Escape The Central Bank Trap

Podcast Transcript

Ed Coyne: Hello, and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott. I'm pleased today to welcome Daniel Lacalle, CEO of Alpha Strategy and author of multiple books on the economy and the world of energy. Such titles as Escape from the Central Bank Trap, The Energy World is Flat, and Life in the Financial Markets. Daniel, thank you for joining me today on Sprott Radio.

Daniel Lacalle: An absolute pleasure. Thank you so much for inviting me.

Ed Coyne: Well, Daniel, and we'll go with Dan. How about that? I'm Ed, you're Dan.

Daniel Lacalle: Absolutely. That's great.

Ed Coyne: Prepping for this podcast today, I saw you've got an extensive background, both from a global economic standpoint, talking about the economy and also in the energy markets, and I want to unpack a lot of that today. Before we do, could you tell us a bit about your background, your career and the work you're doing over at Alpha Strategy?

Daniel Lacalle: I'm an economist by degree. I started in the energy industry in oil and gas. I was in charge, from international finance to Africa and the Middle East, in an oil company for quite some time. Afterward, I was always interested in financial markets. I had the great opportunity of being hired by an investment bank, joined that investment bank, and very quickly received an offer to join Citadel on the buy side as a hedge fund manager.

I worked at Citadel, then at Ecofin, then at PIMCO, and afterwards at Tressis as a fund manager, and now I'm a chief economist. I'm also a PhD economist and chief economist, and in Alpha Strategy, I give advice to companies on everything from strategy to macroeconomics to energy. I didn't want to go into too much detail. The resume is not much more than that.

Ed Coyne: Well, it's extensive. I think you're doing yourself a disservice. I have to ask you, how in the world do you find time to write between your analytical work and your research? My last count was seven or eight books on the economy and energy. Where are you finding the time to do all this?

Daniel Lacalle: I'm always writing. What I do is that every time I'm thinking of something or researching something, etc., I'm always writing my thoughts, and I keep them in different folders. It allows me to think of themes and ideas and revisit what I have been thinking in previous months. All of that informs my articles and my books. It's almost like a circular strategy in which, if I'm going to give a keynote speech, I'm thinking about a number of things that will also be used for my books, articles, and videos. Ultimately, doing all I can to write as much as I can all the time, basically, and I find that it's something that I enjoy and, at the same time, helps me a lot in producing more content.

Ed Coyne: You were ahead of the curve in talking about central banks. Your 2017 book, Escape from the Central Bank Trap, is timely today. At Sprott, we focus on precious metals and real assets, and central banks are driving the gold narrative right now. Let's unpack that concept a little bit.

Daniel Lacalle: The idea was basically to tell people that the world that we live in and continue to live in, in terms of monetary policy, is completely abnormal, and it's not something that people should think has no risk. I wanted to explain to the average reader: "What the hell is this monetary policy quantitative easing? What is everything going on?" and why you should protect yourself. There's an entire chapter about gold.

It's called Escape from the Central Bank Trap because what I was saying in the book is what we are seeing right now is that we were told a narrative that made absolutely no sense, which was that central banks can always increase the money supply and can always continue to inject liquidity with no discernible consequences. What I mentioned in the book was there is going to be an inflation burst, a reduction in the confidence of sovereign issuers, and citizens need to be aware of that and need to protect their wealth and protect their savings by escaping from it through hard assets, cryptocurrencies, gold, and other financial assets.

Ed Coyne: I think your point's well taken. In terms of global currencies, it seemed like for a while, it was the US dollar versus everyone else. That seems to be changing a bit, and gold and cryptocurrencies are becoming part of that narrative. Can you talk a little bit about that? How is the world of currencies evolving right now?

Daniel Lacalle: I think we're living the complete meltdown of the post-Bretton Woods world, in which central banks all over the world started to get rid of gold and started to use, as the reserve asset, developed economies' debt, US debt, and also euro area debt. The euro area was initiated, which led to the perception that developed economies with a world reserve currency could increase their debt and massively increase the money supply without any real consequences.

