Ian McAvity: Interview in New Orleans

Weekly Commentary • Nov 02 2011
Ian McAvity: Interview in New Orleans
David McAlvany Posted on November 2, 2011

A Look At This Week’s Show:

  • The biggest mistake a gold buyer can make is to watch the price every day. Buy for the long term preservation of buying power and don’t watch it like a day trader would.
  • Looking forward beyond the current currency crises, the ultimate currency solution will likely be a currency backed by a “Basket of Commodities” discipline.
  • Harry Brown’s wisdom from days gone by still applies. Don’t ever bet the whole farm in any one direction. Build a correctly allocated portfolio based on a long term outlook and reallocate as necessary based on the big picture.

About the guest: Ian McAvity, CMT, has been writing his DeliberationsTM on World Markets newsletter for a global readership since 1972. He draws on 48 years of experience in the world of finance–as a banker and broker since 1961 and as an independent advisor and entrepreneur since 1975. Principally a technical analyst, Mr. McAvity has written on global inter-market relationships since the 1970s, including original research on relationships between gold mining shares and gold bullion. In the 1980s and 1990s he served as a director of many junior mining and exploration companies.
He has been profiled by most of the major North American financial media including the Wall Street Journal, Barron’s, and the Financial Post. Mr. McAvity has been a special guest on Louis Rukeyser’s Wall $treet Week, as well as on CTV’s Canada AM morning show and CBC’s Business World.

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: David, you are just getting back from the New Orleans Investment Conference. This is the conference, of all those you attend each year, where you probably feel most at home. It goes back decades with your family.

David: It is interesting, Kevin, we do travel a lot, and there is a variety of different conferences that we will speak at, and present at, and this one is a little bit like old home week. The conference has been around since 1974. Jim Blanchard began putting it together and then it really caught stride in the mid-1980s. Gold had been popularized by the major move higher in the precious metals, through the late 1970s and early 1980s, and it was really a gathering place.

Kevin: The old patriarchs, what we would call the true dyed-in-the-wool gold bugs, from back in the 1970s. Jim Blanchard was one of them. Your dad, Don McAlvany. Ian McAvity is another one. These are guys who were there for the ideal, not necessarily for the bull market.

David: Kevin, my dad called Jim Blanchard on the phone one day. This was, again, the early 1970s, and he said, “Jim, we have to do something about this.” Keep in mind, the context is that it was illegal to own gold in the United States.

Kevin: Sure, gold had been confiscated.

David: It had been illegal since 1933. 1973/1974 rolled around, and they were trying to break the gridlock, and so they arranged to have Howard Segermark write up legislation and begin the lobbying proposal and put it in front of Jesse Helms.

Kevin: Yes, it was later given to Jesse Helms who pushed it through, didn’t he?

David: He pushed it through, and January 1, 1975, gold was made legal again here in the United States.

Kevin: Bullion gold and bullion coin gold. Collectibles had been legal, but you couldn’t own actual bars of gold, or bullion coins.

David: Exactly. So really, what you are looking at with a conference like this, Kevin, is that it is still the watering hole of the folks who were there when it was philosophically bent, and they were looking at the issues of government, of power, of politics, of fiscal responsibility, at a very deep philosophical level, and trying to come up with a solution to that.

Kevin: David, just a couple of days ago, you were actually in a room there at the conference and got some time with Ian McAvity, and it is always a great conversation, because this is one of those men who really don’t care whether gold goes up or down – he knows what it does as far as preservation and equalizing a monetary system, and that is why he does what he does every day.

David: Kevin, just two words, because before we start the interview, everyone should know, one of the best newsletters that they could subscribe to, that includes both technical analysis, and fundamental analysis, is Ian McAvity’s Deliberations on World Markets.

Kevin: Decades and decades of experience.

David: Yes, it is a fantastic crystallization. You get to see real-time, and benefit from, the long experience – decades and decades – in the marketplace. Ian McAvity is one of the founders of the Central Fund of Canada, what started as a few million, and then became a few hundred million.

Kevin: What is it now, $7 billion?

David: Exactly. Their CEF and GTU, which are both gold and silver funds up in Canada. He keeps his finger on the pulse of these issues, with a larger responsibility in mind, still advising in that capacity with CEF, with the Central Fund. He is very thoughtful, very forward-looking, and we would like to know what he sees and thinks when he looks at world events today.

