The $14 Trillion Dollar Maturity Tsunami

Weekly Commentary • Mar 13 2024
The $14 Trillion Dollar Maturity Tsunami
David McAlvany Posted on March 13, 2024
  • Government Debt Will Be Rolling Over At Twice The Current Interest Cost
  • Our Proxy War With Iran Just Got Hotter
  • Gold Makes A New High With New Momentum Confirmation

“What is the real state of the economy? It seems to me there are two views on that. I think you can argue from household net worth statistics that there are parallel economies. These are two worlds. One is representative of a class benefiting from the wealth effect and access to assets and the inflation of those assets. But monetary policy which has benefited asset prices, is not concerned with the distributional effects, which are very uneven. The other economy is that economy of the forgotten man.” —David McAlvany

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

What we’ve been trying to squeeze in our recording time, Dave—because it seemed to be on a lot of other news outlets right now, Bloomberg just recently—it seems that the subject matter is starting to become gold. Wouldn’t you think? “Gosh, gold. When did people start talking about that?”

David: Well, it was fascinating. Last week we were talking to one particular news outlet and were cut off in the middle of it because of a bank crisis and the shares of New York Community Bank down 45%. Shares halted, and all of this right in the middle of the interview as we were talking about why to own gold, I thought it was quite ironic.

Kevin: It was streaming along the bottom right?

David: Yeah, exactly. Exhibit A. It wasn’t in my show notes, but hey, there it is.

Kevin: Well, we look at the financial field so often, we look at the economy so often. I’ve got to tell you that I get sucked down the rabbit hole sometimes of these YouTube shorts, Dave, and they know exactly what I click on. And I have to admit, they know to show me some of these war shots that are coming in from Ukraine, coming in from over in the Middle East. And I’ll tell you, the more I look at these, the more I’m starting to realize I see an awful lot of US flags at war, either with a proxy war in Europe or a proxy war against Iran. And we probably have a proxy war going on somewhat within China. The Iranians actually are a very clear and present threat right now for the Americans, even though people are focused on Israel and Gaza right now.

David: It’s fascinating to me as we look at the flow of interest into and out of these commodities gold and silver, that it’s your large investor that is taking an interest in metals right now. And I think a part of that is because they have a different calculus. They’re looking at the way the world was and the way the world is becoming. And the geopolitical anxiety that some big money folks are addressing in their portfolio makeup is that things may be very different and may be very different very soon. 

We had the Iranian parliamentary elections at the start of the month, very well summarized by the War on the Rocks staff. “The elections ended up replacing hardline parliament members with ultra hardliners.” And they added that, “different factions are trying to maximize their share of power in anticipation of the eventual death of the Supreme Leader Ali Khamenei. Internationally, these results likely mean we’ll see a shift to more confrontational policies towards the West and closer ties with non-Western powers, especially Russia and China.”

Kevin: And it’s interesting how you get this mixed bag. You know how Congress passes things. They a lot of times put in all these extra things. They say, “This is what we’re voting on,” but they’re actually voting on another 10,000 things that maybe aren’t as popular. It seems that the Iranians are actually using as leverage what’s going on in Israel and Gaza and the people’s feelings toward that.

David: Yeah. If I were to summarize the guys at War on the Rocks—I love their writing—Iranian political factions, paramilitary forces, they’re itching to impress. And opportunistically they’d like to influence the Middle East conflict. I mean, from my perspective, this keeps the Gaza-Israel conflict near the boil. When it’s at the boil point, Iran has a situation that it can leverage to its advantage while remaining out of the direct line of fire and away from direct responsibility. And it underscores why, with or without US support, Israel remains committed to eliminating Hamas. To lose or to quit too soon would embolden their regional antagonists. So from a market perspective, this gets very interesting. This supports both the oil price, and, I think to a lesser degree, the safe haven demand for gold. Clearly OPEC+, and their maintaining production cuts, does that as well in terms of oil.

Kevin: Yeah, you remember when the dollar was the reserve currency of the world, Dave? It had a whole lot more power. Yes, we’re still the reserve currency of the world, but there is a block of countries right now that don’t really want to treat it that way.

