Podcast: Play in new window
- They Will Run It Hot Until It Blows Up
- Welcome Back To The 1970s: Inflation + Gold Explosion
- The Chinese Are Buying Gold Like Crazy
“So, yeah. Biden did that enormous package and you got inflation. And Trump, doing pretty much the same thing. Then when you lay over China, who’s fighting to keep their economy from imploding. As bad as our money supply is, China’s is worse by at least a factor of two on their money supply and their debt issues. And, that’s when you see, with the Chinese Central Bank, Chinese are buying gold like crazy.” —Bill King
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Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
One of my favorite guests, Dave, and we have him on fairly often, is Bill King, and he has so much trading knowledge from his background going all the way back to the 1970s. I have to admit, I take continual notes whenever you’re interviewing him.
David: We have the privilege of reading Bill King’s thoughts on a daily basis, and at least a couple of times a year he joins us on the podcast.
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And so, Bill, you’re a favorite guest on the Commentary. People love to get your insights on the market and the economy. Let’s dive right in, but great to have you back.
Bill: Oh, thank you. It’s always fun.
David: We had stronger than expected GDP figures announced shortly following the Fed’s decision to cut the fed funds rate. What is your impression of the Fed’s decision in light of economic strength and in light of record high prices in equities and gold?
Bill: Unfortunately, despite the Fed for years saying, “We’ll never make the mistake again,” we’re replicating the ’70s. And, I think that’s something we mentioned probably last time we talked, and you could see it developing. It’s very similar. It’s said history doesn’t repeat, but it rhymes. Well, this one is doing more than rhyming. This is very, very close.
And, it was easy to see. You had this unbelievable price stability from after World War II all the way up until early ’70s. I mean, you can go pull up online, you can see McDonald’s menu with 15 cent hamburgers in 1949, early ’70s, that’s where they were. Think about it, nickel candy bar, nickel gum, 10 cent Cokes. I mean, it was ridiculously stable. And, that’s why we had such a great—not only a great economy in the ’50s and until the nuttiness began in the ’60s, but just social stability.
Then you had a number of things happened in there. They had OPEC’s raising prices and Kissinger went along with United States because they wanted to make Iran the policeman of the Middle East after the 1973 war where it stunned Israel, and they almost lost. Then, you had the big move into grains, led by soybeans and on and on and on. Nixon, in ’72, wanted to be re-elected. Then, he had the Fed pump up the money supply. So, you saw that in the stock market, the ’71, ’73 double top and then they just got cratered. And then, [unclear] inflation showed up, you had the worst recession, ’73, ’74, since the Great Depression.
Same thing with stock market. You had the American Stock Exchange, which was the NASDAQ of its time at that time, lost 89% of its value. Again, worst action since the Great Depression. So then, you started coming out of it, Carter came in, and then ’78 midterms came up and he wanted even more money supply. And, you had Arthur Burns in there who famously said, “We can’t call this recession anymore.” And so then he put in G. William Miller to run the Fed in ’78 and they just pumped the money like crazy because Carter wanted to do well in the ’78 midterm elections, and that’s when everything went berserk, and Hunt brothers cornering the silver.
You go back though, and just for your listeners, if you picked up any list—whether it was Forbes or Fortune—of the richest Americans in the late ’70s, it was real estate, oil, and gas. You didn’t see Buffett. He was really nothing at that time. Very minor guy. That was the game. It was inflation. People wanted to get out of hard assets. And, you could go back to ’71 when Nixon closed the gold window, he saw it coming.
And, even you could go back to ’67 when the US quit putting silver in their coins. It was all setting up, but part of that was because Johnson put in the Great Society program in ’64, ’65 in there, and then the government spending and it just took off. So then, mid ’79 and ’80, everything just went berserk to the upside. And then Japan threatened not to buy more US debt. Carter called, “What do I do?” Talked to David Rockefeller and said, “You better put a real banker at Fed,” and that was bring in this guy, Paul Volcker. And Volcker gave everybody the medicine and there you go.
The point there is inflation just doesn’t come in one trend. There was two waves. The first was the shocking wave, which was like ’73, ’74 that broke long-time stability. And then, people got a little complacent because you had the normal reset. Gold fell sharply. Gold had gone up to almost $195 from— It started $40 actually but then it fell down all the way to a $100 and then started basing and took off again. And, that was the really first big gold bull market because, as you know, gold was pegged for decades.
So, that’s what I’ve been watching is you had that first inflation pop up and then all of a sudden we’re sitting here kind of complacent and you get back to what do you think of the GDP? What do you think? What’s going on here? Well, Trump’s an inflationist. Well, look at the guy, where did he make his money? In major real estate. How do you make money in real estate? By inflation. That’s the game. You lever up, you bet your net worth, you go to bank, you borrow gazillions of dollars and you hope that the property inflates.
And, he said that a long time, “I’m the king of debt.” And, that’s why he ran into some trouble here with the budget because people were just, “This is ridiculous.” So, yeah. Biden did that enormous package and you got inflation, and Trump doing pretty much the same thing. Then, when you lay over China, who’s fighting to keep their economy from imploding. As bad as our money supply is, China’s is worse by at least a factor of two on their money supply and their debt issues. And, that’s when you look at night, you see, with the Chinese Central Bank, Chinese are buying gold like crazy. That’s part of this configuration so it’s going on here.
And, we don’t even have to talk about the global situation, Russia, Ukraine, some of this other stuff going on. There’s always global issues and you could always point to, “Oh, this is happening,” or, “That is happening,” and there might be some influence in that, but the big one, if you really want to look at that, is what’s going on in Europe.
Europe is really hanging by a thread there politically, socially, or whatever you want to say. The last inflation scare we had here, when bitcoin took its first run and with gold and with silver was 2011. And if you guys remember, you had all the issues as Italy, Greece. All that was just a disaster because of what happened in the financial crisis in 2008, ’09. So, that’s when bitcoin finally got on people’s radar, and you saw what happened there with silver. And, in fact, what you’re seeing now, people are saying silver’s at its highest level since 2011.
So, you got Europe’s kind of back on the map, not quite yet on the financial side, but on the social side and the geopolitical side. That’s the configuration you’re looking at. Like you said, stocks all-time high, gold, the cryptos going, although they’re starting to settle down a little bit, but what’s out there to stop this stuff from going higher? That’s the question you have to ask yourself.
