EPISODES / WEEKLY COMMENTARY

Robert Prechter: How To Stay Safe In The Debt Implosion

EPISODES / WEEKLY COMMENTARY
Weekly Commentary • Oct 04 2023
Robert Prechter: How To Stay Safe In The Debt Implosion
David McAlvany Posted on October 4, 2023
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“I think the philosophy that one approaches financial markets is crucial and many people don’t have one. They tend to default to the ones that economists use, which is mechanics. The stock market doesn’t work that way, and none of the financial markets work that way. In my opinion, they are essentially products of crowd psychology and economists don’t take that into account. Human beings have thoughts, they have emotions, they have opinions, and when those are aggregated, people tend to herd. When herding occurs, very little rational thought actually occurs.” –Robert Prechter

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

Well, David, I’ve never heard you interview Robert Prechter on this podcast, because we’ve not done that, but I have warm feelings for Robert Prechter. When I was 24 years old and I first started working here, it was 1987, the stock market was going gangbusters through the summer. A lot of people were saying, “Well, boy, this is just going to go through the roof.”

Then of course, we had that amazingly quick crash in October, and I think about a third of the stock market just went away in a couple of days that Friday and that Monday. But I remember not long after that, seeing in the Wall Street Journal this picture of a very eclectic-looking guy named Robert Prechter, right on the front page of the Wall Street Journal. It talked about how this guy saw it coming and that people need to pay attention to him.

David McAlvany: What’s remarkable about the method that he uses, Elliott Wave, is that whether it’s a bear market or a bull market, there is really prescient insight. If you’re a long-term reader of the Wall Street Journal, you’ve seen him there and you’ve seen him there at different points in the cycle. There is a time to be very bullish and there is a time to be very bearish. A part of it is, again, the conclusions that are driven off of a read on social mood.

I’ve known Robert impersonally for a long time because of family exposure and the discussions we’d have around the dinner table, and personally for probably the last 10 or so years. It’s been a real privilege to know him, to have shared some time and to have gained some insight and encouragement directly from him when I’ve needed counsel on a number of specific things.

Again, growing up in a home where Robert Prechter’s work was often mentioned, there was a recognition that his work was insightful, it was helpful. Not always perfect, but to ignore it was to do so at your peril. When finance became more of a focus for me than philosophy, Prechter and his whole team became a part of my routine.

A number of years ago, and for a number of years, we would gather, share a meal in New Orleans with some other writers and market practitioners. I’m getting the sense currently that Robert has something on his mind. So, I hope my questions don’t get in the way of that. But between Elliott Wave and Socionomic Theory of Finance, we’ve got a lot to talk about.

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Robert, what’s most important to you? What are you looking at right now that is really essential in terms of the takeaways?

Robert Prechter: You majored in philosophy. I think the philosophy that one approaches financial markets is crucial, and many people don’t have one. They tend to default to the ones that economists use, which is mechanics. They view the world the way we view physics. If a rock is hurling toward us, it might hit us in the head if we don’t get out of the way. The stock market doesn’t work that way and none of the financial markets work that way.

In my opinion, they are essentially products of crowd psychology. Human beings can institute actions, unlike rocks, and economists don’t take that into account. They think the human being is something that can be impacted like a physical object. But human beings have thoughts, they have emotions, they have opinions, and when those are aggregated, people tend to herd. When herding occurs, very little rational thought actually occurs.

I come from markets with the idea that mood, social mood, is really the driver, and that if you can identify the kind of mood that the markets and the society are in, you can get a very good handle on where the markets are likely to go. As you said earlier, they don’t always go where you think, but you certainly can identify the milieu that you’re in, the overall psychological situation you’re in.

One thing we know from markets, they don’t go endlessly in one direction. They fluctuate. When they get to extremes, they tend to turn. We can talk about it today, but I think the stock market in 2021, and again recently this summer, have reached extremes that we have never seen before by at least two or three dozen indicators. It’s really been a historic situation and we’re not out of the woods yet.

David: Well, let’s do that. We had a variety of the indices peak towards the end of 2021, maybe a few that lingered further into 2022. Of course, then the bear market cycle appeared. Was this cyclical or was it one of a secular nature, now we’ve got a rally? What did you see this summer? What do you see now?

Robert: Let’s start back in 2021. In December of that year, I published a report called “A Stock Market Top for the Ages.” I don’t usually use strong language like that, but we could not believe what we were seeing throughout the year of 2021. Now, December when I published the report, it was right in between two crucial months. The previous month, November, was when the broad market indexes topped, and the next month, January 2022, is when the blue chip indexes topped.

Just to give you a flavor of the kind of things we were seeing, there was an all-time overvaluation relative to the standard measures such as gross domestic product, overvaluation in stocks relative to GDP, also relative to corporate sales, also relative to corporate earnings, also relative to book value. At the same time, we had an all-time low in cash held at mutual funds. So, the smart guys that managed money were as invested as they had ever been in the history of the readings, which go back to the 1960s.

It was amazing, and we were stunned. This report was a little longer than usual because I showed 27 indicators, and I’m just going to tell you about one of them to give you an idea of how absolutely crazy people were that year. Rydex is a family of mutual funds, all right? They keep data, which is very handy, on what their clients are doing. In the past, tops such as 2000 and 2007 in the stock market, you would see extremes where the people who have their funds at Rydex had twice as much money, sometimes even three times as much money, in the long funds as they had in the short fund.

