Podcast: Play in new window
- Increase Your Ounces Of Precious Metals Through Prudent Trading
- Decline Number One (Last Week) To Be Followed By Decline Number Two
- Japan Spooked Out Of Interest Rate Increase
“The markets, if I said the man in the street has moved on, he’s not thinking hyper fragility. I’ll tell you that market practitioners—the pros—recognize that last week was a reveal. It takes virtually nothing to upset the global financial markets and turn them inside out.” —David McAlvany
Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
David, we talk often about legacy. But think about those quiet guys that you know through your life that maybe they never looked like they had a lot of money. It’s funny how I talk to clients and they’ll say, “Well, how much have I made?” And I’m like, “What do you mean? In dollars? That matters?” And they’re like, “Yeah.” Because that’s how they’re taught to think. But think about that farmer that you’ve maybe known or rancher or somebody who, they always drove an old pickup, but strangely enough their farm or their ranch just got bigger and bigger and bigger. And you’d say, “Well, how much do you have in the bank?” “Well, I’ve got, I don’t know, $50,000. I’ve got about what I need.” And you see thousands of acres around them that they had built through a lifetime of just carefully watching the land, trading when they needed to trade, and they’ve built an empire.
And I think about that because if a person starts thinking in something other than these worthless paper dollars that just seem to be getting worth less and less and start thinking about compounding something real, Dave, that’s what we do here. I’ve watched you do that. I’ve watched your dad teach us that. I’ve watched guys who’ve been in the business now— We work with one guy who’s been in the business nearly 50 years.
David: The information is an interesting thing. We live in an age where there’s more information and more access to information than any other time in all of history. And so you’ve got data centers and storage for the information that’s created. You’ve got the large language models which are trying to capture from that some sense of meaning and real content from these disparate informational nodes. And the best we can do is get stuck in a new cycle, is look at social media, is deal with things that will flip our script every five seconds, every 10 seconds, every five minutes, every five days. And what does it mean? What do we do in light of this?
Kevin: What does it mean? See, you just now said— That’s the key. What does it mean? What is real?
David: And I think this is where having a framework for thinking about things is really important, because it’s easy to get lost in the details, in the informational data points, and not have a way of processing it. I appreciate Doug Noland’s approach, we did the Tactical Short call this last week. That’s available if you want to listen to it or go through the transcript. And there’s a framework for understanding the information that is presented to us each day, but it has a context.
What we try to do with the Commentary now for 17 years is create context so that as things shift, there’s a larger picture in mind that helps us make sense of what this stuff is as it unfolds. Whether it’s conflict in Ukraine and Russia or conflict between Israel, Iran, and Hezbollah. These are all things that need context. And without it, what does it mean? And where do we go next? There’s more confusion. And I think what happens eventually is people’s minds begin to shut down. You get numbed and you’re on what is basically informational overload. So what do you do? You just start ignoring all of it. There’s a numbness that is a part of life.
Kevin: It’s the breaking news thing. I remember when they first came out with that breaking news. Breaking news used to actually mean something important. Now it’s breaking news all the time.
I was telling a client this morning, as I was talking to him, I said, “You would love this place.” I was out in the bike shed talking to him, and then I came in. The guy who held the door for me I’ve worked with now for 38 years. We’ve watched our kids grow up. And as we were in the meeting, we got into telling a couple of older stories. The Red Alert that Don McAlvany wanted to send out when silver hit $3.32 an ounce back in 1993. I remember that. He said, “Hey, we can’t afford to send this out.” I mean, it was all first class postage. And he says, “We can’t afford to send all these out, but we have to because the market’s got to be at a low.” And strangely it was. But Dave, we have story after story of people who’ve been with us for a while.
I’ll give you an example just here recently over the last couple of months, Silver American Eagles. Silver American Eagles, we placed a lot of our clients in those coins years ago when the premium was low. The premium got real high, as a lot of people know, over the last couple of years, we called them up and we said, “Hey, do you want to swap these over into Bullion for a little while and then come back in and get a whole lot more when the premium falls?” Well, we’ve been making those calls and we’ve been compounding ounces. Now I want to talk about the news events, but I want to make sure that we don’t lose the longer narrative, the meaning of what we’re trying to do.