And, unless you think the Feds going to start tightening rates or China’s going to stop, this stuff’s got more room to run. And, the thing people forget is, when you see how gold went crazy in late ’79 and ’80, Fed had actually started, shocked the world in October ’79 when Volcker came out and said, “I’m going to stop reserve growth and rates are going to go where they’re going to go.” That was the October massacre. A couple of people that were in silver and gold almost got wiped out here in Chicago on the Board of Trade. But then, it took off again. They had a month whack, took off and it made new highs in January.
Then everything started coming apart, and Hunts almost took down the system in March of ’80. And, that’s when Volcker started easing rates, pumped the economy, then the commodities took off. Oil made its high in November of that year and it started coming apart. But, that’s what it’s looking like here is that there’s no Volcker at the Fed. Trump just put in his lackeys. They want to cut rates, which makes no sense.
And so, I think as much as I see gold up here and going, a quick anecdote. About three months ago or four months ago, where we have my pension account, I get the call from the account, rough going, and this is one of the major banks in the US, “We’re getting a compliance department notice here on your account that you’re heavily concentrated in gold,” which I had GLD, GDX, like that in there, and it’s probably around 25%, 30% of the assets. Now it’s well over 50% just because of how much gold has gone up. And, as you know, the gold stocks have really taken off after that. That’s how, when the gold gets going, it goes crazy.
In fact, I talked to a guy who was a really smart guy, Fortune 500 CEO, whatever, a good investor and talking about [unclear], and he kind of said, would be saying to you now, “Yeah. It’s up. It’s up a lot. But, boy, at the end, if you remember 1979 there at the end, it just went crazy to the upside when you get the real panic.” And it continued when Volcker changed the table. It’s going to be tough. It’s going to be tough to navigate right now because the difference back then is you didn’t have as many small traders and amateurs in there. And, there’s a little more sense in the markets because the big players, you kind of think along what they want to do and what they have to do.
The problem when you have the masses, I call them the army ants, in here now, boy, when they move in mass, you don’t know the psychology, things are so much quicker now. They could just pull out their iPhones and start trading. So, yeah. I think it’s going to be interesting times here.
But, the other thing is, if you do want to start selling your gold and silver and stuff in here, where do you put your money? That’s the thing right now is vexing everybody. Every professional investor is, “What do I do? I don’t want to be in cash. With the US deficit, what China’s doing, I just cannot afford to be in cash.” And, gold always outperforms stocks at the end. That was the lesson in ’79 and ’80 and even there in the first time gold took off there in the early ’70s. That’s because people look around, equities are overvalued, the central bank is trying to stave off a recession, and stocks do okay, but gold does better. And, anybody who has been paying attention, as good as the stock market looks, gold’s been outperforming stocks for a few years now. That’s where we’re at.
David: It looks like the White House prefers to run the economy hot, and that would seem to imply more inflation on the horizon as maybe an implicit policy preference. Would you agree with that?
Bill: Absolutely. They’ve said it, they’re leaking it. A lot of people on Wall Street were very happy that Bessent [unclear] of treasury and you see the prospect, it’s really people on the street have been saying it. He’s the adult in the room there with some wacky people. But, if you remember in the beginning what he told Trump is, “Shut up talking about the Fed cutting rates. It’s the ten-year bond yield that is going to rule the world.” That’s what mortgages are based on. That’s what the economy is really based on. So, he shut up for a while, but then he starts running again. And, you can see in the bonds, they’re not happy with the Fed cutting rates there. It’s obvious to see why, because we’re running the kind of deficit we are. Now, Trump is saying, when he talks about this, as though we have to get the cost of our debt down and that’s why he’s beaten up. “We’re paying too much money on interest.” Well, cut the debt, pay it down, whatever. But, instead he’s yelling at the Fed to help us save the economy and the US budget deficit by lowering interest rates.
Well, that was the thinking back in the ’70s, and it just didn’t work. And, they go back to the Fed saying, Bernanke and also Powell, “We’re not going to make the mistake we made in the ’70s.” Yeah, you are, idiots. The mistake in the ’70s was when LBJ—and even when Nixon expanded LBJ’s great society—when fiscal spending was going hot so the people could get reelected, they tried to control inflation via interest rates. “Oh, we’ll just raise the…” The old K IS-LM curves in economics 101. “If we have, running the economy high, high fiscal spending, then we’ll just raise interest rates.” Well, it didn’t work.
And, all he did is made things worse. You might shock the market for six months to a year. And that’s why Volcker came in and said, “No. You got to stop the reserve growth. You saw what happened with reserves here.” So, either they were idiots and they didn’t understand the lesson in the ’70s, which was, you want to stop inflation, you got to cut reserve growth. You can’t do it by interest rates. So, we’re doing that game in here now.
And, the other thing is, and I don’t know if Trump, this is part of his strategy or whatever, but if you look what has happened with the Democrats, if you look at the issues in the country, the US is a center right country. And, you’re seeing it right now with whatever the major issue with the US is. And that’s why Democrats are doing what they’re doing now. They don’t have any issues so they’re playing the game they’re playing now, the demonization, all this other stuff.
But what the Democrats succeeded in decades was getting people to vote for them because they give them something for free. It’s that simple. Again, here in Chicago, both my parents worked for the city of Chicago. Firefighter and a secretary in a Chicago public school. That’s how you get the vote out. You either do business with the city, you work for the city, or you’re getting an entitlement from the city or somebody in your family is doing it. That’s what the original Mayor Daley came up with. You made the democratic machine type thing. So, the Democrats got in, and once they got in, especially later, Obama, whatever, they put in policies that they wanted and they got them by giving people what they want.
