We Are Writing ‘Bretton Woods 2.0’ & U.S. Will ‘Write Up’ Gold Price to Pay Debt | James Thorne

Key Concepts

• Capex Supercycle: A long-term boom in capital expenditures driven by energy and intelligence.
• Reflation: The process of increasing the money supply and credit to stimulate economic activity and asset prices.
• Fiscal Anxiety: Investor concern about government debt and spending, often leading to a flight to safe-haven assets like gold.
• Intelligence Super Cycle: A projected bull market driven by advancements in artificial intelligence and related technologies.
• Secular Bull Market: A long-term upward trend in stock prices.
• Four-Year Cycle: A recurring pattern in market cycles, often influenced by presidential and midterm election years.
• Quantitative Tightening (QT): The process by which a central bank reduces its balance sheet by selling assets or allowing them to mature.
• Quantitative Easing (QE): The process by which a central bank injects liquidity into the economy by purchasing assets.
• US Dollar System vs. US Dollar: Delineating between the global dominance of the US dollar as a currency and the broader US dollar financial system.
• Weaponization of the US Dollar: The use of the US dollar and its financial system as a tool for geopolitical leverage.
• Market for Lemons: A concept in economics where asymmetric information leads to a decline in the quality of goods traded in a market.
• Intrinsic Value: The actual worth of an asset, independent of its market price.
• Capex Supercycle (Tax Deductibility): The Big Buy Back plan makes capex 100% tax deductible until January 2031, incentivizing investment.
• Debt Deflationary Spiral: A situation where falling prices and economic contraction lead to an increase in the real burden of debt.
• Middle Income Trap: A situation where a country's economy struggles to transition from middle-income to high-income status.
• Critical Mineral: A mineral deemed essential for economic or national security by a government.
• Resource Nationalism: A policy where a country asserts greater control over its natural resources.
• Modern Monetary Theory (MMT): An economic theory that suggests governments that issue their own currency can spend freely without being constrained by the need to tax or borrow.
• Debasement Trade: An investment strategy that seeks to profit from the erosion of currency value.
• Bretton Woods 2.0: A potential new global monetary system that could involve gold as a key component.
• Artificial General Intelligence (AGI): A hypothetical type of artificial intelligence that possesses the ability to understand or learn any intellectual task that a human being can.
• Supply-Side Economics: An economic theory that advocates for lower taxes and reduced government regulation to stimulate economic growth.
• Keynesian Economics: An economic theory that advocates for government intervention to stabilize the economy.
• Mercantilism: An economic policy that is designed to maximize the exports and minimize the imports of a nation.
• Deleveraging: The process of reducing debt.
• Collateral Calls: A demand for additional collateral to cover potential losses on a leveraged position.
• Counterparty Risk: The risk that the other party in a financial transaction will default on their obligations.
• Settlement Problem: A breakdown in the process of completing financial transactions.
• Parabolic Move: A rapid and steep increase in an asset's price.
• Frustrating Consolidation Patterns: Periods of sideways price movement in an asset that can precede a significant breakout.

Market Overview and Investor Sentiment

The market is currently divided, with optimism on one side and fear on the other. The US government shutdown, now over 40 days, is the longest in American history. Stocks are rising on hopes of a bipartisan Senate deal to reopen the government. Simultaneously, precious metals are also rallying. Spot gold is trading around $4,100 per ounce, and silver is up nearly 5%, surpassing the $50 per ounce mark. While stocks are driven by optimism, gold's rise is attributed to "fiscal anxiety."

The Capex Supercycle Thesis

Dr. James Thorne, Chief Market Strategist at Wellington Altis Private Wealth, argues that investors should adopt a longer-term perspective, looking out five to six quarters, to navigate day-to-day market volatility. He posits that the Western world's excessive debt levels necessitate either war or economic growth to overcome. Thorne's outlook favors growth, predicting lower interest rates and minimal inflation. He anticipates a broad reflation across asset classes, including gold, silver, crypto, real estate, bonds, and stocks, similar to the period between 1950 and 1975.

Intelligence Super Cycle and S&P 500 Projection

Thorne projects the S&P 500 could reach 8,000, driven by an "intelligence super cycle." He distinguishes this era from the 1990s dot-com bubble, arguing that today's leading tech companies are indispensable infrastructure, not speculative ventures.

