Navigating the Treacherous Waters of Global Realignment

Simon Mikhailovich on the Convergence of Financial and Geopolitical Risks - Article #100

In this 10-minute article, The X Project will answer these questions:

• I. Why this article now?

• II. Do We Recognize the Uncertainty and Complexity in Financial Systems?

• III. Why Is Gold a Counterparty-Free Reserve Asset?

• IV. What Does the Fourth Turning Teach Us About Historical Cycles?

• V. How Does Debt Fuel Financial Fragility?

• VI. Why Is Confidence and Trust Central to Economic Stability?

• VII. How Is Geopolitical Realignment Shaping the Global Order?

• VIII. What Are the Implications of Financial and Geopolitical Risks Converging?

• IX. What does The X Project Guy have to say?

• X. Why should you care?

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I. Why this article now?

I just listened to two interviews with Simon Mikhailovich that resonated deeply, so I wanted to share. I have mentioned before that I am a bronze subscriber to The Grant Williams Podcast, and Mikhailovich was his most recent guest on January 16th. I then found another recent interview on the Palisades Gold Radio YouTube channel: Simon Mikhailovich: Capitalizing on the Discrepancies between Perception and Reality.

Who is Simon Mikailovich? According to his bio on The Hidden Forces Podcast website,

“Simon A. Mikhailovich is the founder and Managing Partner of The Bullion Reserve. TBR offers a full-service fiduciary solution for private and institutional investors seeking to establish and maintain independent bullion reserves in diverse jurisdictions. Prior to founding TBR in 2014, Mr. Mikhailovich co-founded Eidesis Capital, a special situations investment firm. Between 1998 and 2014, Eidesis deployed over $2.5B through special opportunity funds focused on high yield corporate bonds and loans, credit derivatives, distressed CDOs and MBS, and, after 2011, gold. Between 1985 and 1998, Mr. Mikhailovich was a Portfolio Manager at Falcon Asset Management overseeing alternative investments in corporate credit and hard assets, including oil and gas, timberlands, and agribusiness. During the early 1990s, he headed a workouts’ team, restructuring service businesses in North America and Europe. Simon Mikhailovich is an entrepreneur, contrarian investor, and an avid student of history who envisioned the financial crises of 2000, 2008, and 2020 (on-going) and took advantage of the resulting opportunities. His macro views are informed by nearly four decades of investment experience, as well as diverse educational and personal background. He received an M.S. in Business (Finance) from the University of Baltimore and a B.S. (Political Science) from Johns Hopkins University. Previously, he studied chemical engineering at the St Petersburg State University of Film and Television, completing a two-year core engineering curriculum. Mr. Mikhailovich was born and grew up in Leningrad, USSR. In 1978, at the age of 19, he and his immediate family were allowed to emigrate in exchange for surrendering citizenship and all assets, except for $100 and a suitcase per person. In 1979, the family secured US refugee visas and resettled in the United States. After seven years as a stateless political refugee, Mr. Mikhailovich became a naturalized US citizen in 1985.”

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Below is a summary of the top seven themes from these interviews, plus my additional thoughts and why you should care.

II. Do We Recognize the Uncertainty and Complexity in Financial Systems?

Mikhailovich emphasizes the unprecedented levels of uncertainty and complexity in today’s financial systems. He critiques the modern reliance on forecasting, labeling it increasingly futile in an environment shaped by interconnected and unpredictable forces. From geopolitics to trade dynamics and financial markets, he argues that traditional models fail to capture the cascading effects of these variables. This uncertainty, exemplified by volatile inflation data and job number revisions, undermines the confidence of established financial systems.

He draws attention to the Federal Reserve’s admissions of navigating "without a map," likening current economic policymaking to groping through a dark room filled with obstacles. These conditions, Mikhailovich argues, necessitate a paradigm shift in how investors and policymakers approach risk. The message is clear: complacency in the face of uncertainty is a gamble with potentially catastrophic outcomes.

III. Why Is Gold a Counterparty-Free Reserve Asset?

Mikhailovich passionately defends gold’s unique role as the only financial asset with no counterparty risk. Unlike bonds or currencies, gold’s value does not depend on a government or institution’s promise to fulfill obligations. This characteristic becomes increasingly significant during declining confidence in traditional financial systems.

He underscores the growing dichotomy in gold demand between the East and the West. While Western investors have shed gold-backed ETFs, central banks in Asia and emerging markets have aggressively accumulated physical gold. This divergence reflects a strategic shift by non-Western countries to hedge against the perceived fragility of the U.S.-led financial system. Mikhailovich argues that gold’s liquidity and universal acceptability make it an indispensable reserve asset, particularly in an era of rising geopolitical tensions and economic uncertainty.

IV. What Does the Fourth Turning Teach Us About Historical Cycles?

From Neil Howe and William Strauss’s "Fourth Turning" framework, Mikhailovich situates current global upheavals within a broader historical cycle. He posits that the world is transitioning through a period of profound structural change, marked by the breakdown of post-World War II arrangements and the questioning of long-held norms.

Mikhailovich notes that such periods characterize heightened conflict, geopolitical realignments, and significant economic disruptions. He references the erosion of post-World War I borders in the Middle East and the destabilization of post-World War II alliances in Europe. This cyclical perspective suggests that today's crises—from wars to economic instability—are not isolated incidents but part of a predictable pattern of systemic renewal and transformation.

For more on the “Fourth Turning,” see my prior articles: “The Fourth Turning: An American Prophecy - The X Project Summary of the book written by Neil Howe and William Strauss (1996)” and “The Fourth Turning is Here: What the Seasons of History Tell Us about How and When This Crisis Will End - A summary of the book written by Neil Howe (2023).”

V. How Does Debt Fuel Financial Fragility?

A recurring theme in Mikhailovich’s commentary is the unsustainable nature of debt-fueled economic growth. He highlights the quadrupling of the U.S. debt-to-GDP ratio over the past 40 years and questions the illusion of prosperity created by financialization. Mikhailovich warns that relying on debt to sustain government spending and economic activity has left the system exceedingly fragile.

This fragility is compounded by what he calls “a credit-driven boom,” where economic growth is artificially supported by borrowing rather than genuine productivity gains. He warns that the eventual inability to expand credit will collapse the current financial architecture. The situation, he asserts, is precarious, as few investors and policymakers appear to grasp the magnitude of this risk.

VI. Why Is Confidence and Trust Central to Economic Stability?

Mikhailovich argues that confidence is the bedrock of modern financial systems. The erosion of trust in the U.S. government’s fiscal policies and the broader Western financial system has far-reaching consequences. He cites the confiscation of Russian reserves as a pivotal moment that has shaken global confidence in the dollar and Western institutions.

He explains that the "confidence gap" between the West and the rest of the world is driving countries to seek alternatives to the dollar-based system. This shift is not merely theoretical but is reflected in tangible actions, such as the de-dollarization of trade and the accumulation of gold reserves by central banks. This growing mistrust signals a turning point in the global economic order for Mikhailovich.

That concludes Section VI. I have hit a new paid subscriber threshold, so you must now be a paid subscriber to view the last four sections:

• VII. How Is Geopolitical Realignment Shaping the Global Order?

• VIII. What Are the Implications of Financial and Geopolitical Risks Converging?

• IX. What does The X Project Guy have to say?

• X. Why should you care?

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VII. How Is Geopolitical Realignment Shaping the Global Order?