Because what is debt for a developed economy is an asset for an emerging economy, and its central bank, to maintain a specific stability of the local currency, needs to hold a tremendous number of treasuries or European debt or developed economy debt or UK gilts. All of that is breaking and disappearing. When governments implemented the atrocious experiment of 2020, which was to increase, massively, the money supply and government spending in the middle of the lockdown, and at the same time bring rates to exceedingly low levels, negative real rates, what that created was the inflationary burst that we are still living with today.

That also generated a very substantial impact on developed economies' central banks. Central banks started to incur very significant losses, including the Federal Reserve, the European Central Bank, and those central banks that held treasuries or gilts or any of the developed economies' bonds in their asset base. In the first year of that happening, many of them thought it was temporary, but it's the third consecutive year of losses in the bond portfolio.

That is showing that fiat currencies are surpassing what I call the three limits: the inflationary limit, which we have just discussed; the fiscal limit, which means that it doesn't matter if you cut rates or if the central bank purchases assets, the interest expense continues to rise in the budget and makes it even more challenging; and the economic limit, which means that higher government debt does not generate any multiplier effect in the economy.

Those three limits have been exceeded. Many central banks worldwide have decided, "I don't want more treasuries, European debt, or gilts. I want gold, and I want gold back in the balance sheet, because that is actually what can give me and my domestic currency stability and a certain level of true reserve value."

Ed Coyne: The debt thing, I think, is fascinating because it wasn't that long ago that very senior people and in political seats were saying, "Debt doesn't matter. We can print more of it. We have people to buy it. We can keep moving this around." It's starting to seem like it matters now. What was the tipping point of that? At what point was it like, "Oh, wait a minute, we went too far"?

Daniel Lacalle: I think it's the inflationary limit because governments don't care about the economic limit. Governments don't worry when too much debt brings stagnation. Look at France. Now, they're not worried about it. They even demand more debt. The fiscal limit is not a problem for governments because they will always say, "Hey, I'm going to raise taxes."

Nobody cares in the political environment. Now, my friend, the inflationary limit has destroyed the narrative that Sovereign debt will always be a reserve asset that the private sector will demand. Therefore, governments can increase the money supply and debt as much as they want." That is evidence of an issuer's insolvency.

Inflation is evidence of an issuer's insolvency, the same way that rising bond yields are evidence of a private debt issuer's worsening solvency ratios. I think that is what has changed, and it is also the alarm bell of many governments that were used to the idea that it didn't matter how much they issued every year; they would have two, two and a half times, or three times bid-to-cover. That is gradually changing.

It started very fast. It began with the PBOC, the Chinese Central Bank, reducing sovereign debt holdings. It continued with countries like Poland, Oman, and Saudi Arabia. Many people try to give a spin and say, "Oh, it's because of the Ukraine war. The countries that are close to Russia don't want to hold developed economies' sovereign debt, because they are supporting Ukraine."

Well, that makes no sense because Poland is one of the largest buyers of gold. Another one is Turkey, Oman, which is completely unaligned. The narrative is starting to crumble, and many governments are worried. That's why the euro area wants to accelerate the experiment of the digital euro.

Ed Coyne: I think it's interesting talking about digital. In this digital world with AI and everything, we're going back to real, hard assets and things we can touch and hold. I think the loop that we're in is fascinating. Let's stay on this for a bit longer because geopolitics has historically evolved, impacted economies worldwide, and moved markets. They don't have a true impact if you step far enough back. What's your thought on that? What is your view on geopolitics in the state we're in right now, and how is that driving the markets?

Daniel Lacalle: Geopolitics matter, but they don't matter the way that many market participants assume, which is an immediate and abrupt impact on asset valuations. It impacts the erosion of investment and CapEx among international, multinationals, and exporting nations. It also manifests in this monetary realignment that we are living in. We see more countries that are siding along China, other countries that are siding along the U.S., and we are seeing a world in which, instead of de-dollarization, we are seeing re-dollarization of many economies and others are yuan-izing, if that word even exists, their economies, which is taking more debt in yuan.

Geopolitics is very important, but it's dangerous to think, "Oh, there's a war, therefore, asset prices will decline." That is not necessarily so because the driving force of markets is liquidity. Usually, when there is an enormous geopolitical challenge or a conflict like the Ukraine War or the attacks on Israel, all of those immediately generate a very aggressive response from central banks, almost in a concerted way.

