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Kevin: Welcome to the McAlvany Weekly Commentary. Merry Christmas and happy Hanukkah. I’m Kevin Orrick, along with David McAlvany.
Well, David, it’s fun recording these programs. I had lunch with your son, who is a freshman in college, and I told him, “I’m thinking back 25 years, 26 years when we had lunch together, and what’s happened, and then, before that, me working for your dad.” What’s amazing is these conversations have turned into the Weekly Commentary. And as I was talking to your son, I was thinking, wow, no wonder. There’s so many interesting things to talk about, books, the things that we’ve studied, just our thoughts and dreams moving forward. The questions that our clients ask, I was reading through them and I was thinking, they’re really family. Don’t you feel like this is sort of family?
David: Oh, I do. It’s an extended conversation. It’s a lot of what we experience, the two of us, when we get together for the regular Commentary meetings on a Monday afternoon and evening. Some of the questions are beyond what I have the capability to answer, so this will be the first Q&A that we bring in Philip Wortman and Morgan Lewis to tackle a couple of the ones that are just right down their alley.
Kevin: I’m looking forward to that. Well, tell you what? Let’s just go ahead and get started. And I hate to start saying that John Maynard Keynes might be right on something, but here’s the question, “Dear Kevin and David, John Maynard Keynes was a complex human, but one thing he got absolutely right was the relationship between macroeconomics and wars. You and Doug (Doug Noland) have been warning of macro risks in China for years now, and we see those warnings playing out in real time. However, as China’s economy falters, so does their ability to invade Taiwan. Are the Chinese still serious, and are they a serious military threat to Taiwan? Thanks, Seth.”
David: Well, thank you Seth. Yes, the Chinese economy has experienced much slower growth, and their primary source of growth has been impaired for many years from the real estate sector. And even now we’re beginning to see yields on those companies, so their borrowing costs—numbers that you just can’t even wrap your minds around. The very best case scenario is Vanke going from 17.5% to 21.5% just in the last two weeks. And then, on top of that, you’ve got other yields for companies that are 500%, 1,000%, 12,000%, and higher. So it’s basically saying, in that sector, is game over. They do still maintain GDP growth well above that of the U.S.
Even if you discount the official statistics by 30 or 40%, I would argue that the case for war does not go away. In fact, it increases with economic desperation. There’s the aspect of public distraction on the one hand, playing to nationalist themes, and there’s also the positive impact to youth employment, what is today an unemployment problem, both inside the military via conscription and in manufacturing employment growth, as well, for military hardware. So discouraged and unemployed youth need purpose.
Low levels of inflation in China also leave them with the latitude to increase spending and money printing with less immediate negative impact to their consumers. Gas war is inflationary, so that’s one other aspect of that John Maynard Keynes macroeconomic connection between war and the economy and macroeconomics, but the deflationary malaise they’ve been locked in is creating a dynamic which increases social and political pressure domestically. Thus far, they’ve not announced any radical fiscal measures to break that trend, and so I think it’s worth keeping in mind that war could very well be an opportunity to redirect that negative attention.
I think they understand the global demand for semiconductors and other manufactured goods from Taiwan. They may be inclined to invade Taiwan as if it were a hostile takeover of an industry or company. Not everyone’s happy about a change in management, but your suppliers, your vendors, your customers, if they’re dependent on the products being produced, they may very well go along to get along.
They may be waiting for an opportunity—and this is again The People’s Republic of China—China may be waiting for an opportunity tied to an increased deployment of US military assets elsewhere in the world, anything that would leave us stretched a bit thin, and therefore forced to choose our sphere, if you will, forced to choose between commitments. For instance, if Russia, if they were unleashed and hypersonic missiles were used elsewhere in continental Europe, all of a sudden our NATO commitments kick in and that would become, by necessity, an increased focus. Then the Chinese might see a window of opportunity.
The World Bank and the IMF have estimated losing Taiwan—the financial impact to the world in terms of global GDP—5 to $10 trillion hit to GDP. That assumes you lose Taiwanese production and it negatively impacts global manufacturing. If on the other hand you maintain access to Taiwanese goods, now Chinese goods, again, just new management, the loss is considerably less, and this is where I fear our loyalties—and global loyalties as well—are limited by wanting to maintain the status quo and are not sufficiently tied to the current Taiwanese government.
