Bill King: “The Big Money Players Are Moving Into Gold”

Weekly Commentary • Jul 05 2023
Bill King: “The Big Money Players Are Moving Into Gold”
David McAlvany Posted on July 5, 2023
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Bill King: “The Big Money Players Are Moving Into Gold”
July 3, 2023

Fifteen days to stop the spread. Let’s shut down economy. Let’s shut down schools, universities, businesses, restaurant, you name it. Well, in their thinking was, yeah, okay, we’ll take this recession here and we’ll get rid of Trump on top of it, and then we’ll just pump money and off we go. Wrong. There’s a big difference than when Wall Street has a problem because they’re over levered, or they had programming trading that went berserk in ‘87 or long-term capital went down in ‘98 and Russia couldn’t pay back their debt or whatever, the bubbles. These were liquidity and even solvency problems. Pump money in. You shut the economy down and what happened? You had especially small, medium businesses that had been around for decades if not longer, they were out of business. A lot of them couldn’t get back up. –Bill King

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

Our guests often ask, when is Bill King going to be back on the program? 

David: For good reason, this is a gentleman with decades of experience in the markets and as an active trader, whether it’s options or commodities or stocks, he knows the nuances better than most.

Kevin: Well, and he always brings a little bit of a surprise. I can read Bill King every day and still when he comes on the Commentary, he’ll say something and I’m like, “I never thought of it like that.” He thinks very fast too.

David: I’ve enjoyed sitting at lunch with him and he’s got this recall. He’s got almost, I would say, a photographic memory, or at least some sort of a Rolodex in his brain that gives him access to details and facts and figures and nuance within the marketplace going back for the decades that he’s been in the market. So, it’s not as if yesterday is less fresh than today. Yesteryear is just as fresh.

And so, I love the historical perspective he brings, but also the real time street fighter in him because he’s had to participate in the rough and tumble markets on a day-in/day-out basis.

*     *     *

Well, first of all, let me thank you for being an annual, even a bi-annual contributor to the Commentary. You’ve done this every year for 15 years, and more than that, you’re a daily contributor to our thinking and analysis of the markets. So, our gratitude runs deep for who you are, for the work that you do. In many respects, you’ve been like a market mentor.

Bill King: Well, thank you very much for the kind words.

David: I read you every day. So, I know what some of your granular thinking is, but I’d like to start on some broad topics and then narrow the focus as we go. Let’s go back in time a little bit. 2022 began a reversal of the Everything Bubble. As we’ve finished the first half of 2023, there’s some recovery in bonds and equities and cryptocurrencies. Maybe we could start with the bond market, partial recovery of the 2022 losses year to date. What say you to a 40-year bull market in bonds correcting its excesses in such a short period of time?

Bill: Okay. So, we’ve had this wonderful grand super cycle bull market in bonds for 40 years, since the 1982 low and all the way up until early last year. And as you know, we’ve argued for decades that that was the mother of all the bubbles. That is what fed everything because you had the low interest rates and it put a floor under stocks and it also put strong bids in the market for stocks.

And then that happened for a number of reasons. One is, people understand that when rates go down, you start buying equities, you reach for yield. It makes the dividends more attractive. But the two things people might not realize or understand is with that cheap money, there’s three things that really happened here. One that’s obvious is that every time there was a problem in the market, the Fed could throw money in, stocks went up, whether it was ’87, ’91, ’97, ’98, after 9/11, then they ran the market bubble 2008, 2011, and you go through this whole litany.

But the other thing is, you made financing cheap for companies. So, for a while, companies did a lot of CapEx, but they did it offshore. They were doing it in China and Vietnam, Mexico, through the decades, wherever they were relocating. So, you were lowering the cost of production, lowering the cost of labor. So, that kept the inflation low. Everybody knows China, what they were doing from ’95 on. But that was also going in Vietnam, in Mexico and other areas. You list the globe, even behind the curtain, India. So, you could keep pumping money and get away with that.

And so, everybody got accustomed to bonds, stocks, whatever. If something bad happened, you just wait it out. It’ll come back. And this created what they called it the Greenspan put, the Bernanke put, on and on and on. But the other thing people might not be aware of, these cheap rates and never having to wash people out of the market really increased the leverage in hedge funds.

So, you go back— When hedge funds started gaining some traction in the late ’80s, a big hedge fund would have several hundred million dollars. And then when you get into the ’90s, a big hedge fund had like three or four million. And then so Greenspan then ran the carry trade, the bail out the banks after ’91 when they were scared.

So, all of a sudden, Soros and these guys started six million, eight million. And then Japan, when they burst their bubble in 1990, by April ’95, they went to zero rate policy. So then, people did the yen carry where they were going to Japan and borrowing in yen and buying bonds. Now the bonds didn’t go up as much, but the yen got crushed. So, by borrowing in yen, you were effectively short yen. And the leverage they were at, they never expected they were going to get those gains. So, these hedge funds went berserk to the upside.

People had four billion, had 10 billion, 16 billion. The size got enormous. And then of course that’s what fed the bubble in the internet, those other stocks, because the money was so huge in private traders and in hedge funds, they were playing the hot names. And momentum just chases momentum and off you go.

And when you see these guys, we thought it was obscene when like the top, say in the late ’90s, and at the top 20, 25 hedge funds managers were making somewhere between four and 600 million a year. Well, now you fast forward into the last 15, 20, they’re making billions of dollars a year. For doing what? It’s not like creating jobs. They don’t create jobs. They don’t create industry on and on and on. So, this was enormous leverage in the system.

Now that’s only part of it. The other part is private equity. Because these guys don’t trade in and out. And you see these funds just kept exploding over the years because they were so lucrative. So, it’s not just KKR and some of the big Bain Capital and some of the household names you hear, but you see so many people just started popping up, especially in different cities around the country. People had connections, whatever.

And what did they do is they kept buying assets. And what kept doing? Rates kept going down. And as rates kept going down, they could lever up by more and more assets, and more and more assets they could keep under control. And then the values, they could go get more money from institutions and wealthy individuals. And this thing just kept going and going.

Now somebody put out a piece of literature all in front of me of the earnings gains from the early 1990s up until probably right before COVID. It was something like they calculated 60% of the earnings were driven by interest rates in the big companies, in the Fortune 500 and whatever. So, what we’re saying is this was the mother of all the bubbles. This fed everything.

And you saw what happened when this thing ended, you had these great bond managers, the bond kings, the masters of the universe, they’d been wrong for a year and a half. Oh, that’s it. Oh, we got to buy them. Well, part of it was because every time bond yields went up a little bit, pretty soon they would reverse and they’d go to new low yields. And all you had to do was just stay in there, just stay in bonds.

And I looked over the last 40 years, and I don’t think it was more than five or six periods where bonds went down anywhere from like nine months. I think the longest draw down was 15 or 16 months. Again, the moral was never sell bonds.

Now if you were around in the ’70s, Warren Buffett and others were calling them certificates of confiscation because the bonds kept going down, inflation was going up, government was issuing debt and then you had a problem. So, the Dow Jones Industrial Average was largely flat from 1966 to ’83. And in real terms, I think it even took to the late ’80s before you got above the 66 top. You can look at the chart. You’ve got around 1,051 in there and it would fall down to around 750, except ’74 when it cracked down to 500 and change. But you were stuck there because the bond yields kept going up, the inflation kept eating away.

So, if you think about that, for 40 years you’ve had people just, their thinking, their behavior inculcated by deals keep going down and you can see what’s happened over the last year and a half. You see, we’ve had the problems on the regional banks. In the ’70s, when people got killed and created all the problems in the first industrial crisis was that people borrowed short, the banks, and they would lend long, mortgages and whatever.

And this is what happened for 40 years. They could get away with that because the rates kept going, short rates kept going down, their financing kept going down. All of a sudden, it started going up. And you had people lent out here with mortgages at two and a half, three, three and a half, plus loans and all of a sudden, you have [unclear] trading 5%. And all of a sudden, they were getting killed. I saw the article in the Financial Times today is that Bank of America sitting on over a hundred billion dollars in bond losses because this is what these people kept doing.

For 40 years, you just buy bonds and your financing costs went down. Wall Street is incredibly leveraged. People don’t understand. They’re incredibly leveraged. As a trader, and I remember [unclear], you come in every morning, the bottom right of your trading sheet, yeah, you have your gains, your losses, your positions, and the bottom end, you have your cost to carry. That’s how much the firm’s charging those positions.

So, you could sit there with stocks and they’re telling you can’t hold these things forever because every day you’re getting clocked because it’s costing the firm X amount of money to carry those positions. And when you’re levered, it’s the disaster. So, as long as these funding rates kept going lower and lower, you can hold positions.

Now, all of a sudden over the last year and a half you can’t. And it’s really hurting people. And we haven’t seen the full ramifications yet because some of these people are just going to hold these things for as long as they can and hope that somehow the markets take some out, some kind of genie appears out the bottle and makes them whole. Two things people have not come to grips with. That is what the last 40 years of lower bond prices and short-term cost to carry short-term rates going down did to markets.