David: Yeah, I think it’s very important to be playing a long game. It’s one of the reasons why I wrote the book on legacy because it’s a way of thinking about your family interactions and the things that happen in the day to day. We all eat, we all sleep, we all clean up after ourselves. There’s all of these little things that are just minor points in life, minutia, and they are either chock full of meaning or they’re not. And I think that has a lot to do with how we approach, how we think about it, how we engage with those little things.
The little things absolutely matter. They accrue to what our legacy is. But it’s really helpful to be playing a long game, to know that you’re going somewhere, to know that you have an objective in mind and it’s on the horizon. Your horizon as an 85-year-old might be within five or 10 years. Your horizon as a 25-year-old might be 60 or 70 years out. But what is on the horizon? And how do the decisions that you make align with where you want to arrive on that far out point in time?
Kevin: Well, and just before we move on to the news. I knew you when you were 12. You are now going to turn 50 this year. And I knew you when you had no kids. You are taking your son to college next week. I feel for you. I remember my wife cried all the way home from Oklahoma, 12 hours of tears, when we dropped our first child off to college.
Now it turned out to be a great thing. But that’s the legacy you’re talking about. When you talk about horizons, Dave, it doesn’t matter when you die or when I die. The whole legacy mentality has to do with creating horizons that are well beyond our little lifetime.
David: When things happen in a given day, they always have a context. You can look back for perspective. You can look forward for perspective. There’s never really a point in time where panic makes sense, particularly if you have that context. So if we look at Japan, what do you want to tie it to? The run-up in the Nikkei in the 1980s? The bubble that burst through the 1990s? The challenges to their currency for the last 20 years? What a week last week-
Kevin: Or even last week, what happened. Yeah.
David: Yeah. And last week was interesting, this week is interesting, both are very intriguing. You remember the exculpatory, “What happens in Vegas stays in Vegas.” Well, the markets are today very casino-like. And unfortunately what happens in Vegas does not stay there. What happens in Japan does not stay there. It is diffused and transferred universally. And I think what happened last week is going to live on with us and have implications as we move forward, as it changes the structure of finance.
Kevin: And I’d like you to cover that too. Because when we went through the global financial crisis, fortunately the Commentary was going for a lot of that. We started that in 2008. But I remember Bear Stearns in 2007 when they came out and they couldn’t sell that garbage debt that they had, $400 million worth. That’s just a drop in the bucket. But when they could not sell that and had to pull it back off the market, we all looked at each other and said, “Hey, is this the first sign of something much worse?” And sure enough, it was the first sign, a year and a half before the 2008 crisis.
David: Well, last week ended with little change to any market. Flat, boring. What happened early in the week was erased from the consciousness of Mr. Market. Most investors don’t even care. The market was down. You then had the intervention from the Bank of Japan, markets are up. Move along, there’s nothing to see. Just get back to the casino. And in fact, if you look at the VIX, a measure of puts and calls and real stress in the market, it declined three points for the week. Think of all the drama last week. Think about the record interday move on Monday to over 65, and by Friday it closes at 20.37.
Kevin: Nothing to see here. Move along citizen.
David: It’s in a better position than where it closed the previous week before all the hullabaloo about the end, the end carry trade, and all the rest. Japanese equities recovered most of their losses. Credit indicators return to calm.
Kevin: Okay, was there anyone damaged by the volatility? See, this is the thing. You talked about cleaning up after ourselves. A lot of times they clean up, but actually all it is is a bigger problem.
David: Yeah. What we had last week was sufficient. When you talk about $5, $6, $7 trillion in losses, it was sufficient damage—that volatility—to have long-term implications. And there are institutions, we will discover them in the weeks and months ahead, who are now quietly bleeding and they will fade from existence.
