Market Insights and Dollar Milkshake Theory

Hello, everyone, and welcome back to another episode of Milkshakes, Markets, and Madness. As the name indicates, this is a show where we talk about the financial markets, we talk about the madness surrounding those financial markets, and we talk about it all through the lens of the dollar milkshake theory, which is a framework for understanding how the monetary system is designed, how it works, and how it may react in a sovereign debt crisis. And even though we have not had the sovereign debt crisis, the framework has helped me tremendously to understand and navigate the markets. And that's why we talk about it. And I hope it has helped you as well. So it's October 13th. We've only got a couple more weeks until probably the most maddening election of all time, which obviously has tremendous impact on financial markets. But so far, despite the madness surrounding that, markets have stayed. you know, fairly strong. We obviously had a lot of kind of excitement and drama in August and September, but so far here in October, things have been relatively calm. Now, I don't expect it to stay that way between now and the end of the year, but I'll take it while it is there. But what I thought we'd do just really quickly this week is we'll go over the highlights. And again, I apologize. I think I mentioned the last time sometime these slides that I upload for the podcast come out formatted differently than I have them created on on uh in my uh in my computer but such is life anyway um so this week we had a lot of stuff come out but again you know it's the week started off with you know markets were down Monday morning but then for the most part rallied uh the rest of the week the CPI came in higher than expected kind of midweek And normally that would have led to rates going higher, dollar going higher, many assets potentially selling off as a result of the idea that rate cuts may be slower than expected. However, jobless claims also came in higher than expected. And so that indicated that perhaps the economy has continued to weaken and those kind of offset each other. On Friday, PPI came in higher than expected, but not dramatically so. And again, not such in a way that could derail, at least from the market's perspective, the expected rate cuts. Gold closed the week at 2655, 56, something like that. And so it was basically flat for the week. But, you know, it traded all the way down to pretty close to 2600 again early in the week before the data later in the week. Silver, kind of a similar story. It closed basically right where it started. But it also had a big drawdown early in the week before rallying to the close. Oil basically closed flat, but it had also big swings in both directions. It was up earlier in the week. It was down kind of middle of the week and then rallied in, I think, Thursday, Friday. The Karanda closed flat. And the VIX was flat for the week. But I have to say the VIX is sitting at 20, and it feels to me like it's just a beach ball being held underwater. I think there's a number of reasons why it could go higher, whether they're domestically. politics, whether it's markets, whether it's central bank related, whether it is geopolitically related, whether it's combat situations in the Middle East or Ukraine, or it just feels like the VIX wants to go higher. And then equities were up approximately 1% for the week. I think they were all the Dow, the S&P and the NASDAQ were all up around 1% for the week. NASDAQ. has not made it back to its all-time high yet, but the Dow and the S&P closed at all-time highs. But what I thought we would do this week is I know earlier this year, I mentioned, John and I mentioned doing a milkshake masterclass. And that's kind of gotten pushed to the wayside just due to being very busy with other projects, you know, some new clients. the craziness surrounding the markets. And so this is unfortunately gotten pushed off. It's not going to happen this fall, but it is going to happen early next year, probably late January or early February. So everybody that's already kind of sent in and signed up, we have your email, we have your information. But what I thought I would do today is just go through why I even want to do this masterclass to begin with. What's the point of it? And I'll give you a quick little preview. of what I think it will be about. And then you can decide for yourself whether or not that's something that you would like to participate in. But here, before we get into why doing a master class. I've had so many people ask me, why all the talk about the milkshake? What's the point and why does it matter? And here's the thing. It matters because it is a framework for how the markets work. Now, if you're not interested in markets, if you're not interested in investing, if you don't care what happens from day to day, week to week, or even year to year, then perhaps it doesn't matter. But this is a show about financial markets. I work in the financial market. So it's a hugely important thing to me. And the framework has been incredibly helpful to me. And so as it relates to my job, why does it matter? Well, it matters because to me, it is the dollar. And what the dollar does is one of the most important things you can think about when you think about markets. Now, you'd look at this chart here. This is the Dow Jones over the last 100 years. And what do you see? You see that there's periods of time where the Dow goes up, long periods of time where it goes up, and you see long periods of time where it goes sideways or even goes down. But if you step back and you quote unquote zoom out, you can see that asset prices tend to go up and to the right. And we could do this same chart with a number of different assets, a number of different indices around the world. But in general, Assets go up and to the right. Now, that's an outcome of a couple different factors. Number one, it's human ingenuity and innovation and growth associated with being more productive. That's one. Another thing is that people continue to be born and there's been a demographic trend of increased people on the planet. And so there's increased demand for the commodities and the assets and the... the inventory of things that go into stock prices. And so that pushes that that's a positive trend for asset prices. But the other thing, oh, the other thing that that leads to asset prices going higher is over long periods of time, fiat currency loses value. So in general, you don't want to be sitting in cash. You don't want to be sitting in fiat currency, even if it is the dollar, because all fiat currencies, including the dollar, lose purchasing power over time. So you want to be in assets and ride this wave higher. But having said that, how many people live to be 100? The average person does not live to be 100. And you can see by looking at this chart that there's sometimes very long periods of time where assets don't go up and to the right, whether it's 18 years, 25 years, 17 years, or even 11 years. And so you can't just plan on without any thought going into it that asset prices are going to automatically go up and to the right because fiat currencies lose value. And so if you have to try to figure out how to navigate those down periods, then you have to figure out what can cause those down periods. And that's why it matters. One way to kind of get out of from underneath the risks of the drawdowns is to have diversification. Don't put all your eggs in the stock market, right? Don't put all your eggs in one basket. Don't just buy the stock market. So this pie chart, this is a very rough estimate of a diversified portfolio that's somewhat representative of the permanent portfolio. And the permanent portfolio basically says if you put 25% of your money in cash or fixed income, 25% of your money in stocks, 25% of your money in real estate, and 25% of your money in commodities or specifically gold. then you're going to do really well. You're going to be prepared for anything. You're going to make money almost all the time. You're not going to lose money very often. And over time, you're going to do really, really well. You basically won't go broke with this portfolio. And here's the thing with this portfolio. Over the last 50 years, now the black line is a combination of US stocks and international stocks. And the gold line is the permanent portfolio. This is from 1971 to 2021. So it's a 50-year period. It hasn't been updated in the last couple of