The Most Dangerous Trade in the World Is Unraveling (Uncut) 04-19-2025

The Most Dangerous Trade in the World Is Unraveling – Bert Dohmen

Welcome back to Kitco News, I’m Jeremy Safran. Well, we have lots to cover today. Global markets are grappling with a wave of new uncertainty.

The European Central Bank just cut interest rates to two and a quarter percent. It’s the lowest level in over two years, citing the fallout from President Trump’s sweeping tariffs and warning of exceptional uncertainty ahead. The IMF is now flagging trade policy risks as, quote, off the charts.

And Fed Chair Jerome Powell says the U.S. is entering a challenging scenario where inflation and growth are pulling in opposite directions. Markets interpreted Powell’s latest remarks as hawkish, triggering a selloff in U.S. Treasuries and pushing yields higher, adding further pressure to this uncertain environment. Meanwhile, President Donald Trump is openly attacking Fed Chair Jerome Powell, demanding immediate rate cuts, calling him, quote, always too late and too wrong and saying his termination cannot come fast enough.

Again, reigniting debate over central bank independence as volatility continues to surge in the markets. And at the same time, stress is building beneath the surface of the credit markets. Leverages is rising, spreads are widening and key technical signals are flashing.

Gold, meanwhile, long considered a safe haven, hit another record high and topped $33.70 an ounce overnight in June COMEX futures. Now, this comes as equities remain fragile. Traders are closely watching for signs of a deeper unwind.

Joining me now to break all of this down is Bert Doman. He is a founder of Doman Capital, author of the Wellington Letter. He’s been warning about these market dynamics for months.

And today we’re going to ask him, how deep does the instability go? What happens next? Welcome back to Kitco. Good to see you, Bert. Nice to see you, Jeremy.

OK, you heard all of that macro information off the top. There’s definitely a ton to get into today. But you’ve been warning that the basis trade is the most dangerous distortion in markets right now.

It’s an overleveraged arbitrage that could unravel violently. For viewers unfamiliar, I mean, what is the basis trade and why are you sounding the alarm now? Well, we saw it get unhinged, and that was when the Treasury, one of the sharpest declines in history in three days, they just plunged. Treasury bonds are supposed to be an inflation hedge, a safe haven and so on.

And suddenly the prices just plunged. And that was a signal that something was breaking in the credit system. And that is a highly leveraged basis trade.

Just to make it simple, these huge hedge funds with a big leverage, maybe 50 or 100 to one leverage, for example, they buy Treasury bonds and then they sell short the futures or the other way around. And with high leverage, they make a few dollars per trade, but they do it a few million times and they really make a lot of money. But when the counterparties disappear, then the trade becomes unhinged.

And this is what was happening. So this is like the long term credit management that was a hedge fund started by I think three or four Nobel Prize winning economists some years ago and had to be bailed out by the Federal Reserve in order to prevent the systemic crash of the system. And, you know, already there was a warning when the economists, Nobel Prize winning economists, especially founded a hedge fund.

You know, that’s always a warning. You know, I never listened to economists except when I want to know what not to do. And so because they only know what’s in textbooks.

In this case, Trump is a businessman, a very successful businessman, and I think he knows more about the economy than economists. Interesting. OK, I mean, some say that the arbitrage is safe because it’s collateralized and market neutral.

But, you know, talk a little bit about that disagreement here. Is the risk about leverage counterparty exposure or is it the side of the trade now? You know, Jeremy, anything that’s collateralized or hedged, you know, long term credit management, they also say, oh, it’s all and it doesn’t it doesn’t make any difference that we have, you know, a thousand to one leverage. No, the hedges disappear in the credit crisis.

The hedges disappear. Suddenly you are no longer hedged. OK, I mean, it’s been interesting and fascinating to watch.

I mean, you got to kind of look at what’s happening within that leverage market, too. But I want to get your opinion on the ECB in Europe because they recently, as you know, cut these rates to two and a quarter percent. They’re citing exceptional uncertainty from these U.S. tariffs in the marketing tightening.

