The Entropy Trap: Why the Old Market Rules Just Inverted | Mickey Maini

[00:00:00]Hello, welcome back to the Royalty King Report. You're listening to the Royalty King. Today is my great pleasure to introduce an international man of mystery. He's a former CEO, family office investor, a quant physicist, and most importantly, a good friend of mine that I've known for a while. Mickey Mining joins me today to talk about his new book, The Entropy Trap, already number one on the new release list on Amazon. Check it out, guys. The link is in the description. Mickey, thank you so much for joining me today. It's a true pleasure. I've been waiting for quite a while for this moment.

[00:00:32]>> Thanks, Benjamin. I've known you for a long time, and it's great to finally be on the show and uh have a conversation on your podcast.

[00:00:40]>> Uh absolutely. The pleasure is mine.

[00:00:42]Mickey, let's talk about your book, The Entropy Trap.

[00:00:46]It starts at a very interesting point in history, 1929, post-crash, with the story of Jesse Livermore, Joe Kennedy, and Bernard Baruch.

[00:00:57]Those guys had a very, very different experience post-crash. What did Kennedy and Baruch get right that Jesse Livermore completely missed?

[00:01:07]>> Yeah, so uh thanks, Benjamin, for that question. So, firstly, I picked 1929 to 1934 because it's a very interesting time.

[00:01:17]It's a compressed timeline for learning about what the book is about.

[00:01:23]And I picked three very different and interesting characters to deliver the message of the book.

[00:01:29]Um the first one is Livermore, who was a self-made person, ran away from home at a very early age, uh made his fortune and lost it a number of times, brilliant trader.

[00:01:41]And in 1929, he made almost $2 billion in today's money shorting the market.

[00:01:48]Um and then he lost it all in the next rally, uh believing that the worst is over.

[00:01:56]And what he used to do was basically look at prices and look at tickers and look at sentiment.

[00:02:03]And then you had the next one which is Baruch, who I call the um who used to look much more at um uh I call the detached aristocrat uh cuz you know he he came from a a relatively well-to-do family. And he um he didn't look at the prices at all.

[00:02:22]He looked at the stress in the system.

[00:02:25]And he looked at what was happening to credit, what was happening to ba- policy government policy, printing of money, inflation, rates.

[00:02:35]Uh and so what he did was he started buying gold.

[00:02:38]He bought gold through the through the period. And then he also bought a bought a gold mine.

[00:02:44]And what he achieved through it was his his net worth, which was significant even before the crisis, he was able to preserve it.

[00:02:51]Uh which is great because a lot of people lost a lot of money through the crisis.

[00:02:56]And the third one is uh our friend Kennedy. Um who um who I who uh I would say measured the medicine.

[00:03:06]Um and the effect of the medicine, which is the effect of the policy.

[00:03:10]And what he was doing was he was looking at seeing that after every shock, what was the policy uh impact. And his conclusion was that the policy impact was less and less with each shock. And so what he did was he just stayed in cash, which is very, very difficult to do in that time. Because can you imagine the markets going up and down, up and down, and you have somebody just sitting in cash. And then finally, when there was distress and blood on the streets, he deployed the cash. He bought real estate, he bought um uh tobacco uh so liquor licenses, import licenses. And he did a 45 to 50 X on his money through that period. So, you know, just shows you how you navigate these periods critically impacts your net worth.

[00:04:01]>> Indeed it does. And understanding the difference between a reversion to mean or reversion to equilibrium or knowing when a system is undergoing a phase transition, that is what the entropy trap's about.

[00:04:12]And not many people are used to thinking through that lens.

[00:04:16]In very simple terms, what is the entropy trap? And what is entropy itself?

[00:04:22]>> Yeah, so most people think uh that order is a norm.

[00:04:29]But actually chaos is the norm.

[00:04:32]And order has a cost.

[00:04:34]Right? So, um when the cost of maintaining order becomes too high or unaffordable, I call it the entropy trap.

[00:04:47]So, let's let's give an example. Let's think of uh of our of our refrigerator in a desert.

[00:04:54]And you've got this hot wind coming in.

[00:04:56]And you know, your your room is cold.

[00:04:59]And you feel great about it. And you know, the refrigerator for years and years is fighting the hot wind.

[00:05:05]And then one fine day, the room is hot. And the refrigerator is not able to do its job.

[00:05:12]And that [clears throat] is the entropy trap. Believing that the refrigerator is or is always going to be able to do the job and not looking below the surface in the refrigerator. It's becoming fragile every every year. Uh I mean, the simplest examples that I would say are kids.

[00:05:30]You can try You can try and discipline them >> [laughter] >> until you try until you fail.

[00:05:38]So, every parent goes through the entropy trap.

[00:05:41]>> [laughter] >> Yeah, that's one entropy trap that's still ahead of me. But when I read that chapter, it it was a paradigm shift for me. Understanding the difference between things might appear to be static and mean reverting systems, but in order for that to be at a certain status quo, it requires a lot of input or energy.