And, I’m sure that’s what Trump has figured out too, is that, “I want to reverse these policies. Well, I have to stay in power, and Republicans, you got to stay in power. And, you know how we’re going to do that? We’re going to do with the Democrats— We are going to let everybody have their freebies and play their games. We’ll bring in Elon Musk, we will try to give the appearance we’re going to cut the budget. Definitely we’re going to do this.” And, that’s why Musk left. They made some small cuts here and there, which were band-aids, and then Trump comes with this enormous package where you’re a trillion and a half deficit. So, I think that’s part of the game. I think that’s the two issues for Trump, is everybody knows the budget deficit of the United States is unsustainable, the interest payments that they’re paying on debt, this is going to eventually implode. But, if he wants to put his agenda in, he’s got to get reelected, and the Republicans are, so you can’t upset the socioeconomic model here with the government being a big chunk of the economy or everybody gets thrown out. So that’s why I think the other side with gold is if these guys can’t cut the budget, don’t have the will to do it, or they’re playing for political reasons that they can’t do it, then you’re going to have to run this thing hot until it blows up.
David: In a Financial Times article a few weeks ago, the discussion was on inbound foreign capital. And the appetite for US assets is real, but 80% of the inbound capital, it’s now dollar hedged. What does that tell you?
Bill: Well, it’s just the same thing. You’re running a budget hot. You can’t keep creating these kinds of deficits. That’s what happened in the ’70s. After World War II, obviously, everybody wanted dollars. I think there’s sometimes we’re close to 50% global GDP. People still have not come to grips with was going on. You decimated two industrial powers, Japan and Germany.
Russia was a backward country that we helped boost their production for World War II. Europe was devastated, right? You can argue, England never recovered from World War I. Same with France. And you go through Italy. Well, who was the industrial power out there? That’s why we had to do the Marshall Plan to get Europe off its back.
So you had this insatiable demand for dollars. China was peasants. I mean, you could just really look around the globe. You had a little down in South America, but it was just ridiculous. And that’s why the US standard of living was so high, especially on a global basis. If you were a blue collar worker, you just had to have a job, and you’d live a nice existence in the United States up until really Great Society.
Then the inflation came, and everything changed in there. The only other time you had this in the early ’90s and Bill Clinton was able to get away with a lot of stuff because you had the bankruptcy of the communist world, right? The USSR blew up. China was going through this change of privatizing their state-owned enterprises. Eastern Europe, Russia, China, there was insatiable demand for dollars.
So Greenspan could pump money like crazy. And there’s some articles out there about him briefly saying about this, “I want to be chairman of Fed when there’s global deflation because I know what to do.” Just pump like crazy.
And Japan had burst their bubble.Started doing it early 1990 until April of ’95. They just kept squeezing out all the excess in their economy. So again, there was just enormous demand for dollars, and that’s why we ended up in the dot com bubble eventually because that’s what the US does. They just keep pumping money like crazy. So you get back to your question, “Why are they hedging your dollars?”
Well, normally you wouldn’t invest because you have to have the currency, right? Otherwise, it doesn’t matter how well you’re doing in your investing. But the same thing we were talking before. Where do you put your money in the world, especially in Europe? And even the Europeans are trying to get their money out. And then you got China. Chinese have been trying to get their money out for, what, 20 some years. That was one of the initial waves of the Bitcoin, actually the second wave.
The first wave was that the inflationary problem or Europe problem. And then when it got hot the second time, was the Chinese trying to get their money out. At one point, it was, what, 95% of the bitcoin activity was coming out of the Far East. That’s how they were trying to get their money out of China, through the bitcoin.
So that’s the problem. Years ago, I’m talking in the ’80s, I was still in New York at the time, Wall Street Journal had an article about how the US multinational corporation, especially consumer products, put their fast track execs down in South America to teach and to manage.
And that’s what they learned. They learned they had to stay ahead of the currency, the valuations, or they lose money. No matter how good, how much product you sold in your margins, you had to have the currency right.
So they learned that you got to constantly and vigilantly be hedging your currencies. And that’s kind of what you’re talking about here. There’s really very few places in the world you want to put your money. You want to put it in England? What’s going on there in London? You can go right across, France, Germany, Sweden. There’s very few places now where you could say, “Well, I want to put my money in there.”
That’s who I think— You saw Buffett go to Japan about a year ago, start buying the trading companies or whatever. I’m sure he’s done the same calculus, and he thought, “Well, that’s where we should go,” because you definitely don’t want to be in Europe, but you got to get the currency right. So I think that’s what’s going on here. And again, gold is the hedge against the currency and the precious metals.
David: The allocation from foreign investors to US equities versus US bonds has increased considerably in the last year or so. I wonder if we should think about that as a form of hot money. What would reverse those flows?
Bill: Well, it’s a good question, but it goes back to, we’re talking about at the end of the cycle, stocks go up because the easy money in that, but the gold inflation has gone faster. So if you’re a portfolio manager and you’re sitting there and your choices are— Oh, you got three choices, stocks, some amount of cash, and bonds.
If you’re seeing inflation, as Buffett famously said, bonds are certificates of embezzlement, whatever it was, of your money, that’s why he stayed in the stocks. He didn’t really want to do much in bonds because he was playing the inflation. You have a problem. You can’t buy precious metals, and you can’t do some of this other stuff. And you see what they’re doing. It’s happening today. End of the quarter here, we’re having some portfolio rebalancing going on. Bonds are up. Stocks are down except the NASDAQ and the NASDAQ 1000 are going berserk because people are all piling into the FAANGs and the Mag 7 stocks.
So that’s why those things get so hot is that, gee, I have to have some equity exposure. We’re going to play the momentum game. And that’s what they’re playing that. And again, that happens. This always happened, whether it was ’29 or in the ’60s when you had the Nifty 50 and the -tronics. That was that first wave. Anything that had -tronics, electronic this or whatever, was bubbling up. And then, of course, we saw that again with the internet bubble, and we’re doing it again here with the Mag 7.
And the other thing is people go, “Oh, I couldn’t see and miss it.” For the last, I don’t know how many months now, three or four, you guys seen it. There’s story after stories talking about how this AI is not happening and how the biggest companies are— Spending on AI is turn negative. They’re turning over. They’re not getting the boost they thought.
I’ve got a boyhood friend in a top law firm here in Chicago, one of the top partners. For months he’s been sending me the stuff about how the law firms ran through the AI right away because, boy, we save a ton of money. And all these young associates are doing all these briefs, whatever. And they would send the stories where people were going into court in lawsuits, and they’d present a brief to the judge, and the other side of the would look go, “Hey, this case here doesn’t exist,” because, hey, it was creating cases and things that didn’t exist.