Kevin: So we have an awful lot of news coming this week. I think we should talk about that because these days bad news is good, good news is bad. I wonder how this news is going to actually play out.
David: Of course, what you’re talking about is leveraged speculators who if they have bad news, that forces the hand to the Fed to accommodate. And that’s good for the levered speculator. And if we have good news, that means that the Fed has no reason to accommodate those levered speculators, and it for them is bad. It’s a really upside down world.
Well, this week we’ve got big economic data. We’ve got rising geopolitical tensions. We’ve got options expiration on Friday. This expiration will be unique. Reflecting on last week’s volatility frenzy, there’s plenty of people who, in the context of chaos, opted to hedge positions not knowing where the next levels of support would be found. And those hedges have lost a lot of money. Or should I say, could be in the “expire worthless” category come Friday this week. So investors are conditioned to buy every dip, and last week, the public followed the playbook. For a notable divergence, you’ve got really sophisticated speculators in the pro category that are shrinking their exposure. They’re selling into the current strength.
Kevin: Well, when you see $6.4 trillion lost in a market, you know there’s damage done. And like I brought up Bear Stearns before, back in 2007, that turned into something much, much larger. So you’ve talked before about decline number one is not the one you want to pay attention to. Decline number one is just simply to let you know that there’s a decline number two coming.
David: Yeah. The market message, which is understood by hedge funds, high net worth individuals, folks that have great data to look at on a daily and weekly basis, the reveal last week is that the stability we have had is a thin veneer. And just below that thin veneer is something that is really rotten. So yeah, remember my comments from last week. You’ve got decline number one. Painful, but follow it with a policy intervention and then a response rally. And that’s what we said last week. We recorded Tuesday, we played it Wednesday. And that’s what you have. We have that now. We had the policy response from the Bank of Japan. They capitulated from the rate increase strategy in less than 10 days. And the real test of the markets is the retest of the lows that we put in last week. That’s where you get to see the big story unfold.
Not only was the general equity market hit for over 20% in losses, but in Japan, if you’re talking about why the Bank of Japan might have capitulated and done sort of a quick reverse course. Their largest banks were pushed to over 20% losses. This is a quote from the governor of Bank of Japan, Shinichi Uchida. He came out Wednesday and said, “The bank will not raise its policy rate when financial markets and capital markets are unstable.” And that gave sort of the green light for everyone to get back to the casino.
So you also had, Wednesday, you had an announcement. This is Kishida announcing that Ueda, Suzuki, and Mimura, the three big guys in the world of monetary policy within the Japanese sphere, they’re all going to meet. It’s the brain trust. And it was the first shot across the bow that “we’ve got this,” something of a Draghi moment. We would say, “We’ll do whatever it takes.” Bank of Japan rate cuts happened back in 1995, and that took policy rate from 1% to 0.5%. And rates have not gone above that level since. So we’ve got a 25 basis point increase and the world comes unglued? Not a big move in interest rates for the world to come unglued, but that tells you what happens in the context of hyper leverage.
If you’re paying attention, that is what I would describe as hyper fragile. At Monday’s close, the Nikkei was down 20% in three days. And the Japanese banks 26.5%. We got the verbal commitment. The intervention that we expected.
Kevin: How much had it not moved since 1995? It has not been above what number?
David: Hasn’t moved above half a percent since 1995.
Kevin: And this little bitty move did all that damage last week.
David: All that damage on 25 basis points.
Kevin: Let me tell you what this reminds me of. I used to fly with Civil Air Patrol. We had to go find people who flew into canyons that were very wide when they first started, and they got narrower, and narrower, and narrower. We’re talking, what a fine line right now, that little bitty move caused $6.4 trillion worth of damage. I’m not going to attribute it all to that, but where are we? Where are we in the canyon and are we going to have to go find the wreckage?
David: Well, again, the markets, if I said the man in the street has moved on, he’s not thinking hyper fragility. I’ll tell you that market practitioners, the pros recognize that last week was a reveal. It takes virtually nothing to upset the global financial markets and turn them inside out.