years. But the bottom line is that whether you owned all stocks or whether you owned this permanent portfolio, you got basically the same return. Now, you trailed at the end, but there was periods of times where you were ahead. There was periods of time where you trailed dramatically in the late 90s, but that was mainly due to the dot-com boom. But the big difference is you don't suffer the massive drawdowns. So diversification is a big way to avoid the drawdowns. But if you want to avoid even more of the drawdowns and you want to actually capitalize on some of them. then there's other things you need to do. And that's when analysis comes into it. Rather than just putting this permanent portfolio into your portfolio and never thinking about it, if you want to try to outperform and take advantage of some of the dislocations on the time, then you have to have the tools to analyze the markets. And I think the milkshake theory, the milkshake framework is a great way to analyze that market. But the biggest reason is because the most important factor that pushes asset prices higher is liquidity. Earnings don't matter as much. Innovation doesn't matter as much. The biggest thing is liquidity. And liquidity is largely a reflection of monetary policy and relative fiat currency levels. The bottom line is that despite all the arguments to the contrary, fiat versus fiat does matter. Even if all fiat currency gets debased over time, the relative levels of fiat versus each other do matter because they greatly affect liquidity. So that is why the milkshake matters. Now, why do a masterclass? Well, part of the reason to do a masterclass is because I'm very lucky. I get the opportunity to go to conferences and present. I get invited to go on podcasts. And I'd love the opportunity to kind of explain my views during those opportunities. But here's the thing is, even in the best case at one of those conferences, maybe I have 45 minutes, maybe an hour at most to kind of go over everything. And oftentimes it's more like 20 minutes. And sometimes if you're on a panel, it may be just one or two comments that you get to make along with everybody else. But the problem is, is not only do I not have an hour to explain. the milkshake theory when I do get the opportunity to speak at these conferences. But there's several different factors that go into the whole framework. And I could spend an hour or more on each of those individual factors. So the point is, I never really get the opportunity to explain the whole framework or the whole theory in great detail. And so that led to the idea that maybe there's a way. that we can do it, that I can really drill down into each of the different factors. Now, here are just some of the different factors. First of all, what is money? I mean, the reality is, if you ask people what money is, everybody will say that they know. But if you actually ask them for the definition, they start to stumble a little bit. Now, some people are better at it than others, but a lot of people, it's just very misunderstood. You know, that's a big part of it. You know, monetary history is a big part of it. In many ways, I think monetary history is misunderstood. The design of the monetary system is incredibly important and one that I don't think people have a proper respect for. The euro dollar system is probably the key to it all. And once I stumbled onto that, everything started to fall into place. And yet it's still one of the most misunderstood and perhaps unop... Things, one of the most important things that people are unaware that even exist. Geography, geopolitics, real politic, that comes into it. That's a big part of it. The weaponization of money, the weaponization of the dollar, specifically the U.S. dollar and how the U.S. can use the dollar as a weapon against both friends and foes is a big part of it. And then finally, you know, a transition to a new monetary paradigm or system. Like, what would that look like? What would have to happen? for that to take place? And what would the transition look like? And so that's part of it as well. So again, I could do an hour presentation on each of these individual bullet points and still not cover everything. So again, that's the idea behind it. But let's take a look at some of these. So the whole question about what is money? Well, even if you think that you know. And even if you're steadfast and very dogmatic about your opinion about what money is, that doesn't change the fact that it is extremely misunderstood by many, many, if not most people in the world. And that misunderstanding gets translated into how they make decisions in the markets. And then that affects your portfolio as well. And so. one of the things that I, that I, I like to do is kind of really dig into this and talk about what money is, what it isn't, what it can be, and also what it is versus what people want it to be. That is a very big one. But, you know, in some ways there's a big debate of is money, you know, the most marketable commodity? Is it something that just was naturally selected in nature or Is it what the king or the sovereign or the government says it is? Right. And, you know, there's strong opinions on both sides. And I know there's a lot of people who have dug their heels on and on which side is right and which side is wrong. But my point of it all is you got to understand both sides of it. So, you know, there's one side that says money kind of has to be something. You know, money is a tangible thing. It has to be something. And so therefore. It has to be found on this periodic table of the elements. And I can show you, and one of the things I'd like to do is go through in detail, when you look at this periodic table of contents, why did gold become money? Because out of all the elements in the universe, there are only a couple elements that actually serve or meet many of the attributes needed to be money. So that's one thing that I think would be interesting to go through. The other thing is, how do we know it's... has to be something. Why can't it just be whatever the biggest, strongest guy says it is? You know, if you're in prison, gold isn't money. Maybe it's cigarettes. Maybe it's sardines. Maybe it's something else. But the point is, is if you are under, if you are a subject of the king and the king says you owe him a certain amount of stuff at the end of every year, at the end of every harvest, or at the end of every time you do some kind of a trade, you owe him some kind of tax, he gets to decide. what it is you have to pay him. And you can yell and scream all you want. But at the end of the day, if he's more powerful than you, he can either take what you have or make you give him what he wants you to give him. So there's that side of what is money. Now, this may be the most controversial one, but this is what I actually think money is the original matrix. And I could spend at least an hour on that part of it. So I think that that's a little preview of what, again, what is money? I think that's one of the most fundamental questions if you're starting to dig into this area. But then I think there's also a lot of misunderstanding around monetary history. I think one of the most commonly held beliefs is that money was the ultimate result of barter, right? You know, we used to take a dozen eggs and we would trade those. You know, we had a chicken and it laid eggs and we took those eggs and we traded a bunch of eggs for a pair of shoes from a cobbler. And then the cobbler took the shoes and he, you know, he would use the leather and he would trade it to a saddle maker. Right. And the saddle maker would, you know, give him rope. And then you take the rope and you catch a fox and the fox, you know, you use you go catch a fox and then you take the fur of the fox. And, you know, you'd go back and. go back to the farmer and trade him the fur for the eggs. And it just went around and around and around. But the problem with that barter is that you have this double coincidence of wants, right? If you have a piece of rope and you want eggs, you have to find a farmer that wants a piece of rope that can give you the eggs. And so the medium of exchange or money came about as just a result of free market economics. And over time, that became known as money. And that became, in most cases, gold. Now, that's one very possible and very popular theory about how money came about. You know, there's other ways. You know, it could have started off that way. And then, you know, we