Kevin: Let’s go to that recording right now.

David: There are a lot of things to talk about.

Ian McAvity: Yes.

David: And trying to wrap our minds around where we are going from here. In the U.S. there has been the political divide between what was the Hamiltonian model versus the Jeffersonian model, centralization on the one hand, or something that prized the individual, and it appears to us that it is certainly moving more toward the Hamiltonian model. In Europe you see the same thing. You would think that as Europe begins to unwind to some degree, the people would say, “Well, maybe we have to look at this differently.” And in fact, if you are looking at Germany, as a test case, the SCP and the Green Party are gaining traction. The slow-down in the economy in Germany, they are blaming on Merkel, but they are not seeing that anything is wrong with the system, as it is progressing toward a new and larger leviathan. Where do you see this going? As you reflect, are you happy? Are you sad? A few more scotches and maybe you can go back and forth between one or the other.

Ian: The thing that strikes me is that every once in a while, whenever the question of raising taxes comes up in the United states, they are very quick to boast that 50% of the population is no longer on the tax rolls. My reaction is, if more than half of the people are living out of other peoples’ pockets, have they now created a dependency on the state that can never be undone? That is my largest fear. Basically, people are now servants of the state, which is the exact opposite of the concept that I was brought up to believe in, and I’ve just watched them chip away at it over time.

I am not a big economic theorist in that sense, but the Austrian economics idea is that somehow the little guy at the bottom, walking on the sidewalk is the most important part of the chain. In a sense, it is very much like the Swiss political model, where the mayor is more important than the president of the country. That is my preference, but with the mature economies, I think the political process has become so corrupted, I fear the accident that could lead to change, and if the change does occur, which way does it go? It is either going to go way off to the left, or way off to the right, however you define them.

David: Is it too simplistic to say that is one of the drivers in the metals markets today, where people are saying, “We don’t know what’s happening. We don’t know what’s happening with taxes, we don’t know what’s happening in politics?” We have half of the G20 being replaced in 2012, and so what does the complexion of world politics look like next year? Is it more combative? Is everyone trying in a more concerted way to get along?

Ian: I refer to the G20 as the G13 versus the G7. Being a Canadian, in essence, the Canadians are there, largely, just as a balancing mechanism. We have no real business being in the G7 other than the fact that if Europe was going to expand its membership to please the Spanish and the Italians, then the Americans had to have a neighbor in as well. But the new wealth is essentially in the so-called BRICs – Brazil, Russia, India and China. I don’t really include Russia too much, because Russia has never had any history of mercantilism, so I just don’t trust any part of the Russian system.

But China, Brazil, and India have undergone an industrial revolution in a generation. In 10 or 15 years they have now accumulated something like $6 trillion worth of foreign reserves, and they are looking at the old boys’ club depreciating the value of that paper about as quickly as they can. I am waiting for the showdown, where the new boys explain to the old boys that their time has come.

From an investor point of view, while the elephants are dancing, the smart mouse gets off the dance floor and hides. People ask me, “How high is gold going to go?” My premise, and what I say to them is, that it has nothing to do with how high it’s going to go, but it’s the only safe place to hide, because it has no counter-party risk. It can’t be printed. I am not looking at gold because I’m trying to make money, I’m just trying to avoid getting trampled, when the elephants stumble, and have their rumble.

I look at gold in a totally defensive perspective at this point. As I watch the bailout mechanisms come and go, I am getting ever more distrustful. I have ever less faith in the people that are trying to engineer all of these bailouts of the bailouts. In the last few weeks we have had the Europeans coming up with a plan to have a plan to have a plan, and it is really troublesome. There is no simple solution, but the markets would like to believe that there is one.

As a result, you get the day-trading mentality that the Europeans say they have a plan, the market goes up 300-500 points, and then somebody looks at the plan and realizes it has more holes than Swiss cheese, and then you go down 300-500 points. How do you translate any of that into what I would call a thinking man’s investment decision? By the time a thinking man actually contemplates it, we have had two bull markets and three bear markets, and then they close for the day. (laughter)

David: It is interesting, when we look at the substructure for the U.S. economy, and really, one of the underpinnings for global trade, the dollar in the post Bretton Woods era, post 1945, has been critical. It has been a pillar. You mention the BRIC countries, this trend of the rise of the rest. Developed countries are becoming, not totally passé, they still play a huge role in the global economy, but the countries hitting their stride are the developing countries. That argues for a change in the monetary system. It doesn’t necessarily mean that the dollar goes away.

