Podcast: Play in new window
- Interest Rates Rise In Worldwide Competition For Liquidity
- Mag 7 Stocks Represent 70% Of Trading Volume
- Gold & Dollar Rise In 2024, What Does That Mean?
“Yeah. I mean, breadth is the idea of how spread out the participation is in a market move to higher levels. Are all boats rising with the tide or just a few? And when you have narrow breadth, it’s just a few names participating. It’s not a good sign when breadth is narrow in only a few names. 70% of trading volume in seven names, 20% of global market cap, breadth this narrow is, to say the least, worrying.” – David McAlvany
Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
Well, David, where the holidays fell this year—Christmas on a Wednesday, New Year’s on a Wednesday—with my travel plans, with my kids’ travel plans, I honestly feel like, well, happy New Year. It feels like the holiday was about a month. It was wonderful. It was wonderful. But gosh, it’s sort of nice to be back in the pattern.
David: It is good to be back. I love the holidays. I love the guests and hosting parties. I love the family time and the change of pace. And I love getting back to routines as well.
As the new year starts, there are the common reflections on the past year and anticipations or goal setting for the new year. And everybody has prognostications of what will be in 2025. I feel this with clients, the number of requests to do financial planning reviews, how are we doing. It increases dramatically in the first quarter. And I encourage you to do that as well.
The next four years are likely to have surprises geopolitically, economically, and in the financial markets. And I think getting your bearings is a good idea. So whether it’s a quick look at how you’re balancing liquidity, precious metals, growth and income assets, real estate, or factoring in new situations like retirement, a new job, other new variables, our staff are a great resource to bring perspective and counsel.
Kevin: Well, and you know, Dave, I dream triangles. Okay? I love the triangle, the foundation, the preservation element, and then of course the left side, which has to do with growth and income, and the right side, your cash savings. And that’s what I encourage my clients to do.
I have, I think, trained— We talk about habits and how you can train yourself in habits. You can also help train others to have good habits. I’ve been really thinking about this. One of the great habits of what we’ve done is we draw triangles and we do that analysis, the how-we-are-doing analysis. So that’s what I would encourage our clients to do too. I’ve got my clients calling me right now and saying, “Hey, let’s do a triangle update.”
David: Yeah, I think probably the underemphasized portion of the perspective triangle for most investors is the metals piece. We think of it as insurance, that’s the role that it plays in an overall portfolio. From a practical standpoint, it’s there as a reserve. And you don’t know you need the reserves until you need the reserves.
We’re watching a lot of currency volatility, 2024, and that’s a big question. When do these countries who are defending their currency, supporting their currency with tens of billions of dollars, sometimes in a week, when do they run thin on reserves? That’s when you end up with real currency crisis. You can get through any kind of crisis—whether it’s an emotional crisis, a spiritual crisis, a family crisis, a financial crisis—if you’re adequately reserved, and I think that’s worth taking stock of.
Kevin: You know, Dave, that’s a great point as far as reserves emotionally, spiritually, financially. I remember I was walking out to the car the other day, and sometimes in the first of the year I can also feel a heaviness. It’s like, “Wow, what have I got to do this year? There’s things I’ve got to do.” I felt this heaviness, and I realized I had forgotten to be thankful. There’s something about just counting your blessings and starting to go back, and what am I thankful for? That builds your reserves.
David: Yeah, and I think that’s another area that should be reviewed, the things you’re grateful for from 2024. We did this as a family during a long soak at the local hot springs. And it starts slow as people go back through the events of the year, and it kind of gradually picks up pace. It’s really rewarding to do so.
In years past, we’ve written them down, obviously not in a hot tub this time—or in hot springs. But that paper gets tucked away in some book on our shelves, and finding it again in the future is like an explosion of nostalgia. Re-remembering. It’s not just remembering, but re-remembering things that you’re grateful for. So with gratitude, there is a profound sense of well-being. I think without it, people tend towards bitterness and disappointment. So getting 2025 off to a good start, do your family a favor, practice as much gratitude as you can.