Demographic and Cyclical Influences

Demographics play a crucial role, with the millennial generation entering their family formation and investing years, typically signaling a secular bull market. Thorne also notes the impact of the four-year cycle, particularly when unique 20% corrections occur, as they did in April, resetting the cycle. He suggests that unless a recession occurs next year, the S&P 500 could reach 7400-7500 by spring 2026, followed by a normal 8-10% correction. A rally is then expected into the midterm elections, with the significant pullback typically seen in midterm election years potentially absent due to the earlier 20% correction.

Liquidity and Reflation Drivers

Thorne argues that bull markets end not due to valuations but when liquidity is withdrawn. He anticipates increased liquidity due to:

• The drawdown of the Treasury General Account (TGA), which holds close to a trillion dollars.
• The end of quantitative tightening (QT) in December, leading the Fed to purchase $60-70 billion in government bonds.
• Anticipated Fed rate cuts, potentially bringing rates below 2.75% into the low 2% range. These factors create a framework for a reflation trade, benefiting risk assets, gold, and silver.

The Enduring US Dollar and Central Bank Diversification

Thorne dismisses the narrative of the US dollar's imminent demise, citing its continued dominance and China's recent oversubscribed issuance of US dollar bonds. He differentiates between the "US dollar system" and the "US dollar" itself, acknowledging the dollar's potential for fluctuations but emphasizing its post-WWII role in global finance. He notes that central bankers are prudently diversifying into gold, and eventually Bitcoin, due to the "weaponization of the US dollar" by the US government, referencing the seizure of Russian treasury holdings. This diversification is seen as a prudent measure to mitigate risks associated with dollar-denominated assets.

Concerns about Corporate Profit Reporting and Market Valuation

Regarding Michael Burry's tweet about companies overstating profits by extending asset lifespans, Thorne finds it interesting but not concerning enough to alter his outlook. He references George Akerlof's "Market for Lemons" theory, suggesting that in information voids, the best storytellers capture market imagination. He points out that such concerns often arise after significant market movements and that the intrinsic value of emerging technologies like AI is still unknown. Thorne views bubbles as a normal part of technological waves, citing the 1890s railroad crisis as an example. He believes that between now and 2031, driven by the tax deductibility of capex, there will be periods of exuberance and consolidation. He emphasizes the difficulty in quantifying the intrinsic value of AI, making traditional valuation metrics challenging.

The Global Race for Energy and AI Dominance

Thorne addresses the global race for AI dominance, noting China's deflationary signals and its energy advantage. He argues that cheap, secure energy (including nuclear, coal, oil, gas, and renewables) is foundational to winning the AI arms race. Despite China's debt and economic challenges, Thorne believes a truce is necessary for global growth. He highlights the West's lag in generating cheap electricity as a critical concern, suggesting that the focus should be on energy infrastructure rather than just specific chip technologies. He criticizes the lack of "bubble calls" on China from Wall Street and points to China's debt-deflationary forces and overcapacity.

Innovation vs. Infrastructure in Energy

Thorne distinguishes between innovation and infrastructure, stating that the West lags China in energy infrastructure, particularly in nuclear power development. He calls for a significant build-out of nuclear reactors, pipelines, and grids, describing it as a "rewiring of the economy." He criticizes the generalization of "bubble valuations" based on single companies like Palantir, arguing that many companies in the AI ecosystem are not overvalued.

Real Assets and the Capex Supercycle

Thorne identifies energy, minerals, grid infrastructure, copper, and uranium as logical plays in this capex supercycle, particularly for resource and real asset investors. He believes this is the moment these sectors have been waiting for after years of underperformance.

Gold and Silver as Core Holdings

Thorne reiterates his long-term bullish stance on gold, suggesting a 5% allocation in portfolios. He forecasts gold could reach $5,000 in the short term and close to $8,000 by the end of the decade, though he anticipates a consolidation between $4,000 and $4,400. He clarifies that gold's rise does not signify the end of the US dollar but rather a recognition of issues in the fiat money system. Silver, now classified as a critical mineral by the US government, is also seen as a standard holding, though it is a more volatile asset. He suggests a 5% allocation to cryptos like Bitcoin or Ether, and 5% to gold or silver, or 10% to gold for those avoiding crypto.