If you put on your imagination cap, and did a thought experiment, and imagined the year 2016 has rolled around, what significantly might have changed in the world monetary regime?

Ian: I think there is a crying need to get back to something like the Bretton Woods system. The key to the Bretton Woods system wasn’t that it was a gold standard, per se, but in essence, the U.S. had all of the liquidity coming out of World War II, and the anchor was to define the U.S. dollar in terms of $35, so that there was a common denominator against which to measure all currencies.

That worked really quite well up into the 1960s until the American political process began to creep more and more into deficit mode, and also Europe had, by that time, completed a lot of their post war recovery, so Europe was in much better shape. And it started to build imbalances, and of course, ultimately, to me, the two single points that changed the equation were the Johnson speech on April 1, 1968, that we can have guns and butter, which formally announced to the world, “We’re going to depreciate the dollar,” and then in 1971, when Nixon finally slammed the gold window because they could no longer sustain the illusion of any discipline on the dollar at all.

Since 1971, of course, the spin is that we are now going to go to a so-called floating exchange rate, and then we basically have gotten into a period that now translates to 40 years of everybody trying to devalue against each other. And we are coming to a point that may be not unlike that of the Bretton Woods era, where there is sufficient liquidity in the hands of people that don’t have a say, of the G13, of the G20, where they $6 trillion of it.

They are watching Europe flounder around trying to bail out Greece, Spain, Italy, and whoever, and American commentators are taking great delight in the agonies of Europe, which means they don’t have to look at the U.S. data, which actually makes Greece look fiscally disciplined. If you ever look at all of the debt problems of this country, Greece looks perfect – no problem at all with Greece. But the external holders of those FOREX reserves, they need something that will be a common denominator.

We will never go back to a formal gold standard on the global scale, because it is physically too cumbersome for the velocity of modern trade. I can envision some sort of a defined basket. It would include gold as a monetary component, oil, copper, a lot of basic foodstuffs, and essentially have an indexing system, but the only way that can work is if all of the major participants can be required to adhere to a discipline. And of course, everybody will adhere to it in good times, and then they will all sneak out the back door and cheat.

David: Does the commodity component, whether it is oil, wheat, copper, or gold – does that imply some sort of price fixing? That’s what added stability to the 1944 agreement.

Ian: Amazingly, you need a common denominator, in which a piece of paper can be related to an assortment of tangible goods that are in high demand – I would say a combination of high demand and internationally diverse supply. I was talking about this idea with one guy and he was saying, “We can get platinum in there, too,” and I said, “No, you won’t get platinum in there, because there are too few producers. It’s much too small a market.” It has to be something like copper, like gold, like silver, to a lesser degree, because it is produced all over the place and it is consumed all over the place. You don’t want a commodity that is produced in South Africa and Russia.

David: Well, then, the currency components within that basket – you are really talking about something that is more or less trade-weighted.

Ian: Yeah.

David: The dollar is still, probably, the dominant currency in the basket.

Ian: The dollar would still be important, and to me, it is this elevation that they should, and wish they had, built some structure like that into the euro when they first proposed it. I gave a speech in Ireland in 1992, in Dublin Castle, when they had just announced the contest to name the new currency for Europe, and I said, “Well, hearing of this contest, there is only one name that really works – the Frankenstein – because it’s going to be run by the French and the Germans no matter what committee structure you put in place.”

And I said, “Unfortunately, the way it is being proposed is as a currency that is designed to blow up in the first crisis, because, in a sense, you are creating a currency that doesn’t have central bank discipline. It has the European Central Bank, but each member has its own central bank, and you have 17 or 27 political bodies that you have to deal with. And in some respects, that is encouraging, in the sense that I don’t really like central banks that much, but unfortunately, the ECB doesn’t have enough power, geopolitically, so that at the end of the day, in a real crisis, can you picture a Brit, a Frenchman, a German, an Italian, and a Spaniard, agreeing on the time of day of the meeting that will be held to resolve the crisis? That will be the first three days of negotiations. (laughter) I think that the euro will end up surviving, in part, because everybody needs it, not just Europe, but everybody needs, essentially, a quasi-legitimate counter-party to the U.S. dollar.

