Podcast: Play in new window
- Gold Rapidly Squeezing Out The Petrodollar
- Hillary Calls For Censorship, “Or We’ll Lose Control”
- Sign Up For the Hard Asset Advantage Webinar – Click Here
“The gold market is at a very interesting juncture with the central banks basically flipping the script. They’re not interested in Treasurys anymore. They’re not interested in US dollar assets anymore. They are interested in something that they’re in control of. I think they’re interested in gaining control even as others around the world are trying to keep control. If you care about any control, whether it’s personal autonomy or how a nation operates, you do have to pay attention to the gold market because it’s telling you there’s a tussle afoot. How this plays out is going to be absolutely critical, not only to your personal, social, and political freedoms, but also to your financial and economic well-being.” — David McAlvany
Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
Well, as advertised, Dave, I told you last week, I love this last weekend because we have clients that come in who are investors on the platform. Man, we just sat down and talked. We shared the same worldview and ideologies. Even though the McAlvany Wealth Management platform is really doing well this year in returns, nobody really cared. They wanted to talk to the people who were managing it. They wanted to talk about the ideas, what’s going on in the world, what do we see going forward, what do they see. That’s one of the things that I really love about this place, Dave. Like I said last week, it’s the ideology, the worldview, the philosophy, and the relationship.
David: Well, let me put it in slightly different terms. I think where the emphasis continues to be is on our process, on the thesis, on a very unique team dynamic, which is driven out of that process. Of course, we tend to get along, we like each other. If you’re interested in kicking the tires this Thursday, we have a webinar Thursday 10:00 AM Mountain called “The Hard Asset Advantage.” What we do for clients, because we’re talking about specific companies and things, there’s some SEC requirements that’d be exclusively for clients, but this is a more general look at the thesis at what our process entails, who is on the team, and they’ll each be sharing as we go through “The Hard Asset Advantage.” If you want to register for the call, you can do so. Just follow the link on the show notes. Thursday 10:00 AM Mountain this week, join us.
Kevin: Well, and the various members of the team, the presentations were just great. In fact, you just had Morgan re-present his presentation to us just briefly in the meeting that we were in with the company here just a few minutes ago. But what a weekend, Dave. I mean, it starts Thursday, our clients come in, there’s meet and greet, and then on Friday, the whole day is really wrapped up with presentations. A lot of charts and graphs, but a lot of meaning behind those, and then a dinner that night. And then Saturday, we privately meet with clients. Those were great meetings, but, Dave, I went home and napped after that. My wife was like, “You must be exhausted.” And you, what did you do? You took your boys climbing and then you flew to Denver, went to a Bronco game.
David: Right. No, it was a busy weekend. Exactly, we had the client interactions. It’s Saturday. Friday was eight to two.
Kevin: Yeah.
David: And by the way, the Thursday deal, expect that to be about an hour. Very different than what we had.
Kevin: Oh, the one coming up here?
David: Yes. Yes. Because we went from eight to two in all of our presentations and the Q&A that followed. We will not go that long. It’ll be an abbreviated overview of the process, thesis, the team dynamics, and things like that, looking at the four areas of hard assets that we diversify across.
Yeah, what a weekend. I realized that with all the client interactions, I hadn’t spent much time with my two younger boys, so we went climbing for a few hours immediately after the consultations on Saturday, and then I raced to the airport to catch a flight to Denver. We had the Broncos game on Sunday. I haven’t been to a live game since my uncle took my son and me to an LSU-Ole Miss game in Baton Rouge. That was like 10 years ago. Not my usual weekend, but packed full of memories. Let’s do it again.
Kevin: Well, and that was a business meeting as well. You met guys in the business that you needed to talk to. So I guess that’s a good way to have a business meeting, because not only did you get to go to the game, but the Broncos were in the old uniforms the way you and I grew up watching the Broncos sometimes win, sometimes lose, but they bring back good memories. Oakland, it’s the rivalry between Broncos—
David: Now Las Vegas.
Kevin: Yeah. Well, yeah, now Las Vegas, but— Well, let me ask you a question because you brought up last week the stimulus that’s coming out of China. Is it working?
David: Yeah. News from China in spite of massive monetary stimulus and speculation on a large scale delivery of fiscal funds to follow up next. It may be as much as 1.4 trillion U.S. It’s not coming fast enough. It’s not coming fast enough to keep momentum for Chinese equities.