David: Yeah. So I go back to that phrase that I quoted earlier, “confrontational policies towards the West and closer ties with non-Western powers, especially Russia and China.”

Well, yes, that is apropos to the Iranian parliamentary elections, but it is also apropos to that larger block of anti-dollar folks, this crowd of BRICS and even a broader list. On the gold front, it’s that increased cooperation. It’s the increased cooperation of the anti-dollar block of countries that erodes the dollar’s use in terms of a form of trade settlement, and also continues to motivate the development of a parallel financial system far from the reaches of the US Treasury Department.

Kevin: I’ve got an amazing book at home called Bodyguard of Lies that is about D-Day. But it’s a lot of the information that the British Secret Service basically hasn’t released until just recently. And what it shows is that statecraft is done on many different levels. This book is about D-Day and about the five or six different very relevant narratives that were created almost out of fiction to keep Hitler not understanding at all what was going on.

I think of the statecraft, Dave, that we’ve used over the years. Here on this Commentary we’ve talked about it for a decade and a half. The way we actually administer statecraft with the US dollar, with the US Treasury. I remember the book that you read of the Treasury’s War, and in a way you can almost become nostalgic for that when you start to see blood and bullets flying.

David: The book was recommended to me—Juan Zarate’s Treasury’s War—recommended to me by a gentleman who was Treasury attaché in Saudi Arabia for a number of years. And I’ll never forget reading Juan Zarate’s book and wondering how long it would take for highly effective Treasury interventions to inadvertently undermine US power as the rest of the world’s elevated discontent became something more. And again, that’s just discontent with the status quo dollar system. Seeing that transform and progress to an active protest and disintegration of the world we’ve known since Bretton Woods.

Kevin: A couple of years ago we started to see Russia unloading US Treasurys, over a hundred billion dollars worth. We’ve seen China over the last decade unloading Treasurys. I’m wondering if we should have taken a clue.

David: Well, a longer-term perspective on the US inflation problem includes the macro pressures arising from deglobalization and the diversion of capital flows through a new set of financial pipes, which previously supported dollar stability. Obviously they were underpinning dollar supremacy. But as volumes increase through these alternative channels, it has an equally negative impact. And there’s nothing new here. I mean, people have been concerned about China dumping Treasurys and there being a subversive move against the dollar for over a decade. And all that is sort of gradual erosion to date.

But 2020 was a defining moment. It was a defining moment for the US dollar when the Treasury Department took $300 billion in Russian assets. It set the global reserve asset community on edge. These are the folks who are managing the Central Bank Reserve assets, and they basically had to come to this conclusion: if you don’t hold it, you don’t have it.

Kevin: Yeah, we just took the Russian assets and we have a law called the Trading with the Enemy Act of 1917. It came about during World War I. That was used by numerous presidents. But I remember when I was a teenager, Carter used it to take Iranian assets during the Iranian hostage crisis, so it is a tool that we’ve used for a number of years. But there are other— Talk about statecraft, here in our own United States-craft, you have the printing of money. And you talk about another narrative, where it’s like, “Hey, everything’s fine. We’re just printing—” Well, inflation is what we’re printing.

David: Yeah. This is the funny thing. We come up with these words. Transitory is how it was described first, this thing that was not going to be a problem. Inflation, CPI. This week we’ve got CPI at 3.2%. It’s going the wrong direction. And of course it was tied primarily to the services component, which is sticky, as they say. And there hasn’t been a decline now in the CPI since October. So I think that lends credibility to the idea that the Fed might not really understand inflation.

First it was transitory, then it was dead, but here it is, yet again, rising again. And we talked just a moment ago about structural supports. Then of course you’ve got, on a domestic basis, services inflation. This does not include energy, which at some point may become a major catalyst for higher inflation figures. Which begs the question, what’s closer to being dead? Inflation, or the Fed’s credibility?

Kevin: Well, can we measure the strength of the dollar by looking at, say, the debt market—how we borrow money, looking at the interest that we have to pay on that debt?

David: For those dollar doomsayers, the strength of the dollar is reflected in our military supremacy. The strength of the dollar is reflected in our capital markets preeminence. And I think lastly, maybe in our domestic fiscal stability. If one of those pillars is challenged, then the global macro support for dollar hegemony fades at an even quicker pace. So at this point I think you’ve got all eyes on the US government market. Because of those three pillars, it’s the domestic fiscal stability which is most at risk.

