and the store to get a toothpaste and toothbrush wouldn’t accept cash. They wanted the, the digital wallet which, so we’re seeing things evolve and change this way. So I think that you just have to be able to embrace how fast things are changing and how fast you can move with.

Ben: [00:21:24] Yeah, and I think that’s valid. In what scenarios. A lot of my listeners have a little allocation to both gold and Bitcoin, as well as all the other assets, you know, as part of the broader asset allocation. But in what scenarios in your mind would something like gold massively outperform something like Bitcoin or vice versa?

Frank: [00:21:47] Well, it’s a good question. I. Really sat down. I just knew that something was happening. I was trying to launch an ETF and I realized quickly do the concerns of the SNC and then encounter the OSC was anti money laundering laws, a the AML, you know, and then it became KYC. So I had this knowledge and I sort of learned, and the big part was what my pivot move was.

The CEO. That owns a controls, fidelity and fidelity is a $7 trillion company. And she has her CFA and she never, Abigail Johnson never speaks at investment conferences, but she’s speaking at a crypto conference. And I said, well, that’s a pattern interrupt. There’s something happening here. And that they’ve been mining for awhile.

And that gave me the sort of unique legitimacy and why blockchain is going to be so important as a, as an asset class. And so with that, I had the knowledge and we went out as the first institutional investor. I became the chairman of high blockchain technology. And when public, it was a raving success.

Crypto went through the roof. We raised $200 million, but now they give us lots of money. We wouldn’t start buying mining Ethereum at the beginning and then Bitcoin. And then we have the crypto winter, and now we’d come back. That hide last year was the best before in of all the crypto stocks, it was a crazy 2500%.

Ethereum was up 470 Bitcoin was up 300% and gold was up 25%. What a board. But gold is still a key component of always advocated. That should be 10% of a portfolio goals. DNA of volatility is, is the same as the S and P 500 Bitcoin is like Tesla. It, the number is five times greater. And if you look over 10 trading days, it’s even more phenomenon that how volatile Tesla is because it’s disruptive.

Bitcoin is disruptive. Bitcoin is new and it reminds you of like Andy Warhol art at the beginning was very disruptive. A painter. What he did is a lifestyle and his stuff was all, you can’t do that well that now print the cable and a thousand dollars, the five different colors in a thousand different things.

Which a quarter million dollars. So as more people want to go buy limited supply it rallies what’s different with Bitcoin is what’s happened with technology is called fractions. So you can get a Schwab, a fractals of a stock that’s trades at thousands of dollars. Like Berkshire you’ll have to wait.

So Robin hood allows you to go and buy a franchise. Of Bitcoin and Robin hood. Interesting enough, a long as toolbar allows you to buy gold. You don’t see that at fidelity or swap, but gold is an asset class and then GRV comes out and you can buy fractals. You can buy $200 on Robin hood of the GLD. So you’re getting a fractal of bullion.

So these fractals and a limited supply means these prices are going to trade higher. According to Nick caps law. And this Metcalf’s law is a very blunt. Way of looking at capital markets. When you have an adoption like mobile phones with the successes. I say that Bitcoin is part of that alternative asset class.

All these kids grew up digital money. It was easier if I’m doing dot and just like GameStop. A lot of them shop at games and Peter Lynch, a famous money manager from fidelity. He said, you should buy stocks that you, that you like, like you use your iPhone by fate. I started by apple. And if you like Starbucks and you drink the coffee, you should buy.

And anyone that’s followed, that model has been very successful. So all these kids come along and find out this big, short researcher on GameStop, they’re more educated. They’re stuck at home. They’re using Robin hood. This is a natural, they knew about the product like buying Starbucks. They knew, but it tastes like.

So I see these are new phenomenons happening. And for me, it’s very important. The operative word is price discovery, a real capital markets. The wisdom of crowds needs price. And that’s what’s happened in the past year.

Ben: [00:25:54] What’s that and continues to happen today. We’re clearly in price discovery mode.

Well, Frank, I know your time is limited today, but I really appreciate having you on the show today. I’ll link up a lot of the things we talked about. But where can my listeners find a little bit more about you? Or where would you like to send

Frank: [00:26:11] them? Well, go to U S Our blog goes out to hundreds hundred thousand people around the world in 80 countries.

Frank talk is a subset, some of my sort of thoughts and opinions on it. It’s free. We do it as a discipline money management discipline every week that the crystallized, what were the factors last week for next week? And so you can live the curious and how we look at markets and I think as easy pass to read and you’ll find it entertaining and sort of puncturing opinion.

And that’s probably the best way. And you go to our YouTube. We do a lot of educational videos. There’s competition in everything in America, not just NCAA football and basketball but there’s also in mutual funds. Uneducation and we’ve been recipients of our 90 awards for in a competitive arena for educating investors.

So you can see those videos that are off our website, us funds.

Ben: [00:27:03] Awesome. And I’ll link all of those things. Frank really appreciate you taking the time and coming on.

Frank: [00:27:08] Happy investing.

Ben: [00:27:10] Awesome.

There you go. First off. Thank you very much for listening all the way through. I hope you got a lot of value out of that conversation as always.

You can find show notes, links, and [email protected]. Please share this with anyone you think might be interested and derive any value from this conversation. And as always, you can reach out to me for any feedback or questions. Please give the video a like, or even better subscribe on YouTube or your podcast player of choice.

This really helps others find the podcast or the video as well. Thanks a lot. Hope everybody has a fantastic day and stay safe out there and invest wisely

Ben Lakoff is an entrepreneur and finance professional. He has developed strong global finance experience through 10 years of international assignments in the US, Brazil, Afghanistan, Southeast Asia, Czech Republic and through the award of his Chartered Financial Analyst (CFA) certification.