started off with barter. And then that wasn't as efficient. So then, you know, it eventually became, like I said, it ascended into gold. So we had commodity money or we, you know, we had gold or silver or copper or whatever it was. And then perhaps we started writing letters of credit on top of that. And so it was a derivative of the commodity money. And then eventually it became fiat currency. And then from there, we know now we even have digital currency. And I think there's a lot of people out there that think the system that we have now, the fiat currency system we have now is a extremely new phenomenon. It's never been used before. It's only in the last 50 years. And it's this big grand experiment that it's going to end very, very badly. And I'm very sympathetic to that idea. And I'm not going to sit here and say that that's wrong. But I'm also not going to sit here and say that it's 100% right. Because there's been numerous money systems throughout history. They haven't always been gold. They haven't always been commodity money. And even though it's a nice story, and even though it's a nice way to explain how things happen naturally, things don't happen naturally. There's this entity in the world. that likes to mess with it. And that entity is called human people. And they like to enforce their will on things that perhaps, you know, free market idealists would prefer that they don't. But they've but but but that's just reality. And so, again, I think when you're really dogmatic about one side or the other, you miss part of of of of what the what the answers can be. This is a great book. If you have not read this book, I would recommend that you read this book. It's pretty dense. It's going to take you a long time to get through it, but it is meticulously researched and it is extremely well laid out. And it argues that debt is money and that debt preceded commodity money. And the debt has always been a part of the monetary system, regardless of what you call it. And it kind of takes the whole barter idea. The idea that we used to trade eggs for shoes and then shoes for cows and et cetera, et cetera. It kind of takes that idea and kind of throws it out the window, to be really honest. Now, we don't need to argue about it. You can read the book yourself and you can do your own research as whether or not, you know, the research he has done is good or bad. But my point is that I think he dispels a lot of myths. And I think if you're interested in this topic, this would be a very good book for you to read. But. Most of all, I think it's important to understand all of these different ideas because in my opinion, what money is, is largely dependent upon where you are and it's dependent upon when you are. In other words, money might be one thing in one place and it might be something else in another place. And so understanding how each different system works and why each different method. or, or monetary system can work and has worked and, and the benefits and the, and the, not just the benefits, but the detriments of each side as well, because, you know, we live in a very dynamic world and, um, you know, the idea that it can only be one thing and you should only study that one thing and be totally ignorant of the other systems. I think you're doing yourself a disadvantage. Uh, but then let's go to about the monetary system design. The monetary system is design is incredibly important. And the reason it's incredibly important, it's because it's an exponential system. The design of the system necessitates that the system grow. It has to grow. Now, some people will say this is a flaw and this is what leads to all the problems. Other people will say that's a feature. It's supposed to be like this because it gives certain people certain advantages. But again, understanding that the design is crucial to understanding what's going to happen. And then also understanding that it's a debt-based monetary system. And the way $1,000 can become $10,000 through loans. And those loans have interest attached to them. And as long as this system goes and as long as people are out spending, the system works great. So as long as there's money velocity, as long as you're buying that refrigerator and then the person who sold you the refrigerator can pay their mortgage. And the bank that received the mortgage can make a new loan to the guy that wants to buy the car. Again, as long as commerce is taking place, this system works great. The problem is when the money stops circulating. And when the money stops circulating, that's when you get what happens to all exponential systems. All exponential systems will eventually go straight up and then they will eventually crash. That is just a feature of the mathematical qualities or characteristics of an exponential system. So it will crash. It's just a matter of time. The design actually necessitates its crash. The only variable is when it happens. It's important to understand that. And I talked about the Eurodollar system. I talk about the Eurodollar system all the time, because this is in many ways a key to it all. Now, many people are of the belief that the Eurodollar system was mandated by the US government as part of the Bretton Woods conference post-World War II. And there's a little bit of truth to that, but it's mostly wrong. And the fact is, is the euro dollar system developed on its own, decade by decade, a little bit at a time. But now, over that time, it has become this huge monster that, to be really honest, nobody controls anymore, not even the Fed. Now, the Fed has more control than most, but the Fed doesn't control it anymore. And in fact, it's this spider web. It's basically the biggest network in history. And it is institutionalized across different countries, different time zones, different types of businesses. It is a spider web that has basically permeated every economy on the planet. And if you think that that's incorrect, I would encourage you to do a little bit more digging. And once you kind of understand what has happened, you start to understand why it is so hard to bring down and why bringing it down would cause such chaos everywhere in the world. That's something that we should explore in more detail. Geography is probably the most important factor that nobody ever thinks about. The United States absolutely won the geographical lottery. They have natural defensive borders on every side of them. They have four oceans that touch them, or I'm sorry, three oceans that touch them. They have a country, they have friendly neighbors. The country on the South is largely a desert, which makes entry to the United States from that angle difficult. The neighbor to the north is a friendly neighbor, and it is largely an ice field, which makes coming into the United States from that angle very difficult. So just from a safety point of view, it has everything it needs, but it is also incredibly protected from an outside threat. Once you get inside the country, there are more defensive measures. Each coast. is defended not only by an ocean, but by a mountain range. And those mountain ranges surround the middle of the country. The middle of the country has the most fertile farm ground in the United States, not only in the United States, but in the entire world. Not only that, but when you go back to California, it is probably the single biggest agriculturally based economy. in the world. And so the U.S. is largely self-sufficient on a first principles basis. Not only that, but we have an enormous amount of fresh water. And these sound like silly things, but these are incredibly important to the strength of a nation. Not only do we have an incredible amount of fresh water, but we have the largest fresh water navigable river system in the world. which makes shipping and transportation around the country not only extremely efficient, but extremely cheap. And that is an incredibly large advantage when comparing to other countries. And then not only that, it's because U.S. kind of won World War II, the U.S. was able to set up the rules-based order. Now, this is a book that if you want to understand the rules-based order and the institutions that... run the world, how they interact with each other and how the countries interact with those institutions, this is the book that you read. Now, fair warning, if you read this book, you're going to fall asleep. I remember I had to read this book in college and it was so boring at the time and it would definitely put you to