Kevin: I look at the tsunami that came in a couple of decades ago. And people saw it coming by actually the outflow of water first. Where you had half a mile of beach that wasn’t there before, and all of a sudden, then, this incredible wall of water comes. And I think about this wall of maturity that they’re talking about. Governments who don’t pay their debt off in whatever the sequence of time that they’re supposed to, have to renew that debt. And this time around, it’s going to be at a much, much higher interest rate.

David: Yep. I’ve read a report by Jan Hatzius of Goldman Sachs, and it was on the corporate debt maturity wall. And going through it, what it confirmed in my mind was that it’s the government fiscal policy, and specifically refinancing, that is far more dramatic, far more dangerous of an issue in the next few years than corporate financing. And I think we can thank Janet Yellen for that.

Kevin: How much actually has to be refinanced?

David: Well, corporations took advantage of ultra low rates and they extended their terms—and this was all through the COVID era—and so they lower their interest costs. Governments around the world took advantage of monetizing debt. It would look like free money pricing. Issuing debt at low to zero rates was not the issue. It was keeping the maturity short which was the big mistake. And thus, we have $14 trillion—

Kevin: Wow.

David: —of government bonds to roll over in a short period of time, and we will pay double the rate of interest on the new paper. So we’re going to go from 1.5% to 2% payments, now to 4% and 5% payments, and that’s consequential. The math on that, as you know, is for the interest expense this year to exceed $1.2 trillion. That’s this calendar year. What percent that represents of total revenue remains to be seen because we don’t know what the revenue will be. We’re on track for 20% to 25% of total revenue. And again, that’s interest as a percentage of revenue, if you just let that sink in. But to your question, 16% is the amount of corporate credit that will roll over in the next two years.

Kevin: Okay.

David: Not that big of a deal compared to the 40% that we have in government bonds.

Kevin: Do you remember, Dave? I know you do, but we were just talking about it a couple of years ago, how close the spread was between high yield, almost junk, kind of corporate paper, and US Treasury paper. There were times when the signals made no sense whatsoever, and at this point, that spread could widen, couldn’t it?

David: That’s exactly right. And all that is the difference between the Treasury rate and the extra premium you get for taking extra risk, which is pretty ironic because back in the day, governments had to pay more than corporations. Governments were considered a less sure bet. They were seen as rapacious. Imagine that. 

This Goldman paper did point to high yield, or what we would call junk debt. The high yield market is going to be more vulnerable over the next two years than your investment grade. Nothing immediately wrong with the market, but there’s no pressure in that market today. Again, spreads are incredibly tight, the difference between Treasurys and even junk bonds. And you’ve got bond issuance this year on track to exceed anything we’ve ever seen before. This is corporate bond issuance. We’re talking about investment grade corporate and high yield corporate.

Kevin: If they’re going to pay more in interest, it’s going to cost in other places, isn’t it?

David: Well, in addition to the long fuse concern over high yield paper, there is the impact from higher rates, which feeds into corporate boards’ allocation of capital. So capital investment, or CapEx investment, is expected to decline 10 cents for every dollar increase in interest expense. And labor costs are expected to decline by 20 cents as we see an increase of interest by $1. So a total of 30 cents that has to be reshuffled. Less hiring, pressure on wages, less business investment as a consequence of a slight increase in corporate interest costs.

And again, as we move further out onto the timeline, there is a more dramatic move in those interest rates because of the amount of refinancing—the interest cost, I should say, as a result of the refinancing. So that fancy phrase, debt maturity wall, it’s a small impact today. It increases over time as we move closer to the maturity wall. I guess the bottom line is you never want to run into a wall.

Kevin: Well, and the difference between corporate debt and, say, Treasury debt, you’re not saying that Treasury debt would ever have a solvency issue. In other words, a corporation could just go bankrupt.