Kevin: Maybe China can control the narrative and make the people do what they want to do. I listened to Hillary Clinton’s interview on CNN, and she’s basically calling for censorship. She says, “We’ll lose control if we don’t.”
David: We will lose control. It is just interesting, isn’t it?
Kevin: Yeah.
David: In the US, I think we take for granted the freedom of speech and freedom of movement. Hillary Clinton reminded us that perhaps we should not take our First Amendment rights for granted. I don’t know how to wrap my mind around suggesting that all information channels need censoring. In China, things have been like that for a long time. There was a Financial Times article this week—I think it was Sunday or Monday—reminds us of how rapidly things are changing on the mainland. Very much for the worst.
Kevin: Is that the story about having to turn in your passports, keep you from moving?
David: Exactly. The Chinese government’s demand for public sector employees and school teachers to hand in their passports. A show of strength, that is one possible interpretation of it, or a revelation of insecurity and an implicit sign of systemic weakness. I think it is presaging a situation where they need control of all the information flowing, and they can’t allow foreign ideas to be infecting the minds of teachers and civil servants. There needs to be a keen uniformity.
I think if you’re looking at politicians the world over—I kind of think of them as the political apex predators—the global apex predators are indeed getting nervous these days because they’re not really in control of the narrative. The personal travel abroad management system is what they call it. It helps officials monitor the who, the how often, and the where for people’s travel from the mainland. The fact that teachers are in the middle of this might suggest that control on information flow and the indoctrination of youth is simply too important to allow even the possibility of an errant fact that runs contrary to the official narrative. Of course, if teachers refuse to hand over their passports—I really don’t even understand this language—but they’re subject to “criticism and education.” Depending on case severity, they can be banned from travel for two to five years.
Kevin: I think about it. When I walk my dog, I like to have him walk to my left side with the leash hanging loose. Now what that means is he’s choosing to walk beside me. He’s not pulling. I’m not having to control him. He has chosen to walk with me. Now, I held somebody else’s dog—the leash—yesterday. It was a larger dog, and I realized that I can’t control the dog. I was having to actually forcefully try to control the dog. He didn’t know me. I look at the situation in China— Actually, Dave, I look at the situation here. It’s not just the Clintons that are saying that we need to have censorship. When somebody loses control, you start to see power of influence being applied.
David: Yeah. I think that’s a longer-term story for the mainstream media and the loss of credibility over the last 5 to 10 years. You can look at viewership for CNBC. You can look at viewership for a number of news outlets, MSNBC, you name it, and it’s just not what it used to be. Their advertising model of “entertain and keep the seats filled so that you can sell ads to the viewers,” it’s not working like it used to. Part of the reason for that is that people have moved on to alternative media—for better and for worse. I think about the US and how good it has been to the Clintons. If Hillary and company think we can vastly improve our society and civil discourse by limiting the information available to us, maybe it’s time to ask if the Clintons have been good for the US.
Kevin: I’ll let everybody answer that question for themselves, but the question that I have for you, Dave, is, why would I want only information that is supposedly correct? A lot of the decision-making that I make is by what is incorrect. I mean, you have an open discussion and it’s allowing disagreement, and that disagreement a lot of times refines both parties into a higher level of understanding.
David: Well, and that’s a part of deductive logic. Both knowledge and wisdom are gained through a process that can include getting things wrong. The freedom to get things wrong is essential to ultimately getting things right. Some of you will know this name, but Karl Popper—great contribution from Karl Popper—this notion of falsifiability, used to distinguish science from pseudoscience. His falsification theory holds that for a theory to be considered scientific, it needs to be testable and conceivably proven false. Scientific experimentation hinges on falsifiability and deductive logic.
Think about a world where you can’t test a theory for falsifiability, let alone discuss an alternative theory. There is your world of pseudoscience. Control of information, it ends up damaging the speed of progress. I think about, the difference between open sourced code and closed source. Think about Linux, open source programming. Arguably one of the great drivers of technological innovation in our lifetime. Show me a closed system, and I’ll show you growth constraints. Open systems promote growth, promote creativity, promote error. There’s nothing wrong with being wrong, only with obstinance and the unwillingness to shift perspectives when presented with a better or an even best explanation.
