Podcast: Play in new window
- US Dollar Down 27.4% VS Gold Over 12 Months
- Hard Asset Stocks Clearly Outperforming Bond Index
- How To Multiply Stock Holdings With DOW/Gold Ratio
“I think we are entering a new phase in the metals market. Many investors who up to this point have never owned the metals, they’re the ones who are looking and saying, “I think we have an allocation gap. I think we don’t own any and we should own some.” So going from not a dollar’s worth, not a single gram of gold in their portfolio, new allocators are entering the fray with a fresh set of eyes and a motivation to own gold that didn’t exist for them before 2025.” –David McAlvany
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Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany.
Well, Monday, Dave, I remembered something back from the mid-1990s. I was asked to be a guest at the New York Mercantile Exchange. This was in the World Trade Center at the time, the original World Trade Centers. And I remember standing outside the gold pit. You know, the pits there. Most of the oil was traded in the various pits at the New York Mercantile Exchange, gold, silver, platinum, palladium. I was standing right outside of the gold pit when gold happened to be 399 that day, $399 an ounce. And these guys, you can imagine the pits, these guys stand in a circle, they get a phone call. Somebody says, “Go ahead and sell a contract.”
One of the traders came by and he offered his hand. They put their palm forward when they’re trying to sell something. And he put his hand forward and he was saying, “Augie at aught. Augie at aught.”
And I was like, what does that mean, Augie at aught? Well, he was trying to sell an August contract for gold at $400. These traders who were standing there, they were like, “Yeah, no, I’m not going to be the guy who buys Augie at aught. I’m not going to be the guy who breaks 400.” But Monday, we see triple, triple aught. $3,000 gold, Dave. This is the first time in anybody’s lifetime.
David: Yeah, a close above 3,000 is pretty significant, and it appears we’ll get a multi-day close above 3,000. And so there’s some interesting dynamics within the gold market. Of course, very interesting dynamics across the broader financial landscape. And budget numbers are in, February budget deficit numbers are in, and we added another $307 billion to the debt dumpster fire.
Kevin: Wow.
David: But it was under expectations. They expected 308, so 307, I mean, it seems like a huge win. That brings us to 1.15 trillion for the first five months of the fiscal year.
Kevin: Wow.
David: While we may not continue at that average annual rate of 230 billion monthly, we are on that theoretical course for 2.76 trillion for the full fiscal year. And of course, that’s if the last seven months look like the first five.
Bessent has his work cut out for him. If we land a recession in 2025, okay, 2.5, $3 trillion deficit, I think that’s a given. A nasty recession would tilt the number towards 4 trillion. That’s not politics. This is math. So the current trend for yields in the bond market, US Treasuries in particular, are lower, and that’s in large part because of the stress in the equities markets, people looking for safe havens. But that could reverse by year-end should the fixed-income vigilantes get excitable.
Kevin: So the question always is, how long can we continue to do this? How long can we continue to borrow this kind of money?
David: Yeah. Big questions remain. We are at the end of the major credit cycle. Government finance has come to dominate the credit system. What do the markets—particularly the bond markets—look like when air leaks from the granddaddy of all bubbles, the government debt bubble?
Kevin: Yeah, and I’m wondering if even the American doesn’t ask that question, if it’s not the Chinese right now asking that question.
David: Yeah. Well, speaking of exciting, for the month of February, the People’s Bank of China added a modest five tons to their gold holdings. The bigger splash came from investor interest in and through Chinese exchange-traded funds. They increased 21 tons, hitting the highest levels on record for those regional ETFs, 131 tons in total. So $1.9 billion from Chinese investors. Oh, but wait, there’s more. A total of 9.4 billion flowed into global ETF products. So including the Chinese portion, which was just 20% of the total, the most telling shift was in US buying at 6.8 billion or approximately 75 tons.
Kevin: So that’s the Chinese, but you walk around America right now. There was the old saying, “When your shoeshine boy starts giving you stock advice, get out of the stock market.” First of all, I can’t find shoeshine boys anymore. But when the shoeshine boy starts buying gold, it would probably be the same thing. Are we entering a different phase in this market at this point?