David: Yeah. And again, just to recap, corporations extended their maturities. They don’t have the concentrated role of a risk that the US Treasury Department does. 16% of corporate debt matures over two years compared to just over 40 for the Treasury. There will be an impact, but nothing as dramatic as we continue to see unfolding in the Treasury market. There’s not a concern about solvency or stability within the Treasury market. It just underscores why upward pressure on rates is a structural issue, and not merely a choice to be made by monetary policy committee members. 

There are the mass quantities of refinancing over 24 months, and this is another important point. The Fed is shrinking its balance sheet. What that means is they’re selling paper that they had previously bought. They’re letting go of paper that they bought during the pandemic. This is QE being flipped to QT. The artificial buying back then represents an overhang, an additional supply to deal with now, which requires the marketplace to absorb a quantity of paper that it would not ordinarily have to.

The implication is that capital allocators may require additional incentives to fill the gap created by that Federal Reserve exit from its portfolio holdings. So this idea that we’re just going to see interest rates decline and everything’s going to be good again, you have too much supply. The question is, do you have adequate demand? If not, there is a natural upward bias for interest rates. That’s the implication.

Kevin: Well, and to be honest with you, I love interest rates now. An upward bias in interest rates basically says that we still have somewhat of a market. I think about China, Dave, the difference between China just picking what their GDP is going to be and telling corporations when they can do this or that. That’s all a control economy. And your guest last week pointed out in his book that freedom is actually something that is very much a monetary issue, and interest rates are actually the cost of free market trading. So when we do have this upward bias for interest rates, what we’re basically saying is the government, even the government, still has to pay more to get people to borrow.

David: Right. And I suspect that we first see the market function, the market steps in and says we need to be compensated more. Again, that’s higher rates. Consider that the carrot in the carrot and stick dynamic. If higher interest rates are on offer, then there’ll be more product purchases.

Kevin: Right.

David: Kevin, if that doesn’t work, then Congress may have to tinker with fiduciary rules and begin requiring an allocation to government debt.

Kevin: That’s a command and control action.

David: It comes at a cost. That comes at a cost. That would signal to our international financial partners that the Treasury market has been unofficially downgraded, requiring coercion to function. You’re right. It’s not unlike the forced capital allocations in China. Forced coercive purchases of Treasurys are not a present concern, but we see the growing trend of financial repression, and it has varied forms. Those remain a real threat, and it’s not one that’s far off. That ultimately feeds the market’s appetite for gold, and I think we are seeing the lack of options and the force of capital into certain channels. The consumer in China says, “I don’t think I’m going to be the winner here.” And they’re opting into gold as an outlet for anxiety.

Kevin: We’ve talked about Frederic Bastiat’s book The Law, and the law is actually for the protection of the person. The protection of the free markets is also protection for the person. So if your government, either with the law or like you said, fiduciary action, is no longer protecting your ability to pay a free market price, gold is the ultimate freedom, isn’t it? It’s detached from any government action. It has its price and that’s it.

David: Yeah. So in my mind, there’s few better alternatives for being outside the system. You’re immediately adjacent to the system with easy access to engaging the financial system on your terms and on your timeframes. And I have to say, what we created with the Vaulted program becomes more compelling all the time as an adjunct to a parallel economy. At the edge of the financial universe, you may not want to be in it, but you can be right close to it. What I envision for that savings platform is something like— Think of it as banking in ounces, but spending in dollars. We love the opportunity to continue to invest and develop that for the end user, where the idea of spendable gold and silver, I think it’s as appealing to others as much as it is to me.

Kevin: That’s how I treat the account. Of course, Dave, through the years, I’ve been here what? 37, 38 years. Of course, I have physical gold, but I also have physical gold in the form of Vaulted. And I just use that as a sideline savings account. And so, rather than sitting in dollars, which I don’t necessarily trust long term, I’ll move some money over into gold until I need those dollars, but it’s so easy to shift back.

But let’s talk about the dollar here for a moment, because I don’t like the dollar long term, but the dollar’s, what do they say, the healthiest horse in the glue factory?

David: Best looking horse in the glue factory.

Kevin: Okay.

David: We get style points in the glue factory. For every point, there’s a counterpoint, and I think you can say that to the degree the international currency and capital markets experience pressure, there is a proportional shift into US dollar assets and US Treasurys. So the US dollar can trade higher, and US rates can go lower as a reflection of stress in the financial system. There is clearly a weak dollar argument to be made, but you’ve got to carve out some space for a strong dollar reaction to a downside—to use Doug Nolan’s language—a downside credit dislocation.

