Podcast: Play in new window
- Top Execs Selling 5x More Stock Than Buying
- Goldman Sachs Calls For $3,000 Gold In 2025
- Will Powell Drop Rates Again?
“The Wilshire 5000 to GDP, this is a modified Buffett ratio. It touched 202% last week, which is an all-time high. It’s a measure like the Buffett ratio, covers the aggregate of 5,000 companies, telling us something. There’s notable insider selling. Five to one is the ratio. Actually, just above five to one. Historically, to be fair to the executives who are doing this, they’re not making a market call today. They get to a period where they’re comfortable and they want to get liquid, and they’re usually two to three quarters early before a major downturn. When you see a significant uptick in insider selling, that’s two to three quarters. You’re on notice.” — David McAlvany
Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany.
Well, David, you did it. You did it. You’re down in Texas and you told me you were going to do a Spartan race, but I haven’t seen you training like I had in the past. How’d it go?
David: Not training like I have in the past. How about not at all? It’s been a nice 18-month break. The annual pilgrimage to Texas, it’s here, it’s arrived, like other holidays we spend feasting and celebrating together as family. The special highlight for this one is my second son’s birthday. He turned 16 over the weekend.
Kevin: Wow.
David: On his birthday, he requested that we race together something called an OCR or obstacle course race. You mentioned it, the Spartan race to be exact.
Kevin: Okay. If he’s turning 16, you’re just about to turn 50, aren’t you?
David: This is a huge year for us. My oldest turned 18; the next, 16; the next, 13; the next, 10, so we’re out of single digits. My wife and I celebrate our 25th anniversary, and it’s my 50th birthday in about 10 days. Yeah, this is a big year for us. After watching the Tyson-Jake Paul fight a few weeks back, I figured we might have another version of the old lion being surpassed by the young lion.
Again, maybe I’m just feeling a little unenthused turning 50, but we did both bleed a little. It was not a competitive race between the two of us. It was just a great day. We ran, we suffered a little, we started and finished as a team, and we hopped over prickly pear in quantities I’ve never imagined, working through the 25 obstacles over the course.
And then the course is about six and a half miles. We got to the end and they gave us this interesting pitch as we crossed the finish line, “Do you want to do an extra mile?” It was like one of those fear of missing out moments. He was like, “Sure, I guess we’ll just run an extra mile,” but it was a great memory maker.
Kevin: And you did that. You did that. Well, that’s awesome. I remember one of the people here at the office, Dave. I won’t name them. When we were doing the Half Ironman on the big island in Hawaii, the last part of the run was looped. I remember we all had to run two loops. Remember that?
David: Oh, yeah.
Kevin: You patted me on the back and you passed me quickly. But one of the members of our team thought the loop was just once, not twice. When she got to the finish line, they said, “Oh, no, you need to loop again.” That was a miserable feeling. Running that extra mile, I can see that, but if you recall, I think that was an extra six and a half miles for her.
David: That’s right. That’s right.
Kevin: Yeah. Let’s take it to the economic side of things, talking about running the extra mile. Dave, we were doing this commentary back in 2008, but after the global financial crisis was really playing itself out to look like it was going to be a depression, there was a choice to be made. Do we let the depression happen—which usually is the best thing to happen because you come back out of it? We’ve talked about other depressions in the past where, if left alone, you come back healthier, not in bad shape. It was about 2011. The decision was do we let this thing just fail or do we print money? Of course, the Mario Draghi moment was print money. Larry Summers just recently has said something about that.
David: Well, reflecting on the European debt crisis going back to 2011, as he maps the migration of stress and policy angst as a move from Greece to Portugal to Ireland, noting a massive increase in credit spreads in Spain and Italy as they were battling through the pros and cons of choosing austerity or large-scale fiscal expansion, he references an old economist—and I’ve mentioned this quote before—Rudiger Dornbusch. He says, “In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.”
It’s a little bit like the Starship Enterprise, which seems to almost perceptibly slow before jumping to warp speed. I think that’s kind of where we’re at. I would talk a little bit more about credit spreads in a minute, but we’re in the it’s-taking-longer-to-happen-than-you-think, and you can wake up and it’s happened faster than you thought it could happen.
Kevin: And you can think about times in your life where things like that happen. The whole concept of seatbelts in a car, it’s low probability that you’re going to need it just about every time you get into the car, but that low probability moment at some point— I’ll tell you what, a seatbelt saved my life one time back in 1985, and I would not be here had I not have remembered to reach around just a minute before the accident and put that seatbelt on. Are the markets looking at that? Are they just basically going, “Let’s drive fast and let’s not worry about the seatbelt because it’s a low probability event that we have to worry about”?
David: I think the markets are content to ignore a short list of low probability but very high impact events, probably because they’re so low probability. On the days when the news feed is harder to ignore and the news is more dramatic, you’ve got gold and the dollar rise in concert to safe havens. On other days, sometimes the very next day— You remember the Fonz from Happy Days Are Here Again?
Kevin: Happy Days, yeah. Right.
David: Well, when The Fonz is back and happy days are here again, gold gets discarded, and then the growth plays go crazy. Feeling frisky, risk-taking investors are not shy about exploiting big bets, as if low probability events are in fact no probability events.
There’s a bit of a disconnect, but you can see it in a variety of markets. The performance of the Destiny Tech100 closed-end fund selling at a 780% premium to its net asset value. I mean, shares in MicroStrategy have rallied 74% since the election. Tesla has rallied 42% since the election. Palantir is absolutely screaming higher. More on that in a minute because the insider, the CEO there, sold close to a billion dollars of his own shares. It’s very interesting to see the enthusiasm of people who see the no probability event, and then the insiders who maybe have a different view. Peter Thiel this week, talking of insiders, he said something to the effect that it feels like the world is sleepwalking to Armageddon.
