EPISODES / WEEKLY COMMENTARY

Apple Mentions A.I. & Gets Free Pass On Falling Earnings

EPISODES / WEEKLY COMMENTARY
Weekly Commentary • Jun 19 2024
Apple Mentions A.I. & Gets Free Pass On Falling Earnings
David McAlvany Posted on June 19, 2024
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“Macro analysis is delegated to the company economist. Everyone else parrots the findings and the prognostications, but isn’t really cognizant of the factors going into financial market behavior. Frankly, I’m glad that’s the case, because it creates far more opportunity in the marketplace when the majority of dollars are locked into truisms, are tied, really tied to the mast of conventional wisdom. It makes taking the other side of a trade far more interesting. It’s like counting short exposure, and creating a short squeeze. If you can find something that’s lopsided in the markets, that provides opportunity.” —David McAlvany

Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. 

Well, you were able to get away for a few days. I mean, not just a little bit away, but very much away. Your sailing trip down in the Sea of Cortez, tell us about it.

David: We’re used to travel, and travel can sometimes be a distraction, but when you do that a lot for business, it usually is not. To really disconnect is to be completely absorbed in something. We went with a couple of friends, and got to do everything on the boat. A good friend of ours is a sailor, and so we rented a boat, and it was absolutely fantastic.

Kevin: Weren’t you the guy or one of the guys who provided dinner most of the nights?

David: Yeah. Well, he provided the lessons in sailing. I provided the lessons in spearfishing. I’ve been doing it for about 15 years, so grouper was on the menu. That for me is where I completely disconnect, somewhere between 30 and 60 feet below the water, sitting, waiting for an opportunity, hoping that I have enough oxygen to connect.

Kevin: One of the things we talked about last night was, sailing is such a great metaphor for life because so often you can have storms look like they’re coming, and you can take proper action at the time. But a lot of times when you’re out sailing, you can leave things up too long. You made a comment to me last night, “If you’re actually thinking about reefing in the sail, you’re probably a little bit late.”

David: Should have done it 30 minutes ago.

Kevin: Yeah.

David: That’s just a question of bringing in the main sail, or bringing in the jib, and having less power, which is what you need if the wind’s picking up.

Kevin: Before the gale hits—

David: That’s right.

Kevin: —and tears everything to pieces.

David: Now, I learned from you if you want to be a good pilot, then you look at the logs of what happened in a variety of crashes to see what was done wrong. If you can figure out what was done wrong, you can certainly do it the right way. So, I was a bit obsessed before this trip, going through different sailing videos of catastrophes.

Kevin: You said you watched them with your wife.

David: I loved it.

Kevin: You’d lay in bed and watch catastrophe videos, seeing a catastrophe.

David: Yeah. She’s like, “Is this supposed to be inspiring?” “Absolutely. We’ll be better sailors for it.”

Kevin: Well, when you fly, too, you don’t fly the weather that you take off in. You really need to plan to fly the weather that you’re probably going to need to land in. I’m going to shift this to Wall Street right now because we’ve got stocks that are incredibly overvalued. We’ve got these splits that are going on, 50 to one splits in the stock market, and yet Wall Street is saying, “Hey, we’re just at the beginning of the great rise.”

David: Oh, they’re looking at blue skies, and everything’s fine. The sails are about where they need to be, and there’s not a whole lot of anticipation. So, it will take some anticipation to avoid having too much sail out when the winds pick up.

Earlier this week, I sat on a call listening to a Wall Street firm. I won’t mention the name, but they were extolling the merits of long-term investing. They were imploring the client that I was there to listen in with to put all their remaining cash and Treasurys to work now.

Kevin: In the stock market.

David: Yup, and that’s in spite of high prices, relatively high valuations. They pointed out, “Look, we’ve had a great earnings season, so the valuations have improved.” The argument’s always, “You can’t time the market. You need to have all of the diversification tools in play.”

So, of course, the flavor of the month right now is alternatives, and they’d love to see the allocations bigger to private equity and private credit. Get out of your short-term Treasurys, need to pick up the extra 70 to 80 basis point yield in corporate credit, and again, ditch the short-term Treasurys.

No signs of a slowing economy. The Fed’s going to cut rates three times this year. There are no concerns with market volatility. I even asked a question about elections, and nope, you’d already see it priced into the markets. So, market efficiency dictates that surprises are already priced in, and those were the firm’s views.