And, of course, you can imagine what you look like as an attorney, you come in and present a brief and you’re citing cases that don’t exist. There was incredible errors, and you can see it now. They always joke, go in there and run AI and ask them what they think about Trump or whatever. The point is, the computers cannot think. As much as they want to tell you this, they still can’t think. All you can do is regurgitate what you program into it, and people are acting like AI is, well, this is something really new. Come on.
Did anybody remember the 1983 movie, War Games? That was AI. The computer can think for itself and learn, keep playing simulations. And finally, we didn’t give it tic-tac-toe simulations. And now, we’ve figured out, “Oh, yeah, okay, that’s futile. So we better not fight.” That’s, what, 42 years ago?
David: Well, so back to the Mag 7, we’ve got portfolio concentrations very high. Talk to us about the precedent of a few names driving index returns and what that suggests about the inning that we’re currently in.
Bill: Well, it’s always at the end as you get out because people can’t find value. There’s a reason— Buffett’s got to be about a third of a trillion dollars in T-bills now, right? That’s again why he went to Japan. He’s playing the game of the least bad thing to invest in at the time. And he doesn’t want to be in the bonds. He wants to be on the short end, and he’s waiting.
Charlie Munger always said, “You make your money waiting. You don’t make your money chasing stuff.” And he’s always avoided the hot plays. He got into Apple, but that was more of a consumer. If you look at how Buffett made his money over the years, the one thing Buffett did right, is he got out of the game before the big downturn in ’73, ’74. And people have done this historically. If you look at your stock market returns, and they said, “Boy, if you could just avoid ’73, ’74 and some of these real whacks like that, let alone 2008, ’09, and those, if you just avoid these whacks, it’s incredible your returns.”
And that’s why Buffett has this incredible return. He basically walked away and then came back in after the stock market got crushed in ’73, ’74. And where he came in here, he had Geico, where he bought Dairy Queen. He bought Coca-Cola. He bought that jewelry mark. You can see what Buffett bets on. He bets on the American consumer. In 2008, when that crisis, he bought the railroad.
That’s another safe— Industry is going to be here. Consumers are going to be here. What are consumers going to— What products are they going to do? And that’s what he kept betting on, and that’s why he missed— His performances lag over the last decade or so as he’s missed the big technology boom here. That was his game. It hasn’t been working over the last decade or so, but for all those years, that’s what he did, bet on the consumer.
Munger said something that was very smart. He said, “Everybody’s trained that you buy companies cheaply.” And that was the whole model here. Let’s do a valuation of company and buy it cheaply. And that worked for a long time. And I remember when I first started in business here after the ’74 crash. A lot of people at first started looking at some computers and how to check data. And ’75, ’76 started buying these companies that were really cheap. There were discounted to book value, whatever. Very prosaic companies. Didn’t have big earnings growth, but they bought them, and they put them away.
And over time, by the time, the ’80s came out, people were [unclear] them more because the assets were so rich. What Munger said, though, is what I finally figured out is what you have to do is buy great companies at good prices. Fair prices, I think he said. Great companies at fair prices. And that’s what they did. Whether they bought Coke, they bought whatever, and it was a good product and good management, and they just ran with it. But again, that was a different strategy for a different time, worked for many decades, but it’s a little bit different world right now.
David: The new bond king, Jeffrey Gundlach, talking about having a significant portion allocated to gold, I thought, was interesting. Mike Wilson at Morgan Stanley recently suggested a replacement of the 60/40 portfolio, 60% stocks, 20% bonds, 20% gold. How do you read that kind of adjustment, 50% reduction to fixed income in favor of gold almost begs the question, are we on the cusp of a fresh leg lower in bonds?
Bill: You said a key thing here. The problem you had here with bond people is that bonds made a low in 1982 when Volcker took T-bill rates up to 22% or there about, right in the early ’80s, that 21, 22. And it was just blowing people’s minds. The long bond, I remember, what, 14 and a half, 15, 16 maybe in there, people were going out of their minds.
But what happened then is when Volcker finally started getting control of inflation, and, of course, the Saudis were working with Reagan to bankrupt the Soviet Union dropping oil down. So once people finally started figuring out what was going on there in ’82, bonds made a bottom, and they had this enormous run. You saw what happened.
And then you had a 38-year grand super cycle bond market rally. Unprecedented. Where did we eventually get? One and change in a 30-year bond? When you thought about the US debt, it’s so stupid, that was a bubble actually at the end.
Now, the other thing that hurt all these guys that came in were managing bonds. Anybody came into business and was trading bonds or managing bonds from 1982 up until 2000 took the [unclear] stuff. All they had to do was buy. Every time bonds dip, buy. And you saw these guys, they were relentlessly bullish. Bonds never changed. And I think I went back and looked, and the longest period of a negative move in bonds was 15 months.
They normally lasted eight to 15 months. This is what you expect in a grand super cycle bull market, that when you did get a little bear ripple through there, it didn’t last that long. And if it did, it wasn’t bad, and you just came out on the [unclear] and you made more money. Well, then, what did we go through that when it ended with the Biden inflation and all that?
Most people were saying you had the worst three or four year period in bond market history, and you’ve had periods where bonds that go down hard for a year or two and snap back. I don’t have the exact figures, but I think they’re telling the story that over the last four years, bonds are still having a negative return, which is unheard of for a period because usually the whole idea of efficient bond market is that you’re going to have an interest rate high enough to carry the cost of inflation and [unclear].
So that’s what happened. Now, we’re sitting here now in a consolidation. When you have a bear market that bad, just like if you had a bull market, you need a consolidation. That’s what I think the bond guys were buying all the way down. They got their brains beaten in. All these guys, they were all geniuses, all of a sudden, had the epiphany, “Oh, yeah, the last 38 years where I bought every dip and I ran around telling everybody how smart I was, it’s not working anymore.”
So all of a sudden, you know what? They’re getting religion. They got their hands burned on the stove. Now, they better put some mitts on if they’re going to start handling these hot pans called bonds. So that’s what’s going on there. Those guys all got burned when it came apart. And now, they figured out that this is a different world. And that’s exactly right.
