Podcast: Play in new window
- $6.4 Million Million Lost In Recent Weeks
- Powell Is Caught Between Wall Street & The World Economy
- Legendary Central Banker Tells David Gold Is A Good Thing To Own
“When liquidity dynamics change, speculative dynamics change and market prices follow. You could say that bull markets are driven by an excess of liquidity; bear markets by its scarcity. In recent years, excess liquidity has been fed by extra cheap capital, low interest rates. There was a world brimming with it during the zero interest rate experimentation phase, and when the global zero interest rate policy came to an end, the Japanese central bank continued to feed the speculation beast with zero rates. This is the carry trade, but what is perhaps new is being witness to a carry trade unwind.” —David McAlvany
Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
Well, welcome back. One of my favorite times to see you, Dave, is after you’ve seen your parents. You guys went over to Italy. Was it Tuscany where you spent your time?
David: We spent some time in Tuscany, spent some time in Amalfi, and it was great seeing my parents. We get to see them for that kind of time once every two years. They’re getting into their late 70s, early 80s, and they’re doing well. They’re still working with orphans homes out in Asia. The Asian Pacific Children’s Fund is going strong and it’s fun to see. They’re thinking and planning for how they want to impact the next thousand kids.
Kevin: They never stop thinking about orphans. That’s awesome. Now I’ve got to tell you, though, last night when we were meeting you said, “Hey. Do you want to see some pictures?” And invariably, especially in Tuscany, I see pictures of meat. That’s what you mainly show me. It’s like, “Here’s the sausage we bought.” What were the steaks that you had?
David: When I’m on vacation, I love to cook. It’s where I actually unwind. So for my wife and I to head to the markets and find a little of this and a little of that and put together a feast is absolutely a treat.
Kevin: You had an itty bitty grill outside and you had this gigantic meat that was larger than the grill. I have no idea how you fed—
David: Yeah. Two steaks, 10 pounds or roughly that. I don’t know how to do the math. 4.78 kilos, I do remember that. But yeah, just simple things are the things that kind of make me go.
Kevin: Over the last— Well, we’ve done this now how many years? Since 2008. So this Commentary has gone on for quite a while, and what we’ve seen over a decade is it was the decade of the central bankers. As you recall, in 2011, the central bankers basically came out and said, “Whatever it’s going to take, we’ll do whatever it takes.”
David: Well, the big transition actually was when Greenspan went from being the master of Greenspeak, where no one knew what he was talking about—and he was intentionally opaque—to every central banker communicating exactly what was going to happen. So there was no surprises in the market because, after all, the market does matter to central bankers.
Kevin: Well, and they said, “We’ll give you whatever money you need,” and that’s what has fueled the market. That worked for a while. But Dave, you’ve been talking to central bankers here on the Commentary, and then when you were in London you had dinner with a central banker. And the thing that gets my attention is they’re sober right now. The things that worked in the past may not work in the future. And when a central banker from the Bank of England or central bankers that were friends with Paul Volcker, when these guys get a sober look and they say, “The tools that we’ve used in the past don’t necessarily work in the future,” it gets my attention.
It reminds me of the scene, Dave, sorry, I have to bring up Jurassic Park again. John Hammond who had this park that he was managing. Dinosaurs were working, it was almost like a theme park, almost like Disneyland, but when the tools stopped working, when the dinosaurs got out of hand, there was this scene that captures your attention. When he looks and he says, “Would you please kindly go find my grandchildren?” That’s him admitting that the tools that worked in the past don’t work in the future.
David: Well, and I think as it pertains to things that we’ve seen in recent days, just because you can doesn’t mean you should. What we’re watching is an unwind in the financial markets as it relates to Japan, and what has been a multi-trillion dollar carry trade that’s been building for several decades. So we’ve known it’s a risk. We’ve known it’s a theoretical risk. If you unwind that, it begins to draw out liquidity from the financial markets on a global basis. And that’s exactly what we’ve seen is reverberations of that unwind.
Kevin: And I’d like to talk about later in the program the John Hammond of the day, which is Jerome Powell, who actually probably created the very thing that we thought would get them out of the problem is making it worse.