[00:06:02]What is the book about in two or three sentences? What are people going to get out of it if they pick this one up? And obviously, people are enjoying it because as I mentioned, it's at the uh number one in new releases.

[00:06:13]What is What is the Edge of the Trap about in two to three sentences?

[00:06:18]>> Yeah, so um I would say that um most people think that we are in a cycle.

[00:06:27]Uh but actually, we're at the end of one financial system and heading towards another.

[00:06:34]And this period would which is the end of one and heading to the other in physics is called phase transition.

[00:06:41]And in this period, the rules that regular rules do not work. They actually invert.

[00:06:48]So, what works in the regular time, which is mean reversion 60/40, uh focusing on growth, doesn't work.

[00:06:55]Actually, it inverts. And what is risky in normal times is is not risky here and and vice versa. So, this book actually tells you how to measure using science where we are in in in this period uh and has tested that in history through past similar periods, and then it gives you a road map to be able to navigate through this period uh both from a from a wealth perspective and a personal perspective.

[00:07:28]>> Yeah, big changes seem to be ahead.

[00:07:30]There aren't many who would disagree with that. I've heard a lot of noise being made about analogies with the overlying debt cycle or macroeconomic cycle, whether it be Neil Howe's fourth turning, which gets cited a lot, or Ray Dalio, who's writing a lot about this changing or new world order, as he calls it.

[00:07:49]This is not that. How is the entropy trap different to what those two guys in particular have been espousing in their works?

[00:07:58]>> So, first thing, they've done great work, right? And uh and I'm a big fan of everybody that you've mentioned here. Uh but uh uh you know, pattern recognition is something that has been going on for a long time. And that's a good thing because, you know, that's that's what society needs to do is continuously look at patterns, recognize patterns, and learn from patterns.

[00:08:17]Uh what this book does differently is it uses science to actually be able to measure.

[00:08:23]Uh uh and what measurement allows you to do is to be able to know exactly the steps that are going to happen between now and the new system.

[00:08:35]But there's even one more thing.

[00:08:37]And which is that if you know how to measure, you know what the impact of the decisions are.

[00:08:44]And therefore, you can calibrate your decisions to help you navigate better.

[00:08:50]And so, this book this framework is better in that way. It's not better, but different. That it helps you uh measure and then calibrate your decision-making through the process.

[00:09:02]>> That was one of my takeaways after reading the book was there was a a roadmap in the book that was practical, that could be adapted to the end user or the reader in this case. A lot of people would refer back to various points in history where it's looked like a phase transition is about to occur, but it hasn't quite eventuated, at least not in the same uh not in the same sense as some of the other historic examples you give in the book in terms of a totally new system being created.

[00:09:32]How would How would you classify or the framework classify, for example, uh Richard Nixon's 1971 Black October 1987, 2008 with the GFC, etc. Compared to today, what's the difference and what's the classification?

[00:09:51]>> Yeah, so that's that's a really good question. So, 1971 was the start of the current phase transition when they debunked the gold dollar from the gold.

[00:10:02]1987 was just a normal correction, right? And that's also important because when you my models and your models are not able to differentiate between normal corrections and phase transitions, then then there's an issue.

[00:10:16]So, testing models on um periods which are not phase transition is very important. Because that's when you know they work or they don't work.

[00:10:26]Um then I would come back to 2008. 2008 was an event within phase transition. In physics, we call that the system is trying to come to an equilibrium on its own. To finding an equilibrium, right?

[00:10:41]Um and currently we are in uh well into phase transition. We are in stage three uh of of five stages in phase transition.

[00:10:55]And um probably you have these things change every day because I measure every day, but we are five to seven years away from a system reset.

[00:11:05]>> Okay. And when you're measuring using the the proprietary models that you have, what are they telling us about this current point in history? So, obviously most of the audience are interested financially in terms of what that means, but given the the state of the world, it's inextricable from the geopolitics and the technological advancements. So, what are your models telling you about the current state of the world financially, geopolitically, and technologically then?

[00:11:35]>> Yeah, so we are in a really interesting interesting period because three clocks are running at the same time.

[00:11:42]Uh which is and the level of stress in the system this is really high. So from a financial perspective we are in 19 early 1970s, I'd say around 1973.

[00:11:53]Um 1973 saw uh inflation um oil blockades um commodity issues you know all the similar issues that we have currently.

[00:12:07]Um then you have militarily we're 1938.

[00:12:13]Uh 38 is important because 38 was rearmament.

[00:12:17]Was stockpiling. Was getting ready for the big wars.

[00:12:21]It wasn't still at the war stage. So it's about new alliances. Alliances around access to resources. That's what 1938 was.

[00:12:30]And then technologically we're in the early 2000s.

[00:12:34]Uh because um the internet was an amazing thing.

[00:12:38]But in the internet time the um since demand the supply was way ahead of the demand. We just built too much, you know, too much fiber optic and so on.

[00:12:48]And the valuations therefore crashed.