How does this diverge from what we just heard Fed Chair Jerome Powell say? I mean, does this put the ECB on a different trajectory? Play this out for us, Bert. Yes, definitely. I think the ECB is much smarter in this case.

And they’re lowering interest rates in order to lower inflation. This is the big problem. There’s such a huge fallacy and that’s been around for a long, long time, probably the last 70 years that rising interest rates will reduce inflation.

That is so false, so false. That only happens if there’s tight money. But when the money is not tight as right now, you can still get bank loans, you get mortgages, et cetera.

Then rising interest rates increase the cost of doing business and it raises prices. This is so important to know the big difference. And all the economists that you will see on TV, they get that wrong.

They say, oh, we have to raise interest rates in order to lower inflation. No, it boosts inflation. I remember when Great Britain under Margaret Thatcher, she came in and the people before that had raised interest rates continuously in order to stop inflation from rising.

Well, they were actually fueling inflation. Every time they hiked interest rates, inflation went up. Pretty soon was double digit, 15 percent, 16 percent inflation.

And so I wrote even a letter to Margaret Thatcher. I don’t know if she ever read it, but I said, don’t continue raising interest rates, start cutting interest rates if you want inflation to come down. She started cutting interest rates and inflation came down.

Interesting. So then, I mean, Bert, are we entering a policy trap where both options, tightening or easing, are losing their effectiveness? Well, it all depends, you know, many people, they look at the ripples instead of what is causing it, you know, and in my opinion, monetary policy is everything. When you see a liquidity expanding, the markets have to expand.

But we had the greatest influx of artificial money, fabricated money out of thin air for the first two years of the last administration, you know, ending in 2022. And the Federal Reserve finally had to come in and tighten the money in order to stop inflation. But this was a very, very big mistake.

They created about, depending on what measure you use, about eight trillion dollars. Money supply went up 60 percent in two years. I’ve never seen such growth in money supply M2 as we had at that time.

The 60 percent increase in money supply will boost inflation. You will have double digit inflation. And that is still in the pipelines today.

And of course, who’s going to be blamed for the inflation? That’s still going to come out of the pipelines. It’s going to be President Trump, not the last guy who did it. Of course.

Yeah. Speaking of inflation and the liquidity in the market, I got to ask you, because we’re seeing credit spreads widen quietly, but pretty meaningfully here. I mean, you’ve said that this is one of the most reliable early warning signs of stress.

First, explain to the viewers who might not know what do wider credit spreads mean? I mean, what do widening spreads versus narrow spreads tell you about the markets and what are they signaling now? Yeah, usually it refers to junk bond yields versus treasury yields. So when the yields start rising on junk bonds, you know that there’s less money going into junk bonds because of the perceived risk of junk bonds. So when the when the spreads widen, it’s always a signal that a bear market is ahead of bad things are going to happen because the big money is avoiding the higher yielding junk bonds.

The higher yield is no longer sufficient to compensate for the added risk. And so then the yields widen. All you have to do is watch the spread between junk bonds.

There’s an ETF, JNK, HYG. These are junk bonds, ETFs, and compared to the yield on treasury bonds, long term treasury bonds like the TLT. Is this divergent, you know, between rising spreads and still easing policy? I mean, is it a sign that liquidity is evaporating in the financial system? Well, liquidity can evaporate without the Fed doing anything, and right now it’s happening.

I mean, let’s face it, all this was artificial money that went into the system. When the foreigners stopped taking our money, then the dollar goes down. And we’re seeing this happening.

The dollar is having a severe plunge and is probably going to go much lower looking at the charts. And so gold is soaring. And before we off the air, we talked about 1978.

I was in Vancouver and that was the start of a period which is very similar to now. You know, the economy does not necessarily repeat, but it does rhyme. And at that time, 1978, if you look at the charts, 77, 78, when we gave a buy signal on gold to a sword, I remember we started buying it at $123 an ounce and eventually two years later was $800 an ounce.

So very similar to now. And at that time, also people went, what is making it go up? Well, it was all the artificial money that the Federal Reserve had put into the system several years before. See, it takes a long time for this to emerge.