Kevin: I love the fact that you used the Fonz as an example. When that show came out, I was 13 years old. I think it was ’76, ’75, 12 or 13, and you’re right. The Fonz would just say, “Everything’s A-okay.”
But do you remember when you were a kid—I don’t know if you remember those pictures where you could turn it back and forth and it would change from one picture to another. You remember those little photos? You’d get them sometimes in a crackerjack box or what have you. Well, this is what I’m sensing right now, Dave, because gold has been a fascinating field to be in for the last 38 years, because back in the late-eighties, early-nineties, I can remember when gold and the dollar would rally together when people were fearful of a geopolitical event, like Saddam Hussein invading Kuwait. Some of those geopolitical things that happened would cause gold to go up, which is appropriate, and the dollar to go up, which is appropriate. That’s flight capital.
But like you said, right now it’s like one of those pictures, because in one day what we’ll see is those old geopolitical reactions because people are afraid of World War III, and then the very next day we’ll see the greed reaction where it’s like, “Hey, Trump’s in. Let’s just buy everything.” That greed/fear indicator, which sometimes will go months or even years with one side being on and one side being off, right now you can just turn that card back and forth sometimes several times during a day.
David: Yeah, there are a variety of greed/fear indicators. CNN has a whole list of them if you want to look them up online, but the greed/fear indicators, the market momentum indicator is in the extreme greed mode. The ratio of puts to calls, that’s in the options market, it is, again, at that level of extreme greed, as are total options volume. If you’re looking at what happens as we get towards options expiration, you’re dealing with hundreds of billions of dollars in trade value, trillions as you get towards that expiration. Demand for junk bonds—also in the extreme greed mode.
Kevin: Well, David, it’s so hard, though, when you’re making money to rein that in and turn it into captured profits. I’ve got a client. I really enjoy him. He’s always on a high. I think he’s always on adrenaline high or a caffeine high, but he’s got enough discipline that he jumps into one of the cryptocurrencies or a high-risk stock. Sometimes it works, sometimes he’ll lose a large amount of money, but when it works, a lot of times he’ll capitalize on that. Right when it looks like he’s going to make more money, he’ll sell and he’ll buy some silver or he’ll buy some gold. I look back over the last few years that I’ve known him, and he’s built up a very nice position of captured gains in things, certain investments that today no longer even exist.
David: Well, he’s a unique person, I would say, because the vast majority of investors don’t want to rein in risk when prices are going up. The greed factor of wanting to maximize every profit opportunity, it keeps investors fully invested past the time of reasonable departure, if you want to think of it that way. It often takes a shock move lower. And even then, too, you have an expression of regret having not sold at higher prices. They’re quickly overwhelmed by the sort of, “Woe is me. I guess I’m not a market timer, so I might as well sit with the position.” “Nobody can predict the future, so I’m just going to sit with the position.” “These are long-term investments, so I’m going to sit with the position.” “I don’t want to take a loss on an investment.”
Whereas if you read the great traders, they would say your first loss is your best loss. Your amateur investor takes a loss and then sits on it forever. Those kind of weightless words of comfort disappear as time passes and further losses accrue until the ultimate pain point is reached. Again, there’s a difference between what the professionals see as an opportunity and what the amateur is forced to do in that moment. Professionals recognize that moment of ultimate pain as capitulation. The last seller is the most desperate.
Kevin: Well, yeah, sometimes you’re sitting on something that, at one point, was the most valuable thing you could own, and it’s nothing. Dave, I was a toy store manager when Cabbage Patch hit. I don’t know if you remember that craze, but Cabbage Patch—
David: Of course.
Kevin: Coleco was the name of the company and they purposely under-manufactured both Cabbage Patch one year and Laser Tag the next, and I just happened to be a toy store manager at the time. Dave, people were paying—back then, this is back in the eighties—they were paying $1,000 for Cabbage Patch dolls, black market. If people could get one, if it looked like their daughter, they would pay big money to buy that Cabbage Patch doll.
At this point, if you go to a garage sale, you probably are going to find an old Cabbage Patch doll that’s worthless. I bring it into that field, the toy field, because that’s not even an investment necessarily. But when you’re investing in something, let’s say it’s in your retirement, and you really do need this money going forward, you don’t want to be the last guy holding that investment, do you?
David: Well, I mean, the last seller, as I mentioned, is the most desperate, and the feelings that they experience run very deep. The asset that they owned and now want to sell, it’s despicable. The asset class is detestable. The disappointment and the directed fury—of course it’s an outward fury towards the worst investment ever—it precipitates the wholesale dumping at the bottom as the bottom in prices are being put in.
Again, this is the difference between the amateur and the professional. Bear markets need capitulation and the last seller to get out before constructive buying and a recovery in price can occur. Remember the flip side of this, because that’s really what we’re talking about here. Bull markets need the last buyer, driven by greed and sometimes senseless optimism, most often caught up in a euphoric experience. To the outside observer, it’s incredibly bullish. This is the trend, it’s momentum. We’re looking for the last buyer in a number of markets right now.
Kevin: Wouldn’t you say, though, what we’re talking about, Dave— I mean, we can laugh about it, we can get frustrated about it, we can criticize it, but isn’t it just— It’s part of all of us? This is human nature we’re talking about.