A totally warped, perverted, distorted, whatever you adjective you want to use here, market judgment, investor behavior, investor attitude and psychology. And now you have to somehow normalize that. We’ve seen every time you try to normalize it, you have these problems show up.

So, this is one of the things that is filtering through the market. And the one thing people say is, “Well, how come it’s not down low?” Well, you can look out through history. As you know, when they bailed out the regional banks, where I go, “Well look, they bail these banks out in March.” They bailed Bear Stearns out in March and the stock market went almost straight up from the end of March of 2008 into the summer, until late May, early June.

The foreign markets rolled over first in May, but we kept going up. In fact, the transportations made all time high in July 2008 and we were already at least a quarter or two quarters in recession because the Fed threw the money in. Now that’s why we’re going up here in the stock market. It’s the same thing, as you said, we called at least a two, two and a half month rally, which we’ve had. Now actually it’s extending now because again, you get the momentum players, you get all this stuff going crazy in here.

So, the thing here is, they can’t get the inflation down. When you think about, you’ve had one of the biggest rate hikes since Volcker in the ’80s and they’ve got the inflation now, but you can see the core stuck. And so, people don’t understand, even the central bankers do not understand, all that easy money for the decade, the quantitative easing, the zero interest rates, the near zero interest rates.

And I was like everybody else, when the banks were giving you a 10th of 1%, T-bills were a 10th of 1% or two-tenths of percent. They didn’t pay that much attention. But then last year in February, the rates started going up. I’m out of my CDs. I’m in T-bills. I’m three months because they were going up so fast and then eventually six months when the last time was slowing down.

But people all of a sudden, the banks were thinking, well, if you looked, they were offering two and a half percent CDs when T-bills were at 5%. The only people that didn’t understand what was going on are lazy people who wouldn’t make that transition. And that’s what caught them. Their funding costs went up so fast here. So, people still haven’t come to grips what this has done to the markets. A year and a half now, oh, we have an inverted yield curve. That means recession’s three months away, six months away, whatever. It’s not showing up because the markets were distorted.

Those traditional indicators made no sense. We’ve been arguing this for years. Quit looking at the bonds and going, “Well, look at this means, this and this in the bonds.” It means nothing because the Fed, they not only rigged the market, they cornered it by doing all the QE. So, what is the bond market telling you if it’s an artificial market? And that’s why so many of these guys have missed out on these. And we made this argument a couple months ago. There’s a lot of people running around going, oh, M2 headed south 4.2% year over year. That has never happened since the depression. We’re going to go into—

No, we’re not because yeah, year over year, but if you saw what happened in the previous two years, it went berserk. So, if you had a stock that went from 100 to 200 and then all of a sudden it went down 4.2% year over year, “Oh, oh, it’s a bear market.” No, it’s not. It was perspective. Of course, it had to go down. It went berserk because of the COVID. Of course, it was going to come back down. You can’t compare that to normal market cycles.

So, that’s what’s going on. A lot of the experts and economists, again, these markets and these indicators have been so distorted, so corrupted by all this government intervention. And of course, the other thing that happened people have not come to grips with, and we made this case a lot, is that the central bankers and politicians in Wall Street over the years, when we’ve had crises, and you could go back to ’82 when the first one, Mexico and Brazil couldn’t pay their debt, and Volcker said, “Okay, I’m done crushing inflation. I’m going to put the money in the system.”

So, we saw this great bull market in bonds and equities in ’83. Well, by the second half of ’83, Volker’s taking the money out. ’84, some people were looking for depressions. I remember Mario Cuomo was on Larry King in ’84 and they said, “Oh, are you going to run for president?” He goes, “No, I think we’re having a depression.”

Several economists were saying the same thing because the bonds were running back up, the yields running back up. And then we had Continental Bank went down, we had the first Maryland and Ohio S&L crisis. You had [unclear] muni house in New Jersey went down, almost took Chase with it. So then, he eased up and we started going up. ’87 crash, financial system is paralyzed, pump money in like crazy. Okay, off you go.

Same thing happens with Japan. Well, ’89 Japan started taking money out because they want to slow their bubble. And then all the airlines crashed, all the speculation. We had that mini crash in October of ’89. ’91, Bank of New England, Bank of Boston, some West Coast banks, trouble, Greenspan pump. And we can go through this. ’94, Mexico. The point being ’97, ’98, ’99, 2001 just keep pumping money. Where there’s a crisis, pump the money and away you go. So, yet ’11 with Europe, I think it was ’13 with Europe, pump money, pump money.

So, now all of a sudden, we get to the COVID. And whether they wanted to get Trump or whatever, wreck the economy. I mean people were saying, Democrats, “We’ll take recession and get rid of Trump.” And unfortunately, he went along with this thing, shut down. Now we know it was horrible. They lied to us, masking, the virus itself, and vaccinations.

But anyway, so they go, “Okay, we’re going to shut the economy down. We went from 15 days to stop the spread. Let’s shut down economy. Let’s shut down schools, universities, businesses, restaurants, you name it.” What they’re thinking was, “Yeah, okay, we’ll take this recession here and we’ll get rid of Trump on top of it. And then we’ll just pump money and off we go.” Wrong. Idiots. Stupid idiots. Because there’s a big difference than when Wall Street has a problem because they’re over levered or they had programming trading that went berserk in ’87 or Long Term Capital went down in ’98, and Russia couldn’t pay back their debt, or whatever, the bubbles.

These were liquidity and even solvency problems. Pump money in. You shut the economy down. And what happened, you had businesses, especially small, medium businesses, that had been around for decades if not longer, they were out of business. A lot of them couldn’t get back up.

The other thing is, you paid people not to work. You’ve changed behavior. That’s why we have this inflation problem now. They tell you all the time, we got service inflation. What is service inflation? Labor, labor. The commodities come down. Depleted strategic reserve to force oil down, but they can’t get the non-housing service stuff down.

Go ahead, ask your people, call a plumber. Call somebody to work on your roof. We had a tree fell down three months ago. They finally came out last week and they didn’t have to take it down. They just had to cut it up until they get out. Took them this long to get it. Because you told people they didn’t have to work. You gave them money. You changed behavior. You put businesses out that could not come back.

Especially a lot of the restaurants. We’ve seen the fast foods here. We had the White Castles here. They pride themselves. We’re open 24/7 except Christmas Day. We’ve got White Castles in suburban areas that are closed two days a week and close overnight. It’s unheard of. They can’t get people to work.

And this is going everywhere in the service industry because you told people, “Stay home, don’t work, we’ll give you money.” That’s what they’re wrestling with. Because these idiots for 40 some years pumped money on every financial crisis, not an economic crisis. And they created an economic crisis and they’re still dealing with it. So, that’s the thing people have not come to grips with, and it’s playing out here. We’ll see. 

And then the numbskulls in the Fed— It was a year ago when Jerome Powell made the mistake. He said, “I think the disinflation process has started.” Boom, stocks went up to raise it. Boom to the moon. Everybody’s speculating, boom, here we go buy all this stuff. Inflation kept going up. So then, oh no, we’re going to raise more than expected.

Everybody thought we’d be cutting rates in 2023. Oh yeah, we’re going to hear in 2024. 2022, we’re hiking, but then we’re going to go down. Constantly have misunderstood what’s going on. You’re constantly seeing the people. “Oh, that’s it. No more rate hikes. Oh, that’s it. Can’t do it.” They’ve got problems here in the system.

And the other thing is when the Republicans went along, buying in on this budget deal to increase the debt limit and actually take it off until after the 2024 election. People weren’t paying attention. In that period in June over, I know it was like a two week and two and a half week period, but that went up $600 billion. That’s come into the market. That went somewhere, that spending. That had to go somewhere.

Some of it went to Ukraine, some elsewhere. But that’s high-powered money. That’s the helicopter money. When Bernanke was going, “Oh, we could always run the printing press and drop helicopter money.” No, you can’t. The Fed can’t do that. That was idiotic to say. I don’t care me how many degrees you have from Princeton, or whatever. The Fed doesn’t do that. The Treasury can do that. The Fed can’t. All the Fed does is create credit. They credit Chase account with $10 billion. They credit Citibank’s account, 100 billion. They buy stuff from a street and credit your account. They don’t print money.

But when you had the COVID, federal government did the funny money, the helicopter. They printed checks and they sent them out. And a lot of it was fraudulent, a lot of it went elsewhere, whatever. But it was trillions of dollars was printed and put to people. When the money goes in the Chase Bank, how does that get in Citi and Bank of America, very little gets into the economy because it’s going into Wall Street. It’s going into speculation. It’s going into asset inflation.

And we all know that’s why you have the concentration of wealth, concentration of income. It’s hard to get that into the economy. Write the checks though from the Treasury and send them out. Now you got the inflation problem. And that’s the other thing, these people didn’t understand what they were doing with the COVID stuff.