sleep. But now looking back on it, it's probably one of the best books I've ever read. So if this is stuff that you're interested in, I would highly recommend that you read this book. The other thing is, you know, you have to understand the real the real politic of the situation. What I mean there is the real politic is what is happens in the real world, not what you would like to see happen, not the way you would like things to be, but how they actually are and how hard and difficult, mean, brutal, whatever word you want to use. how things really are in the real world. And I would argue that at the geopolitical level, even though they may be, they dress a little bit nicer and they talk a little bit nicer and they stay in nicer hotels, it's not all that different than street gangs. And when it really comes down to it, the strongest wins. And so in that situation, military power does matter. And the United States has, I think, think over 700 either bases or some kind of outposts around the world. They produce more oil than anywhere else in the world. And they're aligned with the other country that produces the second most oil in the world. It's not to say that the US can never be toppled. It's just to say that they have such a great advantage that they would never give it up willingly. And if anybody ever comes along that wants to take that role, they're going to have to fight them for it. And in that fight, even if the U.S. were to somehow lose that fight, they're not going to go down easy. And a lot of damage can be done while that's happening. And while that's happening, the dollar would probably go to the moon. And that is part of the theory as well. But that's something that you need to understand. The other thing is the money is a weapon. The dollar is. probably, and you've heard me say this before, it is probably the biggest weapon that the U.S. has. The U.S. has the ability to use their monetary policy as a weapon, and they can do it while disguising it as domestic policy for domestic issues. It all goes back to that famous quote by Connolly. I think he was the Secretary of the Treasury, and he said, yeah, it's our currency, but it's your problem. But if you have any doubts about this, just look back in 2022. The U.S. was raising rates in order to fight domestic inflation. Now, there's truth to that. They actually were doing that. But they also know that when they do that, it puts the rest of the world under pressure. Now, this is a chart of the VIX. And you can see in 2022, when they were aggressively raising rates, the VIX kept on spiking. It led to asset prices and economic growth in China to come to a standstill and start to fall precipitously. We're seeing the results of all that now. Things have fallen so far in China, they've had to do historic levels of stimulus. But in late 2022, it also caused the ECB to have to intervene in Italian sovereign markets. It caused the Bank of England to have to intervene to save the gilt market. And it caused the Bank of Japan to have to intervene to save. both the JGB and the yen markets. And this was all while the US was raising rates and nobody said they could do it. Nobody said the right, they said, if the US raised rates, it'll throw the US into a massive recession and it'll hurt the US more than it hurts the rest of the world. Well, the exact opposite happened. And so the point is, is not that the US has everything figured out. It doesn't mean that bad things can't happen to the US. It just means the U.S. has a weapon that nobody else has, and they have the ability to use it. That's a huge part of understanding the system. And then finally, it's just kind of the law of the jungle. I saw this picture, and it's a horrible picture, but I love it. Because it just shows, you know, at the end of the day, you know, you just don't know what's going to happen. And sometimes the results aren't the result of nice things happening. I mean, this is a hyena walking around with a lion's head in its mouth, right? Now, I'm not saying this is exactly the way all G7 meetings go, but at the end of the day, war is a reality and the US is never going to give up the global reserve currency without a war happening first. So the idea that the bricks are going to get together, they're going to have a few meetings, they're going to introduce a currency, and all of a sudden the whole world is going to move to that new currency in the dollar. the demand for the dollar is going to fall away and nobody's ever going to use it anymore. It's just, it's silly to be quite honest. There's just no other way to say it. But anyway, going back to this again, the transition to a new system, the system's design necessitates or guarantees, I guess is the right way to say it, that it will fall because it's an exponential system and all exponential systems fall. But the law of the jungle ensures it won't happen without economic volatility. and probably not without military violence. And it's important to understand not just this slide, but all the slides leading up to this. This is a big story. It's really important. I think it's the single most important factor when analyzing global markets. And so that's why I talk about it. And that's why I think I'm going to do this longer version. So this, I think, what have we been talking here, 25 or 30 minutes? And I've given you a good overview. of what's important. But again, I can do an hour or two hours on each of these slides, because that's how much detail goes into it. In any case, that's what I thought, I thought might be helpful. If anybody's interested, more interested, and they want to, you know, find out when we're going to do this, go to macroalchemist.com and sign up there. What that will do. So I, let me back up a little bit. So I've got basically three different channels now. Santiago Capital, this is my business. This is the business where I manage client capital. The Milkshakes Market and Madness, what we're talking on now, this is just the weekly show that we do to kind of keep people up to breast, what I'm thinking, what's going on in the markets, what's happening with the framework. And then the Macro Alchemist, that's a... research service that I recently started with a friend of mine. And we put out reports, we put something out every week. Sometimes it's a longer term report. Sometimes it's just a kind of a fun little, this is the types of things we're thinking about. But at least a couple times a month, we're sending out some fairly long, bigger topic research pieces. And through that, you can go to macroalchemist.com. If you sign up for that service, then we will have your email. And when it's time to do the milkshakes masterclass, you'll be on the list and we will send it out. So anyway, that's all for this week. You know, I think as we as we said, we're back at the all time highs in equities. I'm not sure what's going to happen. But the only thing I'll say is I feel like, you know, I think I told you guys back in July, there was a day where every single indicator that I look at. was hitting saying sell, sell, sell, sell. And that had never happened in 25 years of doing this. And I said, I could probably go another 25 years without it ever happening again. The crazy thing to me, the absolutely maddening thing to me is that the way things are headed right now, all of those things could hit again within the next few weeks. Now I'm not saying they're going to hit again. I don't know that we're going to have another repeat of what we had in July of August. I'm just saying the trend for all these indicators that I watch, and I've went through, if you go back a couple of, you know, some of the episodes over the last month or so, I've gone through in detail what some of those different indicators are. But the way those are trending, they're trending back to where they could almost all be at the same levels they were in mid-July. And so that's going to be pretty interesting if that happens. In the short term, the ones that are getting closest to it are some of the smaller... uh, semiconductor companies like Palo Alto networks, Broadcom. I'll tell you, I think those are, maybe they go a little bit higher this week. I actually hope they do. I'm looking to put a trade on those to go lower. Um, but anyway, we'll have to wait and see what happens. Anyway, that's it for this week. Thanks for watching. Um, hope you guys are all doing good. Hope you're staying safe and, uh, you know, the madness is just beginning. So buckle up.