It's no surprise that you don't see the kind of impact that you would rightly assume, looking at the fundamentals, i.e., that you would see equities go down, commodities go up, that kind of thing. This is because the market is more focused and dictated by money supply growth than by geopolitical risks. Geopolitical risks matter a lot regarding growth, investment, the manufacturing sector, and the monetary developments we mentioned.

Ed Coyne: We'll try to sum up the market part of this with your take on the financial markets today. I watched a couple of your most recent interviews, and you seem positive about them. With all these things happening, what's your take right now? Where do you think we are?

Daniel Lacalle: Why am I surprisingly positive on the markets? Because everybody says, "Oh my God, this is a disaster. This is a disaster." A lot of the things that everybody is saying, by the way, are very valid arguments in terms of trade war impact, but we need to pay attention to the money supply, which is soaring.

The money supply is soaring. Equities and markets always react with a lag. It depends—it's usually between two to three months, but not more, to abrupt changes in money supply growth. We had a significant decline in money supply growth between September 2024 and February 2025. That manifested itself in markets with quite a bit of volatility and a substantial decline in some cases.

At the same time, we have seen the opposite happen recently. That is super important because it leads the market to defend itself against inflation. By inflation, I mean the destruction of the currency's purchasing power. Therefore, even if the annualized rate of inflation, CPI, may be declining, money supply growth and inflationary pressures continue, and those are reflected in equities in particular.

I agree with all those who present very valid arguments against risk assets. I always have to remind people that they're an escape from the central bank trap. The market is all about money supply growth. When the money supply grows, markets rise; when it grows down, markets become volatile.

Ed Coyne: Are tariffs just smoke, mirrors, or noise right now? Of course, they matter, but will they drive the market? We've already moved past it, as the U.S. and China are now talking. It seems like it was a hiccup in the world. What's your take on the tariff environment right now?

Daniel Lacalle: Tariffs were always going to be a negotiation tactic, a fist on the table, in which the Trump administration was going to go to the world and say, "We're going to put tariffs on everybody," and then start negotiating. That is what it's doing right now. At the beginning of what I call the tariff tantrum, a lot of market participants, and certainly I would say the vast majority of investment bank analysts, went immediately to make a worst-case scenario analysis of the tariff situation.

The results were atrocious. Think about it. You analyze global trade and add a 20% tariff on everything. The impact is brutal, no? The two most dangerous words in economics are ceteris paribus. All of the economists in investment banks use ceteris paribus. They get their models, their models have all the variables unchanged, and then they suddenly have a dramatic negative impact, like tariffs.

The result is brutal, but it's so unrealistic. I think that what the markets have finally learned is that it was always a negotiation tactic, maybe a scary negotiation tactic, maybe a challenging one. Still, I think that what markets are doing right now is that, at the beginning, they immediately started to discount the worst-case scenario. Now they're saying, "Oh, wait a second, instead of being 100% or 120% tariffs on China, it will be 30. Oh, that's fine.”

People are starting to make their assumptions because, for example, I was saying to European companies, "You're telling me that European companies cannot sustain a 20% tariff when European companies have sustained an increase of 50% in taxes?" Of course. The market is just adjusting to a different reality. At the beginning, it was a reality that Trump only wanted tariffs to hurt the economy and to bring a tremendous amount of revenue to the U.S. Now, people are starting to understand he's negotiated with the UK and China. If he negotiates with China, everybody else will come afterward.

Ed Coyne: I know you like money supply, and I think you're spot on with that. Any other indicators out there that you want right now, or are you looking at to give you a pause or appreciation for the health or weakness of the economy? What else are you following right now?

Daniel Lacalle: Credit card usage and capital expenditure announcements are very important. An economy doesn't go down the drain as people think it does. Companies certainly don't decide to increase inventory and investment if they see that new orders are declining dramatically. When you look at the PMIs, I like to look, for example, at new orders and the strength of those new orders, even if there is a slowdown.

When it's about consumers, I like to look at credit card usage, and I want to look at the changes. I always look at the rate of change instead of absolute figures because absolute figures tend to give you a very aggressive view. Everything I'm looking at, from consumer behavior to company behavior to investment trends to manufacturing and services sector trends to financial sector trends, is also very important. Credit growth, et cetera, all tell me that the economy is preparing for a slowdown, not a recession.