So, that’s what we’re dealing with here. And you’ve changed behavior. It’s hard to re-change it. That’s why the Fed is always reluctant when wages go up. They call it the sticky wages because if you have a too much inventory problem— The Fed hiked rates when they saw inventory is building up and they saw inflation, so then they would hike rates.

Remember that nice cycle, like two and a half years, three, business cycle. Then you went down for six months to a year or 15 months was your recession, then you came out again and rung it out. But what they got concerned in the ’70s because the wages went up. It’s hard to ring wages— You heard that so many times from the Fed over the last couple years. Wages, wages, wages.

Now the problem is the wages is creating the service inflation because you have shortages. You don’t— The trades, in the restaurant business, fast food, you name it. They just have these shortages. It’s not going to be easy to ring this out, for this to play out here. And of course, you got an election year right on the doorstep. Everybody’s campaigning already. Starts earlier every year, and this is what you’re going to have. The Fed’s got a problem.

They paused again. Oh, yeah, we’re going to have to wait. And the stock market went berserk to the upside. And this has just got to kill them that this is going on in here. And by delaying the rate cuts, they’re going to push it closer and closer to the election.

And what we’ve got to watch here for the remainder this year is that they really hurt Biden in a way because if the rate hikes start working, you’re going to be in recession in probably not Q3, there’s too much— But maybe Q4, maybe Q1 of 2024, and that will impact the election. People forget Bush lost in ’92 election because we went down in ’91 with all that banking crisis and stuff going on. But by ’92, we were already coming out, and that’s what he was arguing. Look, I’ve turned up, but people just remembered the pain from ’91.

Now we’re further along in the electoral cycle. So, you start having problems in Q4, Q1, Q2 next year, that’s going to impact the election. Now, they’re going to know that, and the Fed knows that. And in the past, the Fed tried to be neutral, but we all see now the Fed is loaded with Obama and Biden appointees, and we’ve seen how liberal they are and what they want to do.

And you see, they were speaking, this was a couple weeks ago, you had the aspects of the Fed saying, “No more rate hikes, no more rate hikes.” And the other one’s going at least two more. And you see it playing out in the media. The way this is going to be a problem is you get closer and closer to the election. So, the way it looks like to me here is with the stock market going up, they’re going to have to hike rates July maybe again.

And I think they’re going to do it because they’re going to say we wait, and if stock market keeps going up, inflation starts picking up, and we still have the service problem—and housing is picking up now, which is scaring them. We’re going to either have inflation pick up in 2024, which is going to hurt people in power, or we’re going to have to hike rates, and then it’s going to look political.

So, that’s the thing to be watching. The summer’s quiet, and third quarter tends to be quiet, and the fourth quarter things start happening. But that’s the thing to start watching here as we go through the year is how this inflation starts playing out in the Fed rate hikes. Because this is going to spill into 2024, and it’s a very political year. And of course, every year is important politically, but this is an existential year for a lot of people.

Christopher Wray, the Bidens, Garland, all these people, then in the justice— You can imagine what they’re thinking here is if we lose and somebody comes in here from Republican Party that puts in an attorney general, and they start clearing out the FBI and the upper echelon of the Justice Department, they start going after all this stuff we’ve been hiding for four or five years.

I mean, this isn’t going to be a normal election. It wasn’t in 2022. Part of it was the COVID. But part of it is because they wanted to get rid of Trump, but they didn’t want to have this other stuff hanging over their heads. As Hillary said, or is attributed to saying in 2016 when Trump was winning, if he wins, we all hang. And you saw what they put into the motion.

So, the point being here is this 2024 is going to be a very strange and dangerous year where we are economically with what the Fed has to do. And politically— How many people— Again, existential threats here for people. Now I’m not just talking, you’re out of office, we’re talking jail time for lots of people here if certain people get in and start pursuing investigations. So, wow, buckle up your seatbelt.

David: Couple more credit questions. One, we see rates again rising. You got the two-year, 10-year mortgage rates, bunds, gilts, European peripherals, they’re all creeping higher. What’s your interpretation of the interest rate environment as they uniformly keep on marching higher? The stock market could care less. I mean, there’s no sense in which the tightening of financial conditions is somehow going to dissuade the party-esque atmosphere. So, equities continue to go up, but they seem to be ignoring this gradual increase in rates and it’s pretty uniform.

Bill: Well, usually when rates go up, it means demand for money, because that’s supposed to be what your interest rates are registering. What’s the demand for funds? The problem you have, again, we haven’t had to talk about this because you had this big bull market in bonds. Look at the money that the government’s borrowing. As we said, just had 600 pop in here and the Fed has been monetizing debt for decades.

But with the QT, it was beyond monetizing. They were cornering the market. And for all the lies Bernanke said, “Oh no, this is just temporary.” It’s garbage. So, this is the thing is you’ve got all these people leveraged, whether it’s hedge funds, whether it’s Wall Street, where it’s private equity, they got to keep borrowing to keep this game going, to keep their assets going, the assets under management going.

And you can see the data with the people here, first it was, well we had all this money from COVID. Now it’s spending. But you saw what’s going on in the credit markets. Because what’s going on with credit cards? People are borrowing. They’re borrowing record amounts of money in here. And you say, “Well, why are the stocks going up?” Because there’s still too much liquidity on Wall Street.

Remember, stock market is not the economy. The stock market is the money in this financial system that the big elephants have: the big banks, the big brokers, the big hedge funds, the big private equity people. And they’re not creating a lot of new businesses. In fact, they’re taking over businesses and firing people by rule of thumb, they’re consolidating.

But the other thing, too, is, people are conditioned to buy things. And when I keep thinking, oh, the Fed’s getting easy— They laughed at the Fed while the Fed was jacking these rates at the fastest pace since Volcker because they don’t believe the Fed. Oh, how many times do you see, “Oh, that’s it. No more rate hikes. Oh no,” all the experts. “Nope, that’s it. No more rate hikes” And they keep doing it because they just can’t believe it.

And the problem is there’s still too much excess liquidity. You look up here and you’re still almost three trillion of excess reserves in the system. What are you going to do with that? Well, if you’re the banks, you go, “Oh, I think a recession, I’m not going to lend it to some guy who wants to build a new fertilizer factory. I’m not going to lend this out to farmers who want new equipment. We’re going to have recession. You know what I’m going to do, I’ll put it on the hedge funds, private equity guys, that’s more liquid. That’s just moving around the table. We can go and get that whenever we want.”

That’s the problem, is, for months, there’s still too much—the stock market’s telling you—there’s too much liquidity. Now, also, bash that up. You got the retail people playing all these zero days to expiration options. In other words, daily, which is what bucket shops did from the turn of the century and made Jesse Livermore famous, and they outlawed that for that reason. But Wall Street needs this game to keep going.

So, most people recognize. If you take out the seven big stocks—[unclear] stocks, the Amazon, Apple in the FAANGs, the big FAANGs, Facebook, Google, Microsoft—they’re driving most of the rally. It’s like seven stocks are the majority of this rally, and it’s been for a while. What does that mean? Go look who owns those stocks. It’s the same guys buying the same stocks, same institutions, hedge funds. Warren Buffett buying Apple. I mean, Apple today closed about three trillion value. Think about that. That’s 10% of the US economy. That’s ridiculous. It’s absurd.

Why do they keep buying it? It makes no sense. Look what they did in Nvidia. It was trading ridiculous amount to projected earnings. That finally whacked. That tells you there’s too much liquidity in the system. And it’s going into the guys’ hands—to the club, but it’s going into the same hands because they keep buying the same stocks.

So, they’ve got problems. The Fed knows they got problems and they keep running their mouths. These guys should go away again, go back before Greenspan, you didn’t know who Fed governors were. You didn’t know who Fed presidents were. You didn’t know who any of these people were. But Greenspan— because for years he was laughed at. And when Gerald Ford’s economic advisory came out with the “whip inflation now,” everybody, let’s wear the WIN button, and became a national joke. Comedians killed them. The late-night talks kill them.

So, he went away in disgrace, with Townsend-Greenspan Consulting, the economics firm. It didn’t do much. And then when it’s time to get rid of Volcker, because Bush wanted to run in ’88, they didn’t want Volcker to start to tighten rates up in ‘86, they jettisoned him in the summer of ’87, in August, and put in Greenspan. And Greenspan ran around. Oh, look at, he’s the maestro. What did he do? Pump money. Any idiot could pump money.

And he said that, “Oh, we’re in deflationary environment. We’re just going to keep pumping money.” And then they all started talking because they wanted the accolades. You had European countries giving him awards for what? For pumping money? What does he do as Chairman of the Fed? But they became rock stars. They wanted to talk. They wanted accolades, wanted to move the markets. Their egos got out of control.