Kevin: So let’s look at this week. I mean, just the news this week, I’m not saying it’s going to happen right away, but any one of these things could cause this hyper fragility to become more hyper.
David: So we’ve got PPI, CPI, the two measures of inflation. Small business optimism, Friday, along with options expiration. And then we’ve got the August preliminary report for consumer sentiment. That’s from the University of Michigan. And I forgot, Thursday is retail sales as well.
Kevin: Oh, and all this basically, while Ukraine is pushing into Russia. Now let me restate that, because a lot of people haven’t paid attention. Ukraine is pushing into Russia. It’s invading Russia. What that sounds like to me is, it’s no longer invasion. This is outright war between the two powers.
David: Well, I mean, we talk about hyper-frailty, hyper-fragility, and I think we could add to that hypersonic. Because that’s what Russia brings to the equation. When push comes to shove the scale of armaments, it gets nasty. It gets very ferocious. This week has economic data that could elicit market reactions and volatility in either direction. The more disconcerting elements not in the data are in the background. Ukraine pushes into Russia in a way that is sure to bring out the worst from Putin.
Iran is moving hardware in preparation for a retaliatory move against Israel. Western embassies are notifying citizens in Lebanon to leave the country immediately, including US, French, British. Russia is sending S-400 anti-aircraft systems and nuclear-capable hypersonic missiles to Iran. Again, these are the things that in the background set the stage. We look at small bits of data. The PPI. The CPI. Is it up or down a 10th of a point? Small-business optimism, is it moving into what is suggestive of recession or further strength?
All these things take place in a context, and without the context and without a framework for understanding what is happening in a bigger picture, you look at the details and it’s just boring, meaningless data.
We had Israel— When they did what they did in Iran just a few weeks ago, Israel sent a message. Not even your tightest security is sufficient to keep us from taking out whom we want, when we want, where we want. And it’s highly effective psychological warfare. Yes, Israel will take heat. Yes, you’ll see some sort of a response. The Iranians know full well that a moving target by Hezbollah, [unclear] Ismail Haniyeh. Far easier to keep safe than a static target like uranium being enriched. There are no secrets. That’s what Israel was saying. There are no secrets and there is no place in your country that is safe. A moving target we know about and we will eliminate. A static target is not an issue either. That was effective Israeli communication.
Kevin: Just strong leadership in the United States in the past has served as a deterrent for a lot of these types of moves. And I don’t know that I’ve actually seen— Who is leading right now in America?
David: Who’s in the White House?
Kevin: Yeah.
David: Sightings of the leader of the free world are as frequent as an albino crocodile.
Kevin: Oh, that’s not fair to the albino crocodile. I’m sorry.
David: At least we’ve had no official comment on the US hardware headed to the Middle East. We’ve had no comment on Ukraine advancing in Russia. We’ve had no comment on Iran receiving Russian military hardware. We’ve had no comment on market gyrations and what happened with Japan and the carryover into global markets, the volatility that we had last week. No comment.
Kevin: Oh, and there’s no comment on the thing that really is foremost on people’s mind. I mean, we’ve been talking a lot of things that really should be on our mind, but the truth of the matter is, when people go to the grocery store or when they’re trying to pay their bills, they’re running out of money before the month’s done. And so CPI, consumer prices and of course producer prices which affect that, that’s something that we’re not hearing anything about either. And that’s what’s coming. I mean, we’re going to see the next numbers, aren’t we?
David: Well, I think that’s a healthy reminder of you know what you know. And if you reflect on what you experience, there is a very reasonable anchoring for interpreting other things that happen around it. Granted, if you wanted to take that comment, you could pick it apart with various heuristics and things that— You know. You have biases attached. Great. But when CPI and PPI come out and there is no more inflation, go to the store and tell me what you know about the prices paid and what you can fill with what you can buy for a 100 bucks, what you can buy for 200 bucks. I’m constantly surprised, constantly surprised. I don’t get very much in terms of groceries, and I’m not shopping at Whole Foods—Whole Paycheck, as some people call it. And yet there goes 200 or 300 bucks. And I think, I just didn’t walk away with that much. This was a mid-month supplemental trip to the grocery store.