Do you know when you could see that the economy was preparing itself for a recession? In 2020. In 2020, companies and families immediately reacted in the opposite way that governments said they should. They ignored the signs saying, "Don't worry, this is going to be good, and continue with business as usual because we will get out of the COVID situation quickly."

No way. People said, "Bam, save. Save like there's no tomorrow." That's why we didn't have a recession afterward. Right now, the economy is certainly showing a slowdown, but not the kind of crisis or slump that markets seemed to discount, at least at the beginning of April.

Ed Coyne: Well, and it seems that money supply, then and all the cash on the sidelines as well, will continue not to prop up but continue to support the market.

Daniel Lacalle: Absolutely. That's another very important factor. So much money went to money-type investments. It's so important to see a tremendous amount of money on the sidelines waiting for an opportunity to invest. Another factor that was very important for me was seeing an acceleration in share buybacks, because usually, if companies see a crisis, they start to hoard cash. They don't accelerate buybacks. That's another important factor.

Ed Coyne: It looks like we're doing okay.

Daniel Lacalle: We're not doing okay. Let's go back to Escape from the Central Bank Trap. We are getting slowly roasted, if that makes any sense. The economy is in secular stagnation, and the global economy is suffering from an enormous debt accumulation problem. All those things are true, but precisely because of that, economic cycles are also shorter and abrupt, leading to more money supply growth and more inflationary pressures on assets.

The point that I'm trying to make, always, is that yes, there may be a very significant correction. That correction will be an opportunity to look at quality at a reasonable price for long-term investments. What you need to pay attention to is not geopolitics, tariffs, China, Trump, or all the headlines that we read. Instead, it will be the fact that the disaster created monetarily in the last 10 to 15 years will only be addressed in the only way in which governments and currency issuers have tried to solve it in the past, which is currency debasement.

Ed Coyne: Hence, gold, cryptos, and other types of assets are stepping up and filling that void. Fascinating. Let's shift over to energy because it seems like energy and the markets and the economy are being woven together more than I've ever seen. More recently, you talked a lot about this, the most recent blackout we had back in late April in Spain and Portugal, and what that has started from a conversation standpoint.

Can you first talk about what happened? From there, will we see more of this in the future? What does this mean from an economic standpoint? What does this mean from an energy standpoint? Start with what happened in Spain a couple of weeks ago.

Daniel Lacalle: What happened in Spain is the following. We have been used to building an energy mix that is more volatile and intermittent, and getting rid of stable base load energies. What that has done is to make the grid more unstable and unreliable. People don't understand that you don't substitute a 500-megawatt nuclear plant for 500 megawatts of solar power.

It seems the same to people, but they are not the same regarding stored capacity and inertia. Solar and wind are great technologies in a mix that has baseload energy, synchronized capacity, and the amount of baseload energy that allows the grid to remain stable. Understanding inertia is a basic principle. What has happened in Spain is very simple. The government wanted, at all costs, and the cost was enormous, to present itself as the first developed economy that achieved net zero.

They ignored the warnings of the grid operators. They ignored the warnings of the utility companies. They ignored the warnings of the previous blackouts. A week before the blackout in Spain, there was a massive blackout in one of the main train stations in Madrid, and they ignored it completely. This happened. If the blackout had been for any of the reasons that the Spanish government and the so-called greens, which are not green, say were the causes, the blackout wouldn't have lasted 10 and a half hours without power and communication.

This is the first blackout in the history of the OECD in which there has been no power and no communication for 10 and a half hours in Madrid, and in other areas for 20 hours. Why is this important for the rest of the world? Because the rest of the world is doing the same thing, which is eliminating base load, inertia-driven energy that provides stability and exchanging it and offsetting it with technologies that have great advantages in many aspects, but don't provide inertia, are unstable, are intermittent, and volatile, which are solar in particular and wind. It's a warning. It's a warning for everybody because this whole nonsense of net zero is making things that were supposed to be a thing of the past, like blackouts, come back.