David: We had the Japanese markets collapse 12.4% in a day with sympathetic losses in the South Korean market, 9%. And the South Korean market and South Korean currency are very key when you’re looking at leveraged speculation. When you see moves in that currency and in that stock market, it tells you that leveraged speculators are under tremendous amount of pressure. Following that, we had the opening in New York for the NASDAQ off 6% at the start, the volatility index, the VIX, closed Friday at 23.39. It traded Monday to a high of 65.73.
Kevin: That’s a record, isn’t it?
David: It was the largest move. It’s been higher, but that was the largest move in a single day in VIX history. US markets followed through with concentrated weakness in tech. The leaders remain the leaders, except now it’s on the downside. Of course, cryptocurrencies are part of that. They do what they do. The range of losses was 10 to 20% for the big guys, that’s Bitcoin and Ethereum. We won’t go into the ones that you wouldn’t recognize their names.
Kevin: Well, we can talk about percentages, but that doesn’t mean anything. Okay. Imagine a million millionaires. Think of a millionaire that you know, and now multiply it by a million. Now, multiply that by six. Six million millionaires. Those are the losses just from the last couple of weeks.
David: Losses in recent weeks tally to 6.4 trillion globally. History is making transitions within the markets. And it’s interesting when you clue into the media, they have causal attribution and it’s very rarely proper. Very rarely is it accurate. You could even ask AI, “Tell me how this ends and what caused it.” I think you’d hear crickets. But the best explanation they had for the volatility late last week and early this week is recession fears. People are starting to think about recession fears, and that was the lead explanation. Well, that’s not actually what was going on, so we’ll take a crack at it.
Kevin: Well, and I’d rather hear what Doug Noland has to say because from the Credit Bubble Bulletin, and even before he ever came to work with you, Dave, we were reading Doug Noland, and he was talking about: what is the problem when the carry trade blows up?
David: He’s been an amazing team contributor since 2017. We have our call this week. You can sign up for that if you’d like and join us for the Tactical Short call. We do that every quarter, and he’ll be looking at the bubble dynamics that we have, and of course with some updates as we begin to see that bubble burst in real time.
But his summary was: the massive yen carry trade is blowing up. It’s a highly levered trade with tentacles all over the world, and this is a major development for global liquidity. The second thing that he points to is that the NVIDIA semiconductor tech trade is unwinding with significant deleveraging and liquidity implications. And the third point that he made is that indications that deleveraging has commenced in US corporate credit, with significant widening of risk premiums and indications of waning liquidity, we have them. It appears a tightening of financial conditions has begun.
Kevin: Well, just to review, for those who are not familiar with the carry trade, if you can go borrow money at 1% in one place and go make 10 or 11% elsewhere, that’s not a bad deal unless there’s a change in either interest rates or currency values. But it all boils down to liquidity. When you can borrow money at 1%, you’ve got a lot of liquidity.
David: The thread running through those three bullet points is liquidity, and when liquidity dynamics change, speculative dynamics change and market prices follow. You could say that bull markets are driven by an excess of liquidity, bear markets by its scarcity. And in recent years, excess liquidity has been fed by extra cheap capital, low interest rates. There was a world brimming with it during the zero interest rate experimentation phase, and when the global ZIRP ended, zero interest rate policy, when that came to an end, the Japanese central bank continued to feed the speculation beast with zero rates. This is the carry trade. It’s not a new concept for our audience, but what is perhaps new is being witness to a carry trade unwind.
Kevin: It reminds me of being the last one out of a burning theater. If you’re the last one out, the zero interest rate policy, Japan was the last one out. Now, they got to see more of the movie than everybody else who had run out of the room. But now it’s a problem.
David: Doug’s first point is that global liquidity dynamics have shifted as the assets which were purchased with nearly free yen-denominated loans, they’re being liquidated, with the proceeds going to repay the end creditor. It’s highly disruptive any time a mass of sellers hits the market, and of course the smaller the market, the more disruptive it becomes. Emerging markets are a case in point. They call it a freeway going in and a goat trail coming out. Emerging markets have offered the highest yields on debt, so the game has been to borrow near 0% and invest the borrowed money in high-yield paper all over the globe. This is why the unwind of the carry trade has implications for investors globally.
Kevin: And that is also why we’re starting to see an increase in interest rates in Japan.