Kevin: Yeah. I was talking to my wife yesterday because I said I went to lunch at, you know that place that has ramen noodles? And I was eating and I was like, “Gosh, I paid almost $25 for this lunch.” It was $17 for the ramen. And then I got a seaweed salad. And I was thinking, “I can do this every once in a while, but I can’t do this often.”
And there was a lady who walked in, middle class and she just looked at the menu. I know she wanted to eat. But she was making a judgment call. And my wife said, “Yeah, she probably had just shopped at Albertsons, was going to pick up a little bit of lunch, take it home.” Because my wife does things like that too. And she says, “Yeah, you’re looking at these menus and you’re making a different decision at this point.”
David: That used to be a steak dinner, not bowl of ramen noodle.
Kevin: Ramen and seaweed salad. And everybody’s experiencing this. So I know that that’s not unusual.
David: Well, CPI and PPI are the numbers most impactful this week. If you’re looking at the data coming out, they’re considered sort of the solid evidence of where the FOMC will take rates next. And the ease of access and easing of terms of credit are the speculators’ green light to enjoy the casino.
Inflation surprise to the upside alternatively, you get rates higher for longer. Equities are under pressure. Bonds are backing up in price, and yields are going higher. So what will it be? Easing of inflation towards the target, and yeah, the assumption of lower rates sooner. Wall Street loves it. Equities get a little pep in their step. And that’s the expectation, is if we’re moving towards the inflation target, it’s time to get out there and take advantage of this most recent drop in equities. Last week’s carnage can be ignored because we’re off to the races. Options expiration Friday, always a good time to press harder on the short-term manipulation string. So anything can happen. But we’ve got CPI and PPI this week which are worth watching.
Kevin: Well, unless we just get caught talking about numbers, ratios, charts, that type of thing, what makes this week interesting is, you were talking about the first decline followed by the second decline. If there was damage done last week, and there was damage done last week, this week may be important.
David: Yeah. I mean, for Bear Stearns it was a couple of funds equal to $400 million total that sort of got the party started. Now, we’re talking about last week’s gyrations and I don’t know, $6, $7 trillion in losses. That’s material. And we haven’t moved that far from the 2008, 2009 frame to think that a trillion here, a trillion there is no longer consequential.
This week is interesting. I don’t want to move too far past last week because, again, the extreme volatility where we started Monday, Tuesday of last week was enough to destroy trading firms caught with too much exposure. And it takes weeks to months to see the longer run impacts, the unwinds of those trades and the dismantling of those firms. It’s a slow hemorrhaging, right?
Drexel Burnham disappeared after a major bout of volatility. Lehman and Bear Stearns as well, and it took time for the impacts of volatility to migrate and become solvency issues. But AIG, Northern Rock, many others taken out over a six-week to six-month time frame from the initial shocks which in retrospect were called the global financial crisis. It started very local, it started very small, but there were implications to extreme volatility.
For the pros, there is the question of counterparty risk increasing. If that volatility was damaging, who was it damaging to and what does that mean for me? When you go back to business as usual in trading, but have a suspicion that there might be a zombie counterparty recently transformed from the volatility, it’s business as usual—maybe? There’s certainly a lot more nervous glancing from left to right.
Kevin: Well, and it’s good for us to differentiate the unreal world of Wall Street, which, they’re just watching to see what the numbers are like PPI or CPI. And then the lady who’s looking at the menu who walked out without buying any ramen because she realized she was not going to make that kind of decision. But we’ve got PPI, and is producer price index saying what the Fed wants or Wall Street wants?
David: Oh, very much so. Lower than expected, 10th of 1% versus the 2/10ths expected. Equities are up on the news. You’ve got labor market weakness is an inspiration, and with one part PPI reported, waiting for the part two CPI which will be later this week. We’ll see if inspiration abounds.