[00:12:51]Uh in today's time the AI is a wonderful story. It's probably there for 20, 30 years. Um I think it's actually in many ways um the story itself is undervalued.

[00:13:02]But um the fact is that the demand is way ahead of the infrastructure.

[00:13:09]And therefore there is a potential valuation correction possible. So you have three clocks at the same time. You have financial clock 73 military clock 1938 and then a um technological clock 2000 to 2002.

[00:13:26]I'd add another clock which is the Fed clock, because now we have Mr. Warsh.

[00:13:32]And the Fed clock is 1978.

[00:13:34]>> Okay, so tell us tell us what you think of Warsh then. What's what's he going to bring to the What's he going to bring to the mix? What's he going to put in the model?

[00:13:43]>> Yeah, so I I think um you know, he has a lot of great ideas and I I like and I think it's great to kind of uh have the Fed out of the markets. And I think everybody agrees the QE wasn't really a great idea.

[00:14:00]But I think he's just come at a very, very difficult time.

[00:14:04]The Fed is trapped. And so trapped they can't raise rates because if they raise rates, I think there's an underlying credit problem.

[00:14:13]Uh a massive credit problem and they're act if they raise rates, I think they will push the phase transition uh at least 1 to 2 years in advance. And they're going to push and take us from inflation to deflation pretty quickly. So, he can't raise rates.

[00:14:31]If he reduces rates, then in an inflationary environment, the bond market will will go down, the stock market will go down. So, he's trapped.

[00:14:39]So, I think he's got he's got great ideas.

[00:14:42]He's a He's and I think what he's trying to do is is is is are the right things. But I don't think he has a lot of flexibility and I think all he's doing is trying to gain time and hoping that inflation comes down because home oasis open and he has and the AI productivity comes in at some point the next 1 year and he doesn't have to do anything.

[00:15:05]>> [laughter] >> Yeah, I think that I think that would be his best case scenario. I'm sure his intentions are well and good, but I still can't get around the the ultimate dilemma that he has, which is does he sacrifice the US dollar or does he sacrifice the bond market? And historically speaking, as you allude quite well in the book, we know which choice they tend to take. I've got to ask a difficult question and that is that your framework is very impressive. Having read the book, you've tested it over a very, very long period of time and across different samples, which is of course very important for scientific purposes.

[00:15:41]It's not a cherry-picked data set.

[00:15:45]But what would prove the framework wrong or what reading from your dashboard would make you materially change your current thesis?

[00:15:57]>> That's a really good question. So and I think about that almost every day.

[00:16:01]Right? Because we measure every day and honestly I'm still improving every day.

[00:16:05]Because anybody who says they have the the perfect answer in a very complex world with all these new factors coming in is probably I don't know what he's smoking.

[00:16:15]>> [laughter] >> What about what about Trumpy? Trumpy says everything's under control. He can drill down the market. He's He's in charge of everything.

[00:16:23]>> Trump is an output of the system. That's what I would say. But anyways, coming back to that.

[00:16:28]Um Uh we I you know, big picture.

[00:16:33]The first question is what would reverse the phase transition?

[00:16:37]Right? And so this whole thesis about phase transition doesn't work.

[00:16:41]Um And the answer to that question is well, firstly, in all my studies, it has never reversed when it has reached this position. This situation in terms of debt, uh innovation, stress, uh geopolitics.

[00:16:57]But it could still, you know, like in science, it could reverse. And what would make it reverse is if you had again a big wave of globalization.

[00:17:07]Hm. Uh if you had a massive debt restructuring, you know.

[00:17:12]Uh if you had a great China, Russia, US grand bargain, right? Uh trade. You know, things that take us back, you know, 20 years.

[00:17:22]I don't see that happening today.

[00:17:24]But who knows, right? So, if we suddenly see things reversing, you know, more free trade, more more uh globalization, um everybody agrees that is a bad thing.

[00:17:36]Fiscal spending reduction reduction of fiscal spending. I see all those things and you know, first phase transition can reverse.

[00:17:44]Um and I'll have to write a book about the other side.

[00:17:47]>> [laughter] >> With the reverse uh the reverse entry >> I don't know how to make money in the reverse phase transition.

[00:17:56]>> [laughter] >> But um uh also, you know, there always events that models cannot predict. You know, for example, COVID, right? I mean, there's always extraneous sudden events. Because what models are good at are slow burns. They're good at picking up stress as they come along.

[00:18:16]But they're not good at suddenly, you know, sudden big shock event that comes in out of the nowhere. So, that could happen. And then that changes everything.

[00:18:25]You know? Or a Trump tweet.

[00:18:28]>> Yeah, that's exactly right. That's the ultimate uh exogenous shock factor right there.

[00:18:33]You've mentioned a couple of times I've heard you on a podcast and I've read in the book itself 2027 seems to be a very important year for a potentially significant macro event.

[00:18:46]How could that play out over time and what do you think that looks like?

[00:18:50]>> So, you have a number of different stresses right now that you're monitoring, right? So, I'll start with first as I told you is the AI valuation bubble, which which we have to watch very carefully under return on CapEx.