Kevin: Well, and that really hit you this weekend. Because you were telling the story of, it was time for you to just clean everything out, right? It was time to do that spring-cleaning in January.
David: Clean the closet.
Kevin: And then you came to a box full of letters from, what was it, 1994, ’95?
David: Yeah, ’95, ’96, and from friends that were back in college in California. And of course, my dad wrote a couple of letters as well. Every one of them. I think the smallest one was 19 pages long when he—
Kevin: He’s verbose, but it’s meaningful verbosity.
David: Absolutely. Well, on we go. I’ve often said that bond yields and currency volatility are critical for long-term market direction. Those are two things to keep an eye on. Gordon Pepper makes a complementary case in his book on the liquidity function within asset markets. It makes the case that liquidity is what drives asset prices. When in abundance, prices rise; when liquidity is scarce, prices fall. And interest rates were part of that equation. And as you consider even the cross-border lending exchange rates are also critical to those liquidity dynamics.
Kevin: Well, and liquidity itself is very skittish, it can either be all-in or it can be all-out almost instantly.
David: One famed financial writer, Raymond DeVoe, known for his cautionary reference to the dead cat bounce, when a market declines and then is recovering. He’s often very cautious—or was cautious when he was alive and writing—but he drove that same point on liquidity home.
“Liquidity is a coward,” he said. “It runs away at the first sign of trouble.” So where to look for critical pricing and signals within the 2025 context? I think yields are one place and currency pricing another. So when liquidity transitions from one to another, like a phase shift, rates and currency movement show many of the tracks.
Kevin: Well, and you brought out last year the yen carry trade. Talk about liquidity moving.
David: Yeah, that’s certainly one instance where we saw pressure within the financial markets. August 5th was a profound period of volatility, and you had rates which were on the increase—currency values that were involved in the carry trade, those higher yielding currencies getting into trouble. By the end of the year, the Argentine peso had dropped 21.6%. Mexican peso, 18.5%. And in fairness, the yen carry trade, that was one dynamic afoot south of the border, with the election of Claudia Scheinbaum being another. Most of the peso losses accrued after the election results were in.
But farther afield, the Turkish lira down 16.5%. A very important currency within the Asian context. The South Korean won lost 12.5%. And the New Zealand dollar down 11.5%. Even your go-to stable currencies—the Swiss Franc, under pressure; the euro, under pressure. Those looked like inverse movements compared to the US dollar, which was very strong last year.
Kevin: Well, when we’re watching where liquidity is going, liquidity has to be enticed sometimes. And the yield on debt is how you entice liquidity. And even though the Federal Reserve really would like to see rates coming down, yields across the board—worldwide and here—increased. They didn’t decrease except for on the short side.
David: Yeah. One more thing just on dollar strength, it’s up over 7% for the year last year, and gold was up over 25%. And so it’s worth keeping in mind that axiomatic relationship that Wall Street believes as an article of faith—dollar up, gold down; not always.
Kevin: That didn’t work. I’m wondering if that doesn’t have something to do with what Morgan’s been talking about as far as dollar recycling or gold settlement, because gold right now is in demand. It’s one form of liquidity that is in high demand.
David: Yeah. One of the uniform dynamics from 2024 was the increase in yields all over the globe. US rates, after dropping really in anticipation of Federal Reserve policy shifts early in the year, then reverted higher, as did the yields of at least a dozen other countries. But were those increases in yield—did they reach any meaningful threshold where one would consider a tightening set of financial conditions?
And I’d say not quite, but we’re very much on the cusp. And I think that’ll be a defining issue in 2025. Marginal changes will be critical changes in 2025. It won’t be high drama that begins the drama. There’s a tremendous amount of fragility present in the financial markets, and I think it’s worth remembering August 5th as a reminder of how fragile the markets are. A little bit of change at the margins can be very big as you see a migration of concerns. And it’s a little bit like the manic and depressive moods of the bipolar patient. Had a fabulously, fabulously manic 2024. Would a depressive 2025 come as a surprise?