That is a benchmark. When they were bearish on the market, they would go back to more like one-to-one. Well, in 2021, the amount of money that clients of Rydex had put into the unleveraged bull funds versus bear funds was not two or three times, it was 60 times. In the leveraged funds, the multiple was 80 times. Unprecedented isn’t even enough of a word, unprecedented by multiple. We probably hadn’t seen that much financial optimism since sometime in the Roman period, if we had data.

That’s what we were seeing back then. Now, incredibly, as you just mentioned, we had a setback, lasted in October 2022, and then we had a partial recovery. Now, under Elliott Wave model, that’s called wave two, it’s the first major rally in a bear market. Again, this summer we had crazy readings, which we can talk about those if you like, because they set some records.

David: Yeah, let’s get there. Wave two in a bear rally, and we’re getting crazy readings again. We’re often critical of the Efficient-Market Hypothesis. As you move towards some of the specific indicators now, can you contrast the Efficient-Market Hypothesis model of finance with that of Socionomic Theory of Finance?

You really are looking at different things. I think it goes back to what you were describing as mechanics and physics. I love the fact that you’re a philosophy guy, you’re a psychology guy. Now granted, math I think came easy to you as well, but psychology is an interesting framework to understand behavior in the financial markets. What is the EMH model missing in that respect?

Robert: It’s missing, probably most importantly, the fundamental importance of psychology. For example, EMH feels that markets, like physical systems, seek equilibrium. I demonstrated, I think at least, in one of the chapters of The Socionomic Theory of Finance, which I published in 2016, that the stock market never seeks equilibrium and there’s no such thing. Some of these indicators that we talked about, like stock values versus TDP or earnings or any of that sort of thing, book value, have had fluctuations of as much as 15 times.

If there were any such thing as equilibrium, it would be hanging out at one particular multiple most of the time and then something from the outside would jar it, like the ocean is calm most of the time, but every so often there’s a hurricane and whips things up. But when the hurricane’s over, everything goes back to normal and you’re back to equilibrium. Well, that never happens in the stock market. It’s always dynamic, moving from one extreme to another. Sometimes, it takes a while to do it, but that’s what it’s always doing.

The whole concept of equilibrium doesn’t apply. The whole concept of supply and demand don’t apply. They do apply in economics, because you have two different groups. You’ve got producers on the one hand and consumers on the other. But in the stock market, there’s only one group. They’re called speculators. You can’t say, “Well, the buyers are demand and the sellers are supply” because the same person can turn around the very next moment and sell what he bought or buy what he sold. So, they’re simply speculators.

That’s how you get the herd mentality, and that’s how you get socionomic causality instead of mechanical causality, and that’s how you get models such as the Elliott Wave principle, because I think human optimism and pessimism, waves of social mood, are patterned. RN Elliott described that pattern way back in the thirties. We probably don’t want to get into the weeds of that, but that gives you an understanding of how differently I approach things from the EMH people.

David: By proxy, when we talk about the EMH model, we’re talking about the dominant model on Wall Street. You can throw in the Capital Asset Pricing Model. There’s a few others that are pretty similar, pretty compatible in terms of being very mechanical. What are the indicators suggesting as of this summer? Price to sales was, again, some eye-popping numbers. What else were you looking at?

Robert: Let’s talk about June. We had record foreign buying in June. One of the first things I learned when I joined the Merrill Lynch market analysis department in New York City, when Bob Ferrell was running it way back in 1975, was that foreigners tend to buy an overseas market or a market that’s not their own at the wrong times. That even is true of Americans who are trying to buy overseas markets. So, we had a record foreign buying in June.

Now, record is an important word here because it means there was more foreign buying in June 2023 than at any month during the top year of 2021. Also in that same month, Investors Intelligence reported the lowest percentage of bears. I think we put it on a 15-week moving average or something. But on that one week, 18.5% of all the advisors they pulled were bearish. That means more than five times the advisors were bullish than bearish. This number was more extreme, again, than the most extreme reading of 2021. So, when people saw the market partially recovered, they went crazy and said, “We’re going to new highs and we want to own stock.”

David: That’s what’s curious to me because we’ve had this suggestion that with higher rates we’d get a recession, and then all of a sudden the tone started to shift and it was like, “Well, we don’t have to have a recession. If we have one, it’ll be very light.” By the way, we’ve never seen such bearish sentiment. Then the argument was made, “Well, everyone’s bearish, and yet no one has sold stocks.” In fact, we’ve had inflows into equities of over 150 billion year to date, and yet there’s the mantra, whether it’s the CNBC mantra or the Wall Street bull mantra, which is, “No, no, no, we are just getting through this really strange, negative, uber-bearish period.” Doesn’t sound like the numbers bear that out, does it?