David: Yeah. I’ll tell you, there was a moment in the last few days where I thought we had the shoeshine boy, and it was in the private equity markets, private credit markets. Tony Robbins publishes a book on how to invest in private equity. And it’s probably as close as you can come.
Kevin: Neuro-linguistic programming and how to invest in private equity.
David: Exactly. Exactly. Your personal coach for private equity investing.
Kevin: Yeah, but nobody’s involved in gold over here. So are we going to start seeing that?
David: And I think that’s the real significant piece. 6.8 billion in US buying within the ETFs, that’s a shift in sentiment. We don’t need the asset. We’re happy with crypto. We don’t need the asset. We’re happy with Tesla. We don’t need the asset. We’re happy with an Nvidia position—actually, a three-times leveraged Nvidia position. Until you’re not so happy with that. So I think we are entering a new phase in the metals market. This phase will be difficult for the seasoned gold investor to participate in it. “How is that possible? Who is buying at over 3,000 an ounce?” they could ask.
I can tell you, many investors who up to this point have never owned the metals, they’re the ones who are looking and saying, “I think we have an allocation gap. I think we don’t own any and we should own some.”
Kevin: So they’re about to.
David: Right. So going from not a dollar’s worth, not a single gram of gold in their portfolio, new allocators are entering the fray with a fresh set of eyes and a motivation to own gold that didn’t exist for them before 2025.
Kevin: Well, could it not just be the markets, but could it be nervousness about what’s happening worldwide geopolitically?
David: Certainly, geopolitics was a theme in 2024, but it was a narrow audience who was paying attention. Geopolitics is a driving factor far more powerful than inflation. And I think what we have in 2025 is the shifting geostrategic relationships and the uncertainty that creates. It’s allowing for a risk reassessment amongst investors.
Kevin: But you’ve talked about seasoned gold investors, and one of the things that I love about our client base is a lot of them are. I mean, they continue to add when a lot of people think, oh, it’s topping out.
But there really are multiple types of investors, right, Dave? And when you see the different types come into the market, you can see about where you are in the sequence.
David: That’s right. So mavericks are typically at the front edge of any particular investment theme. That could be insiders. If you’re looking at an early stage move in technology, these are the folks that have programmed. These are the folks that know the intricacies, the ones and the zeros and what the implications will be upon broader adoption.
But the maverick or the insider, they’re in an early stage, and we had that in the early aughts. We had that from 2002 to 2009 or ’10. I think Wall Street has made up the second phase. And finally, the third phase is Main Street. Those are the three phases of a bull market. We’re entering the third phase for metals. It is a manic phase. It will have its own drawdowns and consolidations.
But remember this, gold is an under-owned asset globally. Modest allocations, like we’ve discussed with the Chinese insurance companies in recent months, they tally to the hundreds of tons in demand, which in a market that has inelastic supply, makes for significant improvements in price.
Kevin: Well, and you talk about manic buying, Chinese insurance companies are not manic buying. Those are strong hands. So are central banks. I mean, the central banks have made a huge impact.
David: The inflows from central banks in 2024 contributed significantly to the push to nearly 3,000. Is there a shift in favor of investor positioning in the metals now? It appears that way. As speculative energy comes out of the AI trade, the crypto trade, the easy money trades of 2024, at least a few of those dollars are flowing towards metals.
More than that, the appeal of diversification into tangibles is more on the mind of the investor community with uncertainties boiling to the surface. Where are we at with NATO? What’s going to happen with Russia and Ukraine? Will things get better or far worse in the Middle East? How about our trade policies? Will we see not only trade implicated, but capital flows implicated? What cannot be foreseen or clearly anticipated turns for the investor to anxiety. It turns into fear, and it translates to risk-off for most assets. And frankly, gold benefits in that environment.
So contraction in US Treasury yields and an increase in bullion prices support the notion that risk-off is becoming more prominent. Our market risk indicators are flashing concerns on a level last seen August of 2024. Not a panic mode, but certainly registering more and more concern as the days go by. There are systemic risks being weighed by investors.
Kevin: Well, and things really have changed, because I remember the crash in 1987 of the stock market. They talked about in the Wall Street Journal, this thing called the Plunge Protection Team, and the government came in and intervened on the market. Have we gotten sort of fat, dumb, and lazy just assuming that the government itself would like to see the stock market stay stable?