David: Yeah. I’m reading a book by David McWilliams, Money: A Story of Humanity. It is a fabulous history of money and credit. I recommend it. Very rarely do you find an economist who can write, and he can write. I mean, it’s a page-turner. I know that some of the books that I read are page turners to me and they wouldn’t be to the general public, but this is one that I think has some general appeal. It just ties together just how important the change in money and credit through time has defined many of the key aspects and elements of what have developed across society. I had some great little gaps filled in my reading in one of his chapters on the Gutenberg Bible, but I mean they’re just really poignant little things. I highly recommend it.
Kevin: Dave, you remember Howard Onstott, who was my free market mentor when I first got here. He let me read a book on monetary history, and, like you said, page turner. It was fascinating. These stories, talking about humanity, they go back 4, 5,000 years. I mean, recorded history. We can actually go back and see that this human nature thing and credit and these booms and busts go back to the very beginning.
David: We borrowed that theme in a little advertising piece we did for Vaulted recently, where the man with the Midas touch touches his bride-to-be and turns her into a gold statue. Well, that came from the myth of Midas, where he receives this gift from Dionysus that he can turn anything into gold, and he touches his daughter and turns her into gold. Well, he asks for being relieved of this, and he’s told to go bathe in this river, and so he does. He goes and bathes in the river. From that point forward, the Lydian culture, they discovered a mine in this river, and it became a very rich place. They innovated gold coinage. It’s not like that was where money came from, credit came from. Credit predated that by another 2,000 years, go all the way back to the Minoan culture.
The Minoan culture prized the bull—I thought this was interesting—as a symbol of strength, as a representation of fertility, but also as a picture of the triumph of human skill and ingenuity over brute animal force. One of the ancient practices was called taurokathapsia and it involved agile athletes jumping over a rushing bull. You think it’s crazy in Spain that they’ve got the Running of the Bulls, that’s running away. This is running towards and jumping over, right?
Well, I mean, this is to me the taurokathapsia. It sounds like our leveraged speculator today, which, again, I think more as a triumph of human stupidity and luck than it is a triumph over brute strength. But it is like our market today, taurokathapsia. While the bull is powerful, we are smarter, we are quicker, we are faster, and even more powerful. At least that’s how we understand the conceit.
Kevin: Well, let’s go back 25 years. I hear this all the time. I’m hearing, “Oh, don’t you understand technology has defeated so many things? You need to invest in this or that.” But remember 25 years ago when the algorithmic models had finally figured out how not to get crushed in a downturn and make a bunch of money on the upside? I think it was called LTCM. Remember that? I go to church with a guy who—
David: Yeah, Long-Term—
Kevin: Yeah. Long-Term Capital Management. I go to church with a guy who was a multimillionaire. He worked for LTCM, and he lost everything, Dave. The algorithm stopped working.
David: The book that Roger Lowenstein wrote about that was When Genius Failed. It goes through— Again, where does this conceit come from? The idea that we’re smarter, quicker, faster, more powerful than the bull, and can stay ahead or at least leap over its horns. Long-Term Capital Management and the math and physics PhDs from MIT and Harvard that ran it believed that they could not make a mistake. It was such a low probability event that they bet trillions of dollars. They had successfully been jumping over the bull, proving the superiority of mind over matter, till one day in 1998. They miscalculated the tolerances. The “engineering tolerances” were off just slightly, and they were thoroughly gored. Market liquidity was abundant one day, disappeared overnight.
Kevin: You have had Richard Bookstaber on several times on the Commentary. I love it when he comes on because he goes back and he says, there are these insurance types of models where you can make the algorithms reduce risk to the point where it almost looks like it’s non-existent. But the problem is, you’re miscalculating or underestimating something in another area. Let me ask you, Dave. What are traders right now who are just—they’re frothing right now. What are they possibly underestimating?
David: Well, I think two things. One, they could be overestimating their ability. That would be one thing. But then underestimating the challenges thrust upon them. I think that’s something quite different. Geopolitics comes to mind. In the past week, we’ve got the US, the UK, and France have all greenlit the use of their long-range missiles for use in Ukraine between Ukraine and Russia. Within hours of Biden’s approval for use and within days of that policy echo from London and Paris, Putin shifted the Russian nuclear doctrine. Medvedev offered direct nuclear threats to Ukraine and any NATO facility wherever it be located. An attack on Russia supported by a country with nuclear power would, according to Medvedev, be grounds for a nuclear response. The immediate Russian response was swift, literally a hypersonic missile traveling 8,000 miles per hour crushing a military facility in Ukraine.
Kevin: Yeah. Well, and from what I understand, there is no defense against that particular type of missile, but look at who’s connecting to who right now, Dave. Look at North Korea and Russia.
David: The Russians are gathering hardware from lots of places, human resources from North Korea. The Financial Times ran a piece talking about how Houthis are being moved from Yemen. Many of these are people who want Russian citizenship and are being offered jobs. They’re basically being trafficked. They’re not going as hardened warriors. These are not professional mercenaries. These are people who are going because they think they are going to get $10,000 and $2,000 a month for an engineering job or whatever. They’re being conscripted and moved directly to the front line. It’s a really interesting thing, and I think it actually is fairly telling.
How desperate are you that you would take a Houthi farmer with no military experience and put them on the front line to fight your battle against Ukraine? Of course, there’s mixed ideas in terms of who’s winning and the pace towards victory or towards some form of conciliation, and I think it’s telling that they need North Koreans and Houthis to fight this fight. I think one of the things we can assume is that the scale and the complexity of the conflict continues to grow, and the possibility of a worldwide war is expanding.