Kevin: Well, and you bring up pseudoscience. It’s interesting, the disagreement during COVID—man, especially vaccines. I can remember that people would say, “Well, I just follow the science.” They didn’t want to have a discussion. They just say, “I follow the science.” And if you said, “Well, what science are you following?” it usually led to an emotional response.
David: Well, that’s the case, isn’t it, when you are dealing with articles of faith, when you’re dealing with things that require an unquestioning commitment to a particular dogma? I think you’re right. Multiple cases of closed-mindedness in the scientific community in recent years, through COVID—and frankly through any news cycle where a leading leftist politician wants to shut off the conversation via censorship. Elon Musk— I mean, love him, hate him, whatever. Very creative guy, one of this generation’s great business entrepreneurs. He posted on X saying, “The same people that demanded that you have a vaccine ID to travel are now demanding that there be no ID for voting.” Well, I wonder why.
Kevin: That’s an interesting thought, huh?
David: Elon of late has said this might be the end of democratic elections. I think he’s mostly wrong. It’s the end of an election that requires you to be a citizen to have a vote. That may be the case. The border czar has done her job. She did exactly what she set out to do.
Kevin: Isn’t it amazing, too, how we define things and make people fear them? This new term, fake news, or misinformation, we’re supposed to be afraid of it. But Dave, when in the history of man has there not been fake news?
David: I spent the better part of an hour watching videos last night dealing with North Carolina and the devastation around Asheville and Black Mountain. We looked at a couple of colleges for my oldest son in that area, and there was a bit of relief that that’s not where he ended up. He’s in Nashville instead.
We did get a lot of rain that weekend, but I was doing my own version of fact checking because there was some videos that described this complete lack of connection, FEMA doing nothing, and crime going off the charts, moving towards almost this post-apocalyptic they’ll-be-eating-babies-before-long type of extreme conclusion. It was important for me to sort out the difference between what was someone’s conjecture, what was someone’s speculation, and what was actually happening.
Kevin: But you did your own work.
David: Right. I mean, I don’t mind the term “fake news.” There is plenty of it. Yes, a part of the problem with fake news stems from the free and unrestricted flow of information. Sorting and judging what is true, I think you can make a clear case that it needs improvement. What is your filtration process?
Kevin: And who are the filterers?
David: But that’s the deal, right?
Kevin: Yeah.
David: Filtering by officials assumes a disinterested and objective point of view which simply does not exist. Agendas are everywhere, good and bad. You can have a good agenda, you can have a bad agenda, but agendas are everywhere. Restricting informational flow is— In my mind, it’s a fear-based and it’s a very insecure mode of operation. If you’re afraid of the free flow of ideas— If you go back to Umberto Eco’s novel, The Name of the Rose, do you remember that?
Kevin: I do. I do.
David: Afraid of laughter. Afraid of humor. Part of what he was dealing with was the notion that fear somehow dominating (at that point) the Catholic Church—that was his diatribe—was very negative, and that fear was altering— But you couldn’t allow this to be a part of the Catholic community without ultimately compromising— What were they doing? We had to introduce all measures of control, and so it’s a murder mystery. Anyways, I’m a little off point, but I think that notion of fear and operating out of an insecure mode—not the greatest.
A similar argument can be made, I think, by any totalitarian state, that we limit the flow or movement of people to root out the transmission of bad people taking bad ideas from one place to another. I think that is the reality in China, controlling the movement of people. If you’re thinking about it, it’s more concrete than controlling the movement of ideas. Maybe that’s why it’s so offensive, the idea that you’re not allowed to travel. Both are offensive, but the former suggests a system of total control. We’ve talked about this in the past in reference to Bentham’s panopticon.
Kevin: Yeah. That’s the prison that he theoretically designed that could be controlled with just a few guards because it was continual censorship. It was always watching the prisoners.
David: If there’s information flow and you know people have information flow about you, your behavior is altered. That visibility in the way that the prison was set up, where the guard has access and visibility into every cell, knowing that you’re being watched changes your behavior. That was the idea of the panopticon.
Well, our republic is dead, our democracy degrading. This is just a fact, right? We don’t even talk about the United States as a republic. You read the founding documents, as I had the opportunity to do in recent weeks, and it’s very clear that we were set up as a republic. I don’t think this is controversial, saying that our republic is dead.