And that's why we talk about it. And I hope it has helped you as well. So it's October 13th. We've only got a couple more weeks until probably the most maddening election of all time, which obviously has tremendous impact on financial markets. But so far, despite the madness surrounding that, markets have stayed.

you know, fairly strong. We obviously had a lot of kind of excitement and drama in August and September, but so far here in October, things have been relatively calm. Now, I don't expect it to stay that way between now and the end of the year, but I'll take it while it is there. But what I thought we'd do just really quickly this week is we'll go over the highlights.

And again, I apologize. I think I mentioned the last time sometime these slides that I upload for the podcast come out formatted differently than I have them created on on uh in my uh in my computer but such is life anyway um so this week we had a lot of stuff come out but again you know it's the week started off with you know markets were down Monday morning but then for the most part rallied uh the rest of the week the CPI came in higher than expected kind of midweek And normally that would have led to rates going higher, dollar going higher, many assets potentially selling off as a result of the idea that rate cuts may be slower than expected. However, jobless claims also came in higher than expected. And so that indicated that perhaps the economy has continued to weaken and those kind of offset each other.

On Friday, PPI came in higher than expected, but not dramatically so. And again, not such in a way that could derail, at least from the market's perspective, the expected rate cuts. Gold closed the week at 2655, 56, something like that.

And so it was basically flat for the week. But, you know, it traded all the way down to pretty close to 2600 again early in the week before the data later in the week. Silver, kind of a similar story. It closed basically right where it started. But it also had a big drawdown early in the week before rallying to the close.

Oil basically closed flat, but it had also big swings in both directions. It was up earlier in the week. It was down kind of middle of the week and then rallied in, I think, Thursday, Friday.

The Karanda closed flat. And the VIX was flat for the week. But I have to say the VIX is sitting at 20, and it feels to me like it's just a beach ball being held underwater.

I think there's a number of reasons why it could go higher, whether they're domestically. politics, whether it's markets, whether it's central bank related, whether it is geopolitically related, whether it's combat situations in the Middle East or Ukraine, or it just feels like the VIX wants to go higher. And then equities were up approximately 1% for the week. I think they were all the Dow, the S&P and the NASDAQ were all up around 1% for the week.

NASDAQ. has not made it back to its all-time high yet, but the Dow and the S&P closed at all-time highs. But what I thought we would do this week is I know earlier this year, I mentioned, John and I mentioned doing a milkshake masterclass. And that's kind of gotten pushed to the wayside just due to being very busy with other projects, you know, some new clients.

the craziness surrounding the markets. And so this is unfortunately gotten pushed off. It's not going to happen this fall, but it is going to happen early next year, probably late January or early February.

So everybody that's already kind of sent in and signed up, we have your email, we have your information. But what I thought I would do today is just go through why I even want to do this masterclass to begin with. What's the point of it?

And I'll give you a quick little preview. of what I think it will be about. And then you can decide for yourself whether or not that's something that you would like to participate in. But here, before we get into why doing a master class. I've had so many people ask me, why all the talk about the milkshake?

What's the point and why does it matter? And here's the thing. It matters because it is a framework for how the markets work. Now, if you're not interested in markets, if you're not interested in investing, if you don't care what happens from day to day, week to week, or even year to year, then perhaps it doesn't matter.

But this is a show about financial markets. I work in the financial market. So it's a hugely important thing to me.

And the framework has been incredibly helpful to me. And so as it relates to my job, why does it matter? Well, it matters because to me, it is the dollar. And what the dollar does is one of the most important things you can think about when you think about markets.

Now, you'd look at this chart here. This is the Dow Jones over the last 100 years. And what do you see?

You see that there's periods of time where the Dow goes up, long periods of time where it goes up, and you see long periods of time where it goes sideways or even goes down. But if you step back and you quote unquote zoom out, you can see that asset prices tend to go up and to the right. And we could do this same chart with a number of different assets, a number of different indices around the world. But in general, Assets go up and to the right.

Now, that's an outcome of a couple different factors. Number one, it's human ingenuity and innovation and growth associated with being more productive. That's one. Another thing is that people continue to be born and there's been a demographic trend of increased people on the planet.

And so there's increased demand for the commodities and the assets and the... the inventory of things that go into stock prices. And so that pushes that that's a positive trend for asset prices.

But the other thing, oh, the other thing that that leads to asset prices going higher is over long periods of time, fiat currency loses value. So in general, you don't want to be sitting in cash. You don't want to be sitting in fiat currency, even if it is the dollar, because all fiat currencies, including the dollar, lose purchasing power over time.

So you want to be in assets and ride this wave higher. But having said that, how many people live to be 100? The average person does not live to be 100. And you can see by looking at this chart that there's sometimes very long periods of time where assets don't go up and to the right, whether it's 18 years, 25 years, 17 years, or even 11 years. And so you can't just plan on without any thought going into it that asset prices are going to automatically go up and to the right because fiat currencies lose value.

And so if you have to try to figure out how to navigate those down periods, then you have to figure out what can cause those down periods. And that's why it matters. One way to kind of get out of from underneath the risks of the drawdowns is to have diversification.

Don't put all your eggs in the stock market, right? Don't put all your eggs in one basket. Don't just buy the stock market.

So this pie chart, this is a very rough estimate of a diversified portfolio that's somewhat representative of the permanent portfolio. And the permanent portfolio basically says if you put 25% of your money in cash or fixed income, 25% of your money in stocks, 25% of your money in real estate, and 25% of your money in commodities or specifically gold. then you're going to do really well. You're going to be prepared for anything. You're going to make money almost all the time.

You're not going to lose money very often. And over time, you're going to do really, really well. You basically won't go broke with this portfolio.

And here's the thing with this portfolio. Over the last 50 years, now the black line is a combination of US stocks and international stocks. And the gold line is the permanent portfolio. This is from 1971 to 2021. So it's a 50-year period.

It hasn't been updated in the last couple of years. But the bottom line is that whether you owned all stocks or whether you owned this permanent portfolio, you got basically the same return. Now, you trailed at the end, but there was periods of times where you were ahead. There was periods of time where you trailed dramatically in the late 90s, but that was mainly due to the dot-com boom.