Robert: No, and in fact, you’ve hit on something important because I think what happens is rationalization. The arguments you hear from money managers and economists and pundits on TV and radio and podcasting and all that sort of stuff for the most part are expressing this unconscious social mood that they don’t realize they’re experiencing. So, when the market went down from January ’22 to October, people started getting more bearish. The market went down. That’s why it goes down, because people were getting more bearish. So, they had all kinds of reasons in October why it should continue down. Fear of recession was one of them. So then they start getting more optimistic and the market goes up, and they start having to come up with reasons. “Well, why am I optimistic? I know I feel that the market should go up.” And then they say, “Well, the chances of a recession have gone down. And yes, interest rates are rising, but the next one’s going to be the last one.” So, this is reason to celebrate, because when the Fed stops raising rates, everything will be rosy. And now that the market has started to slip again, I think you’re going to see some of those arguments jettisoned, and they will rationalize why they’re feeling more bearish.

David: I was at a dinner party about five years ago, and sat with a gentleman, he was a retired bond trader. He was in New York in the ’70s, met his wife there, Treasury trader, tough as nails, really smart, both of them. He’s a musician and he’s an artist, and he was excited to know that you and I knew each other. He was like, “I can’t believe you… When are you going to talk to him next?” He was very enthusiastic about the great…

Robert: Well, I hope he’s listening.

David: Well, I asked him to submit a question, but this was a story he told me five years ago. Gave a presentation in London, had sort of a Prechter socionomics influence. His opening slide was one of Charlie’s Angels in a bathing suit. Not that you would necessarily sanction this, but here he is discussing Fibonacci sequences, the exploration of limiting losses, and he definitely had the crowd’s attention, a group of bond traders in the ’80s, very well engaged with his presentation. His boss is sitting there in the front row, John Mack. Loved the insights. So, for our audience today, why a bathing suit? Why body style? What does fashion tell us? What do other popular trends reveal about social mood and the direction and the speed of a financial market trend?

Robert: Yeah. Well, it’s very exciting to hear about that presentation. I’ve made many of those and tried to tie in what’s happening with the culture, with social mood. Because social mood, if it’s shared by everyone, doesn’t just show up in the stock market, although it does so I think very, very clearly. It also shows up in the expressions throughout the culture. So, during an early stage of a bull market, through the middle, toward the later stages, you tend to get more upbeat music, for example. When things are less ebullient in the stock market, you’ll see angrier music or sad music, that sort of thing. Some dissonance will creep into the tones of popular music. The same thing with movies. The comedies that were pouring out in the ’80s were just something as we were lifting off, and they continued right through the ’90s, and ever since the valuations have been mixed ever since, it’s been more of a mixture.

Well, he showed someone in a short skirt, no doubt, to indicate that’s what women’s fashions tend to be like near tops. You had miniskirts in the late ’60s, you had micro-skirts sometime in the late ’90s. I don’t know if you’ve watched the papers, but the latest thing in the past week or so is hot pants. They’re sort of back. And so these are major top indicators, when women are feeling frisky, they show off their bodies more. And when they’re all conservative, you’ll get some of these things that cover the bodies more fully. So, you can see it in all kinds of areas in society. And we even started something called the Socionomics Institute, and every month we put out a little magazine called The Socionomist, where we talk about these things, and it’s a lot of fun. Anybody who wants to become a member, just go to socionomics.net and take a look.

David: Recommended. Absolutely. You mentioned the report that you wrote back in 2021. Would love if folks could get a copy of that, it’s important to see and connect the dots between the things that you talk about, the things that are notable, both in the markets as well as in society. And it really does make the case compellingly that mood shows up everywhere, and if you’re just paying attention, you’ll see it. It’s quite fascinating.

Robert: Well, my guys did put together a page for your listeners. If they just go to elliottwave.com/david, I think they included that in there. Part of an offer, it’s half-price stuff and all that, but that report, “A Stock Market Top for the Ages,” is part of the giveaway there.

David: Elliottwave.com/David.

Robert: Dot com slash David.

David: Okay.

Robert: I think it’s a backslash.

David: A backslash.

Robert: What I’d call a backslash, anyway. And Elliott has two L’s and two T’s. It’s Elliott, E-L-L-I-O-T-T, wave like on the ocean, dot com.

David: Perfect. Definitely read them. That bond trader I mentioned earlier, he asked this, and I think this is interesting, because it does tie to mood. I wonder if you’re familiar with his reference. He says, “I make the assumption that Robert Prechter is aware of Strauss and Howe and the generational theory. My twofold question for Robert is, can you overlay the five-cycle Prechter analysis with Strauss and Howe’s four historical turnings? And if so, are we in the crisis fourth turning and a societal third wave, or fifth wave down? What advice do you have, if that’s the case?”

Robert: I’m really not able to tie them together, because I don’t think there’s any such thing as generations, in the sense of strictly when people are born. Now, we all feel that there are, because we all have parents and grandparents and kids and grandkids and so forth, so it feels like we exist in a world of generations. But people are born every two seconds. And so, really there’s just a flood of people being born all the time. There’s not exactly such a thing as a generation.

Now, people try to attach personalities to certain generations, but I think that’s entirely due to the social mood, and Elliott waves are the true definer. So you have the ’20s, for example. That was a period of extreme speculation and very positive social mood, and people were dancing their little butts off with short skirts and all that thing. And then the ’30s hit, and things were more depressed, and that carried through the ’40s, we ended up having wars. And so people call them, those are different generations, but really I just think they’re different waves.