Very quickly, last week we had the Russian response with the missile, the hypersonic missile. Biden then quickly approved anti-personnel mines for Ukraine midweek to keep the Russians and North Koreans from flooding in. It’s just a fascinating thing, and I think this is in the category of underestimated risk. China is watching. Iran is watching. It looks like Biden is, to some degree, leaving a flaming bag of poop on the White House doorstep for Trump to deal with in January. This is not a pretty picture.
Kevin: What I was sharing with a client last week, I said, “Wow, look at gold responding to geopolitical events.” Because it was rising, the dollar was rising. We mentioned that before, but that type of behavior is something that we really haven’t seen for the last couple of decades, Dave, because we haven’t had real geopolitical stress. Last week, you and I were talking about prices and dollar-cost averaging, and it certainly does make sense, but you definitely want to have enough if something were to happen. When I say enough, enough gold.
David: Yeah. I think that’s very true and to see metals through the lens of insurance. That’s one of the reasons why we talk about the perspective triangle as often as we do so that you’re clear on why you own what you own. You can take risk with certain asset classes. Just understand how it fits into your total asset management schematic. Growth and income, that’s one motivation. Insurance is another. Having liquidity, ample cash and cash reserves, another mandate altogether. You can have different expectations for those asset classes. They don’t duplicate, they don’t replicate, they’re not exactly identical. Purposes are different, and the risk profiles are different, of course, as well.
On high alert last week with all the geopolitical things going on, gold moved higher last week as those risks became impossible to ignore. It recovered all its previous week’s gyrations. Gold strength was noteworthy alongside the US dollar, which continued to strengthen. Then we get a doozy of a decline to begin this week in the gold market.
Kevin: It’s important for us to continue to point out that the move in gold, which was substantial this last year, has really not come from the West. I mean the Western investor’s not buying gold right now. It’s mainly China and the BRIC nations, and that continues. I mean, we’re seeing it, aren’t we? I mean, you went out last week and visited a friend in the industry who’s been in the industry for 40 years, and he would attest to the same thing.
David: Last week, I traveled a bit—three days in a row the six o’clock early morning flight out. I showed up ready for that race but barely hanging on in terms of energy. One of those trips was out to speak with a friend of ours. Forty years we’ve known this gentleman, an industry veteran. We’ve worked with him for a long time, and his comment was that volumes have been considerably slower this year than from last year. I got to look at tangible evidence. I looked at his books. They’re a public company, and so revenue is flat year over year even though the gold price is up 27.5%, probably explainable with sales being similar, less product changing hands. My conclusion is there’s no fear in the market. Foot traffic is strong, it’s reasonable, but it’s not strong enough to put pressure on supplies. That’s typically what you see when fear is operable in the gold market.
Kevin: A good example of that is 2008. The fall of 2008, we had pressure on supplies here in the West because everybody wanted to buy gold. The price of gold actually had corrected down almost a third when the markets came down, but actually buying physical gold was almost impossible at that time. The premiums were high enough that if you were buying physical, it did not match the futures market, the paper market on gold. We don’t have that traffic right now, Dave, but there’s traffic going somewhere. Where is it?
David: That was a fascinating timeframe, wasn’t it?
Kevin: Yeah.
David: If you were—October to November—if you wanted immediate delivery of gold, you were paying 150 to $250 more per ounce or you could wait until March, April, May, anywhere from three to six months. You could take delivery on that kind of a timeframe and not have to pay the premiums. Immediate demand was massive. It outstripped supply. We were limited to one kilo bar per day per client, and that was it. Very limited products available, very high premiums, and that’s what a market looks like when demand is super robust.
Well, where you do have endless traffic—not on the gold market or silver market—but where you have endless traffic today is with every risk trade. Coming back to spreads, coming back to Larry Summers’ comment, he noted the massive premiums on European peripheral debt back in 2011. Those premiums, those spreads above the rate of Treasurys, they’re non-existent today. In fact, they’re at a discount. The ten-year Treasury is 4.3% as we speak. The French OAT, that’s their 10-year, is at 3%? The Italian 10-year is at 3.444, 10-year Greek paper 3.06. Just let that sink in. The US Treasury at 4.3 and the Greek ten-year at 3.06
Kevin: Makes no sense.
David: The Portuguese are at 2.68, Spanish at 2.92. It discounts not massive premiums. What those premiums tell you when they’re there is that there’s stress, there’s concern, and there is risk aversion. When the premiums disappear, when the spreads compress, it tells you that there’s rampant speculation as opposed to de-risking. Investment grade spreads to Treasurys—this is here in the United States—investment grade paper, 47.9 basis points, less than half a percent above the Treasury yield. High yield—this is your classic junk bond—296 basis points. Just under 3%. There are presently no stress points in the bond market. I guess if you wanted to flip that on its head, you’d say, “Perhaps the exception is the US Treasury market trading at premiums to its peers.”
Kevin: Yeah. Would you rather have US 10-year debt or would you rather have Greek debt? The thing is, right now, people are saying that Greek debt actually trumps that. Something you watch, though, Dave, is, in the markets—we talked about Bookstaber—there are insurance mechanisms that you can use to try to insure volatility or against volatility or against loss. Credit default swap market is one of the gauges that you watch. What’s it saying? Is there any fear in the market at all?
David: Yeah. I mean, think of it as like fire insurance or flood insurance. If you haven’t had a catastrophic event in 50, 60, 70 years, the premiums tend to go down, people aren’t concerned, they kind of forget about the risk. And then all of a sudden somebody lights a fire and a neighbor’s house is on fire and you think, “Well, I should probably get some fire insurance.” Well, what do you have to pay in that moment to get insurance when the neighbor’s house is on fire? You pay whatever you have to. The price goes from zero to a lot very quickly.