Kevin: I don’t know. But I know that we went through over a decade, Dave, where we continued to marvel at how the central bank policy worldwide was just perception management. Powell, all he’d have to do is speak, or Bernanke, or Yellen. At this point, it doesn’t seem like perception management’s working at all.
David: One more thing on just uniformity, because there was a uniformity of belief that we’d have a recession in 2024, and a uniformity of belief that we were going to have real pressure in the equity markets. And I’m not talking about contrarian investors, I’m talking about Wall Street in general was very negative coming into 2024. And now all of a sudden you have the reverse: uniformity that we will see strength in the economy and uniformity in terms of prognostications for higher prices in tech and across the board—across US indices in particular.
So Powell’s comment in hindsight was kind of funny. “The time has come,” Powell said, “for policy to adjust. The direction of travel is clear.” What makes that really intriguing to me is that US rates didn’t follow where Powell was trying to direct them. Quite the opposite. They backed up 92 basis points from 3.65 on the 10-year—that’s in September—to 4.57 at the end of the year. And as we record this, 4.67.
What we have is a supply problem in the debt markets. There is way too much of it, which is putting pressure to the upside on rates—and that’s on a global basis. Debt rolling over and new issuance—at least here in the US—in the trillions, which may be part of the catalyst for even higher rates in 2025.
Kevin: So let’s take that to the currencies, because you were talking about how much the currencies were down. But actually, a lot of these currencies, they have to pay back in US dollars. And so you had mentioned in the past certain levels that both the Chinese currency and the Japanese currency had to maintain above or they would break down. Is that a consideration right now?
David: Yeah. Certainly for the dollar-denominated debt—and there’s a lot of that in the emerging markets—as they see currency depreciation relative to the dollar and yet the debt is denominated in US currency, it makes the hurdle to pay back that much more difficult.
We discussed several times last year two currencies that were very critical to keep an eye on, and it’s no different in 2025—the yen and the RMB, or sometimes it’s referred to as the yuan. These currencies are still critical to watch. For the RMB, the line in the sand has been at 7.3 to the dollar, and this week we’ve already crossed that line. Passing it brought out the People’s Bank of China to say that [the RMB] would be defended and that [the PBoC] would support the Chinese equity markets. Both of those really off to a rocky start in 2025.
But more discussion and concern over devaluation is in the air. I think if they can do it on a controlled basis and on a stable basis, that would be their preference. Those would be the hallmarks of the PBOC managing a decline. But the question is, can they maintain sufficiently tight reins on currency volatility? No one knows. It’s a big maybe, but I think that’s very much worth watching—how we revolve or move around the 7.3 number.
Kevin: So that goes back to the yen, the yen carry trade.
David: Yen’s at 157.6, just a few points off of its multi-decade lows of 160 to 161. You’ve got rates rising in Japan. You’ve got inflation rising in Japan. You’ve got wages and salaries also rising. The Japanese market is a huge source of liquidity for global speculators, and if we have continued reversals of the carry trade—for that matter, if we have any pressure on the basis trade, which in 2024 surpassed over a trillion dollars in total value—we could flip to that depressive mode—again, manic to depressive in 2025.
Kevin: So talk about interesting timing with the passing of President Jimmy Carter. I remember the passing of the baton from Jimmy Carter to Ronald Reagan. And I’ll tell you what, there were some major changes when Reagan came in. I’m wondering, Biden in a way is a little like Carter was. I hate to say it, but there was an awful lot of weakness in foreign policy, a lot of weakness in the— We had high inflation at that time. So we have, in a way, with Carter’s passing and then the baton being passed from Biden to Trump. What are the parallels?