David: That’s really the balance.

Ian: That’s what it is, and it is supported by a large enough economy, large enough GDP, international trade, and the rest of it. It has the structure in place to be a valid currency. Unfortunately, it is a valid currency that doesn’t quite have the disciplines we would like to see. But on the other side of the coin, if you look at what Misters Bernanke and Geithner are doing to the U.S. dollar, where allegedly, it does have all the disciplines, I think I respect the Greeks more. (laughter).

In a sense, the world needs competing currencies of that kind of stature. When Japan went through its great growth phase, they took great steps to not have the yen become an international currency, and the yen did become international, but it was all what we used to call euro-yen, i.e., yen transactions denominated outside of Japan. So a Swiss bank and a British bank could create a yen obligation. One is long, one is short, and now you have a piece of yen paper. That is what used to be called a euro transaction before they co-opted the name for the currency. And China will do the same. There is no way that China wants their currency floating outside of their control. It may be great for the American ego for the dollar to be called the reserve currency of the world, but the minute you are in that status, you are subjected to an awful lot of external pressures over which you have no control.

David: Isn’t it sort of implicit in the Bretton Woods system that we will run deficits?

Ian: It wasn’t at the time. The whole point of the $35 peg is that if American numbers get too far out of control, we will take all of our dollars and we will arrive at the New York Fed and say, “Here is all your paper, we will take all of the equivalent gold at $35 an ounce,” and what led to 1971 was a combination of the French and the Swiss arriving with a wheelbarrow with too much paper. (laughter)

David: Right. Well, $35 was chosen to cover our external liabilities back in 1933, and our stock of gold today, if we covered our external liabilities, would have to be north of $17,000 an ounce. I don’t think that is a reasonable equation. I don’t think they will be pursuing that. I don’t think they are interested in that.

Ian: They would never go a straight equivalency, because nowadays all of the (shall we call them?) political elites are sufficiently arrogant, and undoubtedly, they can hire three Chinese Ph.D.’s in math to write a formula that nobody can understand, but it will be the perfect formula, until it blows up like every other one of them. But, my larger fear is that if gold does end up playing a larger role, as one of the founders of Central Fund of Canada, my point always has been, the bullion is held in Canadian banks, in a Canadian entity, outside of the United States, just in case Franklin Roosevelt gets re-elected.

I often tell audiences, the Peoples’ Republic of Canada has made a lot of stupid political decisions over the years, but we didn’t call in the gold in the 1930s. These days I get all kinds of people asking if the government is going to call in the gold. They now have a tax mechanism that makes that redundant. They don’t need to call in the gold, because they put in so many controls over financial transactions that your social security number is tattooed on everything, and they could declare a 100% excess profits tax over a deemed amount of gold and that’s the equivalent of calling your gold.

David: This has exactly been my concern.

Ian: Yes, that’s been my fear for several years.

David: Change the tax regime, and that’s it, whether it is jumping it from 28%, which it is now, to 50%. We may see gold at $3000, $4000, $5000, or something else, but it doesn’t mean you get to keep the profits.

Ian: Exactly, and that has always been one of the arguments for international diversification, and not just for Americans, but for citizens of any country. When a country gets in a crisis and passes laws, they tend to harness their own, not necessarily the transient visitor. I give a speech every year in Zurich, and I always thank the Swiss for maintaining the most wonderful country for a Canadian to visit. Unfortunately, they don’t look with quite the same friendly eye on U.S. passports anymore, and they beat up their own citizens pretty severely, but for non-American foreigners in Switzerland, it is the ultimate financial haven to deal with, and to visit, and to live in. I have one old friend, and I don’t want to give the title of the book away, but the only way I can describe it is the dog bone philosophy. If you have sufficient capital, be like a dog, and bury a bone in every back yard, because you are never entirely sure which back yard you are going to find yourself in. (laughter)

David: Well, Eisenhower changed the rules in 1961, and made it illegal for U.S. citizens to own gold overseas.