Insurance on default both in Europe and throughout the emerging markets—again, this is the CDS market—it’s sitting comfortably at multi-year lows. Multi-year lows back to investment grade and high-yield spreads over the Treasurys. The premium that you get for taking extra risk, they are at multi-decade lows compared to treasurys. No concern is being registered in fixed income. No concern is being registered in corporate debt markets. There is no fear of default. Is there anything at all to be concerned about? The markets would say emphatically no.
Kevin: When we read the book Extraordinary Popular Delusions and the Madness of Crowds, you think of hive mind. It’s very, very difficult to fight the hive mind, Dave. When you see everybody around you making money in just about everything they’re buying, and you’ve been hesitant up to that point, it’s a real fight to not get caught up in that hive mind or that crowd mentality. I would salute our listeners because I’m not saying that we don’t go out and our listeners don’t go out and actually take some risks, but I think, for the most part, the people that I’ve been talking to are accurately seeing through the hollowness of this explosion in prices.
David: Isaac Newton famously said, “I can calculate the motion of the heavenly bodies, but not the madness of crowds.”
Kevin: Yeah.
David: We’re back to a period of madness, of jumping the bull, with beliefs that we’re smarter this time. This time must be different. You’ve got the Wilshire 5000, the Dow is 30 companies, the S&P, 500. The Wilshire covers 5,000 companies, Wilshire 5,000 to GDP. This is back to your— It’s a modified Buffett ratio. It touched 202% this week, which is an all-time high. Last week, actually, an all-time high. It’s a measure like the Buffett ratio. It covers the aggregate of 5,000 companies, telling us something. There’s notable insider selling. Five to one is the ratio. Actually, just above five to one.
Historically, to be fair to the executives who are doing this, they’re not making a market call today. They get to a period where they’re comfortable and they want to get liquid, and they’re usually two to three quarters early before a major downturn. When you see a significant uptick in insider selling, that’s two to three quarters. You’re on notice. Again, there’s a difference between the professional investor who looks at insider selling and says, “Oh, this is a signal,” and the amateur investor who says, “I think they’re stupid. Why are they getting out? We’ve only got blue skies from here.”
First, Buffett’s selling down his Apple position. For me, doesn’t that make sense? 38 times earning, it’s a bit rich for what is today a slow-growth consumer electronics company. Now you’ve got other insiders selling shares in a range from 1 million, 2 million bucks to 900 million at a pop. 900 million. Again, I go back to Palantir. 30 days of insider selling, $1.3 billion worth of stock sold over the last 30 days. The CEO is responsible for 900 million of that since the election. Is he picking a top? I don’t know, but he’s certainly getting liquid.
The trend has been picking up pace since the election. Prices are scooting higher in all asset classes, and selling’s picking up. Maybe that reflects fear in the C-suite over the impact of tariffs, but there’s someone on the other side of those trades that thinks it’s a good time to buy, and that’s that coming back to, “I can calculate the motions of heavenly bodies but not the madness of crowds.” Who is stepping in to buy from those executives? Who is paying the highest price ever paid for many of these companies in the belief that they will go only higher? This is what you call the greater fool theory.
Kevin: Yet isn’t it strange, Dave, when you have this heat in the market, and it’s just flaring up everywhere, that Powell at the Fed is still saying, “Gosh, I think market conditions feel tight to me.”
David: Well, here’s a private equity guy who loves loose conditions, and there is no such thing as too loose to somebody who’s in the private equity game. Too loose is— The Chicago National Financial Conditions Index is at the loosest level since the start of 2022, and that’s before the Fed started taking rates lower. Late 2021, early 2022, we were in the middle of the everything bubble. Financial conditions were very loose then. They are even looser now.
Kevin: But Powell says they’re tight.
David: Maybe we’ll have the Fed minutes release this week that give us some insight into how they rationalize where they’re at in their rate cutting cycle. Will we have another cut in December? Just 25 basis points? Do they put that off? Powell still argues that financial conditions are too tight. I wanted to share earlier about the credit spreads, because credit spreads are hitting multi-decade lows and you can’t argue for tight financial conditions.
I mean, this is one of the reasons why private equity companies are refinancing so much of their debt because you don’t see this kind of gift in the marketplace that often. The Financial Times ran an article on private equity refinancing of debt. Great article. These buyout groups, the new corporate raiders rebranded as private equity, the old LBO guys, they’re getting some relief from the compression in yield spreads. Interest rates are not coming down, but spreads— Again, that premium over the Treasury are so compressed that they’re taking advantage of it, an estimated interest savings for the year of about $3 billion from this refinancing.
In the last 10 months, private equity groups have reset interest payments to lower levels, on average, by about 55 billion per month. Run that out. We’re coming up on 600 billion for the year in debt that has been refinanced at more attractive levels. In total, that’s over half a trillion dollars that has been modified, and financial conditions are loose? This is— Only somebody who had a history in private equity could say that.
Some of the borrowing is actually not for refinance purposes but to pay special dividends to the buyout group. This kind of gets my goat. There’s an HVAC group, Copeland. This is owned by the Blackstone folks. They borrowed $675 million last week to pay a special dividend to the Blackstone group. This is not paying off debt. This is not a refinancing. This is, “I think we’re going to have a fat paycheck before the end of the year. Why don’t we just scrape $675 million, leave these guys with an albatross?” The new debt is being repriced. I mean, granted, these are attractive rates, so I understand the rationale, but the new debt is being priced at 2.5 to 3.5% over SOFR. SOFR is the secured overnight financing rate.