David: Japanese interest rates have risen over recent months, even as the yen has further stretched like a rubber band to the lowest levels we’ve seen in several decades. Now, the snap back, it began off the extremes of 1:61. That’s the [dollar-to-yen] exchange rate. The Bank of Japan shifted its interest-rate policy, and it’s essentially following the market trend—not setting but following the market trend—of higher rates with higher policy targeted levels. These interest-rate dynamics have turned a trickle of repatriation into a flood, and a flood into yen, of course, improves its value. It’s essentially a short-covering event. A strengthening of the yen in a brief period of time is a first indicator that the carry trade is being unwound.
Kevin: Okay, so when that happens, so we can think this through, if you’ve borrowed in yen and you’re from another country and that yen starts to strengthen, you have to go back and repay those debts in higher-priced yen.
David: Right. The other strong piece of evidence that this multi-trillion-dollar trade is being unwound is the currency carnage witnessed in the destination countries where those yen loans went to be invested.
Kevin: Are you thinking of Mexico?
David: It’s a big one because there has been a lot of money flow there. Mexican debt, denominated in pesos, yielding 11%. It illustrates the attractiveness of the carry trade. You borrow under 1%, invest at 11%, the gains net of costs come close to 10%, and you’re using someone else’s money to make that 10%. Why not use as much of it as you can? That’s what hedge funds and other leveraged speculators have done.
This is not a new trade. In fact, this has been one that’s been in play for several decades, but it’s once in a blue moon that events beyond the control of the leveraged speculator caused the reversal of capital. Now, the liquidation of Mexican-denominated debt, not a particularly liquid market, pushes yields higher and it pushes the currency lower. As of Monday, the currency losses from recent days, we had the Mexican peso down 18.3%.
Kevin: That’s big move, and then you also have other Central and South American countries that are down too.
David: Brazilian real was down 16.1%, the Colombian peso down 15.5%, the Argentine peso down 12.5%, the Indian rupee 11.3%, and the Hong Kong dollar 11%. The list goes on. These are the emerging-market countries where the yen-carry trade has fed a tremendous amount of speculation. The common theme is a higher yield that for decades has brought carry-trade hot money into those markets.
Kevin: Well, let’s talk about hot money for a moment, because when we’re giving bank ratings, Dave, which, by the way, our listeners can call anytime and we can give them bank ratings, one of the things we look at is money that isn’t necessarily loyal, that is willing to flee at a moment’s notice. That’s called hot money.
David: Yeah, the inflow feels good. Money coming in always feels good. It’s the hot money outflows that are highly disruptive. It’s this development which is impacting global liquidity, because as hot money exits, yields rise, currency values fall, and the financial markets in those geographies have to deal with that extreme tightening of financial conditions as companies operate on a cross-border basis and across currencies. So as a result, the knock-on effect is the stock and bond markets in those areas are also pressured. And the tentacles that Doug referenced reach into just about every asset class, taking away price stability as that liquidity evaporates.
Kevin: So often we’ve talked about the financial evolving into the economic, going to the political, going to the geopolitical. And the geopolitical is where I’m going with this, Dave. Oftentimes we can get very America-centric or US-centric where we say, “Well, politics deems this,” or, “The US economy deems that.” But what we’re talking about is a worldwide connection right now. Powell really was between a rock and a hard place. He couldn’t really lower rates. He couldn’t raise rates. We’ve developed this management system where if you over-debt yourself, you can’t move.
David: Well, raising the geopolitical is interesting because we do have 88 elections globally this year, and if those take place under a stable market environment, you could expect a fairly predictable—or a more predictable outcome. But when you start to change the stability within the financial markets, in the currency markets, in the yields in those particular countries, it’s anyone’s guess who gets elected.
So there is the Bank of Japan shift in rates policy, which is part of the causal breakdown in the carry trade. But our friend Bill King also notes that there’s a key culprit in the yen carry-trade explosion, and his name is Jerome Powell. When Powell went dovish and insinuated that rate cuts are coming, the dollar sank and the yen jumped. Anything that strengthened the yen contributed to the yen carry-trade implosion. Powell did that.