And the Federal Reserve said we’re going to fight inflation by raising interest rates. And we wrote at that time in the Wellington letter, we said that is a prescription for double digit inflation. When you don’t tighten money, the availability of money and you raise interest rates.

And it was totally correct. Suddenly inflation was at 15 percent. Treasury bond yields were 15 and a quarter for long term yields.

It was a hundred year high in the Treasury bonds. And so we had a great opportunity, short selling. Long term T-bonds went down 44 percent in price.

My prediction had been they will decline by 40 to 50 percent, which one economist, a well-known economist at the time at Goldman Sachs, he called it absurd. And but it happened. T-bond prices went down 44 percent.

And then came 1982. And we said, OK, it’s all clear. Paul Volcker was successful.

He killed inflation. Now is the time to make a lot of money in T-bonds. And we recommended the zeros, which have the coupons clipped off.

And so, in effect, you have a leveraged Treasury bond. And we said we’ll probably go up tenfold in price. And that was wrong because it went up 40 fold over the next 40 years.

Forty fold increase in Treasury bonds. Where else can you get that? Yeah, no, you can’t. OK, let’s go back.

I mean, I got to talk to you about gold. Of course, I want some outlooks, including on the miners. But first, you brought up Powell and you brought up the Fed here.

Trump is now openly attacking Jerome Powell and demanding rate cuts. Meanwhile, the bond market is pricing in at least two cuts this year. How does this political pressure intersect with market structure here, Bert? I mean, can the Fed remain independent? Well, you know, this is a question, can they be independent? Maybe they shouldn’t be independent, you know.

And I don’t know why they why we have a Federal Reserve that has a mission to control interest rates. I think the free market can control interest rates much better than people who are so-called data dependent, as they say. Well, if you’re data dependent, you’re always going to be at least a year late, you know, because that’s how long it takes for what the actions of the past year, what effect they have on the economy.

So you’re all going to be very, very late. It’s like driving a car, only looking in the rear view mirror. You know, you’re going to crash.

That’s and we’ve seen that happen again and again and again. They are much too late. And that is and Trump is a businessman, a very successful businessman.

He can predict the economy better than all the Ph.D. economists together. So is Powell already boxed in here? I mean, is he too late to hike or too afraid to cut? Yeah, and we also have the political component, of course. Yeah, yeah.

Which is, you know, I don’t want to go into that because it might offend some people. But that is very important at this time. So he’s got such big opposing forces to fight.

And that’s a big question mark. Will he be successful or will the other side be successful? Right. But let’s get into equities.

We’ll change points here because you pointed out that despite these record index levels, there’s still underlying breadth is deteriorating and small caps, financials and cyclicals are underperforming. What does this divergence tell you about the market’s health? The market is very, very sick. You know, it’s two months ago, he said the headline was in a liquidating bear market.

And I had an interview with Kiyosaki on RedShot. And we talked about what a liquidated bear market is, is when people sell anything they can sell just to get cash. And that is what we’re having.

And it was about three months ago in January. I said, I’ve never seen so much high volume, big selling going on in the market as we had at that time. And nobody seemed to pay attention.

I mean, this was huge selling of any stock, not a specific sector, not news related or so on. So it was a very, very urgent case of raising money. And that was a big smart money.

And at the same time, the guys from Wall Street, they go on TV and say, oh, this is a time to go bargain hunting, bottom picking, you know, etc. And all that stuff. Yeah.

So the reason I watch financial TV is to know what not to do. You know, you always want to be in the opposite side of what the majority says. Yeah.

Yeah. Well said. And I mean, to your point, the Nasdaq recently broke some pretty interesting key technical levels.

You compared this set up to early 2000. I mean, do you think we’re witnessing the early stages of a major unwinding in tech? Or is this this is obviously, as you just said, it’s not just a healthy correction. No, this is great.

On the way, they still call it a correction, although many of the top stocks are down 30 and 40 and 50 percent. I mean, it’s incredible. Take a look at NVIDIA.

Number one, it was the biggest capitalization stock in the world at one time. You know, it just keeps on being sold and keeps on being sold. And there’s nothing bad about the economy, about the company that I see.