So that’s why they’re saying, “Well, we better get some percentage of gold in here.” And that’s the central banks are doing the same thing. Central banks hit a low in gold reserves, what, back in the— I’m trying to think now. I can’t remember exactly. I remember gold was, what, 233 there right before the bubble, I think, maybe around ’97. I don’t it have in front of me. Remember when Bank of England was selling gold out, and all those guys. You remember all these, “Oh, we’re selling to Belgium. We’re selling our gold out.”
David: Yeah, ’98 I think was the low, the high in terms of liquidations of gold from central banks.
Bill: Yeah, which is ridiculous, and that was the sign that something is going to happen, but yeah, there’s a new world out here. I was always making that case. And before, people born after 1960 and they were managing bonds that they had never seen a real bear market in bonds, not like the ’70s where you just kept losing money and losing money. And as bad as that was, certificates of confiscation, that’s what Buffett just called it, because of what was going on in the ’70s. But what happened there in the previous four years in bonds from 2001 to through ’04 here, that’s unprecedented. That’s far beyond what happened in the ’70s. So these guys all of a sudden learned that you just can’t keep buying bonds and [unclear] back—even if the economy looks weak. That’s what these guys, “oh, economy looks weak, let’s buy the bonds” and whatever here.
Yeah, it’s certainly changed out there. And I think that’s what Trump is trying to—I think simplistically—he thinks, oh, we’ll just keep our interest rates low here on debt and that’s good. He’s thinking like he’s still a real estate guy. Gee, I got all this debt on my real estate holdings. I need two things to happen. I need inflation so I can sell this to other people. And I need my interest rates, my cost to carry, I need it to be lower. But unfortunately, because he’s talking about a country, when people think that you’re debasing the currency, rates are going to go up.
David: What’s your opinion of Bessent’s ability handling our debt and the maturity structure, where does the interest component go from here?
Bill: I think the rate is going higher. I don’t see how it can go down. You saw what Yellen tried to do, she’s trying to put everything on the short end, so trillions of dollars of debt are maturing this year. Everything is being pushed into the short end, and that’s why you have the curve steepening. And you can play that game for a while. We’re going to lower fed funds and then we’re going to keep floating T-bills. But that back end keeps steepening and steepening, you’re going to have a problem, because that creeps in the economy, because banks aren’t going to keep making the same loans they made in the real estate bubble in the early 2000s, the adjustable rates and when they had the liar loans and all that. That’s not going to happen. They know they got burned on that before.
You had the chairman of Fed telling everybody, “You guys are crazy for taking fixed rate mortgages. You should be taking these adjustable rate mortgages. You save all this money. You’re being treated like a builder now.” Yeah, the builders have to sell their property within, what, six months or a year when they’re doing a house. That was the whole idea why they give you a low interest, because you’re flipping the house out, not because you’re speculating on houses. They’ve got a problem. They know they got a problem, and the only way to fix it is to take the medicine, and nobody wants to take the medicine. That’s what Trump is. He’s certainly not going to take the medicine here.
David: Does the steepening yield curve ultimately pull the rug on the equity market?
Bill: Yeah. Usually, something else can come up too. Interest rates have tended to finally squeeze you and do that because it usually slows the economy change. Forget secular. That’s the grand super-cycle bull market. That psychology changed. The gold psychology changed. Now, you guys have been here. You’ve seen good rallies or whatever, and then it would settle down, roll over, and build base, and that was just the big private money. It takes its time to accumulate things. But now, you’re seeing where you’re getting gold breaking away and running more because you’re getting more people involved in it that aren’t patient buyers. They’re traders, they’re investors, whatever. Yet, it’s a difficult process at this point right now.
David: So back to Bessent. He’ll have to deal with a steepening yield curve. Certainly there’s the possibility of yield curve control. Do you think that bond players will see through that?
Bill: Well, yeah, the bond guys, it’s pushing on a waterbed. You got these propeller heads in the Fed and academia running around going, well, we can— This has all been done. See, that’s the problem now, because we had this incredible stability in prices after World War II, and as things started going crazy— And see, remember, Kennedy was the first one who did the twist, trying to save the dollar, playing with the yield curve here, and then, well, interest rate, that’s not really working. Well, we’ll control the yield curve. What does that mean? What does it mean you’re going to control the yield curve? All it means is we’re going to borrow short. That’s all. We’re going to borrow short where the rates are cheaper and we’re just going to push the Fed down. That’s all it means.
And then some economic, oh, you’re doing yield curve control. They’re not doing anything. Yield curve control would imply you’re doing two different things because you’re doing at least two things at the yield curve to influence them. Right now, all they’re doing is, like Yellen did, they’re continuing. They’re trying to borrow short term and get the Fed to push rates down. We’re going to control the yield curve. No, you’re not. All you’re controlling is the short end.
Now, if you control the yield curve, the true way to do it is you would also then purchase long-end bonds to keep them from going up too much. So if you turn around and said, “I’m going to issue a trillion dollars of T-bills. I’m going to turn around by a trillion dollars of 10s and 30s.” Now that would be yield curve control. You’re flattening it out there, but they’re not really doing that. They might talk about, well, we might buy back some bonds or whatever, but it’s minimal.
So the point becomes, when it gets back to the waterbed, you can do this, fool around and think you’re so smart when there’s a strong demand for dollars. Now, there’s not. So you’re fooling around with this, and they’ve been fooling around with it. Again, pushing on the waterbed. What happens is you do this and then the dollar has the problem. And that’s why Greenspan got away with creating the bubble in the ’90s, because you could pump the dollar out there, and that’s why that all worked out back then, and you don’t have that now. It’s a different dynamic here.
So you’re right. You want to fool around here, and that Yellen did it, and the psychology changed there with COVID and that whole Biden, with that monster inflation package in there—the Control Inflation Act. Yeah, right. Come on. It was straight out of 1984. “Work makes free,” the Nazis were saying. It was so ridiculous, and that was so bad and so ridiculous. Only the US media would promote it. And that changed. Again, that was such a seminal act that you changed the psychology of almost a 40-year bond market. Same thing with the precious metals or whatever. And of course, we’re seeing it. You’ve lost faith in the pharmaceutical companies, the medical profession, academic research. It’s just all blown up, and you guys just lied to us.