But the big difference is you don't suffer the massive drawdowns. So diversification is a big way to avoid the drawdowns. But if you want to avoid even more of the drawdowns and you want to actually capitalize on some of them.

then there's other things you need to do. And that's when analysis comes into it. Rather than just putting this permanent portfolio into your portfolio and never thinking about it, if you want to try to outperform and take advantage of some of the dislocations on the time, then you have to have the tools to analyze the markets.

And I think the milkshake theory, the milkshake framework is a great way to analyze that market. But the biggest reason is because the most important factor that pushes asset prices higher is liquidity. Earnings don't matter as much. Innovation doesn't matter as much. The biggest thing is liquidity.

And liquidity is largely a reflection of monetary policy and relative fiat currency levels. The bottom line is that despite all the arguments to the contrary, fiat versus fiat does matter. Even if all fiat currency gets debased over time, the relative levels of fiat versus each other do matter because they greatly affect liquidity.

So that is why the milkshake matters. Now, why do a masterclass? Well, part of the reason to do a masterclass is because I'm very lucky. I get the opportunity to go to conferences and present.

I get invited to go on podcasts. And I'd love the opportunity to kind of explain my views during those opportunities. But here's the thing is, even in the best case at one of those conferences, maybe I have 45 minutes, maybe an hour at most to kind of go over everything.

And oftentimes it's more like 20 minutes. And sometimes if you're on a panel, it may be just one or two comments that you get to make along with everybody else. But the problem is, is not only do I not have an hour to explain. the milkshake theory when I do get the opportunity to speak at these conferences. But there's several different factors that go into the whole framework.

And I could spend an hour or more on each of those individual factors. So the point is, I never really get the opportunity to explain the whole framework or the whole theory in great detail. And so that led to the idea that maybe there's a way.

that we can do it, that I can really drill down into each of the different factors. Now, here are just some of the different factors. First of all, what is money? I mean, the reality is, if you ask people what money is, everybody will say that they know.

But if you actually ask them for the definition, they start to stumble a little bit. Now, some people are better at it than others, but a lot of people, it's just very misunderstood. You know, that's a big part of it. You know, monetary history is a big part of it.

In many ways, I think monetary history is misunderstood. The design of the monetary system is incredibly important and one that I don't think people have a proper respect for. The euro dollar system is probably the key to it all. And once I stumbled onto that, everything started to fall into place.

And yet it's still one of the most misunderstood and perhaps unop... Things, one of the most important things that people are unaware that even exist. Geography, geopolitics, real politic, that comes into it. That's a big part of it. The weaponization of money, the weaponization of the dollar, specifically the U.S. dollar and how the U.S. can use the dollar as a weapon against both friends and foes is a big part of it.

And then finally, you know, a transition to a new monetary paradigm or system. Like, what would that look like? What would have to happen? for that to take place?

And what would the transition look like? And so that's part of it as well. So again, I could do an hour presentation on each of these individual bullet points and still not cover everything. So again, that's the idea behind it. But let's take a look at some of these.

So the whole question about what is money? Well, even if you think that you know. And even if you're steadfast and very dogmatic about your opinion about what money is, that doesn't change the fact that it is extremely misunderstood by many, many, if not most people in the world.

And that misunderstanding gets translated into how they make decisions in the markets. And then that affects your portfolio as well. And so. one of the things that I, that I, I like to do is kind of really dig into this and talk about what money is, what it isn't, what it can be, and also what it is versus what people want it to be.

That is a very big one. But, you know, in some ways there's a big debate of is money, you know, the most marketable commodity? Is it something that just was naturally selected in nature or Is it what the king or the sovereign or the government says it is?

Right. And, you know, there's strong opinions on both sides. And I know there's a lot of people who have dug their heels on and on which side is right and which side is wrong.

But my point of it all is you got to understand both sides of it. So, you know, there's one side that says money kind of has to be something. You know, money is a tangible thing.

It has to be something. And so therefore. It has to be found on this periodic table of the elements. And I can show you, and one of the things I'd like to do is go through in detail, when you look at this periodic table of contents, why did gold become money?

Because out of all the elements in the universe, there are only a couple elements that actually serve or meet many of the attributes needed to be money. So that's one thing that I think would be interesting to go through. The other thing is, how do we know it's... has to be something.

Why can't it just be whatever the biggest, strongest guy says it is? You know, if you're in prison, gold isn't money. Maybe it's cigarettes. Maybe it's sardines. Maybe it's something else.

But the point is, is if you are under, if you are a subject of the king and the king says you owe him a certain amount of stuff at the end of every year, at the end of every harvest, or at the end of every time you do some kind of a trade, you owe him some kind of tax, he gets to decide. what it is you have to pay him. And you can yell and scream all you want. But at the end of the day, if he's more powerful than you, he can either take what you have or make you give him what he wants you to give him.

So there's that side of what is money. Now, this may be the most controversial one, but this is what I actually think money is the original matrix. And I could spend at least an hour on that part of it.

So I think that that's a little preview of what, again, what is money? I think that's one of the most fundamental questions if you're starting to dig into this area. But then I think there's also a lot of misunderstanding around monetary history. I think one of the most commonly held beliefs is that money was the ultimate result of barter, right?

You know, we used to take a dozen eggs and we would trade those. You know, we had a chicken and it laid eggs and we took those eggs and we traded a bunch of eggs for a pair of shoes from a cobbler. And then the cobbler took the shoes and he, you know, he would use the leather and he would trade it to a saddle maker. Right. And the saddle maker would, you know, give him rope.

And then you take the rope and you catch a fox and the fox, you know, you use you go catch a fox and then you take the fur of the fox. And, you know, you'd go back and. go back to the farmer and trade him the fur for the eggs. And it just went around and around and around. But the problem with that barter is that you have this double coincidence of wants, right?

If you have a piece of rope and you want eggs, you have to find a farmer that wants a piece of rope that can give you the eggs. And so the medium of exchange or money came about as just a result of free market economics. And over time, that became known as money.

And that became, in most cases, gold. Now, that's one very possible and very popular theory about how money came about. You know, there's other ways.

You know, it could have started off that way. And then, you know, we started off with barter. And then that wasn't as efficient.

So then, you know, it eventually became, like I said, it ascended into gold. So we had commodity money or we, you know, we had gold or silver or copper or whatever it was. And then perhaps we started writing letters of credit on top of that.