Kevin: Yeah, and again, it’s interesting. We call the bond markets the bond markets, and that’s a generalized term, but there is a huge difference between government bonds, where a government can print the very money that it takes to pay those bonds off, and a corporation. And so let’s go back to those yields on corporates, because if yields are rising and corporations are feeling the pressure, they can’t print like the government can to pay those bills.

David: Well, what’s fascinating right now is there’s massive inflows into corporate debt. As we said earlier, the spread is shrinking. We circle back to US corporate debt. In that environment where you may have the dollar go up, can you imagine the dollar going up, government bond yields coming down because of the safe haven bid because of international dislocation, and then the divergent performance in the fixed income markets where Treasury yields go lower, again, prices higher. Treasury yields lower, and then in those investment grade and junk debt segments, significantly widening spreads to Treasurys. Prices are dropping, yields are going higher.

The current investor is obsessed with corporate debt, and I think they’re ignoring that spreads are super compressed, and that an interest rate scenario exists in which Treasury rates do move lower, which is what they’re preparing for, but they’re assuming it’s on a different basis. If it’s moving lower—Treasury yields moving lower—on the basis of demand for safe havens, you can find yourself in a scenario where corporate rates move the opposite direction, reflecting strain in corporate borrowing, reflecting strain in corporate profits, reflecting a recession—this thing that has been written off as impossible—or a variety of other issues.

Kevin: So not all fixed income is created equal.

David: That’s right.

Kevin: But talking about command and control, because I really do appreciate the fact that we live in somewhat of a free market, and I can look at interest rates, and if the interest rate is relatively true, I can make good investment decisions. That’s a famous line from a financier from hundreds of years ago, but China comes out just recently and they said, “All right, we have chosen our GDP to be 5% at this point.” How do you choose, Dave? How do you choose what your GDP is going to be, unless you’re going to coerce, right? Is it coercion that gets the 5%?

David: I love engineering and I love reverse engineering, and if it’s just a matter of picking the number and then figuring out how you get there, I suppose that can work. We had the National People’s Congress conclude their seven-day meeting this week, at which, in this meeting, they said 5%. That’s the growth rate we’ve chosen.

And you might more generously say that they’ve targeted 5%, but to your point, in a command and control system, credit is a political construct. It’s a tool. It flows favorably to the sectors considered most important to meet the goal. And so, in that sense, it is practically chosen.

The target can’t be reached as easily. I think something has shifted here. So, we might watch for some strains within the Chinese currency market, because the target is going to be harder to hit with real estate assets continuing to be impaired. Efforts clearly have been made to revive interest in equity trading, to little effect at this point.

So, what are they doing? They’re reverting to the same tactics that they’ve not been able to move away from for at least a couple of decades now. The mercantilist machinery of producing products and exporting those products globally, that’s cranking up again, and it is interesting. You’re already seeing a variety of trade partners complaining about a flood of cheap products. I think China is in a pretty dangerous position.

Kevin: It’s interesting, Dave, as we talk about the balance between command and control in free markets, and China has played their own balancing act. The United States plays their own balancing act, but I think about a complete destruction of a government.

There’s a pastor and his wife who went back to Haiti. They lived here in the United States, and they felt the need to go back and have a children’s school in Haiti. We’ve been praying for him voraciously because they are in a war zone at this point. Talk about command and control, there’s none. At this point, it’s just roving gangs.

David: I think that the Haiti thing is certainly interesting. Just one last point that comes from last week’s interview with Edward Chancellor. He mentioned that there’s a long history of the Chinese leaning on centralized control to solve problems—what he described as a Mandarin class.

What’s at stake there is really the same thing that’s at stake here. If the Mandarin class loses credibility, the scale of reflexive panic, particularly in China, I think it will shock the world. Japan was the last major Asian tiger bubble to burst. It was just last week that we had the Nikkei set a new high. Kevin, that was 35 years to get back to that all time high.