Ian: That was Kennedy.

David: Was it Kennedy?

Ian: It was part of the interest equalization tax, but it wasn’t just gold, it was all foreign investment that he brought in. It was 1962, I think.

David: Okay, I’m off then.

Ian: Americans couldn’t own gold anywhere after 1935, and they tightened the rules up a little bit in that period. It was 1963 when the interest equalization tax came in, because I was a broker in Montreal at that point. That was when the airline stocks were all hot, and KLM was one of the first international airlines to go to jets so it became the great growth stock. KLM and Pan Am were the two big favorites.

What we discovered in Canada is that under the interest equalization tax, KLM traded in New York under two prices. If it was KLM, it meant that it was the international stock, international seller, so that if an American wanted to buy it, he had to pay the price of the stock, plus an interest equalization tax, which I think at one point it was 20-25%. But then the New York Stock Exchange also traded KLM.Z, which meant that it was already owned by an American, and there was a 20-25% price differential to reflect the tax had already been paid.

So, with typical creativity, a number of Canadians discovered that a great many Americans had married European ladies at the end of the World War II and moved back home, and many of those European ladies still had family and friends on the other side, who could buy KLM in Amsterdam and transfer it down to family who could then sell it as American-owned stock, and I think something on the order of 30% of KLM’s market cap came across the ocean that way. (laughter)

David: Well, it is interesting, because there is a ring of familiarity with the current FATCA legislation supposed to be in motion in 2013, where foreign institutions withhold, on any U.S. product, and that can even be Treasuries, which is almost insane when you think about the fact that the Treasury Department is limiting their own audience for U.S. product, and I realize they have different intentions, but sometimes there are unintended consequences.

Ian: It’s just another form of protectionism. Everybody wants control over everything. My biggest complaint, speaking as an outspoken Canadian, as I always do, knocking Washington, this concept of America having a presumed right to the extraterritorial application of American law. Since when and where does Washington get the idea that they can dictate to Switzerland what is going on in a transaction that occurs between Switzerland and Belgium, if it happens to include either an American citizen or and American ex-pat who doesn’t even live here? Yet somehow they keep passing all of these codes as if the entire world abandoned its powers to certain power-crazed idiots in Washington. This extraterritorial application of American law drives me nuts!

And more recently, now you have them building drone bases, so we now have murder squads so that you don’t have to risk your troops. Picture the Chinese, and imagine China has some guy that they decide is a terrorist, he blows up a train in a railway station, he flees, disappears, and the Chinese have a worldwide search out for him. They finally find that he is hiding in Seattle. Can you picture the outrage if out of the blue, all of a sudden, some little bug in the sky becomes a drone that comes down and blows up a Chinese guy walking out of a Starbucks shop in Seattle?

And China explains, “Oh, don’t worry, that was just a drone attack getting rid of one of our number one terrorists.” If that happened on this soil, CNN would burn out every TV set in the country! (laughter) And yet, somehow, the State Department has the right, in the name of fighting terrorism, or whatever, to go to any country in the world and shoot anybody they want to? It just drives me crazy. It bugs me that anybody claims to have that power.

David: Well, on a similarly philosophical note, looking at your experience, you have worked in the markets for a long, long time, you have done analysis for a long, long time, thought along fundamental lines and looked at a lot of charts in your day. Is there anything you are particularly enthusiastic about, at this point? Or when you look around do you say, “You know, I wish this just wasn’t the case?” I’d like the sage opinion of where we are, where we are going, and is there something that we should be doing? Sometimes I get the question from our clients, and it’s one thing to be in the armchair as a critic, but “What can we do, creatively, to make a difference?” As I guess Edmund Burke would say, “All that is necessary for evil to triumph is that good men do nothing.” From one view, it is sort of a reflective question, on the other it is more about praxis. Is there something we should do?

Ian: Let me put it in stock market cycle terms. We, amazingly, had a great second-year bull market from 1982 to 2000. It maybe topped out with the long-term capital management bailouts in 1999. That’s really when we got into this modern bailout mechanism. But it has essentially created a period that you can call a secular other, or a secular bear, but it is not unlike the period after the crash of 1929 through 1949, or not unlike 1965 to 1982, or the first 20 years of the last century.