David: Yeah, I think both were seen as potentially transformative. The Reagan era, just with a quick refresh, taking over from the weak leadership style of Jimmy Carter. The Reagan mandate was crisp, it was powerful, and there was positivity that was palpable as he took office. And it was similar to the 2024 elections, more or less a red sweep like we saw in November of last year. I think we can expect Trump to be both transformative and disruptive.
And Reagan was certainly the former, and ultimately his legacy was globally disruptive if you’re looking at the Cold War status quo. As Reagan came into office, the markets roared with enthusiasm. So you’re talking about early, early 1981. But it didn’t last long. The first two years of his administration, 1981 and 1982, were brutal for investors. Rates went higher, stocks got crushed.
Yes, Reagan was rhetorically gifted and he set an expectation for a new America. But he dealt with, even then, a profound DC swamp navigation which was slower and messier in those earlier years. And it was not just snap your fingers and make things happen. I think Trump will be challenged, too, to quickly implement policy shifts. And the market will in turn be challenged to justify the valuations through those early days.
The first 6, 12, 18 months, I think it’s going to be very, very interesting. We’ve got official statistics that suggest the economy is far from recession, doing quite well. Liquidity is the key, and liquidity is abundant. So we have roaring economic statistics, roaring financial markets, and of course there’s the exceptions to that. You can find economic statistics that suggest inflation’s coming back and the consumer may be tapped out.
But if it runs away at the first sign of trouble—that is, liquidity—then I think you’ll see the 686 corporate bankruptcies of 2024 surpassed, and, in that context, the consumer really crushed. So we have had credit card delinquencies already move to a troubling place. Credit card companies wrote off nearly $50 billion last year, 45.7 to be exact, and that’s up 46% from a year earlier.
And it really is that the consumer at the bottom end of the economic spectrum is in trouble. Bottom 40% of consumers are tapped already. Negative savings, that’s where they’re beginning 2025. The need to use credit cards just to pay for basics. And of course those delinquency numbers on the rise. While on the other end of the spectrum, the wealth effect and free-spending are evident, again nearer the top of the economic food chain.
So you get a correction or even a crash in equities, and the consumer from the bottom to the top will be under pressure. Mortgage rates are on the cusp of being stifling, with a solid shift above 7% for your 30-year fixed rate mortgage likely being a catalyst for a reset in affordability in real estate.
So if you look at those two things, potential pressure in real estate and in the equity markets, that’s kind of a double whammy. Again, real estate values and equity portfolios at the same time, now you’ve got household net worth under pressure and compelling the wealthy consumer to tighten the proverbial belt along with everybody else.
Kevin: What would you say? Okay, so the winning strategy last year was really just about seven stocks. They were mainly, it was the tech sector. Do you play for the winning strategy in 2025 to be the same?
David: That’s how everyone is lined up. And the problem is, rarely is last year’s winning strategy this year’s winning strategy. In brief, if you want to win in 2025, I think you underweight US equities and you underweight big tech. That’s probably the smartest thing to do coming into the year. Jim Kramer would disagree, and frankly, the majority of analysts on Wall Street would, too. They’re on the bandwagon.
And if you look back, 1980, six of the top 10 performers were oil related. That was the trend. That was the winning strategy. And yes, a period of underperformance followed for 5 to 10 years. Oil was under pressure. 20 years later, it was tech that set the records for performance and captured the public imagination. You had Intel, you had Microsoft, you had Cisco Systems, Lucent Technologies, and others that were setting the pace. They were the outperformers. Lo and behold, those names suffered greatly in the period that followed—a full decade of underperformance.
Kevin: Don’t you think this is when professional management is important, Dave? Because if you’re not going to stick with the ones that are making the news headlines, I mean the Mag-7, you’re going to have to go out and actually pick who are the underperformers and see what they’re looking like going forward.