Now, we have the Chinese property, credit, and investment bubbles, which makes Japan seem mild by comparison, and the Chinese notably have, in this seven-day meeting, expanded their budgets for diplomacy, for security, and for defense. When I think about our growth rate versus theirs, we’ll be a fraction of their 5%. It’s too bad we can’t choose our growth rate. I guess, to your earlier point, I’m glad we can’t. I’m grateful we can’t, because it’s still an indication of a free market.

Kevin: Yeah. So, Dave, we’re all trying to find that balance. The anarchists would say, “Oh, it’s just best not to have a government.” But you look at Haiti, you’re bringing that back up again. You’ve got command and control on one side with China, then you’ve got hopefully somewhat free markets in other parts of the world, and then you have places like Haiti where it’s just hell on earth right now.

David: It’s really fascinating. If you want to step back, look at the map, and consider the difference of policies and their impacts. One island—Haiti is on one side, the Dominican Republic on the other. There’s an arbitrary 290-something kilometer line between them. And on one side, you have freedom and flourishing. On the other side, you have chaos. Absolute chaos.

Over the weekend, I spent some time with a gentleman who lives in the Dominican Republic. I have a good friend that goes to the Dominican Republic and goes kite surfing for a month out of every year, and it’s just a paradise. It is a paradise on Earth. In fact, some of companies we look at on a routine basis have gold mines in the Dominican Republic. There are riches there. It is the same island, but you have Haiti on the other side, which is in apocalypse mode. It’s in apocalypse mode. This may seem like it’s a sidebar, but when you think of a cannibalistic gang, you probably don’t think of the Clinton family.

Kevin: I hope not.

David: Not first anyways, but the road that led to a destabilized Haiti has been one where our involvement with this government and that government, we’ve favored corruption. We’ve supported corruption, and this is not just in Haiti, but in other parts of the world. And this road of destabilization in Haiti, it is one that the Clintons traveled. In fact, they in some sense paved the way for it.

Let’s start with the $30 million which was given to the Clinton Foundation in 2010 for earthquake relief. That’s largely unaccounted for. A year later, we have election interference coming directly from Hillary. Hillary and company helped rig the election for Martelly.

In 2011, there was hundreds of thousands of ghost votes, ghost ballots, 650,000 to be exact, many of those already pronounced dead in the earthquake the year before, in order to bring in the one person that Clinton tapped to be the president of Haiti.

Clinton’s chosen fixes didn’t fix anything. In fact, I don’t think they fixed anything. We still deal with the recurring theme of brokenness, of corruption. I mean, look, election interference is an interesting topic. I wonder if she would be interested in a diplomatic post on the island right now.

Kevin: David, it was fun last week listening to the interview and hearing how Doug Noland—his name continues to come up, and I still pinch myself that we’re working with the crew of people that— Actually it’s a chosen crew, and Doug’s one of them. And Doug brings some great points up each weekend in his Credit Bubble Bulletin. The report on household credit, that was fascinating, where everybody’s money is going. You would think that the mortgages were the place that people are paying their most interest at.

David: Again, this is kind of a tale of two cities. We talk about this island, and Haiti and Dominican Republic being on the other side, and there being two totally different stories. There is two totally different Americas, and I see this reflected in our metals business, even, where we have big purchases, large purchases, multimillion dollar purchases, and then we have lots of people who are selling at these prices to pay their bills. To pay their bills.

And the contrast could not be more stark. And you say, “Well, look, household net worth is at all time highs.” That’s exactly right. That’s why if you go to a high end steakhouse, you can’t get a table, but you also find people struggling to justify going to McDonald’s for a family of four, paying 50, 60, 70 bucks for fast food.

So, Bloomberg’s report of household credit I thought was fascinating. They said that US households are now paying roughly as much in interest on other kinds of debt from credit cards to student loans as they are on their mortgages.

Kevin: That’s amazing.

David: So, this is all according to the Bureau of Economic Analysis. Non-mortgage interest payments climbed to an annual rate of $573.4 billion. That’s in January, just shy of the 578.3 that’s being spent on mortgage interest. Mortgage debt has always been double, always been double the combined total, everything else. Now, it’s equal. That is saying something about folks who are having to use credit to get by.

Kevin: Isn’t this just more confirmation that we are in, to use Doug’s words, a credit bubble?