So, now these guys are out there talking. The problem you have now, you got two factions in the Fed: the ones that want Biden reelected and the others that, maybe they’re against them, or maybe they’re just concerned about what’s going on. And that’s the problem. How many days you see now these guys come up talking, they swing the markets? It’s a parlor game now. Divorced from the economy and—a lot of people, it is the economy. New York City’s the economy.

And that’s why you see people move out. But you see, well, you have this record amount, a townhouse went for 50 million today, record. How is that possible when you get hundreds of thousands of people leaving New York? Because the money, this excess liquidity is going to the same people it’s been going to for the last couple of decades.

And they keep doing the same thing. Buy these expensive properties, buy their handful of stocks, they keep buying, put more money into hedge funds, put more money into private equity. And I don’t know how this unwinds, but the bond market’s telling you that this 40-year game is over.

And again, it took a long time from when Bear Stearns went down— Bear Stearns hedge fund blew up in June of 2007. It took over a year for everything to start hitting the fan. And people have said this for a while, especially at tops of markets. You see bottoms, and things get washed out when things are bad. But when you got markets are up again— We go back to 2008 when we were— Dow Jones Industrial Average is making all time high in July of 2008, we were at least two, maybe as much as four quarters in recession.

Well, what’s that? We’re not supposed to do that. Stocks are omniscient. They see the economy. That’s garbage. Not anymore. But there’s an old adage that tops— It takes a lot longer for all the factors and things to come together where you get the recognition that you should be getting out. But once it happens, events move much quicker than you think. That’s how you get crashes, or you get these severe declines. You resist it, you don’t think about it. Now we’re going to bounce back. And then all of a sudden you get the capitulation and then you get hammered.

You started with the bonds for the last two years. How many of these geniuses have been fighting it? They don’t believe the Fed. All those 40 years, don’t fight the Fed, don’t fight the Fed. No, no, Fed’s wrong. We don’t care what they say, they’re wrong. Of course, the Fed admits we’re terrible at forecasting, which is obvious because the way they’ve been handling it. But it’s also frightening if these guys are supposed to be doing this, that they admit that we’re running on inflation. We know it’s transitory, that’s garbage.

Oh, we don’t understand how this is happening. Well, when you’re printing money like crazy. It’s just absurd. Zero interest rates, quantum easing, government pumping money like crazy. Oh, we don’t understand where this inflation’s coming from. Oh, please.

David: So, the 40-year game’s over.

Bill: Yup. Well, it’s indicating that.

David: Yeah. Let’s say for the sake of argument, that’s over, that would suggest that you’re putting in a top in equities as well. And so, you look at these little small marginalized areas, they’re really not marginal, they’re pretty significant, leveraged loans, private credit, commercial real estate. There’s plenty of pockets of weakness.

And again, rates are increasing, pressure’s revealing itself in those areas. And yet again, happy days are here again, we’re in a new bull market. I can’t tell you the number of times I’ve seen that in the last three weeks. Headlines, new bull market. And the market confirms it with things like credit spreads being pretty modest. March was a crisis period, but we’re beyond that. Banks’ CDS, really no stress to notice there. Not today. What are the areas of concern for you within fixed income, back to leverage loans, private credit, things like that?

Bill: Well, the big areas we can’t talk about is that interest rates inflation and the behavioral change in the US economy, in workers’ expectations, just in people. I mean, you’ve got some lunacy going around here. We could argue about what’s proper interest rate policy or even proper environmental policies and union policies. You can argue this and you can be rational about it. But the really stupid stuff going on. It’s just lunacy here.

Part of it you saw today with the Supreme Court ruling here, that Biden can’t just say I can abrogate contracts. And of course, it is funny in the ruling, Robert said, Nancy Pelosi said, “Biden can’t forgive debt, that Congress can only do that.” But these guys are all running around telling people that. And that got people mad because it’s a total election gimmick to get young people to vote for Biden and Democrats, and you can’t do it constitutionally. It was so ludicrous. But they run with it.

You see the same things going on with the justice. You see all this stuff going on. They would hide it. They’d be cute about it. It was on the sly, now it’s just right in your face and there’s nothing you can do about it. And that to me is the factors. After Russia defaulted, say ’98, whatever, and then Putin finally came to power. But the whole thing, Russia went down ’91, Yeltsin came and he had this whole thing going on. Oligarchs are stealing. Everybody’s fighting for the resources and on and on and on.

And I remember one of our smartest money managers, quant guy who was just killing the market in his funds because he was really good and he started dealing with Russian programmers because they were so much cheaper than the US, and he was so heavy in quant. He had a room full of them. And this is after 9/11 in here and he goes, “One thing, Russia, I found out, these people have cash. They have no debt because when they hit the fan and all this, everything got wiped out.” He goes, “I’m thinking of investing,” and all this. And he was really looking into it.

And I said to him, one thing, “Well, if you have disputes, what do you do? What do you think they’re going to do? What’s your history of business dealings and resolutions? Your litigation history there?” And he goes, “Oh, my god, I never thought about that.” In fact, he didn’t do it. You can see what’s happened.

David: Resolution is, they put you on ice.

Bill: Those are things here that people are starting to think about. You know, what we’re going on here, rule of law, stuff like that. And that’s why I’m saying this 2024 is going to be a huge, huge year. It’s just so many people. Again, this is an existential threat for a lot of very big powerful people in the United States.

Because once this thing starts coming apart, and people, you never know where it leads, and you never know who’s going to give up whom and how this plays. But they’re going to try and hold this thing together in 2024. We’ll see how this plays out. Everything’s right there. The elephants are there. You see in the past things were subtle, hidden, you had to relook. There are elephants out there, but they’re hiding in plain sight now because they made everything ideological now, cult-like, you got to be in the cult Trump, you got to be in the cult Democrat, you got to be in the establishment cult.

So, you ignore all these things because you’re told to ignore them. And you can’t talk about them. You can’t question them or you’re canceled. Today was almost 75% of the country thinks the country’s on the wrong path. And how many of those 25 are just trying to stay positive because they understand that it makes their candidate look bad.

If they say, yeah, and it goes to 80%, but we know what’s going on here because you talk to average person, they don’t like it and they know we’re on the wrong path in so many different ways. So, if you think back, one of the things they said to Reagan— Now we had some of this in the ’60s and the ’70s. That stuff was nothing compared to what’s going on now. The lunacy now, it’s just ridiculous. Look at the city of San Francisco, and it’s ridiculous what’s going on now.

So, Reagan comes in. He gets things going, and Bush says, “Oh, it is going to be voodoo economics.” Now all of a sudden everything starts going berserk. Everything economy. The country has this feeling of just unbelievable things they hadn’t had probably since the ’50s. You see it in the TV shows, you see it in the literature, you see it in all these upbeat movies, displayed, all these good feelings, good music, on and on and on.

And I remember, of course, the Democrats, oh, it was just because the stock market, they were actually saying, well, if you remember, Reagan’s mesmerizing people. He’s hypnotizing them into thinking things are good and everything’s going great. That’s why he won 49 states, he barely lost Minnesota to Mondale, which was his home state. He was like 7,000 votes or whatever there. And he never campaigned there.

But you can’t fool the people. They understand. And there was no internet. Now we’re Fox News there to give a balanced view. They just constantly killed him his first term. And you saw what happened because whatever he did—and there was others involved, there was a lot of other things going on besides Reagan—the economy picked up, things started happening, the cities got healthier, crime went down, on and on. It all fed each other.

And people were thinking, oh, it’s the stock market. Oh, it’s just Reagan. He’s hypnotizing people with this sweet talking, whatever. That’s when the 40-year bull market started in bonds and in financial assets we should say. And now we’re far from that. I don’t know who’s going to get elected, how this is going to play out here. But this is a really important election here. This is not just for tax policy. You’re putting people on the Supreme Court. This is rule of law stuff, and it is breaking down. It’s unequivocal, it is breaking down, and you’re going to end up like Venezuela or Russia or some of these here.

And what that does is, the average person goes, okay, well I get screwed anyway and I go to court if I have a lawyer. What starts happening is the big money. Big money starts getting scared about what’s going to happen—international, even here. And that’s why, if you remember, the dollar went berserk. It was, dollar was getting crushed for a couple decades and then it went so strong, so fast. That’s why they came up with the Plaza Accord there in, was it June, July?

David: Eighty-five.

Bill: July of’85. Because everybody said, there’s Reagan, what’s going on here? The money just poured in here. So, the other thing is, keep an eye on the dollar. A little different now because China’s having trouble. And that’s the other thing. In the ’80s, Russia was descending and now we have China ascending. Of course, it’s funny. You have Russia was in Afghanistan, now they’re in Ukraine. But the other big thing out there is China.