The Role of Government and Resource Nationalism

Thorne discusses the potential for governments to take direct stakes in critical mineral companies, citing Secretary Basset's desire to use the US government's balance sheet for the benefit of the American people. He suggests this could lead to a "resource nationalism" scenario, where sovereigns own the means of production. He trusts Secretary Basset's expertise, referencing his role in breaking the Bank of England. He believes that once minerals are identified as critical, the US government may consider taking positions in them.

Policy-Driven Repricing of Gold and Loss of Trust

Thorne suggests that the current run in gold is different from historical patterns because margin requirements are not increasing, and central bankers continue to buy. He believes that the US dollar is not going away but that assets may be "written up" to pay down debt, especially given the high debt-to-GDP ratio and deficit. He views this as a response to fiscal desperation and a potential integration of digital assets like Bitcoin into national balance sheets.

Keynes's Warnings and the Fiat Era

Drawing on Keynes's warnings in 1945, Thorne highlights the potential for the US empire's decline if the US dollar was not the global medium of exchange. He criticizes the World Trade Organization as a "hollow organization" and notes Keynes's prediction of a decline in the US standard of living and a rise in populism due to Ricardian trade theory and mercantilist policies elsewhere. He points out that since Nixon closed the gold window, fiat currency has grown by 8-9% annually, necessitating similar portfolio growth to maintain living standards. He identifies the point where interest payments on debt exceed military expenditures as a sign of imperial decline, referencing historical precedents.

The System's Recalibration and the Role of Trump

Thorne believes the current period represents an "adjustment period" where the post-WWII environment is no longer sustainable. He sees President Trump and his administration as a "forcing function" for this recalibration, highlighting the expertise of individuals like Secretary Basset. He suggests that this administration understands the necessary solutions and is implementing them strategically.

Capex Supercycle: Investment or Economic Cold War?

Thorne frames the capex supercycle as a race to achieve Artificial General Intelligence (AGI), which he believes will grant a lead in military and industry. He is more concerned about the "hangover" from this period, from 2033 to 2035, than the immediate future. He anticipates a period of cooperation to reduce debt and foster economic growth before returning to "business as usual" and potentially facing tougher choices.

Preparing for the Mid-2030s

For the period between now and 2030-2031, Thorne suggests that valuations may not matter as much due to the pursuit of AGI. However, he anticipates that by the mid-2030s, concerns about overvalued assets will become relevant. He advises investors to consider a significant allocation to gold and Bitcoin as stores of value. He also suggests that by the back half of next year, a shift from AI-related trades to interest-rate-sensitive sectors for a catch-up trade may occur.

The Fragility of Leverage and Deleveraging Events

Thorne acknowledges that many new crypto and tech investors have not experienced real deleveraging events or liquidity pulls. He points to the October Bitcoin deleveraging as an example of how leverage can unwind rapidly. He believes the Fed will need to overshoot to the downside with rate cuts to stabilize the system and that asset purchases may be necessary. He argues that the 2008 global financial crisis was an exception, not the norm, and that future corrections will be more localized. He dismisses the idea that individual company blow-ups will cause another global financial crisis, attributing such events to overleveraging or fraud, which are normal in business.

The Loss of Trust and the Go-To Trade

Thorne agrees that a loss of trust in the system leads to gold as the go-to trade, followed eventually by Bitcoin. He believes the general investing public has seen behind the curtain of the "great wizard" of finance.

Gold Stocks and Execution

Regarding gold stocks, Thorne notes that the easy money has been made in the run-up from $2,000 to $4,000. He emphasizes that mining companies now need to execute, as mining is a difficult business to model and susceptible to unforeseen events. He suggests investors consider picking at physical gold rather than highly leveraged equities.

Popular Trades and Decoy Assets

Thorne believes that in an ETF-driven world, where younger generations prefer top-down investing, most assets will be dragged up. He advises investors to get beta exposure and avoid holding cash. For tactical traders, he recommends avoiding parabolic moves and instead focusing on sectors with "frustrating consolidation patterns," such as Bitcoin, which he believes is poised for a breakout. He also suggests that by the middle of next year, a shift from AI trades to interest-rate-sensitive sectors for a catch-up trade is likely.