So that’s, again, talking back to the confidence side, that’s the problem they have, is what you said. They can say all this nonsense. They’re trying to con you into buying US debt. And the smart guys are staying on the short end because they don’t want to get caught there on the backend because it’s not the same what it was 10 years ago where you just keep buying bonds every time there was a decline. And the dollar is telling you that. The gold, silver, and even platinum are telling you that. Bitcoin is telling you that.
The bitcoin, it’s just absurd. You go backwards. Two years ago, they’re telling you, oh, you don’t want to own gold. You want to own bitcoin. Why? What is it? What are you getting? And you can see it. We wrote about this a few times. You could see that there was a big trade out there where people were buying bitcoin and shorting gold. And you can still see it shows up from time to time. Now, bitcoin is running today because it’s the end of the quarter and people are trying to pump it up, but gold has been outperforming bitcoin for, I can’t tell you exact amount of time, but you could see it.
I remember writing this up as you would see gold going up and bitcoin getting hammered because the guys were on the wrong side. What happened was the investment money, central banks, the big private investors just kept pouring into gold, pouring into gold, and eventually all these guys were short gold and long the cryptos and had to capitulate. And that’s when actually you see— You go back and look at the gold chart. We had that big run and we had what, five, six-month consolidations sideways, and then we popped out on this last run. A lot of this thing popping out with the guys’ hedge funds or whoever else was doing this. The commercials were short gold, buying into cryptos. And that blew up on them.
So yeah, that’s the game here. The United States is trying to con everybody into “we’re going to control the debt and we’re going to get the interest on.” No. The dollar is telling you you’re not doing it. Gold is telling you you’re not doing it. It’s just totally different psychology now. I hate to say different dynamics— The dynamic is there, but people have figured it out, and that’s the problem they’re having.
Now, you can con people for a long time about— Back here, France started grabbing for gold, what, ’68, and that’s when Nixon finally had to close the window in ’71. But it actually started a little earlier in ’60 when Kennedy had to do the twist because he was trying to figure out how to keep the dollar strong and make sure there wasn’t a run. And that’s when they first started, the best and brightest, the guys who had the great strategies for Vietnam and whatever, they’re trying to huckster people in this, and you just can’t do it. The psychology has changed.
David: There seems to be a decent amount of stability in corporate credit. You look at investment grade spreads, high yield spreads. It’s just interesting. How would you read the current credit spreads?
Bill: Well, there’s too much liquidity in the system. Everything is overvalued. Really, gold is overvalued, what it is. But when you do the valuations, then it changes. As you know, if you start comparing gold prices to global debt, not just US, gold is a global asset. Looking at it towards the money supply. And all of a sudden, you go wow. All of a sudden, well, it could go. We have room to run. But that’s the thing going out with these corporate spreads and junk. These guys are sitting there with money. They can’t do anything about it. A lot of these guys, because we’ve structured products in institutions now, whether they’re ETFs, which is one, or you’re mutual funds. Well, you’re a mutual fund manager and you are managing junk bonds.
It used to be, in the past, you had a mutual fund and they’d say, “Well, you could buy bonds of any sort.” So you go, “Oh, things look a little dicey. I’m going to get into T-bills here and I’m going to get rid of my junk bonds and it’d be great, corporate debt, credit, whatever.” But now, you have put that decision in the hands of the public. You said, “No, we’ll create an ETF for everything.” And as long as money comes in, I’m going to keep buying these junk bonds, even if I think they’re going to zero, because that’s what I’m mandated to do. That’s my perspective, so I’ve got to be 80% invested all the time, or 90, or I got to be 95 invested at all times.
So at the end of the month, that’s where you see things go up, whatever, because I get it at the end of the month. I got to buy junk bonds. I hate them. I think they’re going to zero, but that’s my ETF. That’s what I’m mandated to do.
So again, that’s what a lot of people don’t understand. Before you put a guy who managed the portfolio or your pension fund. He made these decisions about, yeah, the economy looks shaky. I better clean up my debt holdings and get into govies or even the A-rated double or whatever. They’re better rated. Now, you got to keep buying this stuff. You might hate it. You might think it’s going to zero, but the money keeps coming to your fund, you just got to do it.
And now the public, the Army ants are making the decision on credit quality now without the information. They get the information online or wherever they’re getting it. But that’s a good point that you brought up. There’s another dynamic here in the market that has changed. And everything is overvalued because there’s so much money out there. Everything.
David: Another part of the credit markets, private credit, if you look at endowments and pension funds, there’s been a big shift in their alternatives mix to include a lot more private credit. And now we see the Trump administration opening the way for 401(k)s and, as you say, the Army ants, to have access to, what, the [unclear] has been verified offerings, extra special staff, private equity, private credit, stuff like that. What are your thoughts on private equity first, then private credit?
Bill: Well, obviously, the LBO boom started really in the late ’70s. I think Congoleum was one of the first deals, but it got really popular there when the market threw off in ’83. That’s milking these guys with the junk bonds. So it’s been about a little bit more than 40 years, going on. And those guys, what people don’t understand, they thought they were idiots. They’re going, you’re paying 16% for your bonds. But they didn’t realize because in ’80 to ’83, even most of the ’80s, they were buying assets pennies on the dollar. People thought you’re nuts paying 16 and a half.
I’ll give you an example. William Simon, who was a Goldman Sachs partner, became Treasury Secretary— Because I was living in Morristown. He and a guy, Ray Chambers, he got Ray Chambers, an accountant, found out about doing the LBOs. But he didn’t have access, so somebody hooked him up with Bill Simon, who has access, being a former Treasury Secretary. I think it was RC. And they get Gibson Greeting Cards. So they put up, I forget, 300 and some thousand each, whatever. And then 30 months later, they took out 35 million each. Think about that. Would you do that? Would you pay 16.5% interest—
David: A pretty good dig if you can get it.
Bill: —to make almost 10 times your money. And that’s why they developed a thing called Wesray. Literally, their headquarters was about a quarter mile from where we were living there in Morristown. And then they made so much money, they just walked away. They had enough and that was that. Then you had what KKR was doing and the other LBO people that showed up in there for some little, whatever. These guys, people that, oh, you’re crazy. You’re crazy.