Kevin: And so let’s talk about the rock and then let’s talk about the hard place. The rock right now is Wall Street going, “Hey, we’re losing money here. Let’s see some lower rates.” Now the hard place is this yen carry-trade in the rest of the world. What does Powell do?
David: I spent two hours yesterday going through a variety of charts, specifically in blue-chip companies. And those charts, if you look at them on a two-year, four-year, or ten-year timeframe, have done incredibly well, and there has been a correction, but it’s barely a blip on the screen. So the fact that Wall Street is already screaming for help, when this correction relative to the growth that we’ve seen over the last decade is minuscule, is quite fascinating.
So the question remains, will the Fed acquiesce to Wall Street pressure for an emergency rate cut? To do so, to lower rates, increases the stresses that King points out: dollar down, yen up, and the trillions in play and the carry trade continue to flow. If there’s no intervention in US equities, the plunge protection team getting out there and doing their work, a larger part of NVIDIA’s as an example, their recent 1,100% gains might go back to—call it money heaven.
Kevin: So we talk about the carry trade unwinding. Is this NVIDIA trade unwinding?
David: Well, that’s Doug’s second point. The second point is that the semiconductor tech trade is unwinding. That too has significant deleveraging and liquidity implications.
Kevin: Yeah, but all you have to do is say AI. I mean, it’s a little bit like adding sugar to any kind of drink.
David: The AI theme is understood by some to be over-hyped, and of course those who are in the midst of the frenzy would say, “No, no, no. This is a great revolution.” I think the clearest summary came last month from Jessica Lessin, who was discussing Apple’s very challenged explanation of its incredible AI launch. It was a dud on launch. So she says, “The legacy of today’s Apple news will be that AI is a feature, not a product.”
And if you let that sink in, it’s nice, but it’s actually not all that revolutionary. The AI craze has reached the absurd point where even equity analysts are cynical about executives referencing AI on their earnings calls. No mention, no movement in the share price. More mentions, more movement. Some calls you’ll have 30 to 50 mentions and the computer algorithms which clue into these earnings calls trade on that basis. You could say, “Welcome to Dot-com 2.0.”
Kevin: I have to laugh. Okay, now this is in no way saying that AI is like cup holders in a car, but my wife, I had no idea until we purchased the last car how important cup holders were for her. And she really does, she counts how many cup holders are in a car. That’s a feature that is far more important to her than it is to me. And again, AI is going to be more useful than a cup holder, I think. But in a way, since you said it’s a feature, we have to treat it like a cup holder in some respects and say, “Okay, well, what about the car?”
David: It’s nice.
Kevin: Yeah.
David: It adds to the value.
Kevin: What about the engine?
David: If we’re measuring it in hedonics, maybe actually it’s deflationary, I don’t know, but it’s a feature. So NVIDIA reached its peak valuation, June 20th, at $3.34 trillion. That’s $140.76 a share. And that’s after it’s 10-for-1 split earlier that month. It was at that time trading at 42.4 times sales. That’s expensive. Yesterday, it traded at $90. And of course, that was at its lows. So $90.69, 35% off the peak.
Kevin: And that’s in the last six weeks.
David: That’s right. So Teflon-coated four weeks ago. It’s been the leader on the upside. Now it’s leading on the downside. You might recall that it was one and two months ago, we were warning about insider selling.
Kevin: Well, my wife, again, I brought her up about cup holders, but I’ve got to give her credit. She said, “Did you see that Warren Buffett was absolutely selling with both hands Apple?”
David: Yeah. In complement to the insider selling are folks that are looking at valuation metrics and saying, “We’ve got disciplines in place and we have to sell.” So Berkshire cash holdings now $277 billion after the last major sale of Apple stock. And the explanation is pretty clear, valuation metrics are predetermined, and when they reach excessively high levels, taking gains is not debated. They’re taken. Most investors unfortunately don’t operate with disciplines and by rules.
Kevin: They go by emotion and sentiment.
David: Yeah, sentiment reigns supreme. You’ve got greed, you’ve got fear. Actually, there was a Wall Street Journal article I read over the weekend highlighting the CEO luminaries from your largest tech giants all emphasizing on recent earnings calls that investment in overcapacity is far less dangerous than under-investment.
Kevin: What does that mean?