But if they are looking for some sort of serious correction, then I would say we’re on the same wavelength at the moment, because I think we are set up for the biggest bear market in the history of the country, bigger than 1929-32. I think we’re heading into a very, very big depression. I think we’re heading into a debt implosion bigger than any others that we’ve seen as well. I think the central banks of the world have run out of tricks, and they have been part and parcel of the expression of positive mood. But I think by the end of this, people are not going to respect them at all. So, if they’re looking for that kind of setback, we’re on the same page.

David: Yeah. I think there is a tremendous amount of overlap in maybe just a different linguistic reference, because what you’re really talking about in Strauss and Howe is related to unconscious social mood, and there is the social actions that you see through time. There’s these cycles of what gets expressed, whether it is anxiety or fear or confidence, and as demographers, that’s how they look at it. As sociologists, they look at it from the standpoint of generations. Maybe they’re right, maybe they’re not on that point, but how they’ve predicted certain things through time, it’s a helpful frame, and there’s some similarities in terms of what happens next.

Seeing political strife would be something that they would point to as a real issue. And we’ve seen that not only with Brexit, but with Trump. We are now in a 2024 election, we’ve got 40% of the globe who will have an election in 2024. This is a rather contentious period of time. At the same time you’ve got— Again, maybe the sequencing is different for you, events determining mood versus mood determining the character and tenor of events. This is where the Socionomic Theory of Finance, I think, distinguishes itself. Mood determining the character and tenor of events, not the other way around.

Robert: Exactly. And you spoke of confidence. I think you’ll find if you study history that confidence is quite strong whenever the trend of stocks is up, and that means social mood is becoming more positive. People become more confident and they feel more certain. You would’ve seen it in the ’20s, 1932-37, 1949-66, and in the ’80s and ’90s, and again in recent years. But when you have a bear market period and social mood is trending towards a negative, a big word that becomes popular is uncertainty. People are suddenly uncertain about the future. They’re less confident. You saw that in the ’30s and ’40s, you saw it again in the ’70s. I think we’re heading into that kind of situation now.

But you brought up politics. In 2012, my colleagues and I wrote an academic paper that was published in SAGE Open, and it showed that for 200-year history of our country, what the stock market was doing prior to a presidential election was the single best predictor of whether the incumbent would be reelected or not. And that is entirely based on social mood. So, I had some choice words for whoever was running last time around, and I said to my subscribers, “You should vote for whoever you like the least, because if we’re heading into a bear market, as I think we are, whoever’s in office is going to ultimately suffer extremely low popularity and not win a second term.” And I think we’re on path for that.

David: This period of time, uncertainty is perhaps the most important word, because we’re talking about market pricing in, or needing to, public policy uncertainty, economic policy uncertainty, international relations uncertainty. One bad print from a payroll number, and now all of a sudden maybe the mind shifts to having employment uncertainty. There’s a variety of things that I think are just right under the surface, and it’s not going to take much for them to become the dominant themes in people’s minds, and for that mood in the market to shift pretty dramatically.

Robert: Right. I think we’re on the cusp of a shift, but it is incredible how tenacious the old positive mood has been. And most people are actually very certain, and you can see it in the incredible popularity of zero-day options. Billions of them are trading all the time. People are gambling like crazy. You can see it in the margin debt/free credit balances. We’ve just had an all-time record in margin debt, relative to free credit balances. Five times as much money is owed in brokerage accounts as there is cash available to cover any shortfalls.

And I showed a chart in my mid-September issue where I displayed the fact that in the S&P, for 34 trading days, we had had 22 up-gaps, but people just couldn’t get enough of stocks. 22 up-gaps in 34 trading days. I have never seen that before. And one streak I think was nine out of ten. So, every morning they’d wake up, and they were so certain that stocks were going to go up, that they bought them on a gap. Now, I think that, probably in the last day or two, is beginning to slip away, but the confidence level has just been amazing.

David: As recently as March, we’ve got Silicon Valley Bank, we’ve got Signature Bank, we’ve got a real concern within the banking industry, the financial markets as a whole. And then with FHLB, Federal Reserve, you’ve got a couple hundred billion thrown in the markets, and it’s as if the liquidity infusion is enough to remove the uncertainty. We’re back to business as usual.

Robert: Yeah. Somebody just brought up that to me last night, in fact, and said, “Wasn’t Silicon Valley some reason people should be worried?” I said, “Well, actually, they’ve used it as a reason not to be worried, because the government rushed in, and even though the depositors, 87% of them, weren’t covered by FDIC, they covered all the deposits anyway.” So now people said, “We shouldn’t worry about anything. Whatever happens, the government will step in.” Well, they were able to do that for that one bank even though the losses were tremendous. They actually assessed all the more solvent banks in the United States for money to shore that bank up.

I have a subscriber who’s a friend of mine, and he has a regional bank in the Midwest, and he got a notice that because of the FDIC membership, they were demanding more than $3 million from his little bank to help shore up Silicon Valley. And he got annoyed. He actually spoke with the Fed. He said, “I didn’t sign up for this. There’s no coverage.” And they said, “Well, you got to do it anyway.” How many times can that happen? People are feeling complacent and they’re feeling optimistic because the government will bail them out, but there are limits to how much they can do. And the fact that they’ve blown so much FDIC money on that already is not a positive. It’s a negative. So, it’s just another rationalization. “Oh, we can gamble, we can do anything we want. Nothing’s going to happen.” But when things start to happen, all of that will change.