When I say our democracy is degrading, going back to de Tocqueville’s presciently predicted democracy being a 51% tyranny. I think that is what we are toying with is, increase the population and not everyone has to be a citizen to vote—at least you don’t have to prove that you’re a citizen to vote—and now all of a sudden you have changed the numbers, changed the game, changed the outcome. I’ve seen arguments in the last week about, we need to mind constitutional integrity, and the arguments were very much against Trump being elected because obviously he has, from their perspective, no respect for the Constitution. Look at what he tried to do January 6th.
Kevin: There’s that fear thing. That January 6th thing, it’s always used as a fear tool.
David: But I would say if you’re concerned about constitutional integrity, look no further than the promised changes to our Supreme Court.
Kevin: Lawfare is what they’re trying to institute.
David: This is where if we lose institutional integrity at the level of our courts, the law will be fully weaponized. The courts are the people’s most important institution. It’s where we are protected from the abuse of the law. I’ve said this before, but that little book, that little tract by Frederick Bastiat, now over 150 years old, it’s titled The Law. It is must reading for every freedom-loving American. This election is truly about weaponization of the law and our protection from that outcome. Curtailment of First Amendment rights, that’s annoying, but it’s temporary as long as we have an appeal to the courts. Tinker with the courts, and you’ve got China 2.0.
Kevin: Yeah. Let’s go back, because we were talking about the control of China. We talked about that last week, we talked about it this week, but this stimulus that they’re throwing out that you’re saying is not necessarily working, that can lead to other things. You talked in our meeting here just a few minutes ago before we came in here on some of your greater concerns. Taiwan, obviously, is going to be a huge economic impact to the world when Chinese aggressors go in. Can you talk a little bit about that before we go into the Chinese stimulus?
David: Well, I really find Stephen Roach to be skeptical of Chinese wherewithal, but his recently penned Financial Times piece contained exactly that, musing over whether the Chinese government had learned from the Japanese experience of stagnation and deflation in recent decades. He referenced Shinzo Abe’s three arrows, what some now refer to as Abenomics. The three arrows are monetary stimulus, fiscal stimulus, and structural change—structural reform. Structural reforms make for an enduring recovery, and fiscal and monetary stimulus break the malaise and get things started. Japan could never get the structural reforms for an enduring recovery, and I’m not sure that China has figured out that piece. I’m doubtful. I don’t know that, other than their monetary and fiscal stimulus, they have much to go on, and thus far the fiscal stimulus has been insufficient to convince the markets that they’re moving on and moving up.
You mentioned Taiwan. It’s difficult for me to divorce their saber-rattling—and it’s on a daily basis with Taiwan. It’s also difficult for me to imagine a world in which the US engages in a defensive posture in support of Taiwan, mainly because we’ve created so many economic dependencies to the mainland. It is virtually impossible for us to do anything of a military nature. We cannot rearm without the strategic minerals that are processed and received—not necessarily mined and produced originally, but distributed globally from China. It’s kind of like a battle we can’t win. And so I see Taiwan as being something of an inevitable global loss. What is the economic impact of that? We talked about the IMF report a couple of weeks ago. They’ve estimated between 5 and $10 trillion, the hit to a complete blockade of the island.
Kevin: Put that in perspective based on COVID and the global financial crisis.
David: Each one of them was a $5 trillion hit to the global economy, so you’re talking about something that is equal to both of those combined. Now, that would be a blockade. Maybe it’s not. Maybe we’re just dealing with a new company boss at Taiwan Semiconductors and his name is Xi Jinping. We continue to operate in a new world where Taiwan has been absorbed, shall we say, into the mainland. This is, I think, worthy of conversation here at the 75th anniversary of the Chinese Communist Party. Xi Jinping has reiterated yet again: it’s not a question of if, only when.
Kevin: It’s a question of when. Well, okay, debt to GDP is very, very important when you’re talking about fiscal stimulus. That was one of the arrows of Abenomics. How are they doing on fiscal stimulus?
David: Well, this is where they’re between a rock and a hard place. It appears they may struggle with the fiscal stimulus piece as well. The limit at this moment is, debt to GDP levels are already high. Last time they introduced massive stimulus, and this was both monetary and fiscal, 600 billion US. That was the fiscal spending during the global financial crisis. 2009, 2010, debt to GDP in China was roughly 33%. That was then. Well, this is now.