[00:19:02]And how that plays out and that will come out in the earnings of the companies.

[00:19:07]The most under rated shock for me right now is the credit shock.

[00:19:13]And the reason for that is uh AI is both inflationary and deflationary at the same time.

[00:19:22]Right? So, it's deflationary in the digital world, but it's inflationary in the physical world.

[00:19:29]Right? And that means there's a lot of uh there's a lot of debt in AI that is being taken on. But then, because it's deflationary in the digital world, what happens to the old economy?

[00:19:41]A lot of that old economy is going to die.

[00:19:44]And a significant amount of debt is in the old economy.

[00:19:48]So, you've got this old economy debt, which is going to die because of AI, and then you've got AI debt. And you add the two together. And you see high yield spreads are historically low.

[00:19:59]Historically low.

[00:20:01]So, I mean, when I look at this the market's pricing of the debt credit today versus where the models think the the pricing should be, that is a big gap. Now, whether that materializes in a stress in 6 months or 18 months depends on a lot of external factors. So, for example, if we have a rate hike, for example, if we have another political shock, like we had Iran, right? So, there could be a number of different things that come to the table that can accelerate it. But that to me is the second second biggest stress point. And the third point is there the geopolitics, right? I mean, it the Hormuz supposedly open, but it doesn't solve anything. You've still got uh you've still got competition and conflict around resources and access.

[00:20:51]And, you know, it's just a symptom. So, it's going to come out and manifest in some other way next year, right? And so, we I track all of that using my models.

[00:21:00]So, I think 2026 to 2028 are your maximum stress periods, and you'll see more of these things merge.

[00:21:07]>> Yeah, and just a note on your models.

[00:21:10]Guys, Mickey and I were having a chat last week and I asked him about the chances of a a deal being done. And this is before the memorandum of understanding was put into place. And the models gave a statistical output in favor of a deal being done within the week. So, it's super interesting stuff. So, 26 to 28 maximum stress point. You and I I think both see things similarly in terms of eventually a new system will need to um will need to come to the fore.

[00:21:40]How do you see that new system? What does that new system look like monetarily?

[00:21:46]>> So, I think there's a few different things, right? Firstly, you have never been able to fully predict a system, a new system while being in the old system.

[00:21:56]So, if you said in the early 1900s, you'd have Bretton Woods and US would be the next superpower, um you know, nobody would have believed that, right?

[00:22:04]>> Right.

[00:22:04]>> So, at best, what we can do is we can we can forecast based on probabilities and and those can change, right? So, take that with a pinch of salt. So, first is we're heading to a multipolar world.

[00:22:15]That's that's the that's the foundation, right? If anything, the Iran war has shown that and if anything, what you're seeing in the world right now is you know, is we're heading towards a multipolar world.

[00:22:25]>> Right.

[00:22:25]>> Gold is a bridge between two systems.

[00:22:28]So, that's a second thing. And uh because it has a history of thousands of years.

[00:22:35]And when trust in one system breaks down, like dollar system currently breaks down, then people go back to what they inherently trust for thousands of years, which is gold.

[00:22:46]So, gold is your trust trade between the two systems, always.

[00:22:52]And then, what comes at the other side is what will the new system value? The new system is an AI system, right? The foundation will be tech, will be AI.

[00:23:02]And what is the key What is the most important measure of value of AI?

[00:23:06]Is cost of compute.

[00:23:08]So, I think the future of measure of value in the new system will probably be something cost of compute um linked to, you know, energy and critical minerals and critical technology.

[00:23:19]Yeah. And And that would be the new system. So, in in my view.

[00:23:22]Uh and that's why That's why this this conflict is so important right now because whoever is able to win this AI war will then be able to own the new system.

[00:23:40]>> Okay.

[00:23:40]So, the conflicts that we're seeing at the moment uh proxy skirmishes between the two current superpowers of the number one and the number two power for the control of the technology that is likely to underwrite or design the new system.

[00:23:58]How do I get that?

[00:24:00]>> Yes, absolutely.

[00:24:01]>> So, who's going to win, Mickey?

[00:24:03]>> [laughter] >> Well, all I can say is at best we have seen the quarterfinal.

[00:24:11]And the final is not yet played out, so.

[00:24:14]>> Okay. So, do we get penalty shootouts, extra time?

[00:24:18]>> I don't know. I'm watching the World Cup just like you, man.

[00:24:20]>> [laughter] >> I know Australia Australia are playing tomorrow at 4:00 a.m. I'm going to be up and watching. A new system emerges.

[00:24:29]One thing I've learned many things from you, particularly around phase transition. Uh you were the person who taught that to me. Another thing I've learned from you is during our chats you always bring the focus back to where it should be and you say, "Okay, what's the opportunity?

[00:24:44]How do you see the macro picture and what is the biggest mispriced risk across your models currently that might be applicable to someone who could look for an opportunity in the current phase transition.

[00:25:00]>> So, I'll break it up in a few parts.