So in summary, I don’t think that ship has sailed. I think the information economy depends greatly on semiconductor production, and we’re closer every day to dealing with new management. So control of that industry would increase the leverage that China has over the global economy, and yes, it stimulates onshore investment in tech. If you’re talking about how that translates for us here in the United States, we would have to increase that investment considerably to insulate from Chinese leverage across the global economy, specifically into tech and the information economy, but that kind of capacity shift towards US domestic production would take time and take money. Thanks Seth.
Kevin: Yeah, thank you. This next question is from Chris. He says, “Thank you for all the years of thoughtful analysis and insights, including the Wealth Triangle framework. Can you please say more about the base of the Triangle as insurance in the form of physical precious metals, and discuss the tradeoffs of various approaches, like taking delivery of physical and storing locally versus investment in physical bullion ETFs versus products like Vaulted, et cetera, et cetera?”
David: When considering the base of the Triangle, what we call the Perspective Triangle, we’re talking about insurance, the mandate that we assign to that part of the allocation, so we’re using insurance, we’re using that term loosely. Physical metals fit that bill the best, and I think that’s the case, over ETFs, which I see as a reasonable tool. You could put it in the growth side, on the left side of the Triangle, trading for fun and profits.
The first question in terms of building out a physical metals’ portfolio is whether it is static or dynamic. That will inform the allocation mix. And the allocation mix will inform whether you want those assets stored or in your possession or inside a retirement account structure. Physical delivery has been the core of our business for 50-plus years. We pioneered physical metals in IRAs in the 1980s, and see that as a very cost-effective way to store as well as compound ounces, as each transaction (as it’s traded between metals in order to increase ounces) is done free of capital gains.
That has limits, though. The limits to that kind of IRA placement are that only certain products are allowed into an IRA, so the range of ratio and premium trades is restricted. So ideally, you would have a metals IRA for a few hundred bucks a year, lowers your total storage costs for metals and allows for ratio trading on a tax-advantaged basis, gold to silver, platinum to palladium, or vice versa.
Then outside an IRA, you would have other products that, again, based on supply and demand, see their premiums expand and contract, which allows for creative trades—ounce gains after tax. Some of those trades are easier to facilitate if metals are stored at a depository, and for others it’s just not necessary. Thousand ounce bars to bags of pre-1965 silver coins would be a case in point.
Just like ETFs fit better elsewhere on the Triangle, Vaulted, using the app, is a helpful alternative to cash. Of course, there’s no interest component, so in that format, you are giving something up, there’s an opportunity cost, but it is a way to denominate a portion of your savings in what has been a more reliable form of cash for a couple thousand years. We have many clients that split their savings or have a set percentage of savings in the Vaulted program as well as in their traditional banking relationships.
And certainly, Vaulted becomes a useful tool if they’re wanting a metals position but already have in mind spending those proceeds six months, 12 months, 18 months out. For instance, if you’re looking at buying a new piece of real estate after liquidating one, but you prefer to wait temporarily for an attractive purchase, you’re not looking to benefit from 1031 exchange. Vaulted has been a great tool for funds that are in a holding pattern where, even with the enticement of interest income, not all funds are being allocated to the traditional bank account money market fund, Treasury position, what have you. We think the options that we’ve just described are like so many clubs in a golf bag, each one has a use case and function for which it’s best suited.
Kevin: This next question is from Lynn, and we did ask for an economy of words, and this question is only four words, Dave, “Are bonds still safe?”
David: Thank you. Thank you, Lynn. It’s a great question. If you take higher-for-longer as your starting point, then the answer is no. If you look at current spreads on investment-grade and high-yield bonds versus Treasurys, then the answer is no. If you see inflation having a second move to higher levels—which has been the case in each inflationary trend of the last a hundred years, in the US anyway—then the answer is no. Bonds are not safe. They may be safer than equities in the capital stack, but they are trading vehicles today. They’re not safe investments.