They really have a lock on the AI and so on. But the boom is over. And we see that in other big booms in the past, the railroad boom.

Everybody thought, oh, my God, there’s going to be a railroad everywhere. You got to buy the railroad stocks. Well, the people who bought the railroad stocks, they ended up in the poorhouse.

And the people who founded the railroad companies, they became very wealthy. You know, so the booms are always ahead of what actually happens. And then when we see that, oh, yeah, they’re building all these railroads or the airline boom or the TV RCA when RCA came out with radios and then came out with with the TV.

You know, by the time the public knows it’s too late, the big money has been made and you’re buying just right at the top when the insiders are selling. OK, interesting. I mean, so this is we talked about that correction, but, you know, could this spill over into more of a systemic risk? I mean, what would confirm to you that this is more than just a rotation? Yeah.

You know, Jeremy, we work a lot with cycles and there are short term cycles and long term cycles. And, you know, it’s amazing how they work sometimes in cycles to shift to the left or to the right, usually. But there was one cycle study we did on gold in 1980, and we had to go back to England to get more years because we only had about 200 some years of U.S. history in gold.

And so we went back to England and added another 150 years to that data. And the conclusion was in 1980 that this is the top in gold and it’s going to be a 20 year bear market. And people thought it was crazy.

You know, we had to make a lot of money buying gold. They said, you’re not going to make money buying gold. You have to sell it short.

In fact, we had one person, a very wealthy person from South America. He came to us and he went to buy gold because he had heard it was going to go to $3,000. He said, no, no, the way to make money in gold is to trade it on the short side.

We started trading on the short side. Over the next several years, he made millions of dollars with us trading. He would call every year, every day for consultation.

And we made a lot of money for him on the short side of the market. And the bear market was exactly 20 years. The bottom was in the year 2000, 20 year bear market.

Nobody would believe that would happen. OK, then we said in that 1980, we said that would be followed by a 31 year bull market. And what will cause it? We wrote, we have no idea what will cause a 31 year bull market in gold.

Here we are. Now we see it. Infinite money printing.

That’s what it is. You know, and we’re in it. We’re in that same phase now where we get that acceleration up move.

Everybody says, oh, I’m going to wait for a dip. I’m going to wait for a dip. And it keeps on going up, doesn’t produce the dip that people were looking for.

It’s the only real money. It’s the only real money. Right.

You I mean, you’ve also talked that, you know, you talked about how gold is obviously benefiting from this weakening dollar and this whole growing uncertainty in both credit markets and equities. But, Bert, I mean, you warned that if the market volatility forces more liquidation, you know, gold could take a hit. So given all this, what’s your outlook for gold prices from here? I mean, do you see this rally sustaining? Are we going to have a pullback? What do you think? Excellent question, Jeremy.

What usually happens in these severe market declines, we saw it in 2008 also. You finally see when money managers have sold everything that they want to sell except the gold, then they finally say we still need more cash and then they sell the gold as well. OK, but but those declines are short term, you know, maybe the last one or two months.

And then that gives you another great buying opportunity. But it can happen if there’s a severe downturn in the general stock market. So this is something that people have to be aware of.

People have to stop buying these double and triple leveraged ETFs. This is financial suicide. You know, most people, they sign these margin agreements with the brokerage firms without reading them.

People can lose their houses when they cannot meet a margin call. That I saw that happen in 2008. We had lunch with a big Wall Street guy.

He came to see us and he said all the places he was traveling to. And I said, why are you traveling so much? He said, oh, foreclosing houses. I said, but I didn’t know you were in real estate, you know, 30 years old stock business.

He said, we’re not in real estate, but this is liquidating margin calls. I couldn’t believe it. He was going around the country foreclosing on houses.

Yeah, wild. It reminds me of, you know, it’s like almost time to watch the big short again, too, Bert. OK, we got to talk about then if we’re looking at the stock market, we would be crazy not to talk about the miners, because in your recent newsletter, you noted that the recent surge in gold prices is not even close to being reflected in gold mining stocks, which you say have a big profit leverage at these levels.