David: There’s a race for spending in AI, really without regard to the timeline of investor expectations for return on those investments. So when Capex spending goes through the roof on a particular item, you’re hoping that there’s a return on that investment. Returns on investment, frankly, with AI are going to remain elusive for a long time to come. So at some point, investors, even the Kool-Aid drinking investor, will sour on the sort of infinite growth thesis. And when sentiment cools, and it does naturally with time, sometimes it does so by force, it’ll cool nonetheless.
Kevin: So is this reminiscent of the hype was Intel, Intel chips? Remember that? And where’s Intel now?
David: Intel, Cisco Systems, those were the leaders in the dot-com boom. Intel this year is actually the worst performer in the S&P 500, followed by Walgreens and lululemon. They’re all off by 55 to 65%.
Kevin: Wow.
David: You have 40% of the companies in the index, the S&P 500, that have traded in negative territory year to date. And of course, the contribution to the index gains have been disproportionately weighted. It is a cap-weighted index. So you’ve got the top 10 names that account for 33% of the entire index.
Kevin: We call it the FAANGs still, right? Even though it’s 10 now.
David: Right? Well, Apple, Microsoft, NVIDIA, Amazon, Meta, Alphabet. Alphabet actually gets a double listing there because they have two share classes, A and C. They’re all perpetuating the AI bubble with tens of billions in spending that they hope pays off. And again, just to go back to that Wall Street Journal article and quote some of these CEOs, “The risk of under-investing is dramatically greater than the risk of over-investing.”
Kevin: Is that FOMO? Is it the fear of missing out in the future?
David: I think to some degree it is. That was the Alphabet CEO. Microsoft CFO says, “Cloud and AI related spend represents nearly all of total capital expenditures.”
Kevin: Wow.
David: Within that, roughly half is infrastructure needs that will support monetization over the next 15 years and beyond. I’m sorry, if it’s going to take 15 years to monetize these investments, I think you can find a lot of investors who are saying, “Tens of billions?” In aggregate, you’ve got lined out over a trillion dollars being spent on AI—those are the commitments that have been made over the next few years. I think you’re going to find that the timeframes in terms of investor expectations and delivery of return on investment to be slightly off. And I think there’s a risk there.
Kevin: It’s fear of missing out.
David: Zuckerberg’s CEO—of course he’s at Meta—he says, “At this point, I’d rather risk building capacity before it’s needed rather than too late.” And there’s similar quotes from the CEO and CFO of Amazon, “It reflects that race-like frenzy to stay ahead of competitors with an increase in capacity.” Guess what? The same arguments were made during the dot-com era just prior to the bubble bursting.
Kevin: But I think about the dot-com era because I was there, you were there in the stock market and seeing what happened, there was more breadth to that market than there is this market. You named 10 companies that basically represent almost all of the gains this year.
David: Although at the tail end, this is exactly what you saw in 1999 and 2000, breadth was not great at the very end. And this is a concept we’ve talked about before. If breadth is too narrow, you’re talking about there only being a handful of companies moving higher versus the vast majority of companies in a particular index, which are flat or down.
So the market’s vulnerability increases when you have that sort of narrowing of breadth. We’ve been talking about narrow leadership for some time. If we move towards recession, if that is something that materializes this year or next—perhaps we already have it emerging—the narrow leadership, which has already reversed, will be reinforced on the downside with broad-based selling.
Kevin: Well, and the problem is you have to have buyers for that. If you’ve got everybody buying the one thing—we’ve talked in the past—who’s going to buy it from those people when they want out?
David: Well, that’s what drives a bull market is this sort of plethora of buyers. When there’s a scarcity of buyers and more sellers than buyers, you know what happens to the price.
The AI trade, the artificial intelligence trade, has been like a late-stage shot of adrenaline. The markets were overbought already. And then a year, year and a half ago, we had this new concept. And it’s actually not a new concept at all because AI has been around quite some time. Market fundamentals were utterly ignored in favor of a revolutionary transformation. Could AI change the way business operates?
Kevin: Sure.
David: Absolutely. Those that don’t adopt it to some degree will be beaten out in the marketplace by those that do. But as we saw in 1999 and 2000, prices do matter. And if you’re willing to pay for 30 to 40 years of progress today, you’re going to have performance issues tomorrow.