Some caveats: Treasurys under five years, safer; Treasurys under two years maturity, safer still; high-grade corporates with a maturity of two to three years, I think you could put in the safer category. But investing in bonds today—or any sort of fixed income—is really an interest rate and inflation bet. I’d rather not participate.
Kevin: Dave, this next question reminds me of one of my favorite lunches. I just randomly sometimes go up to the college and eat in the cafeteria here in Durango. And they had a bookstore, and I thought, I’m just going to buy a book. I bought The Man Who Mistook His Wife for a Hat by Oliver Sacks. And I remember reading that book going, “Wow, everybody needs to read this.” You read it.
This next question basically says, “Been listening to you guys for over a decade. Great show. Kevin used to talk about some catatonics that only showed signs of life when lied to, and so they would laugh uncontrollably when watching politicians on TV. Can you point me to where you heard that? It’s so funny, I hope it’s true.” Do you remember that, Dave?
David: Oh, yeah. Oliver Sacks is the author, the book, The Man Who Mistook His Wife for a Hat. I believe the chapter is on the president’s speech, and it’s about aphasiacs. Sacks is a must-read. He has an amazing talent for seeing importance where others see none, neurological conditions that society would regard as a deficiency he imbues with dignity by discussing a countervailing superpower. I also love the fact that Sacks was a distance swimmer. I love that. He had a unique ability for observing what others don’t take the time to see or to value.
Kevin: Yeah, Dave. And that study that Sacks talked about actually was confirmed later and published in the Journal of Nature, saying that there’s a 73% of the time chance that aphasiacs will recognize a lie versus 50/50 for you and I.
David: The next question, Morgan, I think you’re probably well suited for this. “David Morgan is known for stating that 90% of the move in a metals bull market is in the final 10% of the run. Do you agree with that statement? If so, where would you place us in this current bull market relative to its final stage?”
Morgan: So we could quibble about that statement by David Morgan technically, but yes, the spirit of his observation is exactly right historically. I also expect a late inning acceleration and a dramatic period of out-performance in this current leg of the gold bull, just as we’ve seen in the past. I’m of the opinion that we’re in another up leg within the same bull market that powered metals higher for 12 years, roughly from ’99 to the 2011 top. In my view, the same fundamentals that drove that leg of the bull are still driving this current leg.
So in my view, there are a number of reasons suggesting the potential for this leg in the gold bull to be even larger than the last one, but as a base case, I would say this leg is likely at least to be comparable to the last. So that ’99 to 2011 bull leg was roughly a 670% 12-year trough-to-peak bull move. If we match that this time, starting from approximately 1,050 per ounce gold and—that was at the end of 2015—that would take us to around 8,000 per ounce gold by somewhere in the ballpark of late 2027, 2028. So that might sound surprising to many, but given the fundamental drivers at work, I think that sort of a move is entirely reasonable to expect.
David: One caveat, perhaps, is that from ’99 to 2011, the majority of those years you had net selling of central banks, and only in 2009 to the present have you had central banks coming back to the market as net buyers. So if you’re looking for one dynamic—and a fairly significant one—which has shifted, it would be central bank participation in this leg.
Morgan: Yeah, certainly agree. When I mentioned a number of reasons to think that this bull market could be larger, the central bank buying to me is confirmation of the thesis. As I said, I think this is a continuation of the bull market that started in 1999, and I think it began— Theoretically, I think that market participants were watching unsustainable policies in action, and buying gold in anticipation for coming trouble. I think that move ran ahead of itself. We had a multi-year correction, but 2008 certainly was a turning point for central bank net purchases of gold, and in fact, in 2014, became net purchases of gold and net selling of Treasurys—or at least FX reserves were increasing. Gold was getting a bigger percentage of central bank reserves and Treasurys were losing ground. So to me, that was a significant, fundamental turning point.
And after price corrected from 2011 to the end of 2015, I just think that the next leg of the bull move kicked into gear. The fundamental confirmation from central bank buying and the fact that we had reached a new phase where the theoretical problems that were likely to come in the future from unsustainable central bank policies, by the time we got to the 2015, 2016 time period, I think that the theoretical had started to become actual. And certainly in the last couple of years, the fundamental support—or the fundamental realization, actualization of problems from unsustainable central bank policies and fiscal policy as well are now once again dictating this next move because it is actual, no longer theoretical. I think that potential for this move to outpace the previous leg of the bull is very real.