David: Well, we even adopted what was called the Fed put. In other words, we assumed that Greenspan and then Bernanke would backstop the stock market at a critical level, and would accommodate, would lower rates, would create liquidity, and provide the necessary means for the stock market to stabilize and to not decline any further.
So there is a big question, will the Fed move in the current context given they’re wanting to wait and see what the implications are of our trade policy changes?
Kevin: Dave, I was talking to one of the guys on the wealth management platform. He was saying the meetings that you guys have, there’s not just universal agreement, and it can get a little bit tense. I mean, right now the assessment for assets and opinions toward what would happen in the future, you don’t want to have a bunch of people who just say the same thing. You want to be able to argue it through to figure it out.
David: No, there is no groupthink in our investment committee meetings. Mondays and Wednesdays last many hours, discussing not only risk indicators, but what those indicators are suggesting.
Kevin: Sometimes you have to hug and make up I think afterwards too, don’t you?
David: For sure. Yeah. So there’s not a huge change in our measured indicators yet, but they are within the scope of concerns. They’re getting to levels that the movement is enough for us to be on watch.
Kevin: Well, and didn’t we have an anomaly? I mean, the last four or five years, COVID gave everyone an excuse to just print money.
David: And by printing money, I think you have to include in that issue huge quantities of debt. Just another form of money printing. Here we are approaching the five-year anniversary of COVID. The world now sits on 60 trillion in fresh debt obligations in that time frame. 60 trillion. The monetary policy authorities are concerned with issues that prior to COVID they had not really considered. And this is of course in the more developed economies. There was decades where they weren’t thinking about inflation. They weren’t thinking about the implications of rising interest rates. And they assumed that they controlled rates because they controlled rate policy, which has proven to be a little bit more tricky than thought.
Kevin: So they’re probably less likely to intervene on the market than they have been.
David: There is less latitude for the extreme market interventions. A lower probability that additional QE efforts and re-inflation of asset markets was just taken in stride by the bond market. Because again, you’re dealing with 60 trillion in fresh supply of obligations, those IOUs. If we end up with currency pressure and rising interest rates driven by bond market protests—back to the bond vigilantes—there will be fireworks in the financial markets.
60 trillion in added debt to a system that was already heavy laden with IOUs makes for a very challenging period for policymakers. We’re talking fiscal policy, monetary policy implementation in a time of market duress, which could create any number of outcomes. I think what the gold market is signaling is a less-than-sanguine view on what those outcomes are likely to be. By the way, my monthly allocation to Vaulted hit today. So I’ve made my first purchase north of 3,000 an ounce.
Kevin: Good for you.
David: I save a percentage each month in our vault plan. That’s every month. Have done that for years. And I split my purchases between gold and silver. It was my first purchase over 3,000. I don’t think it’ll be my last.
Kevin: Well, and 3,000 is just a number. It’s interesting, Dave. So often people will say, “Well, do you think now that it’s hit 3,000, I should take some profits? Or what about at four? What about at five? How high do you think it’ll go?”
And I always back away and I say, “Well, to be honest with you, an ounce of gold typically buys one loaf of bread per day for 365 days for a family, so the question really isn’t how high gold will go, but how low the dollar and other currencies will go.” I mean, really, that’s the better way to look at it, isn’t it?
David: And if you’re timing the market, what you really need access to is something that internally we call the Don indicator. The Don indicator is when my dad calls to make his purchases, and they typically are at market peaks. Now, he’s got market peaks at 35 and market peaks at 40 and market peaks at 180 and market peaks at 300, and market peaks at 450 and market peaks at 650 and market peaks at 1,150. And every time he’s made the terrible mistake of coming in so late and immediately facing a market correction.
Kevin: And he’s laughing all the way to the bank because of what you just now said. Who cares if you buy at market peaks if it keeps doing what it’s doing?
David: What gold ultimately is accounting for is the decline of purchasing power in a currency. To your point, there is a reality, which is the movement higher from $35 an ounce to 3,000 is really commentary on the US currency in that time frame. We came unhinged from gold in 1971, and it should be no surprise the price is higher, or the purchasing power of the dollar is so much considerably lower.