David: I think it’s fairly well understood that debt is essentially moving tomorrow’s activities to today. It allows for a rapid accumulation of consumption. It’s spending tomorrow in real time.

Robert: Exactly.

David: And debt has driven a tremendous amount of economic growth. Out of the 2020 lows, this is just phenomenal. GDP is 40% bigger in three years. 40%. This is a $27.5 trillion economy, and ordinary GDP growth is 2%, 2.5%, but out of the lows to current levels, nearly $27.5 trillion GDP, a 40% growth rate in three years suggests that what got us here is a lot of borrowing of future activity. And we just plugged it in. Now what did we get to see?

Robert: Exactly. Look, your formulation is exactly correct, and people don’t appreciate this fact. When this country or the globe heads into depression—and even if we’re wrong, it’s not going to happen, you know it’ll happen someday—they’re going to realize that the things that they want to buy aren’t available because they’ve already been bought. I mean, that’s what borrowing means. Yeah, I’ll spend it right now. I won’t be able to spend it tomorrow. People think they can always borrow, but they can’t. In the Wall Street Journal just today, there was a headline. Americans are still spending like there’s no tomorrow. That’s a perfect encapsulation of what’s going on simply among consumers. And they interviewed half a dozen people that said, “Yeah, we don’t care about this anymore. We’re just putting a vacation on our credit card. We’re going out to expensive dinners. You got to live while you can.” And that is an extreme complacency that you never see at the bottom of a depression, or when people are concerned. To me, it’s yet another indication of massive optimism and complacency. Yeah, we’ll worry about tomorrow tomorrow. And tomorrow eventually does come.

David: The last time we had a significant interest rate increase, you could go back to Volcker. I mean there’s been periodic ones that punctuated the timeframe from the eighties till now. But the big move was with a total amount of government debt of under a trillion dollars, $908 billion when Volcker was in. Now we’re at 33 trillion. I’m just curious how we navigate this kind of an environment where we’ve got significant budget deficits. We’ve got a significant increase in interest rates. The interest component on the national debt has risen, and it’s not a laughing matter. We have an interest payment now which is larger than the total stock of debt was when Volcker took office, raised rates to kill inflation. Just our interest payment is over 900 billion. Tell me about what your views are on the bond market, because do people go to bonds as a safe haven? I don’t know. What do you think of US bonds? What do you think of the bond market today? The direction of interest rates?

Robert: It’s actually the most exciting area to talk about. You were talking about debts and deficits and so forth. There was only $800 billion in circulation in the summer of 2008. And suddenly the Fed decided, “Oh, why don’t we multiply that by 10?” And that’s what they did over the ensuing several years. It was absolutely stunning. And that kept things inflated to some degree. But again, people got complacent, or remained complacent I should say. And they were buying these long-term bonds. You probably read the article that came out today about an Austrian 100-year bond that sold at a very low interest rate in 2020. $16 billion was committed to the bond. Well, it’s down 67% in terms of value right now. That means €10.7 billion worth of value just went out the window. It’s gone. So these were purchased because people felt it was the safest investment in the world, 100-year government bond, blah, blah, blah.

And if you can lose 67% of your money on one of the safest instruments available, that’s an amazing thing. And US bonds that were issued at the same time are down more than 50%. I think they’re down about 52% right now. So these are safe bonds. We haven’t even talked about the unsafe bonds. There’s a whole ocean of junk bonds and other types of corporate bonds, municipal bonds from places like Chicago and Illinois and California and whatnot, that I can’t imagine being fully paid off.

So here’s what will shock so many investors, in my opinion, they think they have X dollars. Let’s just pick a number out of thin air and say they’ve got a million dollars worth of stocks and bonds. So they think they’re worth a million dollars. But the bonds have already dropped as much as half if they were purchased in 2020, stocks are starting to slip. They really don’t have a million dollars, because what they have is a bunch of assets. And the only way to have a million dollars would be to actually have sold those off at the highs. And people are going to realize that investments and money are two very different things.

David: Yeah. So money used to be, this is kind of a rough transition perhaps, but money used to be ounces before it was fiat dollars. And so our measurement has changed. We see the dollar having lost value really aggressively since 1913 and maybe, I don’t know, pick your poison, either then or 1971. Kind of interesting considerations in terms of monetary policy and the stability of the currency.

Robert: Yeah, 98.5% loss of value.

David: What do you think of gold? And I’m going to ask this question with some temerity, because I’ve read projections at different times. You scare me. You’re like a cold shower at certain times. And that’s okay. I don’t mind it.

Robert: Oh, I won’t be scary this time.

David: I’ve read Elliott Wave Theorist, and the downside projection possible wave count that takes my breath away. So I’m reticent to ask about gold and silver. So if it’s $200 price target, please go easy on me. How do you see the price short-term and long-term?