[00:25:02]What you asked is a very interesting question. It's the model versus market, right? That's what you're saying. So, most mispriced risk is credit, and I've already told you.

[00:25:12]Uh most mispriced asset, I would say is cash.

[00:25:18]Because liquidity is going to become more and more important.

[00:25:21]Um and so, if you've got cash and the volatility is going to go up.

[00:25:26]So, um with higher volatility, lower liquidity, cash is king, right? So, the most mispriced asset is cash.

[00:25:34]The most mispriced opportunity, I would say is AI infrastructure.

[00:25:41]Um the most uh the most mispriced strategic asset, I would say gold.

[00:25:50]And the most mispriced long-term investment, I would say are foundation assets like royalties.

[00:25:58]>> Well, you know, you're you're talking to a guy that has a thing or two uh for royalties. Let's talk about that. Before we get to the point of deploying the cash, which as you say is super undervalued. Like, when was the last time you listened to a macro podcast and someone was recommending a cash allocation? Before we get to that, how do you avoid what you call the trapdoor? So, people are expecting, let's say like we've had recently, we've had the Iran war. But, before that last year, we had liberation day. We had a massive sell-off, and then people have got used to this idea of the Fed put or the US uh government put always making the stock market go up.

[00:26:37]Talk to me about the trapdoor and how that can rug pull people just like it did Jesse Liverpool Livermore in 1929.

[00:26:47]How do we look for that? How do we avoid that?

[00:26:49]>> All right. So, it's a great question.

[00:26:50]So, um a couple of things. There's two kinds of trap doors. One One is what I would call fake rallies.

[00:26:57]And uh and those are those and we I look at them by looking at the acceleration of different underlying market variables and inputs and so on.

[00:27:08]So, first and foremost, don't chase the rallies. That's very critical. Look at whether the stress has actually gone down.

[00:27:15]Um in some ways, make the decisions after things have happened, not in anticipation of them happening. That thing is That's the easiest way to do it, right? Uh because we're all used to front-ending everything. In the past in the in our past 30 years, you make the most of money by front-ending.

[00:27:32]Uh but here, you'd actually just wait for it to actually happen and then make the decision. And maybe you'll miss out on a bit, but you'll make a lot less mistakes by losing money. That's That's the thing.

[00:27:43]Now, in terms of bigger trap door, so what's the bigger trap door? We are in an inflationary environment.

[00:27:48]And uh it's likely to continue, but we also have a big credit issue underneath it. And at some point, the bubble bursts.

[00:27:57]And we move from inflation to deflation.

[00:28:00]And in the next two to three years, right? And so, you have to And And nobody can predict exactly when this happens because as I said, there's a number of factors that influence the timing of this.

[00:28:12]So, I would say uh if you are a if you're a passive investor, you should and I I look at investing basically first as having your your trust assets, your gold, your silver, and so on.

[00:28:26]Then your inflationary assets, which is what I call constrained assets, because they depend on where the choke points are.

[00:28:33]And the third would be keep cash, always. A slug of cash that you can go in and deploy uh if if there is a trap door.

[00:28:41]Um and if you really want growth like before, like the tech growth, you can always buy a small slug of technology or innovation assets that actually are solving for the constraints that you're buying for today.

[00:28:55]I got it. So, that's how I would do.

[00:28:58]>> I like it. What I like most about your framework is it doesn't pretend to know the exact timing or to try and front-run the rallies like you mentioned. Having that three-layered approach enables you to first and foremost survive and then secondly to have the flexibility to take advantage of either the inflationary or deflationary environments as they progress. So, starting with a trust layer which we're thinking is mainly gold, then we've got those constrained assets at layer two. I would imagine that would include materials and energy and then the third layer being cash which as Uncle Rick likes to say enables you to take advantage of situations rather than being taken advantage from.

[00:29:44]Let's say this cash needs to be put to use. Let's say the the dip does arrive and people are caught out. They were trying to front-run the Fed. They made the Livermore mistake and they get rug pulled.

[00:29:56]After the storm passes, how is that cash best deployed?

[00:30:03]>> So, you're in the right place, the royalty king.

[00:30:05]>> [laughter] >> So, I call you know, you call it royalty, I call it the foundational assets.

[00:30:12]>> Okay.

[00:30:12]>> And what I mean by foundational assets are assets that are scarce but also and have constraints but also they are the basis and the foundation of the new system, the new economy that's being built.

[00:30:25]So, what does that mean? Water rights, land, you know, infrastructure, ports, you know, you got refining refining nuclear refining things. Anything that is basically gives you the foundation for the new economy, the infrastructure, and the and the access and the rights for the new for the new economy. But, there's one key critical difference between that and buying inflationary assets.

[00:30:57]In these assets, you make money if the price goes up or down.

[00:31:01]And and that's because they're required in both scenarios. So, I would take today we're in a situation where we all are buying inflationary assets hoping prices go up.

[00:31:14]But, I think when there's a dip, you buy the foundational assets, which are actually the infrastructure for your constrained assets.