So using gold as a reference for enduring value. Here’s your currency performance over the last 12 months. So you can either say that gold is up in these currencies, or the reverse of that is these currencies are down relative to gold.
So let’s try that latter, just as an experiment. The US dollar is down 27.4% over the last 12 months. The Canadian dollar is down 31.7% over the last 12 months. The euro is down 27.5% over the last 12 months. The yen is down the same, 27.5% over the last 12 months. The Chinese yuan is down 27%. Now, if you expand the time frame five years, these currencies are down between 47 and 49%, with the yen as the standout, the exception, down over 62% in terms of gold.
Kevin: And this is what you’ve tried to teach people through the years. Value things, whether it’s currencies or real estate— Or let’s look at the equity markets, Dave. How has the equity market done relative to gold?
David: I think equity markets priced in gold also under pressure. In their own currencies, it’s not so bad, but in gold terms, the Dow over the last 12 months is down 22.6%. In real money terms, the S&P is off 20.6%. The Nikkei is down 30.8%. So again, it looks different if you’re pricing it in yen, but priced in gold, these are pretty significant as they start to accumulate.
For me, this is the way to think about it. Markets priced in fiat can do some crazy things. Priced in real money, this is how you arrive at critical decision-making when managing inter-generational wealth. We price the Dow in gold ounces to gauge when a migration of ounces to shares is most opportune. So can I tell you that 3,000 is the time to exit gold at all-time highs and move to the Dow? We were at 15:1 on the Dow/gold ratio just a few weeks ago, holding a level maintained since COVID. Now we’re at 13.78. As the ratio falls, remember that it takes less ounces to buy the same equity portfolio. Think of it as a portfolio force multiplier. To double your share count, reinvesting dividends might take you a decade or more. Using the Dow/gold ratio, playing the ratios, you have the opportunity to compress time.
Kevin: Yeah. So you’ve spoken many times about what is your exit strategy. Well, when you exit something, you have to sort of have an idea of where that money’s going to go. What you’re saying right now is forget about the 3,000, let’s go ahead and look at how many shares of the Dow, or actually, how many ounces of gold it takes to buy the Dow, and when is the right time to reallocate.
David: I think to clarify one thing. When you’re thinking about gold as a portfolio stabilizer, there’s a time to reduce the exposure, not necessarily exit the exposure. So to see the opportune movement laterally from one asset class to another makes perfect sense. To completely eliminate your gold position I think would be foolhardy.
But the relative value is pretty key. When we launched the asset management service in 2008, it was in the back of our minds to help our existing gold investors navigate this kind of migration, a reduction in ounces over to shares. The ratio between ounces and shares of the Dow have historically reached lower levels than we currently have. So if we’re at 13:1 today, historically it’s reached 3:1. From current levels, that’s an improvement of 4.6 times.
You also have rare occasions where you see 2:1 or even 1:1 in the ratio between an ounce of gold and the current value of the Dow. Theoretically, that translates to almost a seven times increase in company shares owned, or a 13, virtually 14 times increase in shares owned should we see that 1:1 ratio.
Kevin: So for the person who says, “Well, do I want to buy shares in the Dow or the S&P 500 right now, or do I want to wait and maybe get 13 to 14 times more shares by staying in gold now and waiting?” it seems like the answer is pretty simple.
David: Yeah, so when you’re thinking about managing wealth on an intergenerational basis, cost basis helps, and we’re looking at things from sort of a combined perspective. A total return is a perspective that combines capital gains and the income received in the form of dividends. So if you can set a basis at a low level and then set your dividend yield off of that low basis, that is a once-in-a-generation opportunity implied by migrating assets in that opportunistic way from ounces to shares.
Kevin: And we are not there yet.
David: That’s right. I think what we do on a routine basis is rehearse the actions that would take place under the right circumstances. So it’s kind of scenario analysis combined with the actions that we take under circumstances A, circumstances B, circumstances C. And that’s where, again, future tense, not present tense, this is a migration that’s worth considering. This is a strategy which you will want to employ, not today, but on the horizon.
The ratio between the assets shifts either from gold appreciation—so again, think of the ratio. That ratio shifts either because gold appreciates or because the stock market contracts—or under certain circumstances you can have both occurring, where the gold price goes up and stocks go down and the ratio moves on a much faster basis.