Kevin: It reminds me of the commercial I remember back in the late nineties, the sock puppet. Remember the sock puppet for Pets.com? And everyone was afraid that pet food was going to actually be sold in stores still instead of on a dot-com, and so at one point Pets.com was worth more than all the airlines in America combined.
David: Oh, all the airlines combined.
Kevin: Yeah. And then where are they now?
David: Well, and it’s not like we can’t buy pet food online. We do, and that was remarkable.
Kevin: But the capitalization for that sock puppet, it just vaporized.
David: Well, you find that it’s a feature, not a product. Right?
Kevin: Cup holders.
David: Right. So following the dot-com bust we suffered what was called the lost decade in equities. Yes, there was a dot.com revolution. Yes, it was real. But did overpaying for assets turn out well for the Johnny-come-latelies who are coming into the market with nothing but enthusiasm? Well, not at all.
Kevin: No.
David: And it never has. Momentum trades are absolutely spectacular until they run out of one thing that they need to continue, momentum.
So what to expect next? We could see the Fed intervention cause a rebound in prices temporarily, but smart money has been hitting the exits for enough time now. I think insiders have been aggressively selling the price action through June 20th, and will continue to sell into any strength that emerges.
The real declines—and this is where you have to distinguish what we’ve just witnessed, this correction, with the potential for a collapse. The real declines are always secondary declines that take out the first lows that are put in. I think we’re putting in the first lows now. A crash scenario is a low-probability event at present, but it’s a very high-probability event in future months. I mean, as soon as October.
Kevin: Well, maybe, I mean, October’s typically a dangerous month for the stock market if things are tense. But Dave, we’ve talked about government debt when we talked about the yen and Treasury debt. We’ve talked about stocks, but actually the way corporations raise money is they borrow. And so corporate debt, that’s a bell that Doug has been ringing for a long time.
David: Yeah. You either issue new shares or you raise money in the debt markets. And it brings us to Doug’s third point, that indications that deleveraging has commenced in US corporate credit with significant widening of risk premium and indications of waning liquidity, it appears the tightening of financial conditions has begun.
Kevin: So this just goes back to where there’s liquidity, you’ve got a bull market. Where you have a lack of liquidity, you’ve got the opposite.
David: That’s right. And I think that’s why Wall Street is already calling for an intervention. Although prices have declined, we’re in correction mode, we’re not in what they would define as a full-blown bear market.
When corporate credit tightens, the end is near. Liquidity abundance feeds upward price moves, and the reverse is also true. Go back to Gordon Pepper’s book, The Liquidity Theory of Asset Prices. That is a must read on the topic. Gordon Pepper’s The Liquidity Theory of Asset Prices. Order it. Read it. If you have any doubts about the power of liquidity to drive bull markets and bear markets— We watch these indicators every day. Starting midweek last week, credit spreads began to widen. That’s the first sign.
As financial conditions tighten, you’ve got CFOs which begin to adjust their game plan accordingly. And that’s all kinds of things. How are they going to refinance their debt? What is their business spending going to look like for the next three to six months? I mean, of course refinancing becomes more difficult. In some cases with some companies it becomes existential. That really depends on the balance sheet strength overall. So when this last trigger gets pulled, investors begin to reassess the buying environment and often shift to selling anything that doesn’t have the most pristine balance sheet.
So corporate credit tightening is a huge factor in bear markets, and throughout this interest rate cycle from less than 1% to 5.5%, believe it or not, financial conditions have remained incredibly loose. Stocks have fared quite well. We’ll have to monitor the spreads that I think that’s where we’re going to see more movement and be the last signal that we are in a nasty, nasty bear market.
Kevin: Well, and I think one of the signals, going back to how we started, was when the central bankers who have been helping to manage this for many, many years become very, very sober and serious. That’s a signal as well, isn’t it?
David: Yeah. I sat with a Commentary guest over dinner last week in London, and his chief concern had nothing to do with the three points we’ve been discussing. His chief concern was the total quantity of debt in the system today. Unsustainable. Since he was the man that traveled to New Zealand in the ’90s and helped implement the inflation targeting strategy for the New Zealand Central Bank, I asked him at dinner if raising the inflation target to 3% would help. And again, we’re talking about chipping away at this burden of debt. If we increase inflation and our tolerance for inflation, wouldn’t that help? I don’t know if you’ve ever had a central banker, a legend in the field, laugh at you.