[00:31:21]But, but you buy them at much better prices, and then you make and then you don't care about the volatility cuz you make money all the way through.

[00:31:29]So, So, you should go from royalty king to foundational king.

[00:31:34]>> Foundational [laughter] king, I don't know. I don't know.

[00:31:35]Royalty king's got a nice ring to it.

[00:31:37]Maybe it will. We'll put a We'll put a vote out for the out for the the viewers.

[00:31:41]What I like about the royalty type model, royalty and streaming becoming more and more competitive, is that you do have the ability to deploy capital counter cyclically, meaning if the commodity price tanks and it catches everyone by surprise, you can survive thanks to the balance sheet and the the the lack of distance between the income and the the net income statement.

[00:32:04]And that ability, I think, is super super underrated. There's one criticism that I There's two, actually. One is the price, but we'll ignore that for today.

[00:32:12]There's another key criticism that I think has some merit. You mentioned trust will be at the basis of the next financial system.

[00:32:20]Royalty and streaming agreements really are just that, agreements. That does rely on a little bit of trust. So, our friend Bernard Baruch did the right thing in buying gold. Unfortunately, he was relieved of his gold before he could really use it. He had his gold effectively confiscated.

[00:32:38]What about this idea that in a really stressful geopolitical scenario, royalty contracts might have their, uh, reliability tested by sovereigns. How do you see that criticism playing out?

[00:32:53]>> So, that's that is a really good question. So, we're at stage three, right? So, what are the five stages?

[00:32:59]Monetary, printing money, which I said printing money, fiscal, spending money, government spending money, regulatory, right? Regulatory is when they put more, uh, controls.

[00:33:10]Uh, you have tariffs, sanctions, capital controls, all you know, government investment in private sector, so it's state ownership. All these things are happening.

[00:33:19]The next stage is what I would call is, uh, political, which is more about polarization. And finally, you have military or coercion.

[00:33:29]So, we're we're in stage three, entering stage four and five. So, what happens in stage three, four, and five? Um, policy makers, when they see all the stress, they want to increase control.

[00:33:42]And they want to increase control so that there's less chaos.

[00:33:46]Uh, but at the same time, they also see that assets that become more valuable, uh, like commodities, they want to have even more control over.

[00:33:56]So, the answer to your question is absolutely pay up for safe jurisdictions, and pay up for diversification, right?

[00:34:04]>> Yeah.

[00:34:04]>> Today, I would do that. Um, and then, uh, pay up for strong balance sheets, right? I would I would do that today.

[00:34:14]Uh, but once there is a crash, then you have more options to see look at what is really the value, what's available. But today, I would just pay up for diversification, cash, and strong jurisdictions. That's my That's my view.

[00:34:29]>> Speaking of diversification and asset classes. I've written a paper on books at rare books as an asset class. So guys, make sure you pick up a first edition of The Entropy Trap on Amazon, link in the description, because they have kept pace in many cases a first edition copy of uh A Tale of Two Cities at a CAGR that outpaces even gold and you can take it across borders and you're going to have to declare your gold or you'll have it confiscated. You could walk right past security with a book and no one would even be batting an eyelid. Royalties are paper claims in a world where trust is breaking down. That will be stressed. We're thinking we can somewhat mitigate that by sticking with good jurisdictions and having some diversifications.

[00:35:17]Why don't you look towards the operators, let's say, and there are a lot of um very very cheap gold miners, for instance, out there and a lot of people listening might be thinking to themselves, "Look, if you're bullish on the metal gold, why don't you Why don't you look towards investing or speculating in the miners because they will give you more upside." What's your take on that idea?

[00:35:39]>> So, >> [sighs and gasps] >> um well, it's it's a complex question because you have to look at a number of things that go into evaluation, right? Uh and it's not a straightforward answer. But if I had to give a simplistic answer, couple of things. Firstly, in this new world, not only critical commodities are going to be scarce, but there's there's another thing that's going to be as scarce or more scarce and that is capital.

[00:36:07]And so you never want to be on the side where they need to raise money.

[00:36:12]Okay? So that puts toll guys in a much better position than operators.

[00:36:18]The second thing with operators is you've got a lot of risk today that is constantly new risk that's coming up to the table, right? You've got political risk.

[00:36:27]Um you're going to have, you know, logistical risk, supply chain risk. Um there is socioeconomic risk. So, the question is you will have to look at all of that and price that properly to ensure that, you know, you get the right valuation. So, the risk premiums for operators uh may maybe much higher and differentiated across operators. Uh but some of the bigger diversified guys are fine, you know, operators are fine. It's the smaller ones which may need to raise capital while navigating all these additional risks that have a problem.

[00:37:02]And even then there are people who are experts, right? I'm not the perfect expert like your friend uh Rick Rule, right? He knows better than me and he can figure out the one that is perfect which is small, but all the risks are mitigated. But that's a very specific skill.