And that’s another one that people are not paying attention, and part of it’s because the establishment of both parties made China. They started in ’95. They go back to the Bushes and the Clintons. Yeah, Clinton’s just, pour technology—and same with the Bushes—into these guys. And we’re telling a theory, oh, well, yeah, we start trading with them and they’ll become friendly. It’ll be just like Germany and Japan after World War II. We went in there with the Marshall Plan, we helped them. They got their economies going, and look at they’re great allies now. Yeah, how’s that working out for you with China, guys?

David: Interesting that although China’s on the ascent, they’re having a hard time keeping their economy growing at the pace they want to. So, I’d love to get your thoughts on the yen, the RMB, the dollar, the euro, wherever you want to start. But I think the currencies, as you were pointing out, the dollar, got to watch the dollar, watch those other currencies as well.

Bill: You’re right because everyone’s talking about the dollar. The problem you got is, China, yuan is falling because as bad as our debt is, theirs is worse. They made this enormous bet, their 100-year bet, and they’re clear. This isn’t like they’re hiding it. We’re going to take over the world. We’re going to supplant the United States.

First when we start in the Southeast Asia and Pacific and their navy is already bigger than ours. We’re going to spend. We’re going to have hypersonic. We’re the guys. England had their day, then they handed it off to US, and now we’re going to take control here. But they’re having problems because they went through this urbanization to move the peasants. For all the talk about long-term planning, they didn’t, because I think they were afraid that eventually somebody else would figure out what they’re doing, and they see us as their mortal enemies, unlike Japan and Germany after World War II.

So, yeah, they have the problems there, because they can’t get the consumption. They are so export driven. Their mercantile is just like Japan, just like the Asian Tigers. And that’s creating a problem. Now, part of the problem is Germany, because people forget that, you go back 10, 15 years ago, Germany was in real trouble. They were the sickling of Europe before the 2008 crisis. But what got them going: China—all those machine tools and things that they just absolutely loaded up on. And now that might be ending there.

So, to get back to the dollar, as much as the US is printing money, where do you want to go? Not to the yuan. For a while, they did. No, it doesn’t look good. Japan. Well, we’ll have zero interest. And the other problem is, the demographics are both killing them. Japan is aging so rapidly, and that’s why they can’t get anything going there. They just can’t. And you could just see with the yen here, which used to be so strong, they’re just struggling. Britain’s having problems, Europe’s having— You can scroll through the whole list.

So, that’s why you see gold and bitcoin and these things are acting strong. For all the Fed rate hikes—we’re talking how this is the fastest since Volcker in 1980 and in ’81. I’m looking at gold here. I’m looking, right now it’s 1927, up 9.20 on the day. Why? If the Fed’s tightening, gold is telling you.

And the other thing with gold, and I know I’ve said this to you before, gold is not like Apple or the funny money, a lot of retail. The people that move the gold are big, private, serious players. They buy. They don’t want to run it away. They buy carefully. They buy very carefully.

When you see gold has the explosive move, that is the traders getting caught the wrong way. The big banks, whatever, the guys that are doing the lending of the gold, they borrow the gold and they short it and they get caught the wrong way. Then you get the explosive moves because the retail comes in. Retail traders come in, and then you get the explosive moves that you don’t see with gold. It has explosive moves, then it gets real quiet.

Because the real players in gold are big private players. They’re careful. They’re not in a rush. They don’t care about marking something up at the end of the quarter. So, that’s what’s interesting to me. And how, again, bitcoin, which, I agree with Buffet on this one— Bitcoin is not much different than your bank account at JPMorgan or any major bank. It’s just electronics.

Well, why don’t you have the bitcoin, it’s digital? What do you think my bank account is? It’s a digital. It’s a number at the bank. Where is it? Go to the bank. Where’s my account? Who’s behind bitcoin? When you have a problem with bitcoin, who stands behind that bitcoin? Well, it’s accepted. Well, so are baseball cards. So, are pet rocks at one point, hula-hoops. There’s nothing behind that.

And that’s where gold— And that’s where the retail, and they talk, oh, ETFs, and we got bots. And so, they’ll run through the hype. But you see how many times bitcoin runs up, and then it gets crushed. But that’s the thing I keep watching here is you see it’s back above 30 [unclear] because they’re talking about having ETFs or whatever. My way of thinking with the bitcoin, anybody that knows anything about the US Constitution knows it’s illegal. The US Constitution is explicit. Only Congress can coin and mint money.

But they told you this is money. We created it. We’re creating it on our computers. It’s illegal. Go out and take a piece of metal, stamp the denomination, go and try to pass it. It’s illegal. People have tried to do this. You get thrown in jail for that. It’s illegal. You cannot create money. But they’re telling you that’s what we’re doing. Why are they letting it go? And my theory is that we know that bitcoin— In the beginning it was just the propeller heads were buying it. Eventually, China was, at some point 95 to 98% of activity in bitcoin, going back 10 plus years, was coming out of China.

And that was the people making money in China, hiding it from the government and getting money out of the country because they had their controls on currency. And that’s the thing I missed was this became where the illicit money is. This is what BCCI was when Bert Lance and these guys there in, what was that? The ’80s and whatever. This is what you want if you were making big time dope deals, arms smuggling, and trafficking, and whatever other elicit. That’s what this has become in here.

And I think just like BCCI, I think the intelligence agencies in the US are tracking the movements on there to see where the illicit money is going. I mean, if you want to know when something bad is going to happen, just watch the money. So, that’s my view is why they just don’t come in and say, “Guys, this is illegal. You can’t do it. You can’t create money because the Constitution says only Congress can create money. They only can make a realm of the coin here.”

That’s what gets me. It’s explicitly illegal. And to me, there’s only one reason they’re letting it on because they’re tracking it. It’s always interesting, but this is so dangerous what’s going on, besides Russia, the Ukraine thing, China 40-year bubble bursting here. The debt is just going ridiculous here.

And again, it’s the first time in my lifetime where you explicitly have the federal bureaucracy that people think is totally corrupt, totally corrupt. The FBI, Department of Justice, the Homeland Security. It’s every day, the media— The media for decades tried to hide their bias. Oh no, we’re just telling you the story, and we didn’t think that’s the right thing. It’s all out there now. There’s no surprises. It’s out there. The question is, what are you going to do about it? Or is this thing, you just have to let it absolutely fall apart. That’s the risk. That’s the risk is that enough people say the emperor has no clothes, and then stuff starts happening in here.

So, it’s going to be a real interesting year for the markets. We know this stuff’s unsustainable. We know the US can’t keep taking any amount of debt they’re doing. We know the stocks. Seven stocks can’t just keep going to ridiculous valuations. The Apple’s going to be 15% of the US economy. Stop it. You just can’t do that. You add into seven stocks, it’s probably a third of the economy. So, Apple’s three. The other six are all over a trillion. You’re talking well over a third of the economy, a third of the US GDP, the value of seven stocks. Just think about that. That’s unbelievable.

David: Right. Crazy.

Bill: But that’s where we’re at. How do you unwind that? You can’t unwind it carefully. We’ve seen that in history. That’s what history tells us, is just what we said before. Eventually enough people say the emperor has no clothes and then there’s a dash for the exits. This is a very tough time.

I think the best thing here, and go back to what I said last time, you want to be safe as possible and you want to hedge your inflation bet. Of course, with gold, there’s some real asset. If you know something, you know something about real estate, you know something about oil and gas, what you know, go ahead and I think here is stay short, stay liquid. I’ve been in six months Treasurys, to me, that’s the tough question now.

I’ve got some maturing in here in a month or so. And the Fed’s probably going to hike here in a couple weeks just because of what’s going on in the stock market, whatever. The thing I have the toughest time dealing with now is, if the two years gets to five, you do that and wait to see what happens.

So, my way of thinking here is they’re going to try to pause in 2024 on the rates. You get the two recession hits, and then rates are going to go down, or you have inflation and the rates keep going up. So, the tough thing for me is figuring out the exposure. I think between now and December, yeah, you could buy short term T-bills and you’re fine. But at some point in 2024, how political is this going to get? Are they going to push rates down? I mean, we know everything’s corrupted and they don’t hide it anymore. They don’t even try to be cute.

So, I think there’s a possibility here in 2024 that you might see rates go down or bond yields go down because the insiders are rigging this thing for the election. But then after 2024, you’re going to have a problem. And that problem is either we have a real severe recession or if the economy—they put so much juice in here—is picking up, where’s inflation going to go?

If we’re sitting here with the core CPI around 5%, where’s it going to go if the economy takes off again? Where are the yields going to go if that happens again? Because we haven’t washed anything out, we haven’t had a recession where you really wash this stuff out.

So, next year’s a tricky year. I think you got to be as hedged and careful as possible. And to me, the hardest decision is how you layer your bet holding to get through to 2024 because it could be very wicked in here. To me, the perfect vehicle is something like 18 months, through the election, see what’s going on. Or you talk about doing barbells in your bonds and whatever, but I think that’s the time to be careful that way.

David: No recession 2023?