Because again, if inflation is perceived by the Fed to be coming under control, that gives them the permissions to lower rates. PPI does in part correlate closely to PCE. That’s the Fed’s preferred measure of inflation. And Powell is likely to get what he wants. Market is likely to get what it wants. Lower rates, frankly this is really interesting, it’s negative for the US dollar, and, lo and behold, positive for gold.
Kevin: Well, and it’s positive for ramen. If you wanted to invest in a bowl of ramen, $17 ramen may turn into $18, $19, $20 ramen pretty quick. We see this in gold. Gold actually in the long run is a truth-teller. It can be manipulated in the short run, but it’s a truth-teller in the long run. So let’s talk about gold right now because this week, that was the highest close that we had seen, correct?
David: Yeah, all-time high for the close, and we actually had the futures—if you’re looking at, I think it’s September futures—over 2,500, I’d like to see some time spent over 2,500. The futures contracts are already there.
Spot should follow, particularly if we get a 50 basis point cut. $26.50, 27.50 spot price, year-end, still possible. Silver is an unknown for 2024, but it suggests $42 silver sometime in 2025. That’s an improvement in the ratio. And probably as the ratio improves, a tradable number going from silver over to gold.
Much discussion in-house on the passage of time on those ratios and the ratio trading range we can expect going forward. I think we ultimately will see a 30 to 1, 40 to 1 ratio. That’s a realistic possibility. They are becoming—call it a third standard deviation event, something that is going to be more rare, with a range between 65 and 90. The range that’ll capture, again, if you’re talking one standard deviation events, two standard deviation events, you know how the Gaussian curve works? That captures 95% to 98% of the trading range. Over 100 and under 50, very much the outliers.
Kevin: It goes back to that patient farmer who drives the old pickups, got 50,000 in the bank, but he’s got thousands of acres, and it’s because he’s traded correctly at the right time. Maybe he’s got thousands of head of livestock, what have you.
So let’s go back to that compounding aspect, because instead of talking about $2,500 gold or $30 or $40 silver, we really need to look at how they compare to each other, because that’s how you build that land.
David: I think the long-term view is super helpful because, in essence, we’re farming silver, not soybeans, and maybe it’s gold. It doesn’t matter, the ratio tells you what side of the equation to be on. It’s really important when purchasing metals to set yourself up for the compounding of ounces. Our competitors lack both the market experience and, frankly, by charging too much on a transaction they make it impossible to compound ounces and get those ratios in line.
I highly recommend talking to one of our advisors to figure out where you’re at, what you have, how you can optimize your precious metals exposure going forward. We’re finding great opportunities in recent weeks, and metals prices are more or less irrelevant when compounding ounces is in play. So getting that as a part of your long-term strategy is super helpful. Following those strategies—I’ll just reference my own portfolio of metals—since 2009 I’ve been able to add between 80% and 100% to my silver position.
Kevin: Without adding new money.
David: That’s right. Incrementally through five separate trades. It’s a long game. We’re coming up on, what is that, 14, 15 years? It’s a long game, but a real game changer when you’re convinced of the value of a hard asset portfolio and are flexible in your approach to portfolio construction.
And I appreciate the increase in nominal prices. I’m taking the view, however, that there are strategies which can be passed on from generation to generation, from one generation of investors to the next, which really is playing the long game and allows for capturing an added growth component. For the farmer, it’s added acres. For us, it’s added ounces.
After 53 years in business, our company and the advisors there, I think what’s interesting is there’s a variety of clients, some who are very eager to be involved, and frankly we find that they are very satisfied and satisfied sooner, because they’re not tied to the price of the metal as much.
But with other clients, there’s a strange reluctance to embrace those strategies. And I can tell you firsthand, they are game changing. When I bought the business from my father, it required a significant bank loan. I collateralized the loan with my metals position, and I had to go to the bank committee, the loan committee, and explain what I wanted to do with the collateral. They gave me the flexibility to do some of these trades.