Kevin: Our next question says, “I’ve been investing in gold for 15 years in preparation for the upcoming financial crisis with extraordinary debt levels and the potential for sovereign currency crisis. As I watched the way things are going, I’m trying to figure out now, what’s the big deal about having gold when everything else is hitting all time highs as well? I thought there was something special about gold, and apparently there’s nothing special anymore. As inflation rips higher, so will the markets. Bitcoin has now become the new gold, which is amazing to me since it was made out of thin air and it sounds a lot like theotic currency. Please explain how I went so wrong by doing what I thought was so right.” Dave, did this listener do wrong? I did the same thing, and I don’t know that I feel that way.
David: Well, we come to conclusions at a point in time long before time is up or the story’s complete. We can do this with people, writing them off based on a set of circumstances that is truly limited in scope. We can do that with assets as well. If performance doesn’t meet our expectations within a particular timeframe, then we draw a conclusion from that.
But there is usually more to the story. No, there’s always more to the story. There is something special about gold, and from ancient Mesopotamia to the Greek city-states to the Roman Empire—the florin, the gilder, the sovereign—gold has an enduring place in all of history, even as history is being written. It’s special enough for central banks to manage their reserves with, for wealthy families to store their wealth in, and for individuals to own even when other forms of money and credit have surpassed its current popularity.
The coincidental move of gold to higher prices alongside other assets, I don’t think that’s permanent either. The demand that drives one market is not the same which drives the other. If you change any variable, divergences have and will occur.
Bitcoin, I would say I disagree, is not the new gold. Bitcoin is like so many other experiments which the markets have conjured from nothing, an asset that captures enough imaginations to drive its price higher. It’s also emblematic of the current flood of liquidity in the financial markets which displaces risk and volatility considerations, and elevates, in its place, appetite for high returns. If you change the liquidity dynamics, the risk appetite shrinks back considerably and I think you see Bitcoin for what it actually is. I would say there’s nothing wrong with gold, it’s returns over a one-year, three-year, five-year, 10-year, 20-year period—
Kevin: 4,000-year?
David: —more than acceptable.
Kevin: 17 years versus 4,000 years, I think I’m going to take the 4,000 for at least some of it.
David: But it’s also worth remembering that gold is not meant to be a speculative vehicle. It’s meant to be a stable form of money. And as such, it has much more to do with overvaluation and undervaluation of other assets—to navigate between them, right? So you want stable value. When you see the price of gold increasing, people think that something is wrong with the system. The fact that we have yet to see what is wrong with the system play out within the financial markets, I think there’s your coincidental move to higher levels. Some people are speculating on price within the AI craze, within cryptocurrencies, within anything. I mean, this week, we’ve got Apple trading at 41 times earnings. That would be an example of people chasing a trend. And other people are buying gold, not because they think that it’s earnings are going to continue to accelerate, they think that there’s a reason to own it because there’s something broken within the system.
Kevin: And if I remember right, 500 years ago, tulips way outperformed gold.
David: Oh, absolutely. And so, there are opportunities to make money in highly speculative areas, it’s just worth remembering that you run out of buyers and the price trend has turned maybe before you could have exited. Philip, what are your thoughts?
Philip: I’m going to drive at this from a different perspective. I’m usually a data guy, but let me answer this question as a fellow investor who in 2011 bought his first ounce of silver in a small jeweler shop at $45 an ounce, and to date, has never caught up, and yet, couldn’t be happier.
For me, I’m curious as to the underlying heart of your question. Did you buy your gold to preserve your wealth against potential financial crisis so you could feed your family, keep them safe, warm, and secure, or was your focus to beat the market?