Robert: It’s one of the few areas where I’m not passionate. I feel certain I know where stocks are going. I feel certain I know where most bonds are going. I feel pretty certain I know where bitcoin is going. We were certain about where NFTs were going, and they’ve already gone there. And I’m certain about where real estate’s going. I think we’re going to have the biggest debt implosion ever, where people are going to find out that the debtors can’t pay. And so the creditors’ balances are just going to melt away. If that happens, it’ll be what’s called deflation. We haven’t had a serious deflation. We had a mild one in 2007 to 2012 approximately, or 2009 at minimum. And look at the damage it did. Stocks dropped 55% in a very short period of time, a very minor deflationary event. We’re facing a massive deflationary event.

Now, if gold had been undervalued relative to the amount of inflation that had occurred from 1913 to the present, I would say, “Okay, it’s going to go way up.” But gold has actually reflected the loss of dollar value since that time extremely faithfully. So I don’t think it has massive upside. What I do think, and what I’ve been very clear on, and by the way, I’ve said this in my book Conquer the Crash, where I focus on how to save yourself from all these things that are happening. I’m very strong about the idea that you should have some substantial gold holdings, and especially if you’re a domestic person, several bags of junk silver coins, US silver coins. Because it’s possible, and I don’t want to get really apocalyptic here, but it’s possible there could be a time where you’ll be glad you had them, and people will trust them, and they may not be so sure about the paper dollar.

So I think it’s crucial to have what I think you and I agree is real money, and actually deserves the term money, which is gold. But I also think if all of the debt that’s been created and fostered and nurtured by the government and the central banks since 1913 begins to implode, we could have an overall drop in the price level of things. And that might include gold, but it doesn’t really matter. You should have some real money anyway.

David: I agree. I agree.

Robert: And it may go up. It could go up as well. I don’t know. And that’s the one I’m least certain about, but it’s good to have it.

David: So factoring it into sort of the perspective of social mood, I think of the Dow/gold ratio as reflecting social mood. The higher the ratio, the more positive the mood. So there you are in 1929, 1966, the year 2000, maybe 1999, and vice versa.

Robert: Exactly right.

David: When the Dow/gold ratio shrinks to three to one, two to one, one to one. When we’re thinking of the stock market, when we’re thinking of any market for that matter, we’re kind of picking a point in time to engage with a social barometer. So choosing gold at $1,900 an ounce, that’s really not how I think of it. It’s 18 to 1 or it’s 28 to 1 or it’s 43 to 1. Where are we at in this continuum of speculation, greed, fear, and as we see sort of a fear trend fully take hold, guess what? There is this shrinkage in the value of equities relative to gold. What is the nominal price of gold? Matters less to me than the ratio because there’s a lot of power in terms of purchasing power looking at that ratio. 

Robert: Right.

David: I’m curious to know if that is helpful in terms of why you would own it. Maybe not just a worst case scenario in barterable silver, but there is a major step forward in terms of purchasing power.

Robert: Yeah, that’s a good way to look at it. I think there’s an even more urgent reason why you might want to have some gold. And that is, even if the price were to slip relative to dollars for a while because of debt implosion, suppose you’re really smart and you say, “Well, I’m going to wait and buy it later.” And suddenly the money you have in the bank isn’t there anymore because the bank shut down. You would’ve been happier with the gold. So there are many reasons to have some real money on hand as well.

David: Big government has stepped in a number of times, and I think that’s one of the reasons why we’ve got some complacency today—certainly post. Government expenditures as a percentage of GDP as recently as Covid, 54%; global financial crisis, 43%. That’s the kind of money we spent during World War II. Civil War was 14%, World War I, 24%, World War II, 44%, Covid is 54%.

Robert: And most of this is just to buy votes. Terrible.

David: Wouldn’t you say, though, that there is a case to be made that in the context of financial crisis, whether it’s monetary policy or fiscal policy, there is a knight on a white horse in shining armor and they will take care of it? Now, it may cost us in terms of the value of the currency, but they’ll put something together. They can’t deal with uncertainty. They can’t not do something because uncertainty is something they’re subject to as well.

Robert: First, let me say, I don’t think it’s a knight on a white horse. I think it’s a black knight on a black horse. They’ve been the problem from the beginning. They created Fannie Mae, Freddie Mac, Ginnie Mae, student loan programs, everything imaginable to try to get people to take on more debt. It’s been a complete disaster. So every time they “step in to save the system,” what they’re doing is encouraging more indebtedness, which is the worst possible thing you can do. Second thing is I think the horse is exhausted and ready for the glue factory because, as you pointed out earlier, simply paying the interest on federal debt is now eating up a huge percentage of the budget. And if rates keep rising, which I think is certainly possible for the next few months at least, that’s going to be a larger and larger percentage.

They’re not going to be able to do anything. And the central bank has psychology just like everybody else. And you might’ve noticed that the central bank suddenly sounds kind of hawkish in the last year or so. And they’re even decreasing the money supply, which is incredibly rare for the Fed to do. So they have psychology just like everybody else, and I think they’re going to balk if an administration comes to them and says, “We’d like you to please create a quarter of a quadrillion new dollars for us.” I doubt it’s going to happen. I think by the time they react to the problems that loom on the horizon right now, it’s going to be too late. They almost always come in after everything has crashed and then tell you they came in to save the day. But I think the will is going to be gone and the means is going to be gone.