Ed Coyne: That's the question, right? As controversial as this may be, do we need net zero? We talk about energy transition, transitioning from one kind of energy to another. I've heard more recently, and I like this; it's more of an energy addition, which we need. We need additional ways to create energy. Do we need net zero, or do we need ways to move towards a net zero, yet continue to have energy security and safety? What's your thought on that?

Daniel Lacalle: Three elements are the pillars of energy policy: affordability, competitiveness, and security of supply. Without those three, you don't have an energy policy; you have a time bomb. Do we need net zero? I always answer it this way. When I talk with environmentalists or so-called environmentalists, so-called greens, who think that solar panels don't need any mining, et cetera, I always say to them, "And why not gross zero?"

They say, "Why? What, no?" "Why not gross, no?" "You think of net zero as the solution to the world. Why not gross zero?" They have been accustomed to repeating a mantra, and they don't understand what that means. What does net zero mean? Net zero means impoverishment. We don't need net zero. What we need, you've said it beautifully, is energy additions that are as clean and as technologically viable and efficient as possible, to reduce the level of contamination.

The level of contamination is not just CO2. Therefore, it makes no sense to substitute nuclear, hydro, and natural gas combined cycles entirely with solar and wind because that would entail 60 times more mining of copper, massive mining of rare earth, lithium, etc., and blackout after blackout because it is a very unstable mix.

What we need is exactly what you just said. Think about this, it's interesting how China and the U.S., the two leading economies in the world, understand it perfectly. I went to a renewable energy conference in Shanghai, and they all mentioned security of supply, reduction in coal generation, not elimination of coal generation, reduction in gas generation, but not elimination.

What are they thinking of? They say, "We want to make a cleaner energy mix, but we are not going to compromise growth, security of supply, et cetera." The same is true for the U.S. The problem is in the European Union, which has this not-in-my-backyard view of green energy. It is so hypocritical that, at the same time, it has reached record levels of Russian natural gas imports. It's just ludicrous.

Ed Coyne: I can't talk about this enough because I think there were sides drawn early on of who was on the net-zero side and who was on the traditional side of base-load energy, and we're all waking up to the reality that we need both.

Daniel Lacalle: I think that is what's important. It's not to ideologize energy. The ideologization of energy is so ludicrous that in Spain, nuclear energy is right-wing, and in France, nuclear energy is left-wing. What the hell are we doing?

Ed Coyne: It's crazy. I know.

Daniel Lacalle: It's just so ludicrous that it's funny. The reason why it's so scary to follow the objectives of these activists is that they're not stupid. None of those activists who are pushing for these completely misguided policies are stupid. The difference is that what they want to implement is demand control. Because they want demand, control, and de-growth, they don't care if there are blackouts, a supply problem, if the manufacturing sector doesn't have ample energy, etc.

The part of the equation that fits their agenda is demand destruction. Everybody else who wants progress, employment, well-being, and supply security needs to understand that we need all available technologies. Some of them will eventually lead because they're more efficient and better, and they provide cleaner and cheaper power. Fantastic.

That's in The Energy World is Flat, by the way. Why did oil replace whale oil? Crude oil substituted for whale oil not because we loved whales or had tremendous empathy for those beautiful creatures. No, it was because it was easier to produce, easier to store, and significantly cheaper to distribute. We need to understand that an energy revolution can only come if the outcome is cheaper, more affordable, and more amply supplied energy. When those three elements are not included, it's not a revolution; then it's an imposition, and that imposition always backfires.

Ed Coyne: I'm glad you brought up the energy world being flat because I think that book, which was in 2015, which was even more forward-looking than the concept about central banks, touched on a lot of these things, and it's now just starting to take shape. Anyone interested in this needs to go back in time and pull some of these books off the shelf because you addressed things before they were even being talked about in public policy, which I thought was fascinating.

Daniel Lacalle: I remember that, yes. Thank you.

Ed Coyne: Let's tie this together. It seems like energy today, you look at what tech companies are doing with nuclear and so forth, with AI and data storage centers, and markets are becoming more and more intertwined than ever before. How can an investor make sense of this? How can an investor participate in this? Looking at what's happening in the markets, what's going on with money supply, and what's happening in the energy markets, if you're a new or existing investor and want to participate in this, how would you do that?