2024 was just gold appreciation, and year-to-date returns in the gold market, 15% higher year-to-date, that’s for gold, 18% for silver, they’re continuing that trend of gold appreciation. If now we get a decline in equities as well, the ratio should trend lower on a much more rapid pace.
Kevin: So I’m going to use an extreme ridiculous example just so that people can understand what you’re saying, because it really does not matter what it’s doing in dollars. Let’s say the Dow falls from its 40,000 plus level to 20 bucks. Okay, that’s what it was in 1896 when they first started measuring it. And let’s say gold falls from 3,000 bucks, or wherever it is, down to 10 bucks. Okay? So you’ve got a Dow at 20, you’ve got gold at 10.
David: 2:1 ratio.
Kevin: That’s a 2:1 ratio. You’re picking up a lot of shares for your gold, even though you’re like, “Well, gosh, I bought it at 3,000 and it dropped to 10. I bought the Dow at 40,000 and it dropped to $20.” It’s the ratio. I don’t want to be ridiculous on this, but it’s the ratio, stupid.
David: It’s the ratio. And I think the ratio is far more important than the price of the assets on their own. Do you buy gold at $3,035 an ounce or silver at, call it $35? The ratio suggests you’re very much on the right side of the trade looking at those two assets.
Kevin: Right.
David: The price is, as you said, it’s secondary to the ratio. 13.78:1, call it 14:1, on its way to 6:1. It’s positive for gold. 3:1, even more so. 1:1, someone else needs to own a few of your ounces at those levels, and you need to have moved to greener pastures.
Kevin: Okay, so let’s differentiate something right now, because sometimes the listener will think, “Well, gosh, Dave, you invest in shares. Are you saying not to invest in shares right now?” But actually your asset allocation plan has to do with hard assets, real things. And so there is a difference.
David: Yeah. We’re of the mind to ignore the Dow and S&P for now. Traditional allocations are less attractive in the present context than hard asset allocations—that is, within the equity space. So within our management strategy, yes, we’re invested in equities, but in a very narrow focus on hard assets. So we focused our asset management on companies within the hard asset space. There are times that the market does not differentiate those hard assets from other publicly traded assets. It’s all risk-on, everything’s going up, or all risk-off, everything’s going down.
Kevin: But there is a difference between the two.
David: Thus far in 2025, the difference is stark. Factoring in the negative performance of the Dow and S&P, which is down a modest 2% for the Dow, 4% year-to-date for the S&P, we’re at a current 11% and 13% outperformance.
Kevin: That’s the hard asset portfolios.
David: That’s right. Relative to Nasdaq, it’s 18%. So we’re up nine versus the Dow being down two, the S&P down four, the Nasdaq down nine. Hard assets are having a bright day in the sun relative to financial assets. Maintaining the performance differential is impossible to predict. We certainly hope that’s how the rest of the year plays out. But the challenges ahead are largely for overvalued and over-owned equities. The opportunity, we believe, lies in the under-owned and the under-allocated spaces.
So perhaps we give up ground by year-end, perhaps we gain ground. We’re managing assets as a team in a period of extremely challenging circumstances. This would be a first go for all of us to have a combination of trade wars, deteriorating global trust and cooperation, increased suspicion, in a landscape that’s much less favorable to leveraged speculation.
And so for us to be cautious and optimistic seems almost to be a contradiction, but we’re able to maintain it as a team in these meetings each week as we hash out the market details. We are cautious in our optimism, and we’re wary of deleveraging that can implicate all assets. And that includes our favorite allocations, which is why we roll up our sleeves daily, come in looking at a changing landscape, and determine if we need to reduce exposures or increase them. Our fiduciary responsibility weighs heavily on the team, and I can tell you, just from my observations, it’s functioning well.
Kevin: And I love it. I love the fact that you guys are not in agreement all the time, that you’re not just a bunch of yes men.
But let’s be clear, Dave, this Dow to gold ratio thing does not happen that often. If we were to say, when was the last time we got to 1:1 on the ratio, it was 1980, right? In that area. And then, when was the time before that? Well, it was about 1932. And then when was the time before that? 1896. Most of us are not alive for more than one or two of these.