You see, I buy gold indiscriminately because I know I can depend on it if and when the financial crisis occurs. I don’t want it to come, I would prefer we as a citizenry make wise decisions, we would lower our government debt, and don’t overextend ourselves, but on the off chance that doesn’t become a reality, I have my insurance. And the best part of my insurance is I don’t have to think about it. As David mentioned, you can take any snapshot of time and show gold outperforming the market or underperforming the market, but as you kind of pointed out, gold is performing alongside everything else.
Did you spend time wringing your hands to choose the right time to buy and manage your exposure over the last 15 years? Likely not. Hopefully, that means on the years where your gold outperformed you were enjoying life while hedge fund managers with billions of dollars in assets were under enormous amounts of stress.
David: Yeah, this comes back to the Perspective Triangle and mandates that we assign to different parts of your portfolio. Having different expectations is entirely appropriate. We have liquidity within the portfolio, that’s the right-hand side of the Perspective Triangle. And that liquidity function gives you, certainly, optionality—the ability to put that money to work whenever you want from an opportunistic standpoint. But it also allows you to manage a business, a household, take care of unforeseen things, whether it’s a car that breaks down or a trip that you want to take and you don’t have to rearrange your finances in order to do that. Liquidity is its own mandate. Insurance is its own mandate. Growth and income is its own mandate. So I think a part of it is balancing expectations between what you’re asking your assets to do and how well they’re doing that.
Philip: And when it comes to Bitcoin, I would take heart because while there’s an incredible amount of speculation, there are investors in that environment who are owning it with the same perspective in which you own gold, which is the insurance piece. Now, when their insurance fails, they’ll be entering to the real bastion of insurance, which I think gets understated in the environment.
Now, if your goals and priorities were to beat the market in this period of time, we do have a wonderful team here at McAlvany Wealth Management, they specialize in hard assets, and they’d love to take the time to speak with you and help you realize those goals too.
Kevin: Thanks Philip and Morgan. It’s nice to have you guys on the show this year, that’s awesome. So next question.
David: This next question is from Dave, “North of the border, Cameco Corp has a consensus rating of strong buy, which is based on 10 buy ratings, zero hold, zero sell ratings. The average price target is 86 Canadian. Price/earnings ratio is 320. That seems almost cartoonish to me, as a healthy PE should be around 20—or so I thought. What am I missing here when every major broker says something is a buy, but I can’t see that? There are other companies with outlandishly high PE ratios—they’re not as egregious as Cameco—that are also considered strong buys.”
Philip, first of all, what is Cameco? Why would it be of interest to us? Full disclosure, we have a small percentage allocation within our managed portfolios to it, but wouldn’t necessarily recommend taking a new position. Maybe you can fill some of that out before we go into the valuation part of the question.
Philip: So Cameco is a uranium miner primarily, based out of Canada. They also do have some downstream exposure to nuclear fuel manufacturing, and more recently some activity in nuclear technologies through a 50% ownership of the Westinghouse acquisition about 18 months ago. One of the primary reasons why we like the space, in general, is because we do have a belief in nuclear fuel as stable, reliable energy, and Cameco is the best producer, has the best tier one assets and the best cost structure compared to anyone else, and has active operating mines and a wealth of opportunity to build and grow up that production in the future.
David: In healthy jurisdictions.
Philip: In very safe, healthy jurisdictions, primarily. Of course, one of our biggest concerns at this point is the relationship with Kazatomprom, a 40% joint venture in that environment. And since they’ve been having issues bringing production online, it’s been harder and harder for Cameco to be able to get access to their pool of uranium that they’re supposed to have contractually. So that’s one of the reasons why we’ve run into a few headwinds in that name, and generally, we wouldn’t suggest entering that name at this time.
David: Okay, so onto the question of valuations.
Philip: This is a fun one. Often, we focus on the price component in the PE because it’s usually more dynamic. Earnings and fundamentals of a company are generally more stable. Therefore, when we see a PE of 35 or 40 for a company, with potentially 4 to 5% earnings growth rates, it’s normal to recognize you’re being taken to the cleaners, and the market buyer is buying irrespective of value.