David: Well, that’s right. Please read the Credit Bubble Bulletin from this last weekend. He covers the Z.1 report. It will make you cry, in part because it’s very, very dense. But upside dislocation, if you need confirmation of a credit bubble and you require the numbers to prove it, look no further than the weekend Credit Bubble Bulletin. I liked pages 1, 3, 5—4 and 5—6, 24, 25. It’s a long report, but there’s some really valuable things in there. And again, you see the basis of why financial markets are going crazy. The liquidity is flowing, but it does not flow equally.

Kevin: Well, and one encouragement that I would have, because yes, Dave, you do read all the way to 24 and 25. I, a lot of times, run out of time on a Saturday for that. So, I would encourage every listener to go and see what a quality report the Credit Bubble Bulletin is, and just basically give yourself a three-page limit. Just read the first three pages. You’ll be amazed at how much you walk away with.

But let’s go back to some of the economic news as far as employment goes, because of course, this was the State of the Union speech this week. I thought it was a campaign speech, but the State of the Union speech—

David: It was the State of the Campaign speech.

Kevin: Yeah, State of the Campaign speech. Yeah. Angry, angry. If I had to characterize any of it, it was just angry. Just angry, and resolved, and angry.

David: I thought he brought the intensity necessary to prove that he still had a pulse. It was great.

Kevin: Oh, well, okay. So, have you ever known somebody who tells you something with conviction, and then the next time you meet them they tell you something different with conviction, and then the next time you meet them they tell you something different with conviction, but they’re all in contrast to what the first thing was? It shows that the first thing was not true. Now, I’m thinking of employment, Dave.

David: Yeah.

Kevin: Employment. How come you can say employment is great and the next month say it’s not, and nobody really pays attention to the second part?

David: Well, this is a tough place to be if you’re an equity trader because you kind of want bad news so that it forces the hand of the Fed to be looser with credit. But that’s not what we got on Friday. The non-foreign payroll numbers were out Friday, 275,000. Great! That’s compared to the 200,000 that was expected. It was fantastic! So, it’s not exactly what equity traders wanted. Bad news is good news if you want loose credit and want it quick and easy.

Kevin: Yeah, but are they going to revise it?

David: What is not noticed is the consistency with which past numbers are being revised lower. So, you might think about that a little. Were they wrong? Were they just off a little bit? Take, for instance, January’s number, 353,000. Great number, right? But it was cut in the most recent report. It was revised lower to 229, not an insignificant cut, 353 to 229. December was cut again by 43,000. Our friend, Bill King, tallies the two-month cuts to 167,000 total like magic. Like magic. I was in Vegas over the weekend for a conference, and they’ve got those famous magic shows. Reality is one thing while you’re looking at what you’re supposed to look at, and then reality shifts when the observer moves on.

Kevin: The art of illusion.

David: What is reality? What is the real state of the economy? It seems to me there are two views on that. I think you can argue from household net worth statistics that there are parallel economies. These are two worlds. This is Haiti, and this is the Dominican Republic. One is representative of a class benefiting from the wealth effect and access to assets and the inflation of those assets. Asset prices ride high, the high life is easily accessible, you travel, you eat out, you’ll see it. But as our guest pointed out last week, monetary policy, which has benefited asset prices, is not concerned with the distributional effects, which are very uneven. So the other economy is that economy of the forgotten man.

Kevin: Yeah, what you see when you read [Chancellor’s] book The Price of Time, you realize that loose monetary policy always creates this parallel economy where you have the forgotten man way, way below the very, very, very wealthy man. And that separation, you were talking about spreads between credit in high yielding bonds versus governments. The spread versus poverty and wealth, great wealth, is devastating, but it is created by the same types of things, and that is credit bubbles. Saying that money grows on trees. You tell your kids that it doesn’t, and then you go grow it on trees when you’re a government.