David: Well, I think one of the things I love about your research is it points to the central bank following the markets, not leading. They’re not controlling things. But that’s the market perception is actually let’s wait and see what the central banks say. And all they’re doing is sort of playing catch up.

Robert: Exactly. In fact, people don’t realize this. There’s a very short chapter, I think it’s four pages, in my Socionomic Theory of Finance, and we show unequivocally that every central bank in the world does not set interest rate policy. They simply follow the rates that are the market for treasury bills. And the average lag we’ve computed is five months. So they have their little meetings, and they go, “Oh, interest rates just went up. We have to adjust our fed funds rate accordingly.” That’s all they do. And everybody thinks they have a policy and a goal. And they don’t. All they do is follow the market’s rate. 

Remember back in 2020 Chairman Powell said rates are going to stay low for the foreseeable future? In other words, he couldn’t see any reason why they would go up. Implication being the Fed’s not going to raise any rates. Well, why did the feds start raising rates with record rapidity? The answer is because T-bills rates started to rise. The marketplace had made them go up.

So the feds just followed them. And everybody wonders if they’re going to raise the rate next go-round. And all you have to do is look at the T-bill rate. And if there’s enough of a disparity, they’re going to raise rates to get close to it. So the whole thing is a mirage, and I’m rather amazed that the Fed wants to keep up the impression that they control rates because they don’t. Because ultimately, when the mood is negative, they will get blamed.

David: When I think about change of mood, I can’t help but think, China. In part because youth unemployment north of 20%, ghost cities which have been built in the context of radical credit expansion. Now, they’re finding some limits to the credit machinery and the control factors of keeping it quiet. It’s as if they understand socionomics, and understand that the only way they can keep it together is to keep a lid on social mood. But do you think that’s even possible?

Robert: No, I don’t think they have a clue about socionomics. They’ve done what every government’s been doing, which is encouraging indebtedness. Thinking the real estate market, for some odd reason, ought have higher prices so they put all kinds of government money behind it. When, really, it helps the consumer when prices are low, not high. The whole thing has been terribly mismanaged. I think China’s already slipping into deflation. There are indications that Europe has slipped to deflation. America hasn’t done it yet. Some of the economists here say, “Yeah, they don’t know what they’re doing, and we do.” But we’re just lagging behind, just as we did in 1929, because Europe topped out in 1928. So we were a little behind the curve and then we followed. And I think the same thing is happening here.

But there’s actually some good news out of this, David, and I think maybe underappreciated right now, because people are very afraid of China. They’re going to take over the world and this, that, and the other. But I think they’re going to undergo some extreme unrest internally, like America did back in the 1860s. So the leaders over there might find themselves facing a rebellion brought on by negative social mood. And because the government runs everything, they will be the focus of people’s anger. So they might have to try to crush things even further. There might be a turnover in leadership, who knows what could happen over there. But I think they’re going to have plenty of internal problems to worry about.

David: So if you need to get on Xi Jinping’s dance card, probably want to do it while the music’s still playing.

Robert: Yeah, I think if you’re smart, you’ll get off his dance card. You don’t want to be anywhere near the guy when things crumble further. But you know what, David? We haven’t talked about one thing. It’s all well and good to say you’re a bear, or this could happen, and that could happen. But where I’ve really tried to focus is how to stay safe. And I really have put a lot of thought into that. And in January 2022, the same month when these last indexes topped out, I polished up the latest incarnation of a book I wrote prior to the 2007/8 collapse, called Conquer the Crash. And this title is Last Chance to Conquer the Crash, just so we can say it’s new. And so I put a lot of new things in there as well. I’ve taken out some things that are out of date, don’t work anymore. But we could talk about some of the ways that people can sidestep the damage and actually come out the other end feeling pretty darn good about that.

David: I think that’s a great idea because part of volatility is being in the right place at the right time, not the wrong place. And you don’t have to see volatility down or up as— You can take a neutral view to it. You just don’t want to be ill positioned.

Robert: That’s right, exactly.

David: Go for it. What are we supposed to do?

Robert: All right, well, we’ve already talked about one of them. I think you should have an adequate, let’s say, amount of gold, and some silver coins and so forth. You need to have some held domestically. But I also researched vaults worldwide. I’m sure you remember there was a safe storage company in California.

David: This is something that we do.

Robert: Oh, you do it as well.

David: Our locations are in Canada, in London, depending on the metals because you’ve got the best liquidity for silver in London. And so it just depends on what someone’s after in terms of price, liquidity.

Robert: Well, good for you. Because, yeah, what happened to this California company is that the FBI came in and raided it on some suspicion that somebody had some ill-gotten gains in there. And they seized everybody’s assets. So you don’t want to store it where that can happen.

David: Right. Why we’ve chosen Royal Canadian Mint and HSBC. We’ve got great partners for both of those.

Robert: Another one I’ve been very hot on, which I wrote up in the book as well, and have for several years now, is something called floating rate notes. Now, these are put out by the US government. It’s virtually the same as Treasury bills, which I think have been absolutely fantastic. And they currently yield five and a half percent. It’s just free money. And at this point, I’m not worried about the government collapsing. That could happen later and we’ll deal with it. But for now, you want to be getting 5%. Can you imagine getting that in a deflationary environment? The value that you’re gaining is just amazing. Now, FRNs, floating rate notes, are instruments that are good for two years. They’re put out by the Treasury. And they adjust rate every— I think it’s every week or month at the most. So as rates have been rising, these things have been paying more and more and more.