Bill: It doesn’t look like it, just now. Yields—they might be rigging the data. I mean, we’ve seen this all the time, how they keep revising this data. I mean, the thing here too is you got the GDP jump. All of it came from net exports. Somehow, net exports went from what, 5.2% to 7.8? How’d that happen? And you had consumption go up. It went from three-eight to four-two and everybody’s telling you. All the retail, nope, nope. We’re having trouble spending. We’re having trouble. General Mills, yeah, the prices went up so much consumers are pulling back.

We see that even in groceries and what they’re telling you is they’re not buying our brands, they’re buying generic or whatever, but somehow, they got that to go up. Somehow, we see these enormous numbers in jobs created, and you’re seeing in private data people are laying off and cutting people like crazy. It makes no sense. But again, once you realize how corrupted everything is and how everybody’s been lying, that’s the thing, you don’t know what reality is.

David: Bill, would you say commodities are giving us an indication of the US economy, the global economy, the Chinese economy? How would you say crude and copper are projecting late 2023, early 2024?

Bill: Well, they’re moving up, and part of it is because there’s liquidity in the system and that’s the game. As far as the economics, the thing is so hard now is the noise. And just go back to this theory, so distorted and perverted the markets that these normal indicators don’t hold much weight anymore.

You go back, this is called copper, the metal with the PhD in economics. Well, what happened in the late ’80s and into the ’90s, it was a guy his named Hamanaka, Mr. Copper, and I can’t remember if he was Sumitomo, whatever company he was.

David: Sumitomo.

Bill: He controlled the copper market. It was what he was doing, and had nothing to do with economy. And that’s why you see the same thing happen when China took control. Remember how we saw these things in London, metal exchange with nickel and these things just going berserk? They couldn’t deliver and then they let the people off the hook, they got short. Remember that one?

David: Mm-hmm.

Bill: Bail them out instead of holding his feet, the guy who was short all the nickel, who was that economics. But that’s the problem. Forty years of pumping money, low interest rates, excess, so much excess liquidity in the system that people will do something with it, and they can’t get it productively in the economy, they’ll speculate with it. That’s what makes this so difficult right now. The process has started trying to adjust it. That’s what the bond market’s telling us. They’ve started the process of trying to adjust it, and people are fighting it, and they’re going to fight it.

So, yeah, it’s tough. I’m not going to kid anybody here. This is tough. And you could see how many people were wrong and what they’re doing. And I think don’t try to fight. Don’t try to be the smartest man or woman in the world here. Just get yourself liquid, get yourself some inflation hedges, and you can dabble in stocks here and there, but it’s got to be something if it goes down 50%, it’s not going to cause you to lose sleep. But just wait.

And I really think this is a tough period. And somebody once, I can’t remember who said it, if it was Stalin or somebody, said, “Sometimes nothing happens in a decade, and other times decades happen within weeks.” And that’s what we’re telling you, nothing goes on, nothing important, nothing historical, and then historically get crushed in a small period of time.

And I think that’s what is happening here now, and it makes all this very difficult to navigate. If you can’t navigate the political, it’s very difficult to navigate all the financial because it’s so intertwined.

David: Totally. Yeah. Well, the two words you used early on, rigged and cornered, what causes the rig to break?

Bill: Just market forces eventually overwhelm where you can’t do it. And that’s like the bonds. The bonds going down are saying we can’t do this anymore. The US is piling up so much debt, we just can’t do this or the dollar. It’s usually the currencies first and then the debt. Of course, Japan, these guys have been fighting for decades, absolutely fighting for decades.

And this one time probably what broke it this time was the COVID. They killed the economy. They could play the games in the financial markets to control them, but when they killed the economy to get Trump or if it was this ignorantly thought they were going to stop the spread of COVID, whatever, they killed the economy. They killed segments in the economy that aren’t coming back, and they changed behavior, and it’s very difficult to change behavior.

And of course, we’ve got a young population now in the 20s and 30s, don’t want to work, don’t want to get married. You see these numbers are incredible. Well, Wall Street Journal had an article about a month ago. There’s like 1.5 million 20- and 30-somethings in Japan that don’t want to work. They don’t even look for work, which is unheard of. You guys go a back couple of decades, those were the bees. Those were the honeybees. They just work like crazy. Nope. Change the behavior.

Now, America, figure’s like seven million 20-something, 30-something, don’t want to get married, don’t want to work. Just hanging out. You changed the culture. You could get all the reasons why we’re doing this stuff. That’s a problem. Look what’s going on in the big cities. You changed the culture. There’s no punishment for crime. Go ahead, loot, you shoplift. We’re not going to stop you. That is impact. Look at these businesses fleeing the big cities. There’s an economic impact to that. That’s not going to turn around, which is the Fed pumping more money in the next cycle.

That takes a long time to turn and change. There’s some really big factors. We’ve known it for the last couple of decades. The central banks and the governments have been fighting it like crazy with this ridiculous spending, with the money. That’s what they’re telling you. When you see this kind of level of debt the government’s spending and these games at Central Bank, they’re scared. There’s something they’re trying to hold back and nobody knows.

You had the great question. When does this all revolt? When does the market forces take over? Nobody knows. You can’t. No. Like I said, it takes a long time, but once it hits that critical mass, just like a chain, it goes quick.

David: Just seems like the stakes are higher this go round.

Bill: Absolutely are.

David: And a part of that is because on a global basis, you talk about China’s ascendancy, their desire to take over the world, naval supremacy, but they’re dealing with their own issues, debt, demography. You look at their youth unemployment at record levels, high levels, and they could have their own version of a revolution. Homegrown.

Bill: Absolutely.

David: And it just makes sense that in the context of distorted debt markets and misallocation of capital over there and over here, powers that be, say, you know what is a great way to keep everyone happy? Let’s not own our mistakes along the way. Let’s just go to war.

Bill: Right. I mean, you can see the change.

David: Blame the other country. Who’s responsible? Maybe it’s not the Chinese. Maybe we don’t blame the Chinese, maybe they blame us, but I don’t know.

Bill: You’re hitting a good point is that we’ve had all this globalism for years and the solons in all these countries. We’re going to have this global order and Bush new world order, all this. Reagan was the guy who said, no, America first, and the Bushes were all kinder, gentler. I mean, they’ve been doing that forever from their grandfather, Prescott, when he was dealing with Hitler in the ’30s and as well as dealing with the Russians back then.

This whole global thing, this whole trilateral, we’re all going to do the World Economic Forum stuff, and it’s all blowing up. And you see what’s happening because you can see more and more regional things. You see France on fire. They’ve changed the makeup of their country with this open immigration. We saw that years ago. They came out and admitted, well, we can’t go into certain areas in Paris because we don’t control that. What? That’s chaos. That’s anarchy. And that’s where you’re right. Those things are breaking up.

Russia, what if Putin goes out here and loses? How do they put that back together? That’s another one with the demographics. It’s just falling apart. He wanted to be a great power. He can’t do it economically. I mean, China’s smart enough to figure out, we want to be great, we got to play the economic game.

Putin wasn’t smart enough. That country doesn’t have that kind of culture or history. They’re more run like a mob family. And that’s what’s going on there. And now how does that play out? How does China play out if it starts hitting the fan with Xi? Don’t know. Nope. We know Europe is in real big trouble here, and we contribute this. When we did all this stuff in the Mid East, we unleashed the flight from the Islamic world there. And you can’t assimilate those numbers that fast. You just can’t. 

And we saw what happened in the United States. You had the Irish came over after potato famine and then the late 1800s, the Jewish pogroms, after World War I we had the great influx and you saw all these horrible situations these people lived in and all the crime and disease it fostered. And it took a while where you could assimilate these people.

And then after World War II, you had all these eastern Europeans coming over here. It was the same way. In fact, we got so bad Eisenhower had mass deportations. People forget about that. Same thing from Mexico, whatever. You see in the big cities, they’re taking over gyms and park districts and taking services away from people, high schools, and these immigrants, they have nowhere to put them. And that’s causing real friction in the minority communities here in Chicago.

It can’t go on. Again, these are so many things going, it’s so crazy. And you have to say, well, who’s doing this? Does someone really want to create this chaos on purpose or is this just you keep compounding problems and you can’t go back? I think it’s, you’ve created cults where you got to believe these absolutely ridiculous things. No matter what we say, you got to believe it.

And we see some stupid— it’s not even logical. It’s just saying, yeah, political factions all have to do this. It makes no sense. It makes no sense. But that’s what we’re fighting here. And I think the problem too is you just look at the people. People are disgusted and they think elections are rigged. They think the government is biased. There’s no thing justice department, FBI, the media, institutions, you just go through the whole list and there’s going to be ramifications for that.

And that’s what they’re fighting because they know just what you said. That’s real revolution when people start going bad, and that’s where they’re trying to keep this thing going here. At this point, you have to understand the problems that are out there. And then you have to say, when the problems overwhelm the system and then hopefully necessity being the mother of invention, leaders will emerge that will address and fix the plans.