David: So find your laggards for outperformance and leave the leaders alone. Rotation is a normal occurrence, in part because of too much emphasis being given to the outperformers in too short a time frame. So we end up with overbought conditions, essentially stocks that are overowned. That, again, is exactly what happened in each sector. Oil in the ’80s—by 1980, Japanese stocks by 1990, tech by 2000, China by 2010. And at present, it’s the seven you mentioned. That’s the Mag-7.
Three weeks ago we had the CEO at Interactive Brokers. He was quoted as saying, “So the Magnificent Seven is still the bulk of where most people’s dollars go trading. And the second may be crypto-related companies and the coins themselves. And thirdly, maybe the chip sector. But still, the Magnificent Seven takes over 70% of the trading volumes.”
Kevin: Wow. 70% of the trading volume.
David: Just to repeat that, 70%.
Kevin: That’s seven stocks.
David: Right. And Fred Hickey had this comment, “Just seven,” in his words, “grossly overpriced stocks account for nearly 20% of the entire world’s stock market value. Never has there been such concentration.” End quote.
Kevin: One of the wisest men, maybe the wisest man who ever lived, was Solomon. And in Ecclesiastes, he writes, Spread your investments out. There needs to be breadth, because you don’t know what’s going to happen from one thing to the next. That’s in Ecclesiastes XI.
David: Yeah. I mean, breadth is the idea of how spread out the participation is in a market move to higher levels. Are all boats rising with the tide or just a few? And when you have narrow breadth, it’s just a few names participating. It’s not a good sign when breadth is narrow in only a few names. 70% of trading volume in seven names.
Kevin: Incredible.
David: 20% of global market cap. You get the picture. Breadth this narrow is, to say the least, worrying. And it precedes a major reversal and a major rotation. Add to this the most recent Bank of America global fund manager survey recording the lowest levels of cash on record. Just let that set in: the lowest levels of cash on record. We are all-in on these bets. Mutual fund cash—the cash-to-asset ratio—is at a 67-year low, which is also a record. You have the makings of a major reversal.
Kevin: As I’m talking to clients, I know the mood is really high for Trump coming in. But I think we have to be careful not to match our mood with our analysis because sometimes there are excessive changes that have to occur for our health in the long run.
David: Well, and Trump may get a lot done in the next four years. The mood you want may be super positive. Just bear in mind that markets are very stretched, as we keep mentioning. Now in excess of 200% market cap-to-GDP—at or near all-time highs. Bet on a boost to GDP, that might be, in your thinking, like Trump’s going to do something to do that. That’s great. But for that to happen, the Department of Government Efficiency, that group, it’s not actually a department, will have to be very careful cutting spending. Because it comes with trade-offs, and we’re talking about total economic activity. And to cut one form of economic activity, you have to replace it with another. So it really is sort of a bet on positivity.
Kevin: Yeah. So it’s a wise thing to do, but it will be felt.
David: So take your two super caps: Apple and Nvidia. Apple’s results are likely to disappoint at month-end. We mentioned dollar strength earlier. US dollar moving higher by 7% last year. Overseas sales of Apple products will come in at significantly reduced margins because they sell in local currency terms, then they have to convert back to US dollars. So that in itself is a hurdle for them to get over. It’s a loss that they’ll have to realize in terms of their margins. Their price is currently 10 times sales. 10 times sales. That’s close to 400% over its average price-to-sales ratio over the last 20 years. Again, to say the least, it’s vulnerable.
In regards to Nvidia, Microsoft is the largest buyer of Nvidia chips. And they’ve basically signaled they have all they need. In other words, the market has gone from undersupplied over the last 18 months to adequately supplied. No, we’re not oversupplied, but we’re resolving the supply-demand issue. Do you think in 2025 Nvidia has a repeat performance of 2024 with the supply-demand fundamentals shifting to neutral?
Kevin: You’re actually betting on the madness of crowds or the greater fool theory.
David: Yeah, it is the lemmings parade. You’re betting on margin debt taking out all-time highs as households use money they don’t have to double up on what they consider to be a sure thing.