Daniel Lacalle: I always give the example of a football team, okay? You need to have a defense. You need to have strikers. You need to have a portfolio that lives and breathes with how the economy is moving. The first thing that you need to do is understand what are the large important trends in the economy, the ones that are not for the next six months, but for the next 10 years, technology, energy, revolution, and change in the energy landscape and healthcare, aging of the population in some countries, and at the same time, fantastic increase in the middle class of developed economies.

All those things are long-term trends that you need to invest in. Then you need to have goalkeepers, gold. You need to have a defense. You need to have assets that are going to give you some protection in periods of volatility that allow you to look at those long-term trends and see corrections as an opportunity to buy quality cheaply. The way that you also need to prepare yourself is by understanding that the traditional concept of the 60-40 portfolio is gone, that sovereign debt has stopped being a reserve asset, has stopped being the quality, low-risk asset that gives you a kicker and a return in periods of volatility and provides you net real returns.

Absolutely not. No government will give you real returns on your money from sovereign debt because of the challenges of debt and spending that we mentioned previously. You need to shift the portfolio. You need to be more exposed to those companies and equities that are focused on those long-term trends. Instead of looking for safety in bonds, look for safety in gold, silver, and maybe cryptocurrencies, depending on your risk appetite. That, basically, in my view, gives you the opportunity to escape from the central bank trap, which is only going to accelerate.

Ed Coyne: Yes. New actors are entering the stage, so to speak, right? For clarification, football terminology was soccer, for our U.S. listeners, right?

Daniel Lacalle: Exactly. Soccer.

Ed: I heard striker. I thought, "I think he's talking about soccer, but I want to make sure."

Daniel Lacalle: I'm talking about soccer. Oh my God, I always forget.

Ed Coyne: What else would you like to leave our listeners with? Maybe I didn't ask, but that would be useful for them to hear as we go into this new dynamic of the 60-40 being broke and thinking of different things. What else would you like to leave us with?

Daniel Lacalle: Well, I think that for investors, it's very important to think of everything leading the headlines. What do they mean? What are we seeing? What we are seeing is a monumental shift in the world of money, the way we have lived it until today. We look at history and forget that the post-Bretton Woods era is a very short period in the history of money.

The history of money has always been one of governments dissolving their commitments and imbalances through inflation. What investors need to think of is that you're not going to find the ways to defend yourself from inflation in sovereign bonds or in those components of the energy spectrum that are fading away in terms of the energy mix. We mentioned energy previously.

Why is oil down, but copper is up? It's showing you that the trends are moving elsewhere. I think that those are things that I would focus on all the time. It's always about currency debasement. If you want to distill all of the headlines you read today in any of the economic media, you want to distill everything into one headline: the currency basement.

Ed Coyne: All right. That's a great way to wrap up the conversation. Now, from an education standpoint, listeners who liked what you had to say today, how can they find you, keep track of what you're doing, see what you're maybe working on today? How can we track you down if you have something exciting that you're excited about working on today?

Daniel Lacalle: Okay. I always say it's easier to find than avoid me.

Ed Coyne: Okay.

Daniel Lacalle: It's relatively easy. You look for Daniel Lacalle on Google and find I have two X accounts, one in Spanish and one in English. I have two YouTube channels, one in Spanish and one in English. Everyone watching will see quite a few more followers in Spanish, but you have the same content in English. On my website, the same thing. My books are available at Amazon or any of the online libraries that you might prefer. What I'm working on right now is that I just published my latest book, The New World Order in Spanish, which will hopefully be published in English in September.

Ed Coyne: Awesome. Any spoiler alerts on that book? What are we going to be looking out for?

Daniel Lacalle: Spoiler alert, we're going back to 1985. The world is not going back to multilateralism but to very differentiated powers.

Ed Coyne: Awesome. Daniel, I appreciate you taking the time today. I know it's late in the day for you there. I appreciate you giving your words of wisdom, and I enjoyed meeting you today on today's podcast.

Daniel Lacalle: Same here. It has been an absolute pleasure—very good questions, and thanks very much for listening and watching.

Ed Coyne: Great. Well, thank you all. Once again, my name is Ed Coyne. Thank you for listening to Sprott Radio.