But if you had gone out and bought a two-year note in 2020, it would’ve lost or certainly a long bond. So we’re completely against owning any long bonds because we saw the rate explode. In fact, in 2020, we said the long bond has absolutely topped out in price, bottomed in yield. And, in 2021, we were really aggressive that T-Bills had been at zero for months and months. And we said, “This thing is about to turn and go way up.” So those have been great for people. And as you mentioned earlier, you’re not in the volatility. You’re just sitting there collecting interest and they keep raising it for you every month because the rates are going up. So I love those.

I think people should have a safe offshore bank. And I looked very hard around the world to find one. And I wrote that up in Conquer the Crash as well. That’s also in the Western hemisphere. There are reasons I’m no longer interested in keeping money in Europe. But, anyway, so a safe offshore bank. You should have an onshore bank, too, or several, the safest ones you can find. You’ve got to be early on that because the safest bank in terms of ratings 20 years ago, when the book first came out, was in California. And about five years later they stopped taking out of state people. So you’ve got to be early.

And the last thing I wrote up new is why you should get a second passport and how to do it. And I’ve got an arrangement with a really terrific woman who’s a lawyer and helps people get that additional passport. So it’s all in Conquer the Crash. And that’s where I would focus. And we’ve got some information on that at elliottwave.com/David if anybody wants to come visit. Check it out.

David: That’s great. Well, these are very interesting times. The inflection points and, where we started the conversation, mood, it’s important to keep track of it. In part, because it shows you sometimes the intensity of where you’re at, the extreme nature of where you’re at. Bond yields, we got to 5,000 year lows. You were talking about just a few years ago, the 30-year bond, less than 1%.

Robert: I don’t know if we’ll ever see it again.

David: Argentinian bonds. You were mentioning the Austrian 100-year, how insane is that? But then, one step further, Argentina did the same thing, a 100-year bond. Who in their right mind thinks that they’re going to get their money back in any kind of a timeframe from Argentina? A 100-year bond?

Robert: I agree. I agree. But something exciting just happened in Argentina.

David: Tell me?

Robert: A Libertarian candidate just got a plurality of votes. Now, I don’t completely understand. I haven’t studied their system and so forth, but that, to me, is a little ray of hope.

David: Maybe a market solution. Maybe?

Robert: But we’ve had enough of collectivism to last my lifetime. I’ll tell you that.

David: I think if there’s anything that underscored the period of uncertainty that we’re going into, it was the quote from our Fed President. Maybe you could comment on this. “As is often the case, we’re navigating by the stars under cloudy skies. At upcoming meetings, we’ll assess our progress based on the totality of the data and the evolving outlook and risks.” What do you see in that?

Robert: Oh yes, this is the Wizard of Oz behind the curtain. People are getting close to pulling the curtain away. So he says, “We don’t always know what we’re doing,” while he’s yanking on levers. What he’s really saying is, “Look, we’ve already raised our fed funds rate to approximately the T-bill rate. But the T-’ill rate’s edging up a little bit and we don’t quite know if we’re going to have to raise it one more time.” That’s what he really means, but he doesn’t want to say it.

David: It’s so fascinating. Well, you’ve been doing this for a long time, ’70s, ’80s, ’90s ’00s, and we appreciate your perspective. We’re constantly trying to figure out these markets ourselves, the leading and the lagging indicators, the continuum of greed and fear, where we’re at, the blind spots that we have in terms of the paradigms that we’ve adopted. Sometimes, we don’t know. We’ve just accepted conventional wisdom. So I think it’s sometimes important to step back and say, “What do I know and why do I think that that’s true?” And we both have perhaps a more out-of-the-box path to Wall Street, philosophy for me, psychology for you. But working with a framework and figuring out what your framework is. You discovered in Elliott Wave something that’s been very fruitful for you.

And I would encourage our listeners to consider what they know, how they know it, and if perhaps the framework needs some rejiggering. Because going into the period that we are going into, it’s clear, in the rearview mirror, we had declining interest rates for 40 years which were feeding all manner of mania. And it’s not clear that we have that same kind of dynamic going forward. So what is your framework? How are you making decisions? What is a game plan? These are things that you want to do probably outside the heat of battle, and with as reasonable a mind as you can.

Robert: If I may, I remember when we first spoke and you had said you had been, at least at one time, a bit in the throes of indecision about whether you wanted to continue your father’s business work. I think the people who have been following McAlvany should be extremely happy that you decided to do it. You’re one of the most thoughtful people, I think, in the realm of finance. And so that’s why I contacted you because I said, “David’s doing a podcast. I know that’s going to be a good time.” So thanks for the opportunity.

David: It’s so great to have this conversation. We need to share another meal, and soon.

Robert: That sounds great. And if I may close with an ad, your guys can go to elliottwave.com/david, and I think my little gnomes are cooking up some offers for them.

David: Excellent. That sounds perfect.

*     *     *

Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany, and our guest today, Robert Prechter. You can find us at mcalvany.com, M-C-A-L-V-A-N-Y.com. And you can call us at (800) 525-9556.

This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.

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