They were skeptical at first how those dynamic strategies would work, but what they’ve seen in that time frame is that my loan to value has continued to improve over that time, and it has not come from price appreciation as much as new and free ounces in the mix. And that’s given me much more latitude. If we have volatility in price, it doesn’t matter because I’ve improved my position with the bank. The bank is looking at far more collateral today than when we started this process.
So I’m just telling you firsthand, this stuff works. It’s like playing with a full set of clubs. Like in golf, there are different tools for different objectives. In the physical metals, there are creative trades, there’s strictly defensive positions if you’re just looking at insurance and don’t want a dynamic element in the portfolio. Again, different clubs, you can play with all of them.
Kevin: Yeah. And I think something that was wonderful—and your dad loves watching this at this point—that he did not bring to the equation— Okay, your mom and dad did such a great job for many years from 1972 until about 2004, ’05, ’06, right in that area. And they could tell that they were being called to help with orphans, and ended up going over, and they’ve lived in the Philippines—for how many years now, have they been in the Philippines?
David: Full-time since 2008.
Kevin: Yeah. I mean, it’s a wonderful thing, and they call that their second chapter, their second life. But what you brought, Dave, and you talked to your dad about this ahead of time. You said, “We do gold and silver, but we could apply these same strategies to what a lot of people use their Wall Street brokers for.” But you said we should be able to do this with the right kind of stocks and bonds and other types of investments. Sort of that left side of the triangle. The base of the triangle is the gold. The left side is the money management side, and the right side, of course, is the cash liquidity side.
And you apply strategies similarly. It’s not compounding ounces, but you apply similar strategies with your asset management team. And when you’re interviewed on Fox or Bloomberg or other news outlets, it’s amazing how differently you are approaching what these other guys— Most of these other guys are just talking about, “Hey, here’s our dollar returns. This is what we’re going to do.” Boom, boom, boom, boom, boom. It’s all US dollars. You’re actually applying what we talked about, that farmer strategy, the old pickup, $50,000 in the bank, but let’s just keep building the real stuff.
David: How many miles of pipe are we going to own? How many data centers? How many cell towers?
Kevin: How many gallons of LP?
David: So when I am on Fox or Bloomberg or CNBC, I’m usually there to share an outlook on metals or energy. And I tell you what, the things we talk about come across as very distinct from other guests on those programs. I’ll sort of be in line and queue, and I’ll get to listen to the other programs proceeding.
Within the precious metals space, there are real values to be found. I find, as I listen to these other commentators, it’s momentum, momentum, momentum. In the precious metals space, there’s value to be found; within the global natural resources space, there’s value to be found; within infrastructure, value to be found. Being a value investor in a growth or momentum environment puts you on the outside of the usual Wall Street strategies. Again, it’s an expression of playing the long game.
Kevin: Well, it’s not exciting. I mean, it doesn’t make for that breaking news excitement.
David: We’re often contrarian, and we’re not contrarian just to be contrarian, not for its own sake. When we engage the markets, this is sort of careful allocations, risk management, deep dives, and company balance sheets, and management teams, and that produces a healthy mix of companies, which are poised to do incredibly well.
Q2 results are in, and the range of reports, particularly for the precious metals miners, are from excellent to incredible, and there are a few disappointments. But the vast majority of companies which are established producers are making more money than they have ever made before. And the shares don’t reflect the extraordinary nature of their performance. They’re also not extraordinarily cheap as they were six, eight months ago, but they’re not overvalued at this point either.
Kevin: Well, and it’s not just the valuation of the company, the actual way the companies have been run. I’m thinking about a lot of the gold mining companies right now, just to survive, even though gold’s been rising, they’ve been through an awful lot if you look at share prices. And I know Morgan would say this, I know your analysts would say this, these guys who are running these companies, these resource companies, probably have gotten very, very frugal. Is that a good way of saying it?
David: I guess they’ve gotten smarter. The last 10 years, they’ve learned some tough lessons. Last decade has brought the C-suite some conservatism, and that’s translated into much more effective cost management, so that as the commodity prices increased, so have margins, and with that, a tremendous boon to free cash flow. The years ahead looked to be very rewarding.