David: Once in a generation. So in the present context, we do favor hard assets. We think there’s a way to bias an equity portfolio for growth, even in the current context. Yes, we look ahead to a much improved Dow/gold ratio, but the circumstances that give us a once in a generation allocation opportunity to traditional allocations out of gold ounces—still very much on the horizon—that set of circumstances is fraught with risk and volatility.
Kevin: This is where discipline comes in.
David: Yeah, I’d say disciplines, processes, robust debate, and that’s certainly what we maintain amongst the team members. It’s required to get us from here to there daily. It is a grind. And I would just say this, if you’re not able to do this yourself, you should consider working with us, working with a team that has those disciplines and a robust conversation ongoing. The team and our processes are in constant refinement, and our offerings are unique. Our risk management is intensely focused on. We don’t always win, but we’re always giving 110%.
Kevin: Well, and there are short-term effects that we have to watch, too, Dave. There’s long-term trends, but there are things that are going to happen this week that may affect the market that don’t necessarily spell out the trend.
David: Yeah, I think what we’ve basically said is that in the present context, there is a way to navigate these markets. In the future context, if you’re a heavy metals owner, then I think there is a future decision path for you to make, and we can certainly assist with that. In the present, there is a super interesting set of dynamics, market dynamics this week. Fascinating. Options and futures have both month- and quarter-end expiration this Friday. This is known as quadruple witching for whatever reason, it’s called that. But it’s when your options are expiring and your futures are expiring, and it’s happening both for the monthly contracts as well as the quarterly contracts.
Playing for a rally is what your market operators are trying to do. And if they can force an unwind of market hedges, that is a typical, that is a normal expiration-week dynamic. If Wall Street is unable to muster a rally in this context and retake the moving averages that we’ve been discussing over the last two weeks, the 200-day moving averages for the S&P, for the Dow, for the Nasdaq, then you’re likely to see pain in the broader indices, pain that we have not felt since COVID, pain that we have not felt since the global financial crisis.
And it’s on that basis that we have encouraged larger positions in short-term Treasuries. We have encouraged an increase in metals holdings. And if you haven’t already taken those steps, you might consider doing so sooner rather than later.
Kevin: You know, when we walk into the studio, Dave, for whatever reason, the carpet, we have static electricity. So we have to remember to touch something metal before we get near the microphone, because oftentimes we get shocked. And when we touch something purposely, we know it’s going to hurt a little bit, but it’s a lot better than the surprise.
What I’m thinking of right now, Dave, is this. Everyone that I’m talking to, whether they like what Trump’s doing, whether they don’t like what Trump’s doing, it doesn’t matter, everybody knows this is going to hurt a little bit, even if it’s going to be better down the road. And I’m thinking right now of the preparation for that shock.
David: And you see it show up in the University of Michigan sentiment numbers, they were very disappointing last week. Current conditions were off slightly. Expectations cratered from 64 to 54.2. 63 was the expected number. And inflation expectations were sizzling at 4.9% for the one year, 3.9% for the five- to 10-year time frame.
So to qualify that, the survey tilts heavily towards a Democratic base and undersamples the GOP considerably. So it is interesting to look at sort of the statistics inside the statistics. The angst over inflation currently is starkly divided by party. The sentiment polls show a stronger-than-usual party bias, and fear that Trump is destroying the world as we know it. That lines up pretty heavily with Democrats. They see inflation coming in at 6.5% on a one-year time frame, independents at 4.4%, and the GOP at a 10th of 1%. So there’s probably overreaction on the Democrats’ part and underreaction on the GOP’s part. Bessent, who’s now head of the Treasury, suggests that an inflationary impact from tariffs is a one-off event, and not something that you need to be concerned with longer term. We’ll have to wait and see.
Kevin: You want to hear crickets, crickets, crickets, and silence. You had mentioned the Democrats, but the platforms that they normally watch, like CNN, are they even going to be around in the future?
David: Very interesting to note the polling for Democrats, CNN has their favorability—and we’re talking about the party. CNN has the favorability rating for the Democratic Party at 29%. That’s a new low.
Kevin: Crickets. Yeah.