Kevin: I’ll never forget in 1987 when I came to work here, the stock market— I mean, there was only blue sky ahead. Reagan was in office. The Soviet Union was starting to crumble. The stock market price earnings ratio was in the mid-20s, but who cares? It didn’t matter because everything was going to go right. I feel fortunate that that was my first year here working with the family, because everyone who was alive at the time remembers the October surprise, the October crash. In a couple of days, the stock market lost between 30 and 40%, depending on what you were owning. It feels like that now, because when I came to work here, I remember reading Fortune magazine, and on the cover of Fortune that summer of ’87, it said, “This time is different. Price earnings might be high, but this time is different.”

David: It was 2002 that inspired me to come back to work with our family business in the precious metals business. I was working at Morgan Stanley at the time. Barton Biggs wrote an internal memo. He was one of the chief economists, Stephen Roach, Barton Biggs, a couple of other guys, but he wrote this internal memo. He was describing a derivatives’ trader who in 1987 came up with an idea, which was to short the equity market. It was the summer. He laid out his justification for why he thought there was going to be a significant decline in the fall, and he couldn’t convince anyone.

So, he took all of his money and family money, which amounted to about $60,000, not a huge sum, and he shorted the market. He retired to Sun Valley in 1988. But Biggs was very clear. He said, “we thought he was crazy, and we still think he’s crazy. Now, he’s interested in gold.” Again, go back to 2002. “He’s interested in gold, and I think he’s still crazy.” Then the last line of that missive was, “unless we are.” And that was, for me, the friendly shot across the bow that I was there at Morgan Stanley, and I was in the wrong place the wrong time.

Kevin: Barton Biggs was always a stock guy. But in 2002 when he wrote that memo, that was just about the bottom of the gold market.

David: He was reefing in the sails. He was suggesting that you trim it back a little bit and consider something else. Of course, you can’t outright say “go buy gold” if you’re a Wall Street stock guy, but you can lay out the story, and tell a tale. That’s exactly what he did.

Kevin: I talked to a broker last week. A client wanted me to get on and justify why I would recommend any gold. So, I spoke to the broker, and he was talking about how the stock market has so dramatically outperformed gold over the last couple of decades. I said, “Well, get a pen out. Let’s just talk that through.” I said, “Now, where was the stock market in ounces of gold in the year 2000?” We worked it out. It was 42 ounces of gold. I said, “Now, where are we now?” 17 or 18 ounces of gold. So, it sounds to me like the stock market really has not dramatically outperformed gold in the 25 years that we’re talking.

David: On this particular call—

Kevin: The one you were on where the broker was recommending going all-in?

David: Oh, going all-in to equities and private credit and private equity and all the rest. To avoid being the only participant on the call who was visually uncomfortable and wanting to contest almost every point made, or at least thinking that there needed to be qualifications to what was being said, I just turned off my camera, muted the mic, and my dialogue was submitted, questions in the chat box.

Kevin: I just wonder what he was saying back in 2021 before the big, big drop.

David: Well, I was on that call too, except for the comments on the elections—which we now have 88 in store this year—and the Fed rate cuts, which are obviously targeted here now. It was virtually the same call, the same message. It was the same firm, same advisor. The force of argument was, “Again, you can’t time the markets. You need to be a long-term investor,” and there we were, late 2021, and he persuaded that client to put a significant multi-million dollar allocation into stocks. From then to now, it has been a game of patience for that client getting back to break-even, and they’re not quite there yet. They’re not quite there yet from the 2021 levels.

Fortunately, this same client has been made wiser from the experience of buying high, and expecting the greater fool theory to come in, and the greater fool to come in and pay an even higher price down the road. 2022 is a reminder that when you put money to work, it does in fact matter, and buying any asset class late in a cycle increases your odds of disappointing expectations.

Kevin: You’re not saying, though, that prices couldn’t continue to rise from here.

David: There’s a possibility that prices do rise in the equity markets and things like credit spreads—a measure of risk above the Treasury market, what you’re compensated above the Treasury rate. They could continue to contract even further.

Momentum has been, and it could continue to be, the game being played. Maybe we have a Goldilocks scenario consistent with what we had in the last few days, improved small business confidence that could perfectly deliver a not-too-hot, not-too-cold, just-right economic outcome.

But there are alternative outcomes and it’s worth noting that politics and geopolitics are factors which may in fact not be priced into the market. That idea of market efficiency may in fact have chinks in its armor.