Reagan was one. I don’t see anybody else on the horizon right now that’s doing this, but you can see some people are talking the big game for DeSantis, and he made the incredible statement yesterday, people aren’t paying attention, he says, “I’m shutting down Department of Education, Department of Energy, all these departments that were created over the last 50 years that really you don’t need. And then get unelected bureaucrats running your economy.” And I mean, get rid of the IRS. I mean he said, “Shut these things down.”

David: I saw that.

Bill: That’s how you stop this, is you go in there and you shut Department of Education down and you take the federal government out and make the states accountable for what they’re doing in their schools. Same thing at energy department, on and on, just go right through the list. I don’t know, whatever was tax policy or what he wants to do for the tax enforcement stuff.

I said this decades ago. I said, “All you got to do is just do the flat tax. It’s so easy.” And a guy, and this was a liberal senator on the West Coast, top eight. And I used to talk to him regularly. He used to get a letter, talk. And I said, “You just got to do it.” And he goes, “You’re right. It will never happen.” I go, “Why?” “Oh, want to pay your fair share.” “Yeah, well, Hunter didn’t pay his fair share. How do you get all these corporations fair share?” “Flat tax right off the top, none of this deduction, all this BS-ing around.”

And the guy said, “You don’t understand what you’re saying. There’s no way Congress will pass a flat tax. They lose all their power. They’re giving out these benefits and get their donations. Do you imagine if the Congress couldn’t reward corporations with tax benefits, what would happen? Think about that.” And they’re just right. It’s so ridiculously easy to have a flat tax, but you absolutely neuter Congress to fundraising and what they can hand out.

David: Right. That’s a pretty keen insight. If you could choose one geography to focus on, you felt it was the most significant in terms of its market impact in the coming years. Would you look at Europe? Would you look at the Middle East? Would you look at China and Asia?

Bill: No. Europe’s pretty much dead. I mean, Europe’s not generating anything. You see the people are just fleeing Europe for the same reason. You’ve got the immigration overwhelmed it and the thought here, and this is such ludicrous thoughts, well, we just won’t enforce laws. We don’t want to discriminate. So, we just go let these people do what they want, which is, again, the insanity.

David: How’s that working?

Bill: Again, we can argue taxes and what? That’s insanity. It’s anarchy. And you destroy your country, destroy the city, who wins? So you can feel good about yourself. So, you’re really, since World War I, England went down and Germany tried to recover and whatever, it’s obviously Asia. They’re the ones. That’s where we’re at. It’s US and Asia. That’s what this is looking. And Japan is just festering. I don’t know how they’re going to get up. I think the two to watch are India and China.

Now, Biden has had this meeting with Modi and it’s very, very important. I think people have figured out. If you’re losing China here, you got to get India because they’re more populous than I think they’ve passed.

David: Better demographics.

Bill: The other thing is you have a huge amount of Indian people who have come to the United States and done exceptionally well. And they’re good in tech, really don’t have a manufacturer, but they’re really good in tech. And the people that have come to the United States have been terrific citizens, very family owned. The whole routine.

The geopolitical bent on that is that’s what Nixon did 50 years ago, tried to pry China, get the communists from the USSR. They made the deal with China. They credit Kissinger and Nixon. But the history is saying that it was really Mao, that he was getting upset with Russia, so he said, “Well, I’ll play this game too. I’ll come over this way.”

So, this is what you’re trying to do here with India. Because not only economically, India’s got a long way to develop there and they’ve got a lot of things politically to do, but India’s mortal enemies with Pakistan. For years, Russia’s been aligned with India. Pakistan is aligned with China. And of course, that’s what people fear is India and Pakistan getting into a spat, exchanging nuclear weapons, then China and Russia are involved. So, the India, it’s not only a play against China, but also Modi’s sitting there. He understands that there’s an enormous amount of people from India that have come to US and are doing really well, really well.

And he also sees what’s going on in Russia. They’re dying. They’ve been supporting Russia since the ’60s, Russia and India. That was almost a client state there. And he sees how bad Russia’s military and their operations, everything’s going. And he’s like, “Hey China, did Russia counteract China?” Not a chance, not a chance. Especially as it goes down. I need a new partner. I need someone else here to counter China. Right now there’s no one other than the United States.

So, that’s something else to watch. But that’s a longer term. But it’s very interesting if people aren’t paying attention to that because it’s very important.

David: Well, coming back to the US dollar, we can think about it in terms of its short-term volatility. We can also think about it in terms of its role in the global economy. Maybe it’s losing a little clout at the margins. But is the yuan really a substitute? Is there any other currency that could stand in for the US dollar as a world’s reserve currency?

Bill: No, no. That’s when these guys were, “ah, the end of the dollar.” You can’t have that unless you can supplant it with something. The only thing you can do if it really gets bad is you go back and you tie it back to gold. And people have argued for years. There’s an artificial tie to oil and commodities and whatever.

The problem is, as I said, everything’s been so manipulated in these markets now. There’s so many traders. Before, you go back even into the ’80s and then you had a big trading companies, Mark Rich and some of these others, and the five big sister grain companies, Continental, Cargill, Bunge, whatever, Louis Dreyfus, they controlled the markets.

But then in 1999, Bob Rubin, trader Bob there with the Clintons, and Phil Graham was a Republican on the Texas, of course Wendy Graham was in charge CFTC, they allowed all these banks to go in and start trading commodities. How many times you can see JPMorgan get fined from manipulating commodity markets? Go do a critical search, take you all day. What do they do about it? Nothing. They should be doing RICO on these guys to stop that.

David: Slap on the wrist.

Bill: I mean, how many times are you going to see these guys, club manipulating commodity markets? Because it’s easier. Commodity markets are so thin compared to your financial markets. It’s easy to manipulate them. And then, printing money. Before OPEC showed up was the Texas Railroad Commission controlled oil. In 1960, the OPEC had their meeting at the end and nobody paid attention to them. And eventually after the ’73, ’74 war, when they put the embargo, then you had a problem.

And of course, as Trump proved, we could crush it in a minute, just turn us loose here and that’d be under that game again. You make the key point. People said, “Gee, I don’t like what’s going on here in the United States, where do I go? Where do I move?” And you go, “There’s no good place right now.” I mean, for a long time people said Australia. Australia is—

David: Oh, my goodness,

Bill: —the former USSR, New Zealand might be worse. That was the other one. Let’s go to New Zealand. I mean, how many billionaires went down there and bought places in New Zealand? Because Australia can start getting tax, “I’ll go to New Zealand.” That’s even worse. Where do you go? If you can answer that question. I don’t like what’s going on in the United States. I want to relocate myself, my family, my business somewhere. Where do I go? There’s nowhere right now. That’s also the analogy you should use with the dollar.

If you can find a country you really want to go to, and you think it’s safe and all the stuff, then maybe you should be in that currency. That’s the problem now. You want to go to England? No. France? No. And you’re right, Japan, no. Not even close. Yuan? No, that’s it. That’s who you’re really looking at the yuan or the dollar at this point. The problem is people in China don’t want to hold the yuan because they’re afraid of the persecution and they’re afraid of political whatever there.

So, you’re right, there’s nothing there that has the depth in the market. The people don’t understand. That’s why I see, oh, we’re going to get rid of dollar. People don’t even understand how currency markets work. The reason you have cost rates is you can’t go into the market and trade, “I’m going to exchange yen for pounds and what.”

That’s not how it works. You change yen for dollar, dollar for pound. That’s what happens. It’s because the dollar has depth in the market. That’s how you do those trades. If you’ve got big money to move, you don’t trade from one currency to the other. You trade into the dollar and dollar into the target currency.

And people don’t understand that. They don’t understand how the commodity market even works. I mean, the FOREX market. They don’t even understand how it works. That’s why if you look at the FOREX screens in Bloomberg, you look at, that’s where the dealers, they make the dollar versus a currency. And that’s how it was even before. If you wanted to go from deutsche marks into a franc, you could do small marks. But if you wanted to move sizeable, if you’re commercial or industrialist, you bought dollars and then you did the other side of transaction.

That’s why these FOREX departments were so big at the banks. That’s why years ago when the stocks were trading a fraction of the volume and at one time was the [unclear] was trading like five times the amount that the stock market traded and the currency market were trading— I remember the stock market was trading a hundred million a day when it was only a few billion. Currency market was going like five trillion a day through there. A lot of it is because it’s double accounting, because you got to go into dollar and then out of the dollar when you move your currency.

Now it might be a little different now and whatever, but it’s still, again, you don’t have the depth in the markets, so you got to go to the dollar. Because that’s where the market makers are making the markets and everything versus a dollar.

David: Well, we haven’t talked about derivatives. We probably don’t have time today, but there’s so many aspects of frailty within the system. You talked about over-leverage because of hedge funds and private equity, the whole Wall Street complex, just getting the benefit of four decades of credit getting cheaper and cheaper and cheaper.