David: NBC, similar polling, 27% favorability rating for the Democrats. And that’s even as Trump hits his highest approval ratings ever. So while there’s concern, there is a base that is apoplectic and there is a base which is super enthusiastic. The share of the country that says we’re on the right track has risen from 27% in November to 44%.
So yes, there’s hand wringing. Yes, there’s uncertainty within the financial markets. And yes, there’s uncertainty as to the implications of the changes in policy—trade policy in particular. I think the gamble that Trump is making on the economy, which may jeopardize stability in the financial markets, which may send us into a bear market, short term, it reflects his interest in and his support from the flyover states.
Kevin: I think he’s wanting to see the middle class instead of Wall Street benefit this time.
David: Well, the flyover states are owners of a much smaller share of financial assets, and it is interesting to see that they didn’t vote Biden in after a massive bump higher in the markets. And I think this is Trump’s bet. They won’t protest a stock market sell-off either. Their money is not in the markets. Most of the middle class is living paycheck to paycheck.
So when we see household net worth statistics, it is important to note the skew. And household net worth comes out along with a lot of other interesting statistics from the Z.1 report, and that came out this last week. Q4 is finally out. At year-end, household net worth reached a new all-time high, 169.36 trillion. 169 trillion. I think it was up $5 trillion in the fourth quarter. Assets actually stalled in Q4, up only 101 million. And this is million in the context of trillions. So it was a small, almost a rounding error. But liabilities were down 63 billion. So you had an improvement to net worth. So liabilities are currently sitting at 20.79 trillion. The damage to net worth— If we see a stock market decline, the sharpest damage will be to equities, and I think you’re already seeing that unwind in the first quarter.
Kevin: So you said the Trump gamble. Tell me more about the Trump gamble.
David: Yeah, I think the Trump gamble, those are not the people he’s trying to help, those who have fat equity positions. Private sector jobs growth, re-industrialization with the express goal of improving exports and improving middle-class income and middle-class income growth, those are his primary objectives. The markets are secondary.
And noticeable tone change is there from his first administration, where the stock market movement on a daily basis, that was important to him. He talked about it daily. Now, that may be just as important to him today, but he certainly isn’t talking about it.
Bank of America commented last week, and I think it was sort of complementary to what we’re saying here, one of their analysts said, “It may take time for the private sector job growth to accelerate, for government workers to resettle, for broad-based corporate profits to rise, and for global trade to find a new equilibrium. In our view, the likely productivity gains from a market-based economic reboot are greater than the risks, and the risks from the unsustainable status quo of debt-financed, tepid, and narrow economic growth are severe.”
We noted the deficit numbers earlier, Kevin. This is the big issue. Debt levels have reached unsustainable levels, and a new way forward is required. That’s what Bessent wants to be a part of. That’s what his advisors are so keen on, this sort of re-engineering of the economy.
Kevin: Okay, so Dave, you have kids, and I now actually have a grandson. So, looking forward, when we’ve been talking in the past and just looking at these deficit numbers and the debt and all this, it’s been hard to see a bright future for our kids and for our grandkids. But what if, going back to your ratio trades, I want to go back to the Bank of America report with Jared Woodard. What if actually this debt thing gets under control? What if the middle class stops living from paycheck to paycheck and actually starts saving again? And what if we can buy shares in the Dow at a 1:1 ratio with gold at the very time that America’s getting this restart? We’ve been talking about fourth turnings moving to first turnings. Could we actually have a hopeful scenario here?
David: Very much so. I don’t know that we’ll see 1:1. 5:1, 6:1, I think that is very likely, 3 or 4 to 1 highly probable. Anything less than that will be a gift from the gods of the marketplace. But Jared Woodard at B of A, he says as much in his opening comments, that again, we are starting from an unsustainable level. “The global handoff from big government to the free market may prove slippery, but it seems necessary given large deficits and bloated debt burdens. Economic growth has been enabled by unsustainable government support and protectionist policies.” That’s the end of his quote.
The efforts to wrap up that era and head a different direction, they’re disconcerting for any and all that were comfortable with the status quo. Now we’re in a period of transition, which is uncomfortable, which is uncertain. The overextended, the leveraged speculator is in a very tough spot. For those of you who are in that category, consider this rule of thumb: your first loss is your best loss.
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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 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.