Now, when you come across a PE like Cameco at 292 as of this recording, cartoonish is a pretty good description on the surface, but a fundamentally focused observer will flag that type of position, and they’re going to want to dig a little bit deeper. So if I told you, as opposed to a 4 to 5% earnings growth rate for the next 12 months, there was a case to be made for a 530% increase in growth over the next 12 months with a company that’s been operating since ’96 and has survived and grown through two bear markets, all of a sudden, the denominator, your earnings per share, takes on several multiples of significance than the market’s pricing factors, and this turns a PE of 292, for an example, into 45.
David: You could say that the metric, on the face of it, is absurd, but you’re talking about the underlying asset—in this case, uranium—having price mobility. Is that a fair description?
Philip: Absolutely. I mean, the PE in its current state is a misnomer, and the reason is that the previous performance of Cameco, due to macro factors depressing its ability to earn income, is basically skewing its valuation in what would make it look like an overpriced manner, but it does offer a prudent investor an opportunity.
Now, there’s one caveat I certainly would put on this. The analysts that you’re referring to are certainly inputting several assumptions which may or may not come to fruition. Now, from my perspective, assuming the analyst expectations are true, and you could competently say that forward earnings could grow 530% for Cameco at this current price, the current price is still too expensive.
So the next level of analysis would say, what did we observe to why there’s a dislocation from peers even with such gargantuan earning expectations? And this again kind of dovetails back to the AI considerations, to purported data center build-outs for those large language models, are supporting of value destruction for the price. And I can make a strong argument that nearly half of CCJ’s current pricing could rely on the expectations of nuclear build-out to support data centers.
Now, this does not include the enormous regulatory hurdles that nuclear deployments will need to overcome so that Cameco can even service fuel, pulling uranium out of the ground and actually have that type of support for coming decades.
Now, there is a good, strong analysis that says that there could be a macro inflection point which could serve Cameco for many decades to come. From my perspective, there are many short-term variables which I believe service headwinds to Cameco. And though 10 of 10 analysts today say, “Buy,” I would tread cautiously. Probably one of the few instances Sam Clemens’ little quips are correct, “whenever you find yourself on the side of the majority, it’s certainly time to pause and full reflect.”
David: That’s certainly a phrase, or something like it, that I was raised with. “The majority is always wrong” might be stating it too emphatically, but most of the time.
Philip: Yeah, exactly. And in this instance, if you’ve got 10 analysts saying, “Buy, buy, buy,” that sounds manic. That doesn’t sound thoughtful.
Kevin: Thanks Philip. Next question, “My family has followed your Perspective Triangle advice for over 15 years. And now we’ve retired and are starting to use the Triangle as a supplemental retirement fund, hoping that it will last about 10 years. At current bullion prices, our Triangle is now heaviest on the insurance side by about 25%. How do you decide when to rebalance the sides of the Triangle?” Thanks, Richard, for the question.
David: Richard, kind words. I appreciate the question. There are two ways to rebalance. One would be on an annual basis, just take year-end, which gives you the ability to capture gains, and in a lot of instances migrate those funds and lower your cost basis as you move from one leg of the Triangle to the other. This is, in fact, how we ran the numbers in a portfolio oriented for growth. If you said, “I want to just focus on that particular mandate,” you could have 100% equities and that would underperform a portfolio of 75% equities, 25% gold with an annual rebalance over almost any time frame, 10 years, 20 years, or longer time frames. And essentially, you’re playing off of gold’s strengths in a period of financial market weakness, which, again, would allow you to own the same quality companies that you’re interested in at a lower basis while taking gains from a metals portfolio.
Or the other strategy: if you like the ratios, there’s the gold/silver ratio—what comes to mind here is the Dow/gold ratio. The second style of rebalancing is at market extremes. There is no time frame, it’s just the simple math of dividing one asset class by the other. We know, historically, the Dow/gold ratio often gets to low levels, 5:1, 6:1 on the basis of economic or financial market swings. And in instances where you have geopolitical events adding to macroeconomic concerns, the ratio can go as low as 1:1. If you’re already heavy in a precious metals position, I think scaling out gradually at an earlier time frame at a higher number makes sense, 7:1, 6:1, 5:1, and then, getting very aggressive on a lateral move should you see those lower figures. I think that’s advisable. So be early and do it often if you are over-weighted.