[00:37:18]>> He also has good access to to warrants and and private placements, which is a completely that really does change the the asymmetry of the equation. But you're right, looking at say, for example, an an Agnico Eagle is completely different to Amalgamated Moose Pastures in Wyoming. And let's you mentioned pricing, pricing these toll takers.

[00:37:40]Should I should someone look at buying into some of these toll booths, so to speak, now or will they wait for the crash and then try and consolidate when that trapdoor opens and get them at a better price?

[00:37:53]>> Um See, you can never really time these things perfectly.

[00:37:57]>> I agree.

[00:37:58]>> I I, you know, I I you can build whatever models you can, but if someone says they're absolutely perfect in timing these things, I I don't buy it.

[00:38:06]So, what I can tell you what I do is which I I have some myself today. I bought some, but I also have some cash waiting for a dip to buy more.

[00:38:16]Um today I would buy ones that have that would be cash providers in a dip. So, they would actually be able to consolidate.

[00:38:24]>> Mhm.

[00:38:24]>> And that's important for me. I buy the ones that are diversified, have a good balance sheet, so that when the dip happens, they are actually going to go and take that cash and go and buy uh more and more and more streams and and enjoy upside. That'd be a great time for them.

[00:38:39]But also, you know, when the dip happens, you can look at potential targets.

[00:38:43]Right? And so, I would say it's sequencing. I would buy some today, keep some cash, and then have a plan for the dip. But you don't I wouldn't put all my eggs in one basket.

[00:38:55]>> Yeah, solid game theory, entering and exiting in tranches. Uh the only person who bought at the bottom and sold at the top was a liar. That's a quote from Al >> [laughter] >> That's a That's a quote from Bernard Baruch. I don't know if you knew that or not.

[00:39:10]Uh we're talking about timing markets.

[00:39:12]It's literally one of his quotes, and he is a and he is a a main character in your book. Is the next royalty opportunity, is that transferable across a discipline? This is something that I've been thinking about a lot uh having spoken with you.

[00:39:26]Royalties are are thought of as being belonging to the old economy or the physical world. But what about land, water, power, and AI or or technology royalties moving into the future? How do you see that landscape evolving? It's a very, very interesting emerging market.

[00:39:45]>> So, you know, historically, it's been gold and silver, right? Um now it's moving into constrained assets, hopefully, which is critical minerals, uranium, copper, those kinds of things.

[00:39:55]Which is the next evolution.

[00:39:57]I think this that I would call that a royalty 2.0. And the royalty 3.0 for me is access. You know, access to seed rights, access to uh tolls, access to you know, uh pipes, um access to land, access to water, uh you know, your our favorite company Texas Pacific, you know, so many you know, that so companies like that a lot that's that's royalty 3.0 in my mind.

[00:40:25]It's appro- it's the companies that provide access.

[00:40:28]>> That's right.

[00:40:29]>> And the fourth one which is going to still emerging is the royalties for of the new AI economy which is your IP and data, right? And that is you know, everything from music, from uh you know, your your persona, everything. And that's going to be a very big thing. So, it's a claim. Royalty's ultimately a claim. And uh I I think in the new economy or through this period, I'd rather be on the side of the claim than owning the asset.

[00:40:57]Unless it's gold and silver.

[00:40:59]>> Uh and national defense and security, how does that fit in? I think we've all been watching Peter Thiel and what he's done.

[00:41:07]How does national defense spending fit into the the phase transition?

[00:41:12]>> Oh, so it's very critical. So, if I if you ask me the top three multi-bagger themes, I would say defense tech is top three for sure.

[00:41:21]Right? Because it is at the intersection of um all three. So, you've got What are the stresses? The stresses are political geopolitical stress.

[00:41:31]Um you've got debt stress and then you've got AI innovation stress.

[00:41:36]And so, what is at the intersection of geopolitical stress and tech?

[00:41:41]And it's it's I would call strategic tech. It's defense. And defense tech.

[00:41:46]And what's at the intersection of geopolitical and debt? It's owning the critical minerals that go into your defense.

[00:41:54]Right? Because that's what will protect sovereignty.

[00:41:57]So, defense is very It's probably my top three four themes. Defense tech tech tech is probably your top three multi-bagger themes.

[00:42:05]Uh you know, so he's in the he's obviously a really smart person uh way ahead of the curve in the right areas way before everybody else is.

[00:42:14]>> You know, so what are the other two, Mickey? We've got defense tech, other multi-bagger opportunities?

[00:42:19]>> [laughter] >> Um well, whatever solves the constraints, right? So, what are the constraints today? Energy, so nuclear tech, uh critical minerals tech, defense tech, AI infrastructure tech. So, whatever you know, transformers or you can talk about all the compute, but if you don't have grid and transformers, what are you going to do?

[00:42:39]Right? So, there's so many things there's so many new innovations and technologies that you know, I I track and which actually help you solve for uh these constraints. And ultimately, technology wins. You know, it may take 5 year, 10 years, but technology always solves constraints.

[00:42:57]Right? And there's entrepreneurs thinking about, you know, there's no copper.