It’s savings today relative to what that number would’ve been a year ago, two years ago, 4%, 6% over SOFR, but here’s the nasty bits. It’s an adjustable rate debt. If you let that sink in, would you finance a mortgage using an ARM today? I hope not. But to private equity, it makes sense. Again, I don’t know how, from the perspective of private equity, you look at debt being priced at 2.5% over the secured overnight financing rate and think that somehow we have tight financial conditions.
There’s a reason why the Blackstone buddies are doing this stuff. It’s because they can. Who’s praying for lower rates? I think you know who’s praying for lower rates. It’s the guys who are putting these deals together, because if they are adjustable rate, the assumption is we’re getting a good deal today or we’re going to get an even better deal going forward as our friends at the Fed keep on bringing rates lower.
Now, you’ve got Bessent. He’s coming in as head of the Treasury, hedge fund speculator of mixed reputation. I say that because his most recent fund, I think it started at 3.5 billion and it’s whittled down to about 600 million today. Not exactly a success story. Yes, he has the feather in the cap. “I used to work with Soros, but since then I haven’t done a very good job, and that’s why I am going to work for the government.” Markets love the fact that he’s a hedge fund guy because they think that, like Powell, he’s going to take care of them. He’s going to butter their bread.
Kevin: Dave, that’s pretty complicated to me. These private equity guys, they’re thinking way, way beyond what I think of on a daily basis. But if I could just summarize, sounds to me like Wall Street is still getting paid. Okay. It sounds like this is just another way of Wall Street getting paid. It doesn’t really matter what the risk is going forward for the investors.
David: Well, that’s right. And it doesn’t really matter what the risk is going forward for the operating companies that they own. I feel for the private equity operating companies, not the owners of the private equity companies, but the operating companies that they’ve gobbled up. They’re stuck paying the tab. The operators are being put in a difficult situation. You had PIMCO portfolio manager David Forgash, he said last week, “Recent activity in the debt markets is the definition of frothy activity.” He illustrated this with the riskier debt deal being done by RR Donnelley.
I had a friend who used to work for this group. $360 million loan deal. It doesn’t require interest payments. You have the option. You can pay interest or you don’t have to pay interest. That can be added to principle. I’d say this tongue-in-cheek. Maybe that’s not surprising for a company that pushes paper. Make these kinds of—
But anyways, it’s not surprising when you overestimate your skills and agility and underestimate the current geopolitical backdrop. I think Thiel may be right about that sleepwalking towards Armageddon.
Kevin: Well, and as we talk about sleepwalking toward Armageddon, I mean, we don’t necessarily know the future on anything, but what we can do is we can judge the past. I’ve been getting a lot of calls, Dave, especially since Trump won the election, on cryptocurrency. I’ll ask my clients and, actually, family members, “What is it? Can you explain it and can you tell me why you’re wanting to buy it?” I have a cousin who called me last week, and he was very honest. He says, “Kev, I’d like to sell my gold back and buy Bitcoin.” I said, “What’s your reasoning on that?” And he says, “Well, to be honest, it’s the fear of missing out. I’m seeing what’s going on.” He couldn’t really explain why, but I go back to this history thing, Dave, because we have 17 years of history with cryptocurrencies. 17 years to measure, yet we have thousands of years to measure other markets like gold or commodities or what have you. Crypto is the current rage right now. Can you tell me, going forward, why?
David: I don’t know that I can. I mean, we had the New York environmental authorities who, on October 30th, seized and euthanized Peanut the Squirrel. If you look at government overreach, there’s reason to be very upset about that. But equally challenging to understand is how the Peanut the Squirrel coin, which is a cryptocurrency named for that squirrel, now has a market cap just since his death on October 30th of $1.7 billion.
Kevin: Wow.
David: When you think you are a sophisticated investor buying cryptocurrencies, just understand you are in league with those who are also buying crypto squirrel coins. If you think that what you’re doing is sane, it may very well be. Just understand that you are in a cohort who is not particularly sane. Bitcoin’s up 30% since the election, smaller cryptocurrency’s up 100 to 200% since the election. Solana, Cardano, Dogecoin, Ripple, and a huge win, a huge win if you got in early on Peanut the Squirrel coins. Now, you tell me what you’re going to use Peanut the Squirrel coin for. What is its functional use? Is this going to be something that someday takes the place of the US Treasury bill or takes the place of an ounce of gold on deposit at Fort Knox? Maybe it makes sense. I’m scratching my head, but I think it’s nuts.
Kevin: I get it. I get it.
David: That’s pretty bad.
Kevin: That’s a pretty bad dad joke. It’s a big year for you guys. The 16-year-old, the 18-year-old, the 13, the 10, bad dad joke, but okay.
To bring a level of seriousness to this, because I don’t understand it fully, and when you have 17 years of history, it’s anybody’s guess— I mean, a lot of people think they’re really intelligently talking about the future of cryptocurrencies, but you can’t really, as a human, talk intelligently about the future of something that didn’t exist before 17 years ago. It’s really still a guess. But we do see that there’s legislation being introduced talking about cryptocurrency. Can you address that a little bit in your thoughts?
David: Yeah. This is Cynthia Lummis from Wyoming. Back in July, she put together a new bill pushing Bitcoin as a strategic and resilient reserve asset for the United States. The bill sponsors, Lummis, argues that the US Treasury should own a million Bitcoins and should sit on those million Bitcoins for 20 years. Lock them up, don’t do anything with them. How you fund the purchase, you take the Federal Reserve’s profits, which was supposed to go to the Treasury. Of course, they haven’t had any for a few years. Remember, that’s what they are in arrears on. They’re accruing what is called the deferred asset. We’ve talked about that before. Who knew that debt could be called a deferred asset?