To me, we are in that secular other phase, and in that secular other phase, the individual cycles will tend to be smaller on the upside, because those are then contra-trend moves, so the bull markets last shorter and go less far, with greater urgency, and then the bear markets run longer and deeper. And given the excess liquidity in the system, the safest bet of all is you can bet on greater volatility, because you have more and more liquidity chasing around, and the New York Stock Exchange, with their high-velocity feed, basically, they are now legalizing front-running for computers. When two computers operating in nanoseconds get to see your trade before it gets to the market, that hasn’t got anything to do with price discovery in the marketplace.

So with this market, we are in an ugly period. I think we have, in the last few months, rolled over. I think we are now starting the second half of the bear market in 2007-2009, and if the S&P 500 is below 1258 on December 31st of this year, that will be the first negative pre-election year since 1939, and I think 2012 is going to be a down year for the election year. What does Obama have to run on in the race other than the fact that the Republican leadership race looks as though it is being organized by the Democratic National Committee, trying to determine who would Obama most like to run against? The political process is almost as corrupted as Washington is.

But I think the stock market generally is going down and I’m not known as a stock picker, per se, but one of the best I’ve probably made this year is at the New York Gold Show in a closing panel. One of the very last questions, which was sort of a curve ball that was thrown at us, was, “Tell me, what’s the best single buy that they can make for the next 12 months?” Fortunately, I had just learned that they had starting trading some ETFs that were measuring volatility. I said, “Well, the only sure-fire double I can see is volatility is going to go up.”

Learn to hedge. That doesn’t mean you gamble on them, but if you have core assets that you want to hold on to, how can you protect those core assets? Gold, in that sense, is the purest protection, but for many people, it is still going to be volatile in price. It goes from $1600 to $1900, then comes back to $1600. Some people think, “Oh, I can’t stand a $300 loss.” My reaction is, “Look back three months before and you didn’t have the $300 gain to lose.” (laughter) The biggest mistake some new gold investors make is even watching the price from day to day. They will buy it from the philosophic point of view and then start thinking like a day trader. To me, that is the biggest mistake they can make in relation to gold.

But in terms of core assets, I was joking at one stage, on one panel, that we are rapidly coming to a point where I would almost prefer to own corporate debt, issued by multinational companies that have really truly global franchises and not too much debt structure, something like a Coca-Cola. You can buy Coca-Cola anywhere in the world at this point, and half their assets and most of their business is outside the country. I would rather buy a Coca-Cola bond than a U.S. government bond, because whatever happens within this country, Coca-Cola is going to keep on going. Proctor & Gamble, Nestlé from Switzerland, the multinational companies are almost outside the state now. So, as a bond investor, what can I own in the way of bonds? I would prefer to own a true multinational that has some discipline over its balance sheet, because there isn’t a sovereign issuer that has any discipline in their balance sheet.

David: We do live in interesting times, and we appreciate you sharing your thoughts with us. It is a challenge looking ahead and trying to determine the best course. You have hit on a couple of critical elements. A conservative approach – very important. Not viewing gold as a speculative vehicle, but as an insurance policy, per se, is a better way to go.

Ian: Let me add one thing to that, because your comment brings to mind the late Harry Brown, who was one of the great libertarian thinkers in this country. I remember some of the early talks where Harry was building toward it. When you look at a portfolio, don’t look at it in the context of how much can you make on each component. Look at each component, and if you lose here, does something else gain?

David: Right.

Ian: Balance it out, and construct it from the point of view of defense, rather than offense, but invariably, I talk to people and they want to know how much they can make, and my reaction is, “Well, okay, what have you got covering the backside of that trade? And in the secular phase that we are in, I think that you should be thinking more defensively, but it doesn’t mean you stop investing.

David: But it does mean that when you look at your portfolio statement, you may have losses that you are happy about, because they were the offset to other trades that you are equally happy about.

Ian: Exactly. Probably my third largest holding this year has been this VIX ETF that I discovered in Canada, and the construction of it, and I know I’m getting eaten alive by the rollovers, but on the other side of the coin, there have been several tops and bottoms, where I have looked at it and said, “Oh, it’s probably going to go down now,” and my reaction is similar to my decision to live in downtown Toronto. I’ve been in the same place for years. I’ve been through real estate cycles, and at the top of a couple of cycles, I’ve said, “Naw, it’s a home, not an investment, so I won’t sell it.” And in a sense, I own the volatility coverage, not because I’m trying to make money. I know I’m about to lose some in the short term, but I don’t mind. If I am losing, it’s because other things are going up. Start thinking of a balanced approach. I don’t think enough people think that way, in terms of buying a portfolio. They want every single holding to perform.