David: Yeah, and it’s not to say that there’s not improvements around the world. You have a hundred thousand people leaving extreme poverty every day. So there are many good things that are happening. But if you look at our political milieu, it does reflect popular discontent, popular discontent with inflation. And again, you see two different, starkly contrasted answers to that question Ronald Reagan asked years ago, “Are you better off now than you were four years ago?” For some it is a strong yes. For most it is a strong no. So coming back to King’s commentary, he says, “Most people realize that the US government fudges economic data for political reasons. We learned years ago that the best economic indicator is tax collection. Please note that tax collections have been declining. Fiscal spending has escalated, and for the past few quarters has contributed greatly to US GDP. After the general election, look out.”

Kevin: It’s concerning that there are a lot of things that you can see coming that are going to be delayed until November.

David: The economy is great. The economy is not great. That’s again, where you have these divides of information and two very different ways of seeing the statistics which are printed. Bloomberg reported that most states saw less revenue in the first half of fiscal 2024 than in 2023. That is, 34 of the 46 that provided data reported year-over-year declines. This is state revenue, but recall that 2023 had a downside fiscal surprise when federal revenue came in 10% light, and a lot of that had to do with the carry over from 2022 and the lack of capital gains. It was a tough year. I suspect that 2024 will fill that 10% gap from last year. 400 billion capital gains tax is helping considerably. The cap gains are coming from that parallel economy. Cap gains are coming where the asset holder is raking in profits from the easy money policies, the monetary policies, which don’t distribute the flows equally. Non-asset holders are getting squeezed on the income front, so the tax collections are a very important piece to watch.

Kevin: So Dave, as we look at all of this, I continue to buy gold because I don’t have to predict the future, necessarily. I realize we’re getting a lot of calls right now because gold happens to be hitting an all time high over this last week. We’ve got some volatility there, but to be quite honest with you, I’m not that excited as to whether it hits an all time high or not, because I’ve seen what it’s done for decades and centuries and millennia, and what it’s done is, it has offered me choices when the powers that be want to take them away.

David: We’ve been through periods like this where gold consolidates at a particular level and doesn’t seem to go any further, and it becomes range bound, and traders get to the top of that range and the behavior becomes almost automatic. You sell at the top of this range, and then you buy at the lower end, and we had that between 275 and 500. Very rarely did gold peak above 450, but if it did, it was exhausted by 500 and it fell back into the 300s. And then we had a cap in and around a thousand, and we’ve done this multiple times over the last 25 years. We just spent 12 years consolidating under 2100. What happened last week was very important because we had not only a multi-day close above 2100, but we also had a weekly close above 2100.

Now, it’s very possible that you get a knee-jerk reaction from traders and take the price right back below that number. But it’s important to recognize when momentum has shifted. There is, in technical parlance, this thing of breaking a ceiling and the ceiling becoming a new floor, which I think holds. More important is that momentum on a daily basis has shifted favorably towards gold. Momentum on a weekly basis has shifted favorably towards gold. If we see the momentum shift on a monthly basis, instead of seeing multiple quarters or perhaps a year of improved pricing in the metal, you’re talking about a multi-year trend. So the momentum has shifted daily. The momentum has shifted, possibly, on a weekly basis. Now you’re just waiting for that last and final piece as confirmation that 2100 is the floor and we’re exploring with the upward bound. We don’t know what it is.

If you could tell me how low the US dollar goes, I can tell you how high the price of gold goes. We’ve seen this in other currencies. We play with the gold price in yen terms, and we’re flirting with 300,000 yen, but it didn’t start there. At one point, it was 10,000 yen or 20,000 yen. This is not a story about gold. It’s a story about currencies. It’s a story about mismanagement, and that’s where we see the impact of philosophy, the impact of ideas. Monetary policy is not neutral. It is a philosophical statement. And so the fact that we have left the forgotten man, forgotten him completely, and have focused on creating wealth in truly what is ephemeral, not real, wealth. Riches, but for how long? You’re going to keep it for how long?

That to me is a compelling point in looking at gold as a critical allocation. Momentum has shifted. You have that backing you. Where we go from here, take this out one year, two years, three years, if we have further confirmation of momentum to the upside, I think now you’re talking about taking out the inflation-adjusted numbers that we talked about last week. $3386 is gold’s inflation-adjusted number off of the $850 1980 highs, and we may even stretch to double that, twice the inflation-adjusted high.

*     *     *

You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. You can find us at mcalvany.com and you can call us at (800) 525-9556.

David: 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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