Kevin: And you’re not saying that AI is not a revolution. I mean, AI, it’s going to change our lives going forward.
David: It is a revolution, like the internet was a revolution. I don’t doubt the revolutionary impact, but you’ve already priced in years of adoption and disruption. Maybe even decades priced into the current value of those companies. So it was oil in 1980, Japanese stocks in 1990, tech in 2000, China by 2010, and at present, it’s the Mag-7. In those two—what I was describing as the super caps—those two stand out as particularly vulnerable.
Greed has this magical ability to erase our short-term memory. You look at those Mag-7, and they have a history. When you enter into a market decline, they have a history of 40 to 80% declines when a real sell-off is in motion. And I think 2025 is primed for those kinds of moves. Crypto perhaps even more dramatic. And here’s kind of an unknown reality. When you have a market, there’s buyers and there’s sellers, and then there’s Wall Street who’s matching up most of those buys and sells, but they also serve as sort a wholesaler.
You have the market maker. And the market maker function is really critical because if there’s too much selling, somebody still has to buy it even though you might not be able to match it up perfectly with the next person who wants to own it. Who is the market backstop for crypto? Who is the buyer of last resort? I regret to inform you it doesn’t exist. There is no such thing as a market maker for crypto. So at least in equities you have institutions that will buy at some price without matching buy and sell orders.
And the same is true of Treasurys. Yes, we’re in an oversupplied position. That’s what we were describing earlier as this pressure on rates to go higher in 2025. But primary dealers have significant balance sheets with which to be a buyer. And we also know that when they’re full, when their capacity is reached—which could happen a lot faster than normal given the overwhelming supply of Treasurys at present—the Fed and the Treasury, they can step in. Crypto, not so much. With tech to continue to be a buyer for, again, these market makers, what they’ll do is they’ll hedge their position. And of course hedging puts further downside pressure on the price—using derivatives to cover that market exposure.
Kevin: So before we finish up, I’d like to go back to something that you said earlier, that with the dollar going up as much as it has, I mean it’s gone, from the election, roughly a hundred to, what? 108 or 9 now. Gold has been amazingly strong. It had a great year last year, even though we had a little bit of a correction. That’s not the kind of correction you would normally have in a normal market with the dollar being as strong as it is. What are you seeing for gold?
David: Yeah. Well, I think it’s notable that gold performed so well in light of a strong dollar. It may not always be the case, but you’re talking about a difference in motivation in 2024. The buyers were looking at a different set of circumstances. This was not just a trade on the basis of currency. This was coming back to where we started the conversation, people buying reserves, wanting control of those reserves, looking at a world that is not that attractive, not so perfect, and saying maybe we do need insurance or something that we can get our hands on. That’s the way central bankers are thinking, which is a really, really interesting circumstance.
Kevin: So Dave, I think of privacy and protection when I buy gold. Okay? The profit part, if I were to think of it in 3P’s: privacy, protection, and then maybe profit. Profit’s fine, but if I’ve got something that gives me some autonomy—being separate from the system—that’s why I actually accumulate gold, and have since I met your dad.
David: If you’re thinking about making money in gold, the real money is not made on the basis of a price move. The real money is made on the basis of an exchange, from ounces to shares, from ounces to acres, from ounces—
Kevin: Gold-silver ratio. Dow-gold ratio.
David: Exactly. Because there you’re dealing with not just linear math, but a multiplication. An exponential move. If you haven’t done the math, the Dow/gold ratio is a classic case in point where today it’s, say 15, 16 to 1. That ratio declines to 3 to 1, and you’ve seen a fivefold increase in your purchasing power. There is a point in time when you take your reserves and you put them to work. And that’s where I think being very opportunistic, or thinking about wealth from an intergenerational perspective, make sure you’re adequately reserved. It’s not a question of taking money out of the game, it’s more effectively engaging it across the life cycle of your stewardship mandate.
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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.