Walk us through how much more upside you see for the gold miners from here. But more importantly, what catalysts you’re watching that could unlock the value? Because we haven’t seen it all year. Yeah, you know, that’s another very good question, because if you take a look at the long term performance, gold has outperformed the miners.

OK, and so but now we have such a huge gain in the price of gold and the miners really don’t have such an increase in the cost of mining. So basically every dollar of increase in the cost, most of it is profit for the mining companies. So there’s a big amount of so-called profit leverage, as I call it, in the mining stocks.

Those big gains and earnings have not yet been reflected in the mining stocks. They have not had their boom. That will come.

That will come. But again, you know, people will probably recognize it too late and they will buy at the top. You never want to buy when everybody else is buying.

You want to buy before everybody else is buying. The central banks have been the bigger buyers and the only buyers, basically, for the last decade or two decades, probably. The public has not been out.

I know some people that are in the gold business and they say it was just a couple of months ago that business is dead. The public does not want to buy gold or gold coins or anything. It’s amazing.

So there’s still a ways to go, but don’t be late to the party. OK, so late to the party. I mean, you’re looking at the equity prices and we have seen some of the major miners, Newmont, Barrick, these types of companies.

They’re printing cash at these levels. I mean, the cash flow is incredible. Will that start to matter here? I mean, are we going to see it in Q2? Where are we in this cyclical area of mining stocks? When is it actually going to catch up? Yeah, well, you know, it’s hard to predict the length of any cycle like this, but it seems like we’re still in the early phase because the public has not yet gotten so excited about it.

You know, I mean, take a look at some of the other speculative bubbles that we had in the last five years. For example, 2021, the meme stocks, there was GameStop, you know, GameStop was a video retailer, a video game retailer. And in fact, there were rumors that it might go bankrupt.

And suddenly the stock in two weeks time went up over two thousand hundred cent in two weeks, you know, and everybody started plowing into it at the top, of course. And then it went down by, I think, 92 percent over the next two weeks. You know, I mean, this is sheer insane speculation.

People started buying stocks, SPACs. People started buying these non-fungible tokens, which were worth a piece of digital art, you know, and I think the highest price was sixty four million dollars for one. I don’t know if there was a real buyer.

Then they started buying this piece of art at the South India Auction, I think it was. And it was a molding banana staples to a canvas. I mean, it’s incredible.

The insanity of the human beings, you can never be overestimated. So I think there’s a problem. Yeah, there seems to be.

I got to ask you, Bert, too, before we let you go. I mean, a lot of your analysis points to cross-asset stress, not just in equities, but in FX markets, you know, credit markets, sovereign debt. Are we in the early innings of a global reset? I mean, where do you see the real capital flight heading to? Oh, this is a serious effect.

There’s a 90 year cycle of depressions. OK, and we are now at the beginning of the next depression cycle. And we always thought, how can this be possible with all the policies of the Trump administration, everything they want to do, cutting taxes, cutting regulations on all very, very beneficial for the economy? Is that what could possibly cause a deep recession or a depression at this point? Well, I think we’re starting to see it, you know, that even these measures are not going to be sufficient.

Long term cycles are very powerful because the markets, people forget this, the markets are not a function of price earnings ratios and dividends and buybacks. It’s just that you hear all the time, you know, the markets only depend on one thing and that is emotions, the emotions of buyers. Otherwise, why at one time when the S&P index is selling at a PE of 28 and all the analysts are still recommending buying, they say, yeah, we know it’s high, but these stocks still look good.

And other times when the PE has dropped down to nine or the big cap stocks, you know, below 10, nobody wants to buy. You know, this is a function of emotions. The markets are emotional.

OK, so that’s what all these long term cycles are also a function of people’s emotions. Now, you know, you see the trend of horror movies, for example, horror movies. They’re produced en masse at the start of a big depression.

You know, we’re seeing suddenly everyone wants to watch horror movies. This is a long term cycle of human emotions. That’s what this is all about.

Yeah, interesting. I never thought of it that way, but it does make sense. Well, then what does safety look like when, you know, we’re looking at traditional safe havens like the Treasuries.