Kevin: Yeah.
David: It’s brilliant. Brilliant. And then she also recommends that they fund from the Treasury’s gold reserves. That would be done by marking all the Treasury gold holdings to market and shifting the difference between the current value and the new number to Bitcoin holdings. What that suggestion means is that you’re eliminating 97.2% of all gold reserves, but basically almost 100% of our gold reserves, into cryptocurrency. Converting at today’s price, it’s roughly $715 billion in gold. You’d leave some still there, 9.6 billion in gold, transferring the remainder to crypto.
Kevin: Dave, that sounds like a terrible child’s fairy tale book about selling the cow for six beans. You know what I’m saying? The milk cow for six beans.
David: You don’t understand the magic of the beans. That’s clear. I mean, what you don’t have is a vision of the future. You’re stuck in the past. You think that things like cows and milk and things that are so terrestrial are worth something. Where’s your imagination, Kevin? Look up.
Kevin: Okay, so the suggestion is sell the gold, the government’s gold, turn it into Bitcoin, hold it now. How— 20 years?
David: 20 years.
Kevin: 20 years?
David: Yeah. The Financial Times describes it as a “long-term bet on the permanent collapse of all institutions. It’s a nuclear put.”
Kevin: Huh. That’s as long as we don’t have a nuclear war, I guess, right?
David: Well, yeah, I think they’re saying figuratively, not a literal nuclear put, because in the event of a nuclear holocaust, your digital currency disappears into the ether. Everything digital goes the way of the dodo.
I mean, this is one of those things that, in terms of resilience, you wonder if people understand just how vulnerability and the electric grid work. If you recall that EMP, electromagnetic pulse, this is the result of a nuclear explosion, and it fries electronics. Fries them. You would need a lot of Faraday cages to protect the digital infrastructure required for pricing the asset, for proving ownership, for allowing for transactability.
I mean, do you get the point? It’s hardly resilient. I think the FT article covered it well. Maybe it is compelling since, in the world of low probability threats, or as the market today believes it or is pricing it, no probability of threats. We face no real nuclear threats today. Ignore Iran, ignore North Korea, ignore Russia. I think what we should do is practice our training beyond the Spartan. Let’s all become taurokathapsians.
Kevin: I’m glad you said it, not me.
David: Did I say that right?
Kevin: Yeah, I think so.
David: Taurokathapsians.
Kevin: Yeah, jumping over a bull. Yeah. Yeah.
David: This is our day. This is our day. Exciting, isn’t it? Oh, Kevin, it’s not sleepwalking towards Armageddon. It’s rushing towards it.
Kevin: Well, and it is Thanksgiving week, so I don’t want to talk too dark, but my wife bought me a novel. She heard about it on the radio, about the effects of what an EMP would do here in America. I think this is what we’re missing while we hear the saber-rattling over in Europe. A lot of people think, “Okay, a nuclear blast, how long do we have to be— We’ve got to be careful that we’re not downwind from the radiation.” I mean, all these horrible things that we remember back from the Cold War. But during the Cold War, we were not interconnected with the internet and our grid like we are now. The real threat at this point is, all it takes is a single nuclear blast 100 miles up in the atmosphere and you wipe out hundreds and hundreds of miles in a circle underneath of any kind of electronics. It’s not just cryptocurrency we’re talking about.
David: The grid’s not down. The grid’s not down. The grid is gone.
Kevin: The grid’s gone.
David: Places like Phoenix become like lobster pots with, I don’t know. Is there 15 million people in the Greater Phoenix area?
Kevin: Yeah. I don’t know.
David: You were talking about total catastrophe.
Kevin: Well, I had to put the novel aside. To be honest with you, I got about halfway through and I thought, “Okay, I really can’t even imagine this. Okay.”
David: You don’t want to.
Kevin: Yeah. That takes us back to something that isn’t 17 years old, Dave. Hopefully, still the government has some, and that is gold.
David: Yeah. This is, I think, one of those fascinating things. I really do recommend David McWilliams’ book, Money: A Story of Humanity. You see how important coinage was to the development of the global economy, which “global” may have been limited to the Mediterranean at one point. But you’ve got this amazing picture of how it spread out over the barbaric north of Europe. It’s just a fabulous, fabulous story. It really puts some roots as to why money and credit matter, and the quality of money and the quality of credit matter.
Kevin: You talked about traffic, Dave. The traffic right now that’s over on the risk investments. People are making money, but if that traffic shifts— You’ve been using bulls as an example, so I’m thinking of a herd shifting directions. If that herd shifts direction and does come into the gold market, which that has not happened in the West yet, what does that look like?
David: I think the next leg higher in the gold market will be Western buyers seeking a safe haven. Stocks have to roll over first. If an equity sell off, I mean, that could be triggered by a lot of different things. Geopolitical events, if that is in fact what it comes from, the move will be powerful. There is a kind of fear attached to the unknowns of what happens next or what could happen next. The unsolvable problems, things that monetary policy can’t touch at all. I think you’ve got 2,800 that now is the hurdle. It’s the latest line of resistance. 3,000, 3200, we’ll see those prices quickly thereafter. Goldman Sachs, as recently as last week, said $3,000 gold is what we have for next year. I don’t know under what circumstances they’re conjecturing those prices, but I think 3,000 next year is an easy bet.
Kevin: We talk a lot about gold, Dave, but, of course, we’re implying silver in the mix as well. About 11 years ago, there’s this cycle where silver will sometimes way outperform gold on the upside, and it doesn’t happen that often. Maybe once a decade. It happened 11 years ago back in 2013 when the gold-silver ratio reached 31 to 1. What do we look like going forward on silver?