Well, now, to answer your question, 40 years later, they’re going, you know what? We’d like to have partners. And I remember this when portfolio management was when you’re in the bottom, you buy back stock and you don’t want partners. You want as few partners as possible. But when the stocks are really rich, you want to issue stock because you want a lot of partners. That’s how it used to be, right? People talk about executives have stock options. They’re always buying back stock. It used to be, yeah, in bear markets, you buy back your stock because you think you’re going to see a turn and you want to get rid of partners. And at the top, when things are booming, everybody is going crazy, you want to issue stock because you want a lot of partners. Well, all the LBO guys are now telling all of a sudden they want a lot of partners. What’s it telling you?
David: Everything you need to know.
Bill: Basically Trump is trying to get people to buy crypto, which is criminal, because his family have a huge stake. I can’t believe the Democrats haven’t gone after him for that. Maybe they’re making money on it too, but that to me is just such a layup. It’s such an egregious conflict of interest to be a hawk in crypto while you’re blowing up the dollar. Come on.
David: Well, the old measures of value, you could look at price to sales, market cap to GDP, the Shiller P/E, not necessarily market timing tools, but as indicators would suggest that we’re in a market cycle top. You talked about bonds and going through a grand supercycle. Could we be at the end of a grand supercycle in equities? What are your thoughts? The caveat is with as much inflation and the tools that central banks globally are using, is this the once-in-a-lifetime crack-up boom that von Mises described?
Bill: Well, unfortunately we’ve been having those, what? About every 10, 15 years now. Right? The ’89 blow off because that was a lot of LBO stuff going on. And then of course, 10 years later, ’99, we get the internet. Well, we actually topped, what, about 2007 on that, but that was the housing bubble.
And then here we are again doing this routine again in here. They just keeps doing because they keep pumping the money. The fiscal spending keeps going up. They got to keep papering over it. And you’re right, we can remember when the debt went from 1 trillion to 2 trillion, I think was under Reagan. People were going out of their minds. Now we’re what? 36 trillion and that doesn’t include how big the off-balance sheet obligations are for the government with the entitlements, with the Social Security, Medicare, Medicaid, all that off-balance sheet stuff. It’s incomprehensible.
And that’s why Trump wants to be an inflationist. There’s no other way out. They want this thing to blow up on somebody else’s watch, or they want a reason, like, “Oh, it was COVID, or oh, it was Russian. That’s what did it. That’s why we’re all in the deep poo-poo here is because it wasn’t us, it was this.”
These are the people that did it here, but everybody knows it’s unsustainable, and you’re racing to the end of the earth, the end of the world, and you’re just hoping that you see it before everybody else does so you can get out of it before it goes down.
And the reason I got them saying that is I remember in 1987, a guy was in a big mutual fund complex, and he was the head economist, a really good guy, [unclear] and this is again the summer of ’87. And I said, “Look at this value. Look at it.” We had this market, bonds are yielding 10% and the stocks are highest multiples since ’29. And this 24% Dow rally in three months here in the summer, you see value. “Well, what do you think here?”
And he said, I’ll never forget. He said, “We’re like everybody else. We’re all in sailboats and we’re racing to the end of the flat earth in a big waterfall and we have to do it because we’re all in a race for performance but we’re making the bet that our guy sitting up in the crows nest is going to see the end of the earth, the end of the waterfall, and we’ll pull ourselves out of it before we go over.”
And it wasn’t but, what, probably two, three months after that the stock market crashed. That’s what you’re in. And again, is the mutual fund industry changed with the big boom in the ’80s and ’90s? It used to be, in your prospectus we’ll be 80%, 90, we’ll be whatever. But what these guys started marketing was “we’re $100% invested all the time. In fact, we can leverage up to 105 or 110% of our holdings.”
That’s what they started selling because people wanted to be in it. They didn’t want you to be only 80%. They wanted you to be, you-know-what-to-the-wall long and capture this stuff. Again, the difference now is there’s so many people, the public, that are in this market and the technology where you can get in and get out so quickly is unprecedented.
And we didn’t have that in ’87, and if we did, it would’ve been far worse than what happened. So this is a situation where, depending on what your portfolio and your obligations are, you’ve really been playing for safety. I think I mentioned last time I was on here, what are you doing?
Well, I’m staying short-term Treasuries and buying dollar hedges, which is basically precious metals, coins, GLD, GDX, whatever here. And the other thing that’s interesting is you know, the gold stocks are telling you we’re getting near the end of something because you saw how long they just languished.
People, “Oh, I got to buy in. Look at it. Gold’s going.” That’s the other lesson here. And it’s a little bit different than the ’70s when gold stocks took off. They used to lead gold a little bit, Homestake, ASA, Campbell, Red Lake, my first job on Wall Street, I’m not in South Street in ’75 with the gold bucks.
I remember all these different— Durbin Deep. I mean there was this ridiculous amount of South African gold stocks and other stocks were out there. But they tended to lead the gold price because speculative money always leads the investment money. Then we got in here later day because of the different EPA restrictions, whatever it is, and you just couldn’t mine the gold.
It took so long to get gold mines up and running, and just all these other problems showed up. So the gold stocks taking off here is telling us that it’s a different phase. I’m not saying it’s ready to blow off, but as you know, for a long time the gold stocks have been languishing. Now you saw what happened recently how they’ve gone berserk.
David: Yeah. Relative to gold they’ve just kind of stepped up the pace in the last three, four months, but have underperformed on a three-, five-, ten-year basis—
Bill: Yes, they have.
David: —pretty significantly. So outperformed now, but only for a short period of time in different phase. Yeah. I mean I think we lack the imagination for where the gold price can go because we think about a stable currency system in a period of devaluation, as we’ve seen with India, Japan, gold price in yen decades ago was 15,000 yen. Now it’s over 300,000 yen pushing towards 400,000 yen.
I mean, are these absurd prices or is it just the story of your currency under pressure?
Bill: Well, you can imagine what gold would be if you didn’t have the cryptos, because that’s all that money is. Oh, I’m a safe haven. Really? A safe haven? Your crypto is a safe haven? What is it? What are you going do with that? And then they can’t believe these people thinking that you can’t track cryptos. [Unclear] last time I was on here.