I think it’s worth noting that you should be over-weighted if performance has been positive in the metals and have grown relative to other assets. So this is something that is a requirement, I think, for any precious metals’ investor—the what is next? How do you reduce or scale back?
Those are the two approaches. The former favors reduction of metals, maybe an increase in cash, if you’re talking about the current environment where equities trading at or near all time highs is not particularly attractive. And I think this is a unique situation where equities and gold have both traded up. I think a move to cash is smarter right now if you’re lightening gold and silver positions with that sort of annual rebalancing. But I think you’ve got a long way to go from the current 15, 16:1 ratio down to five or six, maybe we’re fortunate enough to see three, two, or even one to one. You may find the opportunity to move from cash and liquidity to the growth and income side pretty soon, but I’m cautious there right now. I’d be careful with equities.
Kevin: Well, and if any of our clients would like help with that, I try to do two to three triangle updates a year, Dave, just where we do talk about rebalancing based on various needs.
So this next question said, “Last year at this time David announced the development of a Vaulted debit card, what’s the progress on that roll-out?” Mark asked that question.
David: Thanks for your interest. The process is taking longer than I’d like. Finding the right bank partner is the piece that is absolutely critical for us. The functionality and the ability to roll it out is not that challenging, but knowing who we want to partner with in a long-term relationship, that’s pretty critical. So rushing that detail, bad idea. We’ll keep you informed, unfortunately nothing right now.
Kevin: This is a question from Vance, “I’m a longtime listener to your weekly podcast, and I’m especially appreciative of your views on geopolitics and financial news. You have stated repeatedly that the world credit markets are in a precarious position and that debt is at an all-time high. What do you believe is the most likely scenario that would trigger a worldwide collapse of the debt markets as a resulting flight into hard assets?”
David: Thanks for the question, Vance. A collapse in the debt markets is something that no regulator or policymaker will stand by and allow to occur without massive intervention. If they did not intervene, the banking sector as we know it might not survive. So financial solvency issues, you would see them emerge for virtually all of your financial intermediaries. So again, you’re talking about true collapse, not just in the financial markets, but within the economy.
The two courses that are available when you have as much debt as we have—sort of that precarious position described in the question: one is you can default on your debt. Instantly deflationary, instantly creates solvency issues for the aforementioned institutions. The alternative is inflate, and I think the policymakers prefer inflation to default.
That strategy is in motion. Granted, they don’t like the 6, 7, 8, 9, 10% inflation rates that we’ve seen in recent years, but if they can obscure real world inflation via—call it bean counter creativity—and then run a hotter number than officially reported to alleviate the pressure of too much debt, there’s a likelihood that they can, ultimately, pay back a good portion of that debt with cheaper currency. If you’re able to combine financial repression with inflation, and as best you can designate the losers, that allows the system to avoid collapse and relieves the pressure from too much debt.
So the ideal scenario—okay, this is from a command and control perspective—it’s one of controlled decay in the form of currency degradation. Inflate and direct as much liquidity as you can to key players. Allow the Federal Reserve balance sheet to double or triple. Relieve stress from your SIFIs—your systemically important financial institutions—backstop your commercial banks with both liquidity and regulatory forbearance so they can remain viable. In essence, control everything you can, control prices, control interest rates, control access to the exits from the financial markets.
This brings in the issue of central bank digital currencies. It is a perfect fit for the financial repression necessary to guide, direct, and control this sort of inflationary path. Move towards the central bank digital currency so that all the exits are locked and every transaction can be monitored and guided. I think here we can draw from a previous guest on the Commentary, Richard Bookstaber, The End Of Theory. You direct consumer action via understanding choices and preferences through big data, engage artificial intelligence, guide the economy, and arrive at a preferred outcome. Deflation brought about by a collapse in asset prices is forbidden, that’s just what academics think, and that’s the way policymakers behave. So control what you can control, which is money supply, the flow of money through the system. In some regards, it’s kind of a China 2.0.
Kevin: Oh, man, that’s scary. It sounds like Aldous Huxley and a brave new world. I hope that we don’t have command and control economies. Well, another year of great questions, Dave.
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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.