Kevin: He laughed?
David: He laughed. I said 3%. He laughed. I said, what about 4% or 5%? That’s this look of chagrin, the shaking of his head, it’s gone too far. Those rates would only make things worse. I find that interesting because it was just last week that Mohamed El-Erian in a Financial Times article, joined the chorus promoting higher inflation targeting. We need to move to 3%, we need to move to 3.5%. But things have already gone too far. This particular central banker’s comment was telling. You know what he said? “You’re in a great business. Gold.”
Kevin: Gold.
David: If you don’t own it, you don’t understand what’s unfolding.
Kevin: You know those three weeks that we had guests back to back? That’s what they said. They all agreed that we’re in a period of time right now where gold— Again, John Hammond basically saying, “Would you kindly go get my grandchildren?” That’s what gold is saying.
David: Right. Well, and I thought it was very interesting when we talked to Jeff Christian because he’s nine times out of 10 bearish on the gold price, and you’d expect with gold at 2,400 for him to take that side of the argument. In fact, he’d say, this is a pretty good time to be buying. Why? Because of the larger environment.
So the financial markets are frail. Our fiscal position is desperate. And neither political party here in the US has the will to do what it takes to solve the fiscal problems. We’re talking about cutting spending dramatically. We’re talking about raising taxes in a meaningful way. We’ve gotten to the point where we have terminal math. Terminal math when we’re talking about debt and deficits, we’ve moved to a level where those numbers are unmanageable, and they’re unmanageable by the best and brightest.
Kevin: I remember, Dave, you spoke at a conference back seven or eight years ago, and you very generously bought several hundred books recommending that we go back to a gold standard. You passed that out to the whole audience. Remember that? And that really would be a good thing to do for the people as far as the disparity between the rich and the poor. But politically, you said when you were flying back on the plane, you’re reading Giulio Gallarotti’s book on just that. Can we ever have a gold standard again? I know there’s a lot of internet prophecy going out right now saying, oh yes, we’re going to see a gold standard.
David: Can’t happen. It can’t happen. It’s not that it’s not easy. Actually, in Lewis Lehrman’s very brief book— I mean, it’s only about 80 pages.
Kevin: That’s a great book.
David: I mean, he lays out—
Kevin: That’s the one you gave out.
David: —just how easy it is. And this is sort of this guy in Wall Street saying, “Actually, we could do this, and there would be benefits to doing it.” But it’s not going to happen. It’s incompatible with democratic politics. If I could sum it up in one sentence, that would be it.
We’ll discuss that at length with Giulio Gallarotti in a few weeks. He wrote a book recently dealing with a history of monetary regimes, 1867 to the present, and this transition to universal suffrage on a more global basis, where democracy is the form of government which has been popularized the last 100, 150 years. And democracy is incompatible with a gold standard.
Kevin: Because you got to spend more money than you have.
David: If you are going to negotiate with your potential voters, that’s exactly what happens. There’s an exchange. I will help you in this way or that and you will provide a vote. You will provide me an office, and I will provide you some delivery of goods from the Treasury.
Kevin: And this is why, for years, your whole family has basically said, put yourself on a gold standard. The nation may not be able to go to a gold standard, but you can.
David: Yeah. So where does it leave the individual investors? We talk about these aspects of market fragility, the unwind of the Japanese carry trade, the yen carry trade, which has been building trillions over several decades, to fend for themselves to manage both market risk and the ramifications for decisions which have accrued over decades. I think this is where the individual investor has to act on their own. Perhaps that’s a concern you’ve heard before, and perhaps the notion that the sky is falling, maybe that’s what you hear. And what I’m saying, the sky is not falling. But when asset prices reach unreasonable and unsustainable levels, asset prices do what they’ve always done, they revert to lower levels. That’s bad news for the fully invested, fully bulled-up investor. But it’s great news for the cash-heavy or the gold-heavy portfolio. If you haven’t done enough about that, you might get after it sooner than later.
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Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. You can find us at McAlvany.com. And you can always call us at (800) 525-9556.
This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.