It’s patently unconstitutional to have cryptocurrency. It’s crystal clear. You don’t need a law degree from Ivy League Law School to say the Constitution says Congress has the sole right to coin and mint money. That’s it. Not some guys in the garage with the network of computers, mining bitcoins.
It’d be one thing if you said, “Well, no, no, these things are just like baseball cards.” No. You can exchange these for cars. Well, then it’s a currency. It’s a coin. Remember guys used to try to create in the ’70s, were trying to create currencies or standards, and they took them and they go, “No. That’s a currency. You can’t do that. That’s against Constitution.”
And so guys said, well, why aren’t they calling the obvious? Why aren’t they saying the obvious? The emperor has no clothes here. And my belief is because any illicit money has been moving through the crypto markets, and that’s what the NSA is watching. They want to see what stuff moves through there. They can see if there’s terrorist money, weapons money, drug money, whatever.
There’s no other reason for the government to allow the cryptos here. None. Zero. They used to go through Bank of Commerce about the BCCI before that thing blew up. They were tracked. They’ve always had the [unclear] of Nugan Hand Bank before the CIA was running their drug money from Asia through.
I mean, you just go throughout history, that’s kind of where they watch them where the legal money and where these transfers go. But I’m waiting for somebody, somebody to get a monster short in the cryptos and go to the Supreme Court and say, “Hey, this is all illegal guys. The Constitution says so.”
You tell Congress, come out, pass the law that these things are all okay. That’s fine. But this is all patently unconstitutional to create a currency.
David: Well, back to your anecdote about your personal pension and preference for gold. Some gold stocks, I’m sure you’ve got some T-bills in there too. It sounds like the strategy right now is kind of batten down the hatches and own real things, and if Buffett’s any bit of a guide, then wait, and you make your money if you’re willing to wait.
Bill: Oh yeah, absolutely. No. There’s no question. The thing is you want to be safe, and you’ve said a couple of times in here or alluded to. Yeah. Hedge your dollar risk, and that’s a problem. That is a big problem because, again, the psychology has changed, and when you get these changes in psychology, you see what’s going on. You see it in the crypto and the gold and these other things happening in here.
So my guess here, like I alluded to this in the letter the other day, is December gold’s like 3856 as we speak right now. And my gut here is a guess knowing how traders are. There’s a lot of things going because you’ve got third quarter. So you got a lot of games going on today and tomorrow.
I mean the guys that are short to gold, they’re either making short or short gold against the crypto or something, they’re going to try to suppress gold.
They typically, as you’ve noticed this too, at the end of the quarters for their marks, they try, but the fact that gold’s going up strong today, if it goes up strong tomorrow, it’s telling you there’s a lot of investment-grade people buying gold now because they’re trying to mark it up and they’re trying to overwhelm the other guys who are trying to mark it down. But the way traders work is, if you think back to the old CNBC, “Oh, Nasdaq 1000, Nasdaq 2000.”
Remember we’ll get the hats out. Nasdaq 5000, the big numbers have a psychological impact, and professional traders know that. So there’s always like a game— One of the greatest calls we ever saw was when I was working as gold bug. Gold was just getting absolutely decimated.
And of course, the clients were getting decimated and gold fell down, had gotten up to 190-ish. And then the IMF announced sales, and I’m sitting and this is a death march going down, down, down.
And then it was like, “Oh, 150 is the bottom. Oh, 130. Oh, no. The IMF is evaluating their gold at 120, can’t go through.” It goes right through 120. And then one day it picks 99.50. And then the gold analysts [unclear] recalled from it goes, that bottom of gold is in. This could be a bottom for decades.
I go, “Why?” He goes, “Well, 100 was an enormous psychological number, and it traded 99.50 and then it jumped right back above it.” Anybody that wanted to get out of gold was panicked out, the stop law. Everybody was gone. And he was absolutely right. That was, what, ’75? ’75 in there. Something like that.
David: Yeah. My dad tells the story of being on a hike on that day and he’s out near Aspen. He had just spent the morning with a client, and gold’s trading around 100 bucks, and at the time he was working for John VanEck and they had their Goldshare Mutual Fund, a lot of stuff in South Africa.
And he came off the mountain, called John, was like, “I thought about quitting today.” They almost broke the back of one of the greatest gold bugs in the world. This is it. The bottom is in. It was. If you were going to sell, you were done.
Bill: Yeah. We did some business with John. He’d call, I never talked to him, but the owner of the firm did. But yeah, you remember your dad. Who else? Who’s the guy that was called the original gold by [unclear]? Was that Harry Schultz? I can’t remember,
David: Right. Harry. Yeah.
Bill: Yeah. The world’s most expensive investment advisor, $2,000 an hour. I remember he used to bill him himself. But there was a handful of those guys, your dad, that were in on the gold, in very early, whatever. But that’s what I’m thinking here with the gold is that there’s got to be a lot of 4,000.
So the point being here is, whatever the vehicle is, when you have a really big psychological number, and I’m not talking 38 or 30, those are important numbers too, but like 4,000. So I just have this—knowing how traders operate—somewhere they want to take a shot at 4,000. And the other thing is, there’s a lot of call action shows up at these numbers, call strikes and whatever.
I think they’re just going to keep pulling towards 4,000, and then I want to see how it acts around 4,000. If you get something, a little crazy shot or whatever, then I think it could be time for a pretty good pullback in here, but it depends what’s going on at the time. If nothing’s going on and it’s just a trading game, then I think you go through 4,000, you probably are looking at a pretty good correction.
10, 15% correction in there because they’re going to just force everybody that is short out. But if there’s something else going on, if there’s a fundamental factor going on that’s driving it, then I think the next really big number is 5,000. I’m sure you’ve seen that. There’s a lot of people have circled that, some of the firms, that this is where you probably ultimately end up going on this thing. But again, it depends on what was going on. Where’s the budget deficit? So what’s going on in the world? Whatever, right now.
David: Well, Bill, thanks for joining us on the Commentary. I want to, again—
Bill: Yeah. Anytime.
David: —love to visit, and next time we’re in Chicago, we’ll sit down and grab a meal.
Bill: Yeah. It’s been a while. Yeah. Thank you.
David: All right. Have a great day.
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You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany and our guest today, Bill King. You can find us at McAlvany.com 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.