David: Well, they’re different assets, but they’re connected, like the engine and the caboose are connected. One tends to lead the other. Silver, I think, closes the ratio from 86 to 1, what it is today, to 65 likely next year. Silver’s primed to outperform gold in the next leg higher. Again, you’d see the math. You can just divide gold by the current price of silver to get that ratio. An outperformance from 86 to 65, I think that’s a good move for next year.
If it’s not geopolitical, it could be a scenario like the Fed dropping rates another 25 basis points in spite of no progress on the inflation front, in which case gold and interest rates could move higher together as the market reacts and says no. I mean, and this is exactly what’s happened since September 18th. We’re now 75 basis points lower on Fed funds, but 77 basis points higher in the Treasury market.
Another scenario would be something like the Liz Truss moment here in the United States. If you remember just a few years ago, Liz Truss came in as prime minister, shortest stint as a prime minister in British history. She came in, was going to cut taxes. They were already in a deficit position. This would’ve exacerbated the deficit, and there was a straight-out revolt in the bond market, in the gilts market, their Treasury market. Bond yields spiked, the pound was in free fall, and it required the Bank of England to step in and bail things out.
You’ve got Swiss Re’s chief economist who says something like that in the United States—10-year Treasury moving above 5%—that’s what he sees. Do tariffs and tax cuts set up a Treasury crisis like Liz Truss experienced? Do we have that in the United States in 2025? Anything’s possible. Again, we’ve got tariffs on the table and tax cuts on the table. These are both fiscally impactful, and we don’t know how the market will respond. We do already know that the bond market is uncomfortable with the $1.8 trillion in deficits that we ran in 2024.
Kevin: Let’s look at that, though, because GDP is a little like— If you ran the country like a company, Dave—you run various companies—you have to look at the bottom line. GDP is the bottom line. Now, how does that factor in with the debt that we owe?
David: GDP is like a tally of all the business activity, and it collects all that data and puts it into one number. What is the total horsepower of the engine? GDP, if you’re looking at US Treasurys held by the public—and that’s one measure of the debt-to-GDP figure is just the US Treasurys held by the public—that ratio: 32.7% in the year 2000, up to 76% at the end of 2016, 95% at the end of the second quarter of this year. Now, the number’s over 99%. Again, that’s not all our debt, to be clear. That’s just debt held by the public.
The trigger for the Liz Truss moment— I mean, this is what we don’t know, but again, that’s where you have a spike in yields and then a drop in the US dollar. Theoretically, both of those things we could see. For Truss, it was the announcement of tax cuts. Bond market in the UK revolted, Bank of England had to step in immediately to stop the bleeding. What about an insufficient decrease in deficit spending here in the US? We’re creating an expectation that we’re about to get really fiscally conservative. We’re going to cut the fat.
To me, this seems like a damned-if-you-do, damned-if-you-don’t scenario. The dirty secret is you can’t cut government spending without negatively impacting GDP growth. If the proposed cuts are not replaced dollar for dollar with growth from somewhere else, you’re tempting fate with triggering recession. This is where you’ve got this combination of fiscal idealism and market dynamism. It’s a tough mix bringing those two things together.
Kevin: Ramaswamy and Musk, as good as they are at running companies, they have to figure out how not to cut the GDP while they’re cutting government spending.
David: Yeah. I mean, what are the odds of coming in under last year’s 1.8 trillion in deficit spending? If Vivek and Elon, if that team is familiar with cutting expenses at the corporate level, it’s a different set of implications shrinking liquidity in the financial system within the US economy. It’s just more complicated, and we’ve already added 500 billion to our deficit in the first month of this year. If we’re going to look better in 2025 than in 2024, deficit spending needs to be less than 118 billion a month moving forward. I think, again, for Ramaswamy and Musk, this is— They may be good; I don’t know if they’re that good.
Kevin: Yeah. Well, you know what I wish for, Dave? I wish we could earn interest and have a gold-backed currency all at the same time. Something that would guard you from inflation but still allow you to earn an income.
David: I had the opportunity to buy a land lease in Beverly Hills a number of years ago. I mean, this is on Rodeo Drive, and I didn’t do it. It was too large a purchase, but it was written in the 1920s. This land lease was written in the 1920s, and the inflation adjustment didn’t reference CPI. It didn’t reference PPI. It referenced the gold price, and it increased 4% a year in gold ounces—in gold ounces every year it adjusted higher by 4% every year. I mean, talk about an amazing play. You have a ground lease, Rodeo Drive, California, and you’re being compensated with an increase in the price in ounces. And of course then you take the risk in terms of what the current price of gold is.
Interestingly, Judy Shelton proposes a 50-year Treasury bond convertible into gold. Now, that’s an inflation-protected security I could get excited about, because who cares about CPI, who cares about PPI, who cares about government statisticians trying to redefine reality around what we know and experience every day? You wouldn’t have to worry about inflation with a Treasury instrument like that. Now, I think it’s unlikely to happen because it serves as too much of a tell. The price of gold has always been too much of a tell for what’s going on in government.
Kevin: Well, Dave, that sounds like a dream almost too good to be true. Earn interest on something that’s a gold-backed investment that would keep up with the inflation rate. But in the meantime, if the government’s not going to put—whether it’s a 50-year Treasury bill or a 100-year Treasury bill backed in gold—if they’re not going to back themselves in gold, I’m going to continue to do what we talked about last week. I’m just going to continue to add, and just continue to add, and put myself on a gold standard at least until they do.
David: I completely agree.
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Kevin: 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.
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.