Kevin: Sometimes it’s good to just relocate ourselves outside of the country. You talked about a Goldilocks scenario here, but if you look at France right now, or, well, you were in Mexico last week.

David: Yeah. Well, recently in Mexico, I had the opportunity to visit with both top-level executives and taxi drivers—wide range of life experience, and obviously from differing vantage points. But I’m always asking questions.

And so we were reflecting on the election, the economy, and what was anticipated in Mexico over the next several years. The obvious observation, and this is sort of regardless of party affiliation or socioeconomic class, was that the currency markets did not respond well to the election outcome. Sheinbaum’s promised increase in regulation and taxation are factors in the global step back and step away from the peso.

The taxi driver was very keen on that. He knew he had to keep a positive spin on what this could mean. He really likes the party, but he’s not sure about the person and the promises made. I’m always fascinated by how sophisticated, maybe it’s not sophisticated, or sensitive, relatively sensitive the man in the street is to those kinds of currency fluctuations.

This last year we got to know an exchange student from Argentina. Delightful gal, stayed with a good friend of ours. Most high schoolers are unaware of things like exchange rates and purchasing power unless you’ve experienced inflation which has been sufficiently damaging not only to your currency but to your culture. And then everyone talks about it. Even high schoolers have a sense of things, even if they can’t connect the reality to something causal. So the executive and the taxi driver both knew that Sheinbaum may come into office with trade-offs, one of them being currency stability.

Kevin: Well, and currency stability sounds so cold, but you were talking about most high schoolers don’t know much about inflation. But to put it in perspective, let’s say that somebody’s going to buy a Big Mac in Argentina, in Buenos Aires. The inflation rate got to the point where within a couple of years it was twice the price and then twice the price again. So yeah, everybody experiences that. But Mexico has become— I mean, Mexico’s changed, hasn’t it? It’s become one of our top trade partners.

David: Our very top trade partner. Well, at least we’ve seen Mexico take the number one spot away from China in terms of global trade with the United States. I think it’s too early to say, but the post-COVID benefits stemming from increased trade with the US, pick up in economic activity in Mexico, may not continue. And it might not be Claudia’s fault. The US consumer may be closer to being tapped out. Retail sales this week might support that. And if Wall Street gets its wish of lower interest rates, there could be a dip in household income that makes, although a marginal, it could be a meaningful difference to the purchase of consumer durables, non-durables.

On the other side of the pond, let’s not forget Chinese competition. They are now the number two trade partner. Maybe they’d like to regain the number one spot. Maybe they want to see more market share globally. And that, too, sort of argues against Mexico being in its own version of Goldilocks. A global recession, that would be the worst-case scenario for everyone, that would negatively impact Mexico—have nothing to do with new people or new policies.

Kevin: You don’t have to be in Argentina to feel the pressure of inflation, though. One of the things, when you study economics and you look at the actions of the Fed, I was talking about landing the weather, not taking off in the weather. What they try to do is they try to give the perception that inflation in the future is going down.

Expectations for inflation are so critical. I remember in the 1970s when they came up with the Whip Inflation Now campaign and the government came up with all these different buttons saying “Whip Inflation Now.” And I think Greenspan was part of that with the Treasury back then. And what it was trying to do was really just change the perception that inflation was going up, to inflation is decreasing. What we’re seeing right now out of the University of Michigan is the expectation that inflation will go higher, not lower.

David: And I think the 2024 election is kind of down to two Is. The two Is of immigration and inflation. The US consumer’s under greater pressure. The University of Michigan inflation expectations going out five years show a number north of 3%, still, and that’s 3% on top of the increases which have already occurred. And they expect it to continue to occur 3% each year, every year over the next five years.

Sentiment from the University of Michigan numbers came in below the previous measure, and well below the expected improvement. Current conditions, which is another measure within the UMich survey, looking specifically at Democratic voters, it’s declined dramatically three months in a row. I don’t know exactly what that means, but you could interpret it. It’s suggestive that Biden’s running out of street cred, even amongst his own base.

This week you get Nate Silver, who’s fairly well known for his predictive abilities, looking at polling and seeing who is most likely to win an election. He’s advising Biden to pull out, pull the plug on the campaign. And I think polling levels that discredit the bid for the second term make this debate in the next few days a really make or break event. Even down to small details like, does the president have to be led to the stage or taken away off the stage? This is significant.