[00:43:01]So, and the data centers don't have enough copper. So, they're going and figuring out, you know, what's the next copper? It replaces copper. And it may not happen in a year, but in 2, 3 years, it'll come. So, I you got to while you to make money today on the constraints, you bet on what will solve them in the future for tomorrow, and those are your multi-baggers.

[00:43:21]>> It's as it's as simple as that, guys.

[00:43:23]Uh after writing the book, you mentioned the Solstice Laboratory, which is um I'm very passionate about this project.

[00:43:31]I think it's a really, really interesting idea.

[00:43:34]Why did you set up the Solstice Laboratory? And what is it for? And how do I How do I turn it into a royalty?

[00:43:42]>> Well, um I'm a practitioner, right? If you look at my I'm not I'm not an academic person. I'm not a theorist. So, you know, if you look at my background, you know, I built businesses or I have uh raised capital or I've even even in academia, I was in policy and tech. So, I have built you know, I like to build stuff. So, entropy trap is a thesis.

[00:44:03]But then, you need uh Solstice Laboratory for me is the practice. So, that's where it has all the models. Um and the key is to the use that to help decision makers and and and to a guide people through this transition. Uh >> And guys, just so you're aware, Mickey's too humble to mention this, but he has been at the helm of taking businesses, publicly traded businesses in emerging markets, all the way up to $5 billion valuation from very, very low starting point. So, this is not just theory, this is coming from someone who's navigated many different macroeconomic regimes and is using that knowledge and trying to codify it into what is becoming the Solstice Laboratory.

[00:44:45]Here's a question.

[00:44:47]How are you personally positioned, and I'm sure it's in line with your framework, and how would you What would make you change that positioning?

[00:44:57]>> So, before I answer that question, coming back to the previous one, I mean, uh one of the first times I thought about space transition and this book was in uh 1998. I was a I was advisor to the Indonesian government.

[00:45:12]And you know, Indonesia and all these countries were doing great.

[00:45:17]They were the darlings of the world.

[00:45:19]And the VIX in the markets hadn't predicted, and all of a sudden the the currency devalued 50%.

[00:45:26]And I was I was sitting there and I was talking to the government, and I was thinking, "No one's talking about markets."

[00:45:33]People are talking about, you know, jobs. They're talking about deposits in banks. They're talking about, you know, leverage. They're talking about fundamental things uh that um are the economy.

[00:45:46]And they're concerned about how this affects um the overall trust in the economy, cuz nobody trusted banks anymore once, you know, you have a bank run.

[00:45:57]And so, it it you know, it I'm a systems thinker, and suddenly struck on me that, you know markets are only as good as the overall system and the trust in the system.

[00:46:09]So and and we all trusted till we don't.

[00:46:14]It's like the avalanche, right? It happens till it it doesn't and one fine day there's an avalanche. And so you have to keep figuring out what happens below the surface is really important.

[00:46:23]That's what that was the thing.

[00:46:25]I'm positioned broadly with my book but my Solstice Laboratory and my we have a lot of tactical models, we have a lot of macro, commodities, volatility, geopolitics, constraints, tech trends. So within that regime, within the book and how to build a portfolio comes from the other models.

[00:46:47]And so that's how I'm positioned today.

[00:46:49]What would change it significantly is yeah, some you know let's say Wash goes and increases rates.

[00:46:56]That would change it.

[00:46:57]So I would say okay now, maybe there's a correction or some sort of a event coming, right? If for example, Taiwan was accelerated, it would change my thesis. So there's an you know, there's a number of things that could change it but at present at present that's what it that's what it's based on.

[00:47:18]>> Guys, next best thing is to check out the Solstice Laboratory because the link also alongside with the book, The Entropy Trap, will be in the description.

[00:47:27]What's the one message? What's the takeaway message that you would like to leave the audience with today?

[00:47:33]>> So you know just like when you have a breakup with a relationship >> [laughter] >> it's tough to accept.

[00:47:42]Right? So the hardest thing is to accept that we are in going away from a previous financial system and heading to a new financial system.

[00:47:52]Once you accept that, then you can basically build your own framework or find a framework that works for you that you can help deploy your capital and more importantly you can start preparing yourself for the new system.

[00:48:07]What I would call regenerating yourself.

[00:48:09]So don't don't just go back to mean reversion.

[00:48:13]Don't do 60/40. Do your own work. Read enough and then if you really think that this relationship is ending then I would I would accept it sooner rather than later. That's my advice.

[00:48:27]>> Yeah, solid advice. The more you cling to the past the more pain you're going to experience and you're going to experience a lot of pain without a plan.

[00:48:34]Guys, check out the entropy trap and to help you with your planning. Link in the description. Number one best seller.

[00:48:40]Mickey, thank you so much for joining me today. I can't wait to have you back on where we're going to take viewer questions and we're going to run it through your models. Guys, that's it for me. I look forward to catching up with you in another episode of the Royalty King Report. Take care. Bye.

[00:48:54]>> Thanks. Thanks.