They don’t even have a bid. So, I mean, if you were managing a large institutional portfolio right now, what would you be most focused on? What is the single biggest risk that the mainstream is still ignoring, Bert? You know, Warren Buffett is a very smart investor. You know, I remember I read about him when I was in graduate school and my degrees in chemistry, my undergraduate, but I said, you know, maybe I should try some of these business courses again.

Because the first time I tried it, I was a freshman and they were terrible. They were written by people who had never been in business. And so I went to graduate school business and I read about Warren Buffett from Omaha, Nebraska, right next door.

I went to the University of Minnesota. And so it was amazing, you know, and the theory he had about investing, long term investing and so on. Right now, he’s got, according to reports, three hundred forty billion dollars of cash and cash or cash equivalents, which is short term T-bills.

T-bills are fantastic. You get a yield of four to five percent depending on when you buy a bottom and you have 100 percent safety. This is amazing.

Treasury bonds, long term bonds used to be considered a safe haven. They are no longer because of the higher leverage games that they they play in the derivative markets. So look up the words basis trade and read about how basis trades function.

You know, people have to start reading about investments before they buy something. You know, reading is just an amazing what you can find out when you read, you know, many people. When we interview people for my company for graduate school, like UCLA, and I always ask them the question, what is the difference between a bond and a stock? Well, many of them know.

Then I say, what happens to bond prices when yields go down? They have no idea. They’re in graduate school of business. They don’t know that bond prices rise when yields go down, you know, or the other way around.

So, you know, it’s when they say, well, what books have you read on investments? If you’re so interested in investing, oh, I don’t read books, but I go to on Facebook. I said, that’s that’s not that’s not reading, that’s not very effective, not very effective. I got to ask you, I mean, you’re talking about the average investor here, Bert, for that average investor.

I mean, you’re kind of known for being ahead of the move. But what’s the most important move to make right now before the narrative shifts? I mean, is it just buy T-bills, do what what what our friends doing with cash? Well, yeah, what you want to do is ignore anyone that says, well, yeah, the stock market may not look good, but here’s a stock that is great because of earnings in this. No, in the bear market, especially a bear market that is probably going as severe as this one, everything goes down, everything.

And the one thing that’s going to stay down the least is probably gold related investment. If it is sold, it’s going to stay down for a short time and and it’s going to make you long term money because you have to like like a chess player, you have to think a few moves ahead. I used to play a lot of chess and in fact, my brother was a chess champion of Minnesota.

And so chess chess is really important because you also try to think four or five moves ahead what your opponent will do. So the next move here for the Federal Reserve would be that if things start falling apart, yes, they will step on the monetary accelerator. They will once again generate maybe 10 trillion dollars of artificial money.

People don’t even know what a trillion dollars is. I asked people, do you know how much a trillion dollars is? People don’t have an idea. If it has a one or two in front of it says, well, it can’t be very much.

You know, that’s what people go by. People have to find out what is a trillion dollars. You know, is it a thousand billion? You know, that’s a lot of money.

So this is the whole thing. People have to educate themselves before they buy something. Look at the cryptocurrencies.

Most of the cryptocurrency, I think one time we had over 2000 cryptocurrency. Most of them have gone bankrupt. And of course, the people that were in them, they’ve lost all their money.

Nobody talks about that. You know, no, because it doesn’t it doesn’t fit the propaganda agenda. Right.

All while we continue to see all time highs on the gold front, Bert Doman is the founder of Doman Capital, the author of the Wellington Letter, where you can find out more about this type of information. Thank you for joining us today, sharing your perspective. Always great to have your voice on the program.

Thank you very much. It was so, so nice being with you and especially a beautiful view that you have behind you. I do love this city.

I appreciate it. Yeah, let’s do it again. OK, cheers.

You betcha. And thank you for watching. If you found this conversation valuable, be sure to like this video, subscribe to our channel, turn on notification so you don’t miss what’s next.

We’ve got more market moving interviews and deep analysis right here on Kidco News. I’m Jeremy Safran. We’ll see you next time.