Kevin: Some people would say that Biden’s presidency has very much been a puppet presidency of Barack Obama. And actually Barack Obama had to lead him the other day. So you talk about the base, I mean there is serious concern right now. The G-7 leaders, there were even leaders at the G-7 summit that basically said there’s something terribly wrong.

David: Well, back to the consumer, you’ve got credit card, car loan delinquencies. Both of those are creeping up, and the buy now, pay later schemes are increasingly popular, suggesting the consumer doesn’t want to change their habits but has to take on a different complexion as to how they buy what they want to own.

Certainly the last inflation statistics, the CPI, not bad. Month on month, flat; year over year, still at 3.3%. The Producer Price Index actually was down. Those are positive aspects. Maybe that supports retail confidence. But the cumulative effects of inflation still seem to be weighing on the consumer. So we’re back to the two Is of the 2024 election. I would guess that the cumulative effect of inflation is what you saw reflected in the University of Michigan potpourri of statistics.

Kevin: Okay, so let’s go back to equities, though, because equities really are soaring right now. But is it all equities or is it just very, very isolated and concentrated? And I think I know the answer.

David: Well, you do know the answer. You’ve got equity indexes rising to new highs. It’s on terrible breadth. And what that means is that you don’t have a wide dispersion of interest in stocks. It’s very narrow, it’s very focused in a few names, and those indexes are cap weighted. So it becomes sort of a self-fulfilling prophecy. Money comes in and it’s distributed first to the largest names. We’ve got economic indicators, at least a few, that are less reassuring by the day. Actually, this describes the setup for most fall—or, if you will, third quarter, fourth quarter—market crashes. Bill King says, “we noted several missives ago that the most dangerous environment for stocks is when equities rally sharply at the end of a long equity and economic bull cycle on the notion that the ebbing economy will force the Fed to ease, even if it’s reluctant to do so. It’s even more perilous when the administration is desperately trying to extend the cycle for political purposes.”

Kevin: So when the volume is thinning out, insiders generally sell, don’t they? And you can watch that because they have to report that.

David: Well, I think those are coincident factors. When the volume’s thinning out and when insiders are selling, then tack on anchor investors wanting to get liquid. We talked about JP Morgan, Jamie Dimon selling stock for the first time in decades.

Kevin: How about Buffett with Apple?

David: Yeah, gradually exceeding— He expects, in his most recent meeting, he said, look, we’re at 180 billion. We’re on our way to exceeding 200 billion this quarter, and they’re selling Apple stock, which is significant. Different details, but I do think that this is a similar setup to earlier time frames within stock market history. And I think it’s worth reflecting back, as we did, 1987 and similar setups in the year 2000 and the year 2007 leading into 2008. Now if history was read by Wall Street operators, they’d see it coming. Maybe it is time to sort of reef the sail, bring in the jib. That fact alone, with Buffett selling one of his largest positions, should speak to a retail investor.

Kevin: If they’re paying attention.

David: Yeah. Buffett builds cash to record levels. Is anyone paying attention?

Kevin: Right.

David: He sees no value in the current environment, and thus is unwilling to put money to work. In his words, “we only swing at pitches we like.”

Kevin: Mm-hmm.

David: At the same time, he’s aggressively selling his largest equity position, still representing over 40% of his entire portfolio. Think about that.

Kevin: Wow.

David: What a concentrated position.

Kevin: Yeah.

David: Basically, Berkshire Hathaway is a huge bet on the US economy and an even huger bet on the success of Apple. Buffett, as a value investor, is never in the rankings of sort of the most successful traders of all time. He’s not a Jesse Livermore. He’s not a Stanley Druckenmiller. Maybe that’s because he’s got longer time frames and he buys low and he sells high. He doesn’t sell short and he doesn’t use derivatives. He’s looking for different triggers. Yet he has been very good at buying when there’s blood in the streets. That’s become a common Berkshire Hathaway trait, and maybe he’s now practicing the other side of the Rothschild advice. The first part being buy when there’s blood in the streets; the second part being sell too soon.

Kevin: Yeah. So the Rothschilds would reef in the sails before the weather changed.

David: Absolutely.

Kevin: But let’s go back and look at Apple, because Apple, NVIDIA, and other companies right now, it seems that catnip— You can get catnip and drive a cat nuts. Just put it on anything. AI is the catnip of the markets.

David: That’s right.