You talked about the retail investor taking advantage of the zero days to expiration and the options market. There’s all of these fingers of instability and we haven’t even gotten to derivative. Maybe we need to have that conversation another day. But it seems to me your question about where do you go geographically or where do you go from an allocation standpoint, come back to this notion of big money when it gets scared, where does it go?

Bill: Well, you see, that’s what’s been dribbling into gold. It dribbles into real assets. But the problem again is when we go back to, would you buy them in Russia? You going to buy them in China? So, that’s the problem China’s created. They don’t allow you in to buy businesses. And even if they did, you want to be there? You want to buy farmland in China? Again, if you have a dispute, what’s your recourse? Do you want to buy businesses in China?

Even in the ’80s, Japan wasn’t allowing people to buy Japanese businesses. You saw Buffett has come in and he’s been buying things in here. Well, he’s just telling, they’re undervalued. From his perspective, he’s buying trading companies or whatever in here. But that’s the problem here is investible funds in what countries. You want to buy real estate in France, Paris, London, the firm spots? No, even in the US cities. When I started working in New York and Asia, it dawned on me what was going on here.

There was so many of these great properties in Fifth Avenue, Park Avenue, and it was foreigners, and a lot of them were vacant. And then I started seeing, and some articles started showing up, if you were in South America and you had money, you bought these enormous properties, beautiful properties in New York because there’s revolution. You just come over here, you sell your property for however many millions of dollars, buy a nice house and you got your money. That’s how you got the money out of the country.

China, all this farmland they’ve been buying here. But that gets back to the point is, where’s the stability? And if we’re breaking down, you see some of these court decisions and some of these things going in the US, it makes no sense. So, ideologically driven, you just say you’re killing the rule. The rule of law is what made the United States, and the Constitution made it, and the stability made it an attractive place for fixed investment. And that’s what you’re saying now is if you don’t want to be in paper because it’s been a 40-year on and off bubble—and the big money is made, I know I’ve mentioned this before, the big money over time, over decades, is made transitioning from real assets to paper assets. And we’re just coming out of the paper asset boom.

In the ’60s and ’70s, real estate, oil— I remember picking up the Forbes richest in the Fortune, the richest people in the world, oil, gas commodity, the fixed assets, real estate. [Unclear], they used to go to the best, you used to go Hunts. And then what are you in now? Hedge fund managers, private equity guys. You’re right. Where do you go? You’ll know for sure because it’s a closed market.

But I’ll bet you the diamond market is red hot. That’s where the very wealthy go because you can put a lot of money in a very small place. You can buy gold. You got to store it. You can put a lot of diamonds just in the nice, secure safe in a home or a black box or even just walking around your pocket. And I’m sure that’s a very hot market right now. But that’s the same question.

And the other problem everybody has, because of these monster bubbles we’ve run over the last, especially the last 20 some years, everything’s overvalued because of the amount of money that’s out there. What you’re looking at is if it all hits the fan, where do I lose the least?

David: So, you talk about this big money over the decades is made from the transitions, the transitions from one way or the other, from real assets to paper assets or from paper assets to real assets. The bull market in paper assets is now coming to a close, bond market, 40 years stocks, some pretty crazy numbers, certainly if you’re looking at the top leaders.

So, the transition you could argue is back to real assets. Is this your 10-year, 15-year, 20-year transition back to real assets where, I remember oil at one point, if you look at the S&P 500, energy had a 25% makeup of the entire index. And then it got down to 2% just a few years ago. So, it got squeezed almost to nothing. Is that our journey back to 15, 20? I mean, I don’t know what number, but looking at hard assets as the only way to preserve value if your geography’s chosen well, because resource nationalism, it’s a thing.

Bill: Right. Even in the ’80s, you saw it into the ’90s, people went to London. They bought properties in London. They bought the same thing, bought properties in France, in Paris, bought vineyards in Italy. You saw this buy stuff in Tuscany. You saw George Clooney and he made his money in his vodka thing. Buy a place on Lake Como. You see they’re doing this, when you’ve got this enormous amount of liquidity now, everything’s overvalued.

So, where do you go? And for years, it was US and Europe were throwing off the big money. And then Japan got into the game. And what did Japan do? They started buying properties, Rockefeller Center, Pebble Beach, on and on and on. And it blew up on them. Well, China’s been doing the same thing now, buying properties or doing whatever. The problem, again, is China has so much money, such a big population, and they have a closed system.

You can’t buy properties or businesses in China, nor would you want to. Because they’ll take it away from you. The thing, I was watching Shark Tank the other night, they got some person, “Well, you were selling online or whatever, we’re going to do this or we’re thinking of going as so and so. Oh, we bought China [unclear].” No. Do you understand what they do? They’ll look at your product and then they’ll figure out how you make it. And then you’re gone, take your own product away. And what’s your recourse? You’re going to go to China court, get them on a patent infringement. Stop it.

And that’s another problem. Now in Germany and Japan, you could do that, world court, whatever. And then you played nice. China’s telling you right now, “We’re not playing nice because we’re here to bury you.” Khrushchev’s we-will-bury-you routine. China’s more explicit. We’re going to supplant you as the world power. So, you better get used to it. That’s what’s going on here.

When we had the problems with Russia, it was late ’50s, ’60s, and the ’70s, it was only in military. Nobody cared about them. We were worried about Japan and Germany.

David: From an economic standpoint. Yeah.

Bill: Economically. And OPEC, it was your concerns for a few decades. Then we got into the ’80s and ’90s and US boosted up again. And by the ’90s, everything looked really good. Because all the stuff that was done in the ’80s carried the United States for a couple decades, just like what was done in the ’50s carried us into the ’70s, and then we started having the problems. The same thing happened. All the stuff that was great in the ’80s and into the early ’90s, that carried us until everything started breaking down right around financial crisis 2008 and then that period in there.

So, you got to sit here and think, what’s going to develop here that’s going to help us? I’m curious. Part of that process was the new tech industries came out, whether it was Apple, Microsoft, young kids creating businesses in their basement. In the ’90s, Mark Cuban came up with streaming. It was just ridiculous. For the ’80s and ’90s, the technologies were cut loose. Now they’re all mature.

So, now you buy Apple, it’s not even a tech company, it’s a consumer electronic company. And same thing with Google. And what’s the new innovations? Of course you’ll say artificial intelligence and well, we’ll see how that plays. But then you sit down and you go, how do you come out? When you’re making a transition, when you’re moving from a Fortune 500 economy, which you had after World War II and then started petering out in the ’70s.

And also, the financial industry. Financial industry was very sleepy. And in the ’80s, everything went nuts. Mortgage-backed securities, derivatives, hedge funds. Just think of the millions of jobs and the trillions of dollars were generated from tech and the financialization of America.

And now that’s ending. What’s next? Well, you hope it’s artificial intelligence, nanotechnology, probably biotechnology because of the baby boomers, whatever, but nobody knows. So, you’re right. You see these transition phases in history, and we are in one. And that’s what makes it so very difficult right now.

And the other problem is you had a Volcker and a Reagan and a Margaret Thatcher show up at the right time to wring the excesses of the ’60s and ’70s out of the system and get people back on a proper path. I don’t see anybody out there right now that’s going to do this, and we’ll see how the election plays out here, but right now, it’s not looking good here.

David: So, stay safe, hedge your exposures, have some inflation hedges, liquidity, liquidity, liquidity. If you don’t have to play, you sometimes say this in your letter, don’t play if you don’t have to.

Bill: Yeah. And play with funds you can afford to lose. I mean, I understand you want to go and you play, and the way the market’s moved. Yeah. There’s nothing wrong with having a pool of speculative money and a pool to buy stocks or whatever you think you’ll hold for several years no matter how bad it gets. But you better make sure you have a nice reserve there that is insured with inflation proof real asset. So, you want to be liquid.

I remember, and this goes back to when it was really hitting a fan in the ’70s and early ’80s, and then as Merrill Lynch did some research and they said, when you got this period, this real uncertainty that the best was long Treasurys, long gold, and it makes sense for me thinking that’s basically what I am, but I’m short term in here.

That’s kind of what you’re saying here is if it all hits the fan, you want to be secure as possible with Treasurys. But if they’re playing funny money or there’s political problems here, you want to have your gold. And that makes sense to me. Right now, a lot of reasons people are buying Apple is they think it’s like a bond substitute. They have so much cash and whatever. And I understand that, but not at $3 trillion, not when it’s 10% of the US economy. It’s not a bond, it’s not a pseudo bond.

David: It’s a speculation.

Bill: It’s a spec. It’s a bubble.

David: Well, let’s not wait so long before we have our next conversation.

Bill: Sure.

David: Thanks for joining us.

Bill: Sure. Have a great 4th of July.

David: Thank you. 

Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany and our guest today, Bill King. You can find us at mcalvany.com. That’s M-C-A-L-V-A-N-Y dot com. And you can call us anytime 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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