David: I think what you have just expressed is a maturity born through experience, and many years of testing and understanding that markets don’t always accommodate.

Ian: The way I describe it is that they don’t always listen to what I tell them to do. (laughter)

David: (laughter) Well, again, thanks for joining us.

Kevin: David, what a great interview. I can see why you guys have been, not just professional friends, but family friends, for 40 years, as far as the McAlvany and the McAvity families go.

David: Kevin, he just brings a certain clarity and matter-of-factness to certain issues, looking at, for instance, Harry Brown’s defensive construction of a portfolio.

Kevin: I’m so glad he brought that up. That’s been around for years, but people forget the balanced part of the portfolio.

David: And the balance is absolutely critical. Kevin, obviously, that is a very mature perspective, with the defensive construction of a portfolio being paramount. It’s not just about profitability and gains. That is a temptation. It’s a temptation for investors who see a little bit of green on the screen, and say, “Well, I’d like a little bit more. And if there’s red, then get rid of that, and give me a little bit more green,” not realizing that there can be these offsetting positions that complement each other very well, lower total volatility, and ultimately give a higher rate of return, but in the immediate, show this balancing act between red and green.

Kevin: David, it reminds me of flying planes. I’ve worked with Civil Air Patrol, and I don’t want to be morbid here, but we call Bonanzas and Mooneys, which are pretty high-powered small planes, doctor killers, because these doctors see success in everything that they do, and then they get into flying, and they think, “I can do the same thing with an airplane.” They are low-time flyers, oftentimes. This is not what they do all the time.

David: You get up there, you fly fast, you fly hard, and you also fly right into the side of a mountain.

Kevin: And you want to get there. The thing that kills more pilots than anything is needing to get there when you really shouldn’t, when you need to be defensive, when you need to be sitting back on the runway, and actually not going anywhere until the clouds clear. And the triangle, in a way, does that. The triangle does not force you to get there, because you don’t just have one side covered. You have three different things working. Maybe you’ll have a loss on one side, but you probably have a gain on one of the other two sides.

David: Kevin, a couple of other things that stood out to me from our conversation with Ian was this period of a secular other. It is difficult to see the period in time that we are in as a bear market, largely because just like 1966 to 1982, it went sideways, and the real lunch-eating occurred on the basis of inflation. So the bear was eating your lunch, because that 2, 3, 4, 5, 6, 7%, whatever the current rate of inflation was then, and is now, was catching up with you, with a 0% rate of return.

Kevin: Don’t you think it’s more deceptive that way, David? He says the bulls are smaller, and shorter, so you get more bulls, actually, little bull market bursts, but the bears, the downside, run longer and deeper. If you talk to an investor who has invested the old-fashioned way, with one of the major brokerages over the last ten years, who think like they did in the 1990s, and in the 1980s, these people have just a confused look on their faces, because every time they think they are just about to make money, they lose a little bit more, but it takes so long, that they have let ten years pass, and they think, “Oh my gosh, it really is, not only the lost decade, but I’ve lost – all this decade.”

David: The last thing that stood out to me today, Kevin, was the dog bone philosophy, where you just pragmatically say that you don’t know what yard you are going to end up in, and better to have a bone in each yard.

Kevin: Bury a bone in Switzerland, bury a bone in Canada…

David: That makes sense to me, Kevin. That makes sense from the standpoint, not as an American, but as anyone. Wherever you live, looking at your jurisdiction differently, with a greater historical perspective, and insight into the nature of desperate governments. Harnessing the power of your own – that’s an interesting concept when you realize that is the easiest go-to before you start spending ammunition to harness the power of another.

Kevin: David, this is a great time for you to get together with people who have been in the industry for a long time. Next week, maybe we can even listen to the interview with the Aden sisters.

David: That’s right. We got a chance to visit with both of them while we were in New Orleans, and that was also a very fruitful conversation.

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