Kevin: It just seems like all you have to do is say that you’re getting into AI, and it’s just to the moon.

David: Sure. And NVIDIA is a great example of that, but I think Apple is too. It illustrates market behavior which is not consistent with the company’s fundamentals. All they had to do in their recent quarterly call was mention AI, and they got a free pass on performance. Q1 earnings, they did beat estimates by 2%, which is fine until you realize that those estimates were lowered and the bar was thus easier to get over. I think Bloomberg nailed it. There was an article titled, “Apple Earnings Come with a Low Bar and Big Buyback Hopes,” and that basically sums it up. The share buyback announcement seems to me a ploy to bring in the retail investor.

Kevin: They’re buying back at all-time highs? Would you do that as a person who runs a company?

David: No. If you’re sitting on a big chunk of cash, you may be tempted as an operator of a company to retire some of those shares if you can do so at a really low price. And that’s when I’m not opposed to stock buybacks at all, when they’re putting the money to work opportunistically.

Kevin: But at all-time highs.

David: Yeah, that’s not a good time to buy back shares. I’d say no. Why announce another buyback scheme in 2024 when you failed to completely follow through on your share buyback announcement for 2023? They did not buy back the shares that they said they were going to in 2023. They’re back in the news with that share buyback scheme to stir up the base, to bring investor enthusiasm. So for some inexplicable reason, Apple has in recent years added $104 billion in debt to their balance sheet, reduced their net cash position thereby to 58 billion. The question is, do they plan on retiring those shares, doing the buyback program, financing the purchases with more debt?

Kevin: Yeah. So you’re borrowing money and buying your shares back at all time highs. But what you haven’t brought up, Dave, is even though they beat their estimate, revenues have been dropping.

David: Yeah. Revenue declined in the first quarter. iPhone revenues were lower by 10%. International revenues took the biggest hit at 6%, with specific countries declining in the double digits. Again, all this is ignored if you just say two letters.

Kevin: AI.

David: Yeah.

Kevin: AI. Yeah.

David: So they’ve lost market share in China, that continues at a very uncomfortable pace. And this decline in revenues, five out of the last six quarters have seen a revenue decline. So this is not easily excusable as an exception of the rule. It is seemingly the new rule, and the market cap sits at 3.33 trillion. We’re at all time highs. AI. Ignore the PE of 33.5, well above its long-term average, well above its 10-year average, well above any level that an investor would say here is a good value.

When you look at the complexion—and the reason why I like this—of a case study, perfect illustration of market behavior disconnected from fundamentals. Think about this: The average daily volume in Apple is over 60 million shares. That’s 60 million shares in liquidations matched with 60 million shares in purchases. What is the eager daily buyer of 60 million shares thinking?

Kevin: It must be AI.

David: Yeah, exactly. Maybe a large language model can rewrite the business plan for Apple and transform its ossified consumer electronics persona into something transformative for 2025 and beyond. The AI announcement was greeted with enthusiasm, and I thought at the time it was a bit desperate, actually, like putting lipstick on a pig.

Kevin: As you were talking about AI, I was thinking about the Karen Carpenter song “Close to You.” Just listen to some of the words. Okay. “Why do birds suddenly appear every time you’re near” Well, it’s AI. “Why do stars fall down from the sky every time you walk by?” Well, it’s AI. “On the day that you were born, the angels got together and decided to create a dream come true. So they sprinkled moon dust in your hair of gold and starlight in your eyes of blue.” That’s sort of AI right now. It reminds me of crypto a few years ago where all you had to do was say cryptocurrency. It could be Paris Hilton starting her own cryptocurrency, it didn’t matter.

David: Or a single sandwich shop on the East Coast who’s publicly listed and adds crypto to their name and all of a sudden is worth a hundred million dollars. And yet, I’m not sure it really changed the revenue that they were generating from ham sandwiches.

Kevin: And dotcoms in 1999. Yeah, I mean, it’s just crazy.

David: But it’s still NVIDIA which takes the cake for excess enthusiasm. And again, reflecting back in time a little bit, in the year 2000 when Intel was the most important chip provider for the revolution of the time, something that was going to remake the world, and in fact, it did—the internet revolution. It reached a peak of four times price to sales.

Kevin: This is—

David: This is Intel.

Kevin: Okay. Back in 2000. So we were talking about the tech bubble.

David: Exactly. NVIDIA sits at 34 times price to sales today.