And so it was a derivative of the commodity money. And then eventually it became fiat currency. And then from there, we know now we even have digital currency.

And I think there's a lot of people out there that think the system that we have now, the fiat currency system we have now is a extremely new phenomenon. It's never been used before. It's only in the last 50 years. And it's this big grand experiment that it's going to end very, very badly. And I'm very sympathetic to that idea.

And I'm not going to sit here and say that that's wrong. But I'm also not going to sit here and say that it's 100% right. Because there's been numerous money systems throughout history. They haven't always been gold.

They haven't always been commodity money. And even though it's a nice story, and even though it's a nice way to explain how things happen naturally, things don't happen naturally. There's this entity in the world.

that likes to mess with it. And that entity is called human people. And they like to enforce their will on things that perhaps, you know, free market idealists would prefer that they don't.

But they've but but but that's just reality. And so, again, I think when you're really dogmatic about one side or the other, you miss part of of of of what the what the answers can be. This is a great book.

If you have not read this book, I would recommend that you read this book. It's pretty dense. It's going to take you a long time to get through it, but it is meticulously researched and it is extremely well laid out. And it argues that debt is money and that debt preceded commodity money.

And the debt has always been a part of the monetary system, regardless of what you call it. And it kind of takes the whole barter idea. The idea that we used to trade eggs for shoes and then shoes for cows and et cetera, et cetera. It kind of takes that idea and kind of throws it out the window, to be really honest. Now, we don't need to argue about it.

You can read the book yourself and you can do your own research as whether or not, you know, the research he has done is good or bad. But my point is that I think he dispels a lot of myths. And I think if you're interested in this topic, this would be a very good book for you to read.

But. Most of all, I think it's important to understand all of these different ideas because in my opinion, what money is, is largely dependent upon where you are and it's dependent upon when you are. In other words, money might be one thing in one place and it might be something else in another place. And so understanding how each different system works and why each different method. or, or monetary system can work and has worked and, and the benefits and the, and the, not just the benefits, but the detriments of each side as well, because, you know, we live in a very dynamic world and, um, you know, the idea that it can only be one thing and you should only study that one thing and be totally ignorant of the other systems.

I think you're doing yourself a disadvantage. Uh, but then let's go to about the monetary system design. The monetary system is design is incredibly important. And the reason it's incredibly important, it's because it's an exponential system. The design of the system necessitates that the system grow.

It has to grow. Now, some people will say this is a flaw and this is what leads to all the problems. Other people will say that's a feature. It's supposed to be like this because it gives certain people certain advantages.

But again, understanding that the design is crucial to understanding what's going to happen. And then also understanding that it's a debt-based monetary system. And the way $1,000 can become $10,000 through loans.

And those loans have interest attached to them. And as long as this system goes and as long as people are out spending, the system works great. So as long as there's money velocity, as long as you're buying that refrigerator and then the person who sold you the refrigerator can pay their mortgage. And the bank that received the mortgage can make a new loan to the guy that wants to buy the car.

Again, as long as commerce is taking place, this system works great. The problem is when the money stops circulating. And when the money stops circulating, that's when you get what happens to all exponential systems. All exponential systems will eventually go straight up and then they will eventually crash. That is just a feature of the mathematical qualities or characteristics of an exponential system.

So it will crash. It's just a matter of time. The design actually necessitates its crash.

The only variable is when it happens. It's important to understand that. And I talked about the Eurodollar system. I talk about the Eurodollar system all the time, because this is in many ways a key to it all.

Now, many people are of the belief that the Eurodollar system was mandated by the US government as part of the Bretton Woods conference post-World War II. And there's a little bit of truth to that, but it's mostly wrong. And the fact is, is the euro dollar system developed on its own, decade by decade, a little bit at a time. But now, over that time, it has become this huge monster that, to be really honest, nobody controls anymore, not even the Fed.

Now, the Fed has more control than most, but the Fed doesn't control it anymore. And in fact, it's this spider web. It's basically the biggest network in history.

And it is institutionalized across different countries, different time zones, different types of businesses. It is a spider web that has basically permeated every economy on the planet. And if you think that that's incorrect, I would encourage you to do a little bit more digging.

And once you kind of understand what has happened, you start to understand why it is so hard to bring down and why bringing it down would cause such chaos everywhere in the world. That's something that we should explore in more detail. Geography is probably the most important factor that nobody ever thinks about. The United States absolutely won the geographical lottery. They have natural defensive borders on every side of them.

They have four oceans that touch them, or I'm sorry, three oceans that touch them. They have a country, they have friendly neighbors. The country on the South is largely a desert, which makes entry to the United States from that angle difficult.

The neighbor to the north is a friendly neighbor, and it is largely an ice field, which makes coming into the United States from that angle very difficult. So just from a safety point of view, it has everything it needs, but it is also incredibly protected from an outside threat. Once you get inside the country, there are more defensive measures.

Each coast. is defended not only by an ocean, but by a mountain range. And those mountain ranges surround the middle of the country.

The middle of the country has the most fertile farm ground in the United States, not only in the United States, but in the entire world. Not only that, but when you go back to California, it is probably the single biggest agriculturally based economy. in the world. And so the U.S. is largely self-sufficient on a first principles basis.

Not only that, but we have an enormous amount of fresh water. And these sound like silly things, but these are incredibly important to the strength of a nation. Not only do we have an incredible amount of fresh water, but we have the largest fresh water navigable river system in the world.

which makes shipping and transportation around the country not only extremely efficient, but extremely cheap. And that is an incredibly large advantage when comparing to other countries. And then not only that, it's because U.S. kind of won World War II, the U.S. was able to set up the rules-based order.

Now, this is a book that if you want to understand the rules-based order and the institutions that... run the world, how they interact with each other and how the countries interact with those institutions, this is the book that you read. Now, fair warning, if you read this book, you're going to fall asleep. I remember I had to read this book in college and it was so boring at the time and it would definitely put you to sleep. But now looking back on it, it's probably one of the best books I've ever read.

So if this is stuff that you're interested in, I would highly recommend that you read this book. The other thing is, you know, you have to understand the real the real politic of the situation. What I mean there is the real politic is what is happens in the real world, not what you would like to see happen, not the way you would like things to be, but how they actually are and how hard and difficult, mean, brutal, whatever word you want to use. how things really are in the real world. And I would argue that at the geopolitical level, even though they may be, they dress a little bit nicer and they talk a little bit nicer and they stay in nicer hotels, it's not all that different than street gangs.