There are times that the Commentary can take on a bad data, sort of gloom and doom feel. And what I would say is that there are always opportunities and always pitfalls. How carefully you manage risk, how hard you work to construct a portfolio, I think is key. We’re not in an era where reading a few newsletters and picking up a few stocks from an editor’s tip list is going to cut it. Management of risk is equally important if you’re talking about reaping rewards, and you may actually cut back the potential rewards to effectively manage risk.
And I think there is the difference from what I’ve been describing as a vast casino. The markets are very casino-like at present and very vulnerable. Without a team daily engaged with risk management, you’re in a tough spot. The age of autopilot, I think it’s behind us. The age of index investing is at a very important juncture, and I think it’s going to be found to be inadequate. Stock selection, out of favor in the age of easy money, is going to more and more in the years ahead be important.
I think that’s going to remain the case for a minimum three to five years, maybe more. Find a better way. It’s more work. It’s different than buying a Vanguard ETF, but align yourself with a good team of advisors, I think you’ll find the results to be very different.
Kevin: Here’s what I want to say. It’s boring with a capital B. Boring. It’s not boring to you, you guys are working all the time. But when Japan got hit—that carry trade thing got hit—a week and a half ago, I was asked, “What do we need to do different?” My family asked, “What’s going on? What do we need to change?” And I was like, “Huh? Nothing.”
“Yeah. Okay, great. So the stock market’s down 20% in Japan, the carry trade’s falling apart. Do we need to do anything different?” I’m not saying you don’t do anything—
David: No, but the difference is you’ve put your family in a place where they can respond and they don’t have to react. And part of that is you have a framework for understanding the events, and you also have a framework for decision-making and allocating assets. You use the perspective triangle, I think that’s a healthy place to start. What makes us unique as an organization is that we combine the best of your defensive strategies with your offensive strategies. We’re able to help investors through a complete economic cycle. And what may come across as doom and gloom is really what is required to constantly review and assess risk.
There’s a difference here because for a lot of investors you experience a black swan event and it was not foreseeable. I would say actually if you’re clued into the data, have a framework for understanding it, you can see shifts, and what comes as a surprise for many people, although low probability and highly consequential, is foreseeable and actually is associated with opportunities. So I mean, Tactical Short comes to mind. Our equity strategies that focus on things you can stub your toe on, all hard assets.
Roll the clock back even further, the place we started 53 years ago. Don was steeped in macroanalysis, thinking across a variety of fields, from international relations— I mean, his first newsletter was the South African Intelligence Digest. You want to understand international politics and the move of the Soviets to control 95, 96, 98% of the world’s strategic minerals. They had them in Russia. What they needed was the rest of them in South Africa. So this is all an interplay of public policy, sociology, economics, international relations. Geostrategic thinking was very much his lane. And so what made sense was launching a precious metals brokerage 53 years ago because it was a solution to a variety of problems. And that was then; this is now. We still have about as much chaos. Some of that chaos includes Russia, still, after all these years.
Kevin: Amazing. They’re back.
David: And some of that chaos still includes the Middle East and concern about energy, reliability, and security. Some things never change. Some things never change like inflation. As long as democracy exists, so does inflation because politicians are constantly jockeying for votes and there’s a quid pro quo embedded in the system.
Kevin: So you keep driving the pickup and you keep building the farm.
David: And it’s really quite that simple: take the long view. Don’t get lost in the weeds, don’t get lost or overwhelmed by the data. Develop something of a perspective or a framework that allows you to analyze and understand what’s happening and move from one year to the next, one season to the next, unperturbed. Does the weather change? Is it predictable? Are there factors that the farmer cannot control or manage? For sure. But some things never change. You wake up in the morning, you work hard, you save, you take advantage of value opportunities when they present themselves.
Kevin: You take your kids to college for the very first time.
David: Take your kids to college. Wake up tomorrow. Do the same thing all over again.
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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 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.