Kevin: Wow.

David: With a little bit of experience that the semiconductor industry is very cyclical. Chip demand is cyclical. The space is notorious for booms and busts. So what side of the cycle would you describe us at? NVIDIA, 3.23 trillion in market cap. One analyst this morning calls for 50% more upside.

Kevin: Oh, sure. Sure. But that analyst, by the way, was not Warren Buffett. You look at Warren Buffett, and how many decades has he been alive now? Nine decades. He’s been around for a while. He’s buying real things like you are, Dave.

David: Coming back to Buffett, one last comment. I wonder how many people have in their portfolios over 10% allocated to energy.

Kevin: I would bet Warren Buffett.

David: He does, in fact. His number six and number seven positions.

Kevin: And I would bet you too.

David: Roughly so. And actually, if you’re looking at Berkshire Hathaway, an even larger percentage allocated to energy, if you factor in nonpublic holdings in pipelines and in a recent purchase of an LNG facility. For a man very aware of the green revolution, I don’t see a commensurate position in wind and solar. It’s interesting. Hard to argue that Buffett’s an idiot. What is he investing in? Natural gas, oil, pipelines, energy, infrastructure. We share the same bias on the asset management side of the business. Real things make sense to us.

Kevin: I’m just thinking back to when your dad started the business back in 1972. Okay, so we’ve been around five, going on six, decades as a company. Thinking about Buffett, we’re talking nine decades. History really is important when you’re looking at the markets.

David: This week’s call with the well-educated, polished, well-presented Wall Street financial adviser was a reminder that market history is not well understood. Macro analysis is delegated to the company economist. Everyone else parrots the findings and the prognostications, but isn’t really cognizant of the factors going into financial market behavior. And frankly, I’m glad that’s the case because it creates far more opportunity in the marketplace. When the majority of dollars are locked into truisms, are tied—really tied—to the mast of conventional wisdom, it makes taking the other side of a trade far more interesting. It’s like counting short exposure and creating a short squeeze. If you can find something that’s lopsided in the markets, that provides an opportunity.

Kevin: This call that you were on, how do these people respond? We’ve seen this. When the music stops, it’s like musical chairs. When the music stops, all of a sudden they say, “Hey, that couldn’t have been predicted. We’re in for the long haul. We could not have possibly predicted it.” But how many crashes have you seen, Dave, just in your lifetime that could be predicted if you just, like you said, took the other side of the trade ahead of time?

David: Yeah. We do find value in a number of hard asset categories. Retail investors today, they’re looking at something else altogether. The momentum trade is more important than the value trade. Retail investors are prioritizing returns in the immediate moment over risk mitigation. They’re ignoring everything but momentum-driven performance, generally unaware that when the music stops, only those that have sneakers get the chair. If you can run to the chair, great.

Let me abuse another meme. You’ve heard it said that if you can outrun your neighbor in a bear chase, you’re just fine. You don’t have to worry about a bear. So running ahead of the others and escaping the jaws of the bear, you got to have sneakers. Make sure your shoes are tied.

Someone’s going to get eaten. Lopsided market suggests this is likely to be the retail investor, but what’s fascinating there is that it’s not just the retail investor this time around. Everyone is crowding in. It’s the hedge funds. It’s the mutual funds, it’s the everyone’s-in trade.

Kevin: And it’s hard because if they’re playing for momentum, they really have to be buying one of the top seven stocks.

David: You do, because the Mag Seven, which now have a combined market cap of $15 trillion, that’s on par with about 50% of GDP.

Actually just four of those names account for a third of the entire S&P Index. It’s not a healthy place to be, but that’s where everyone’s collecting. In looking at that dispersion, again, we come back to this idea of breadth, breadth being very, very unhealthy. The S&P Index is at a three-decade low in terms of its correlation to its equal weighted version. Because again, you can do a cap-weighted version of the S&P, which is what’s generally referenced, or you can look at the equal weighted version. And again, the correlation between the two is at a three-decade low.

It’s the market cap Gargantua, which is distorting returns and driving desperate behavior. I can’t find the reference, but mutual funds are now shifting allocations into tech after underperforming ETF indices.

Kevin: Just to keep up.

David: Yeah.

Kevin: Yeah.