And when it really comes down to it, the strongest wins. And so in that situation, military power does matter. And the United States has, I think, think over 700 either bases or some kind of outposts around the world.

They produce more oil than anywhere else in the world. And they're aligned with the other country that produces the second most oil in the world. It's not to say that the US can never be toppled. It's just to say that they have such a great advantage that they would never give it up willingly. And if anybody ever comes along that wants to take that role, they're going to have to fight them for it.

And in that fight, even if the U.S. were to somehow lose that fight, they're not going to go down easy. And a lot of damage can be done while that's happening. And while that's happening, the dollar would probably go to the moon.

And that is part of the theory as well. But that's something that you need to understand. The other thing is the money is a weapon.

The dollar is. probably, and you've heard me say this before, it is probably the biggest weapon that the U.S. has. The U.S. has the ability to use their monetary policy as a weapon, and they can do it while disguising it as domestic policy for domestic issues. It all goes back to that famous quote by Connolly. I think he was the Secretary of the Treasury, and he said, yeah, it's our currency, but it's your problem.

But if you have any doubts about this, just look back in 2022. The U.S. was raising rates in order to fight domestic inflation. Now, there's truth to that. They actually were doing that.

But they also know that when they do that, it puts the rest of the world under pressure. Now, this is a chart of the VIX. And you can see in 2022, when they were aggressively raising rates, the VIX kept on spiking. It led to asset prices and economic growth in China to come to a standstill and start to fall precipitously.

We're seeing the results of all that now. Things have fallen so far in China, they've had to do historic levels of stimulus. But in late 2022, it also caused the ECB to have to intervene in Italian sovereign markets.

It caused the Bank of England to have to intervene to save the gilt market. And it caused the Bank of Japan to have to intervene to save. both the JGB and the yen markets.

And this was all while the US was raising rates and nobody said they could do it. Nobody said the right, they said, if the US raised rates, it'll throw the US into a massive recession and it'll hurt the US more than it hurts the rest of the world. Well, the exact opposite happened.

And so the point is, is not that the US has everything figured out. It doesn't mean that bad things can't happen to the US. It just means the U.S. has a weapon that nobody else has, and they have the ability to use it.

That's a huge part of understanding the system. And then finally, it's just kind of the law of the jungle. I saw this picture, and it's a horrible picture, but I love it.

Because it just shows, you know, at the end of the day, you know, you just don't know what's going to happen. And sometimes the results aren't the result of nice things happening. I mean, this is a hyena walking around with a lion's head in its mouth, right? Now, I'm not saying this is exactly the way all G7 meetings go, but at the end of the day, war is a reality and the US is never going to give up the global reserve currency without a war happening first. So the idea that the bricks are going to get together, they're going to have a few meetings, they're going to introduce a currency, and all of a sudden the whole world is going to move to that new currency in the dollar.

the demand for the dollar is going to fall away and nobody's ever going to use it anymore. It's just, it's silly to be quite honest. There's just no other way to say it. But anyway, going back to this again, the transition to a new system, the system's design necessitates or guarantees, I guess is the right way to say it, that it will fall because it's an exponential system and all exponential systems fall. But the law of the jungle ensures it won't happen without economic volatility.

and probably not without military violence. And it's important to understand not just this slide, but all the slides leading up to this. This is a big story. It's really important.

I think it's the single most important factor when analyzing global markets. And so that's why I talk about it. And that's why I think I'm going to do this longer version.

So this, I think, what have we been talking here, 25 or 30 minutes? And I've given you a good overview. of what's important.

But again, I can do an hour or two hours on each of these slides, because that's how much detail goes into it. In any case, that's what I thought, I thought might be helpful. If anybody's interested, more interested, and they want to, you know, find out when we're going to do this, go to macroalchemist.com and sign up there. What that will do.

So I, let me back up a little bit. So I've got basically three different channels now. Santiago Capital, this is my business.

This is the business where I manage client capital. The Milkshakes Market and Madness, what we're talking on now, this is just the weekly show that we do to kind of keep people up to breast, what I'm thinking, what's going on in the markets, what's happening with the framework. And then the Macro Alchemist, that's a...

research service that I recently started with a friend of mine. And we put out reports, we put something out every week. Sometimes it's a longer term report. Sometimes it's just a kind of a fun little, this is the types of things we're thinking about.

But at least a couple times a month, we're sending out some fairly long, bigger topic research pieces. And through that, you can go to macroalchemist.com. If you sign up for that service, then we will have your email. And when it's time to do the milkshakes masterclass, you'll be on the list and we will send it out.

So anyway, that's all for this week. You know, I think as we as we said, we're back at the all time highs in equities. I'm not sure what's going to happen. But the only thing I'll say is I feel like, you know, I think I told you guys back in July, there was a day where every single indicator that I look at.

was hitting saying sell, sell, sell, sell. And that had never happened in 25 years of doing this. And I said, I could probably go another 25 years without it ever happening again.

The crazy thing to me, the absolutely maddening thing to me is that the way things are headed right now, all of those things could hit again within the next few weeks. Now I'm not saying they're going to hit again. I don't know that we're going to have another repeat of what we had in July of August.

I'm just saying the trend for all these indicators that I watch, and I've went through, if you go back a couple of, you know, some of the episodes over the last month or so, I've gone through in detail what some of those different indicators are. But the way those are trending, they're trending back to where they could almost all be at the same levels they were in mid-July. And so that's going to be pretty interesting if that happens. In the short term, the ones that are getting closest to it are some of the smaller...

uh, semiconductor companies like Palo Alto networks, Broadcom. I'll tell you, I think those are, maybe they go a little bit higher this week. I actually hope they do.

I'm looking to put a trade on those to go lower. Um, but anyway, we'll have to wait and see what happens. Anyway, that's it for this week.

Thanks for watching. Um, hope you guys are all doing good. Hope you're staying safe and, uh, you know, the madness is just beginning. So buckle up.

Transcript for:Market Insights and Dollar Milkshake Theory

Transcript for:
Market Insights and Dollar Milkshake Theory