Know Your Risk - Brent Johnson, CEO Santiago Capital

Episode Overview

• Guest Brent Johnson explains his "Dollar Milkshake Theory," which uses the US dollar's strength as a key signal for navigating global markets, rather than a simple recommendation to hold cash.
• The conversation explores the rising risk of a global sovereign debt crisis and the corresponding role of gold as a foundational portfolio asset that signals underlying issues in the monetary system.
• Johnson argues that even in an environment of globally coordinated stimulus, the US remains the "cleanest dirty shirt," attracting capital that will ultimately strengthen the dollar relative to other currencies.
• He shares his current cautious and defensive portfolio strategy—holding T-bills and hedging equities—in anticipation of a market downturn before longer-term opportunities in U.S. assets emerge.

Key Concepts

• The Dollar Milkshake Theory: The US dollar serves as the primary signal for global markets because it is the liquid foundation of the entire financial system. The theory is an analytical framework for interpreting market signals, not a direct portfolio recommendation to hold cash.
• Global Sovereign Debt & Gold: There is a rising risk of a global sovereign debt crisis, evidenced by a trend of central banks shifting their reserves from sovereign bonds to gold. Gold is viewed as a foundational portfolio asset that signals systemic stress in the monetary system.
• The Relative Game: Even when all major economies engage in fiscal stimulus and currency devaluation, capital will flow to the most attractive destination on a relative basis. The US is positioned as the "cleanest dirty shirt," which ultimately causes the dollar to strengthen.
• Waning Demand for Sovereign Debt: A global phenomenon where central banks are reducing their holdings of all government bonds (not just US Treasuries) in favor of gold, which forces all nations into further debt monetization to fund their spending.
• Gold's Price Dynamics: While a crucial long-term holding, gold is expected to sell off initially during a severe liquidity crisis as investors are forced to liquidate what they can, not what they want, to raise cash.
• Cautious Portfolio Strategy: A defensive current market positioning that involves holding T-bills, fully hedging equity exposure, and maintaining tail-risk protection in anticipation of another significant market downturn.

Quotes

• At 0:11 - "it certainly, at least for me, has provided me a framework which has helped make sense of the craziness that we've experienced for the last five or six years." - Johnson explains how his dollar-centric viewpoint has been a valuable tool for navigating recent market volatility.
• At 2:54 - "The reason I talk so much about the dollar is to me it's a signal that influences literally everything else in the global marketplace." - Johnson states the core reason for his intense focus on the dollar's value and movements.
• At 3:03 - "The reason it influences everything else in the global marketplace is because that is the liquid on which the entire global economy runs." - Johnson explains the fundamental importance of the US dollar as the bedrock of the global financial system.
• At 22:14 - "I just think that the table is set for that. Whether it actually happens or not, I don't know." - Brent Johnson on the potential for a sovereign debt crisis to become a raging global issue.
• At 22:55 - "Everybody should own gold. It should be a core portion of your portfolio, if not the foundation of the portfolio." - Johnson stating his fundamental belief in gold as an essential asset for all investors.
• At 23:26 - "It's saying, 'Listen, something's not right... something's not great in the monetary system.'" - Johnson explaining what he believes the rising price of gold is signaling about the health of the financial system.
• At 23:50 - "My guess is that initially gold gets sold in that environment... you start selling what you can, not what you want." - Johnson predicting that gold would likely see an initial sell-off during a major liquidity crisis as investors are forced to liquidate assets.
• At 25:50 - "Go look at the performance of gold over the last 25 years... it's right there with the market if not slightly outpacing it." - One of the hosts defending gold's strong long-term performance against common criticisms.
• At 51:04 - "The rest of the world has not been buying Treasuries at the same rate and instead they've been buying gold. That exact same phenomenon exists for every sovereign out there." - Johnson explains that the declining demand for government debt is a global issue, not just a U.S. Treasury problem.
• At 52:43 - "You end up right back where you started and the dollar rallies again, just like it has every other time." - Johnson describes the cyclical pattern where, even if the dollar initially weakens, it ultimately strengthens as capital seeks relative safety.
• At 53:15 - "If I had to choose an area, I'd probably still choose the United States because I just can't find another region that I think is better." - Johnson reaffirms his long-term preference for the U.S. as the primary destination for capital.
• At 54:05 - "We have hedges on all of our equities and we have tail risk hedges against everything. So we are very cautious right now." - Johnson details his firm's current defensive portfolio positioning, reflecting his near-term bearish outlook.
• At 55:42 - "If we get into a sovereign debt crisis and the world resorts to printing money and stimulus, I think US equities are probably as good a place... to catch those flows as anywhere else." - Johnson reiterates that a global crisis will ultimately drive capital into U.S. assets.

Takeaways

• Use the US dollar's strength and liquidity as a primary signal for assessing the health of the global economy and its impact on all other asset classes.
• Treat gold as a foundational, core holding in a portfolio, not as a speculative trade, recognizing its primary role as insurance against systemic monetary instability.
• For new investors, focus on accumulating gold over time rather than trying to time the price perfectly; the long-term thesis is more important than the exact entry point.
• Be prepared for gold to potentially sell off during an acute liquidity crisis, as it will be used as a source of cash, not because its fundamental thesis has failed.
• Understand that even if all countries print money simultaneously, capital will still flow to the "cleanest dirty shirt," which has historically been the United States and the US dollar.
• Consider positioning portfolios cautiously for a potential market downturn by utilizing hedges and holding safe, liquid assets like T-bills.
• View a potential global financial crisis as a catalyst that could ultimately drive significant capital flows into U.S. equities as a long-term safe haven.
• Allocate a small, separate portion of a portfolio for tactical trades, which allows for opportunistic plays without jeopardizing core long-term holdings.