McAlvany Recap • Sep 11 2023
Just Wait
MPM Posted on September 11, 2023

Life is teeming with things and actions. Not all of them are good for us.

In that vein, the communications summarized below talk often of things with enduring value—scarce and useful assets, crucial human relationships, virtuous character traits, and the like.

Precious metals are obviously an honored part of this list. This explains why a company that sells gold talks often of other items on the above-itemized list of good things.

One very important sub-item on that list is patience. It’s an element of both successful living and successful investing. One of the most successful investors of all time, Warren Buffet, has said, “The stock market is designed to transfer money from the active to the patient.”

Careful observers of people and their habits might say something similar, perhaps: “Life is designed to transfer good things from the active to the patient.” The contrast in both cases is not between useful activity and sloth (we’ve discussed Buffet’s extensive research and reading habits before), but between staying with a good plan and constantly trying new things before allowing existing efforts to pan out.

There’s a pertinent saying that has been used in several contexts—including combat, flying, and playing the outfield in baseball—that describes those activities as “long periods of boredom punctuated by moments of sheer terror.” We could probably add to that list investors who get bored into selling their gold before it rockets in dollar price.

It’s a common thing. Lots of people buy gold because they know it’s valuable, but also because they know that it periodically appreciates wildly against fiat currencies. But that can take time, which means it can take patience. And most people who want patience want it now. That’s not really how it works, so they sell their gold—and then it heads for the moon. Ouch. Chalk up one more to the capriciousness of human nature.

Precious metals brokers are extremely familiar with the phenomenon. Gold might trade against the dollar for many years in a way that impresses only an accountant. That’s not what people want. They want excitement. They want lots of fiat money. They want to impress everyone else. So they leave terra firma and board the best and trendiest oceangoing vessel—Titanic (or Apple, or Alphabet). And off it steams at max speed for the new world. It’s unsinkable. What could go wrong?

The irony of course is that gold ownership does not prevent investment in other things. It just puts a floor under it. Properly used, an investment in gold insures that your attempts to obtain appreciation and yield will not bankrupt you if the market turns against you.

A further irony is that those who are patient enough to realize the benefits of gold ownership will likely do well in other kinds of investing. Along with Buffet, many of the best investors in stocks and other investments describe patience as a crucial element of success.

One of those investors was Jesse Livermore, whom many people consider to be one of the best investors of all time. He said, “Throughout all my years of investing I’ve found that the big money was never made in the buying or the selling. The big money was made in the waiting.” Of course, when he died, he was essentially bankrupt. He had inadequate insurance for his portfolio, and he often used large amounts of leverage in his investing. Had he grown impatient?

Key Takeaways:

  • China telegraphs its punches
  • Parse or farce?
  • Which Fed is right?
  • Gold seems to be telling us something big; are we listening?

The McAlvany Weekly Commentary: David and Kevin discuss geopolitics this week, including the importance of maritime shipping options for the health and power projection opportunities of a nation. The latter offers great temptations to an aspiring empire such as China, with its 9,000-mile coastline and many natural harbors in its temperate climate zone. That temptation seems to be proving too much for the country, whose 10-dash line delineating the territories it seeks to control extends into land belonging to some of its fellow BRICS members. It prompts a question: how strong can an economic alliance be whose strongest member lays claim to territory belonging to other members? David also asks another question: “You’ve got human capital, you’ve got financial capital, which is doing everything it can to get out of China. Do you want them to be the next global hegemon?” The hosts also discuss a tale of two stories—one told by stocks and one by bonds. One is far more astute and reliable than the other, which fact holds important information for investors.

Credit Bubble Bulletin: Doug notes first that the currencies of China, Chile, Poland, Mexico, and the Czech Republic dropped against the dollar. “Trouble, characteristically, manifests first at the ‘periphery’,” he points out. Later he relates comments from New York Fed President John Williams that, “US monetary policy is ‘in a good place,’ but officials will need to parse through data to decide on how to proceed on interest rates.” Doug’s response is classic: “I often ponder how closely Fed officials ‘parse through’ their Z.1 report. Friday’s release of Q2 Credit and flow data made for interesting parsing. Seasonally adjusted and annualized Credit growth of about $4.5 TN. One-year Treasury debt expansion of almost $1.7 TN. Non-Financial Debt-to-GDP exceeding previous cycle peak levels. The ratio of Total Debt Securities-to-GDP is significantly higher than prior peaks. Household holdings of Financial Assets above previous peak levels. Household Net Worth inflating $5.5 TN in three months. Household Equities holdings as a percentage of GDP higher than previous cycle peaks. Analyzing the data, I don’t see our system in a very ‘good place’.”

Hard Asset Insights: After going through a litany of serious recession indicators, Morgan notes that there are also signs of life in the economy. Even tools used by various regional Federal Reserve banks give different conclusions. It’s as if, he observes, “the St. Louis Fed and the Atlanta Fed exist on two completely different planets.” This discrepancy underscores the surreality of the current moment. There are major indicators of both imminent downturn and building positive momentum in the economy. Despite that fact, there are not signs of robust health. If the economy does well for a while longer, it will do so on the strength of “deficit spending (expected to be north of $2 trillion for FY 2023) on a level only seen during wartime or outright crisis.” “Will the stock market boom as it rides on the back of a deficit spending rocket, or bust as the lagged effect of higher interest rates and tightening bank lending standards slowly but surely snuff out the private sector?”

Golden Rule Radio: Miles and Rob take a step back from the gold chart so they can see gold’s history a few years farther back. While gold has neared or reached 2,100 three times in recent years, one might ask, “which of these is not like the other?” The most recent incidence tells a very different story, and one that is pregnant with implications for gold’s action in the near future. From there, they take a look at the white metals and Dr. Copper, which are giving indications they could rally from here. Miles makes the long-term observation that copper is in what he calls a compression zone, which historically has preceded breakout action to the upside. His description of this phenomenon is technical, but in layman’s terms that clearly convey the potential in this building formation. Returning to gold for a time, Miles makes the observation that gold sometimes does better in deflationary times than in inflationary times because of its purchasing power and the ability to convert that purchasing power into a currency that is harder to come by because of deflation.

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