David: Increasing their allocations to tech, anything AI, to play catch up on the return front. You’ve got mutual fund managers which have been left on the sidelines to watch the show versus participating in it, and fearing more outflows. They’re scrambling to fortify their tech allocations. This is a version of institutional FOMO, fear of missing out. And as I mentioned, it’s hedge funds playing the same game. It’s one big self-reinforcing liquidity splurge, and it’s in a few concentrated names.

Everyone seems to forget, again, if you’re remembering that history is important, this propensity of over-owned names to eventually sell off 40, or 60, or even 80%. And I come back to Intel. Intel still trades today at nearly 60% below it’s all time high. And that’s nearly 24 years ago.

Kevin: Well, and you talk about 40, 60, 80% sell off, and we have to also talk about the 100% sell off of many companies that don’t even exist after something like this occurs.

But this enthusiasm for AI seems to be blinding people to what’s going on internationally. And the game that Macron thought he was going to win is really costing the European markets right now, and that seemed to have been ignored last week.

David: And again, this is the absurdity of market efficiency, where the assumption is that all possible outcomes have been priced in. Macron announces a snap election. There’ll be two, one in June, one in July, and so the French political system is in turmoil. But more than that, it upended the European bond market and many of the European stock markets as well.

Kevin: How about bank stocks? European bank stocks?

David: Oh, yeah. I mean, it was a bludgeoning last week. The French stock market was down 6%, but it was bank stocks which were under even more pressure. BNP Paribas, down 12%; Crédit Agricole, down 11%; and many other European banks. If you are looking in Italy and in Germany, both, again under intense pressure.

You had safe haven buying of German Bunds, safe haven buying of US Treasuries, very dramatic last week. Bank stocks, as I mentioned, sold off 10% or more.

The announcement of a two-part snap election which Macron took a gamble on is now being seen as a risk to his party. And that brings in a high likelihood of forcing a new set of fiscal agendas from a coalition government. That is not just a story about the French economy. It is a story about the European debt markets and stability within the European debt markets. They share a currency. You can’t abuse a fiscal situation in one place without having it show up in the currency. Again, comes back to Mexico. Is it a surprise that Sheinbaum wins and the currency sells off? No, it’s really not.

Now we have turmoil in the European debt markets, and I think ultimately we see that in the European currency as well.

Central bank reserves in euros, that continues to be an issue. They’re being reduced at a rapid pace, and you have the last buyer of European debt. There’s been a fever pitch of hedge funds purchasing European debt. That now is a trade which is being turned upside down. It’s reversing, adding to price volatility. As they say, it only takes a spark to get a fire going, and that’s something that arsonists recognize. That’s something that Smokey the bear recognizes. It’s something that market historians recognize as well.

But ironically, very few financial advisors seem to appreciate that it only takes a spark.

Kevin: You were talking about something this morning that you read in the Financial Times, Dave, about developing nations have been buying gold. But now developed nations, their central banks are moving to gold. So you were talking about reducing European exposure in their reserves. I wonder if some of that’s going to gold.

David: Yeah, and again, French elections may have a meaningful impact on the global financial system. But as we’ve previously noted, any number of the 88 elections this year may be just enough to turn the market backdrop of liquidity abundance today into a tsunami of asset owners seeking the exits. Instead of too soon, maybe they’re in the category of just a little too late.

Kevin: They’ve left the sail out a little long.

David: And so it is interesting to watch central bank reserve asset managers. We’ve highlighted the developing world, central banks moving towards gold, and a lot of that is because there’s a consensus to de-dollarize. There’s a consensus to move away from the old recycling habits and buy Treasurys with proceeds from, whether it’s oil sales or the sale of finished goods. That’s one version of de-dollarization.

This reserve asset de-dollarization is another version altogether. And the FT article this morning was very important, I think, because it was highlighting that it is now the trend for developed world central banks to do the same.

And again, if you’re looking at the central bank behavior, if you’re looking at Buffet’s behavior, these are signals. Signals that most people who are committed to one particular narrative, and only one narrative, they just are not going to get. And all I can say is, in this environment, be very careful. Don’t play with money that you can’t afford to lose. Only invest with a strong rationale, with a strong strategy, with risk mitigation processes as a part of the method that you use, and with an incredible amount of humility.

For us, this translates to hard assets, physical metals, or the companies that derive value from some iteration of a hard asset. I can’t imagine being in the market any other way. If that’s not a strategy you’re willing to embrace, you should be following the Buffet lead, increase your cash position considerably, and do it quickly.

*     *     *

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.

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