Earlier this year, Chinese debt to GDP passed 85%. Now, it’s not the 122% we have here in the United States. It’s certainly not the [Japanese], well over 250. They have some latitude, but how much? We have some latitude because we are the world’s reserve currency at this point. And the Japanese have had more latitude, I think, because of certain cultural dynamics where aggressive savers and huge demand that makes huge financing of those liabilities on a domestic basis.
Kevin: When China had the one-child rule, we talked—for decades, basically—we’ve talked about demographics and how that would ultimately affect China. Dave, you not only interviewed Charles Goodhart, who wrote about demographics, especially China, and you had dinner with him in London. This is a real concern right now. Isn’t the old saying that demography is destiny?
David: Yeah. I think this is where, again, Stephen Roach describes the fiscal promises as broad and not specific enough. Fiscal stimulus may be constrained, but even more constrained are those structural reforms. Demography is destiny. That reality, demographic reality, is a drag on Chinese growth for decades to come. Underconsumption, which is really an issue because of how the state has chosen winners and losers in China— Households have never been empowered as they have been in the West, and this includes up to and including the recent dockworker strike. If you think about the value of what happened there, you get to say, “I’m not interested in working on those wages, and I’ll come back to work when you do something about those wages.” You’ve got the popular voice, the vox populi. That’s a reality here. That’s beautiful. I don’t mind that being an issue that we have to work through, but it’s not an issue that is introducible. The household can’t stand up and say, “Hey, can we get a bigger slice of the economic pie?”
Kevin: Isn’t it interesting that you’re actually talking about consumption. What would Marx and Engels say about the communist system in China right now? It is ironic, isn’t it, that you’re talking about the things that involve capitalism?
David: Yeah. Consumption versus investment. Consumption has always been a smaller share of economic activity relative to the government spending and the subsidizing of manufacturing sectors in China. Your point is right. The irony of capital being a winner over labor in communist China has never been lost on me. Really, the priority is just control over the outcomes. If you’re going to guide towards certain economic growth, you let the liquidity flow where you can determine the outcome. Policy flows easier into structured organizations than it does individual autonomous beings.
Kevin: And that goes back to what Hillary Clinton was saying. We’ll lose control if we can’t control the people and control the information.
David: Yeah. Households that remain unempowered—and I’m thinking specifically in China, although I think you can see this in other parts around the world—households that remain unempowered also remain more dependent, and I see that as a complement to the Chinese system of control. Poverty has long been a winning strategy for politicians. Keep people dependent on handouts. Also keep them in line with behavioral expectations because if they don’t obey, then you can cut off the government cheese.
Kevin: We talked about Asia, but speaking of obedience, or at least agreement, Israel’s no longer looking like they’re an obedient nation to the United States. You talk about de-globalization. Globalization is agreement between countries. Right? Now, you’ve got this de-globalization going on economically, but I think we’ve got de-globalization going on militarily as well.
David: Well, you mentioned the dog on a leash. We like to assume that everyone’s at the end of an American foreign policy leash, and Israel has rejected being put on a leash. They don’t have it on, they don’t want it on.
Kevin: Can you blame them?
David: No, they will— At this point, I think they’ll directly engage with Iran. Requests to stand down have been ignored. Hezbollah being neutralized was the first step towards addressing Iranian regional pressures. Israel, and Israel alone, will shape the Middle East in the next 5 to 10 years, and I think they’ll shape it for the better. Our advice and recommendations—again, this is from a US perspective, unsurprisingly self-serving and subjective—what do we want? We want to avoid sending oil through the roof. We don’t want to reignite inflation and recessionary concerns. We’ve got an election 30 days out. US foreign policy apparatchiks would say, “Stand down. Calm down. Take some time. Let’s breathe.”
Kevin: Tell that to the people who were attacked brutally a year ago.
David: We just passed the one-year mark for October 7th and the Hamas brutalizing of unsuspecting men, women, and children. We still have 97 hostages that remain unaccounted for. The more time that passes, the greater the odds of death for those remaining 97. The regional conflict will continue until every hostage is released or returned. Could this have been over a long time ago? Yep. And I think doors have been opened which will not be easily closed again, and those doors, I think, have a lot to do with a change in direction for Iran as a nation. Every direct attack on Israel will have a disproportionate response. Not an equal response, as Biden has suggested—just keep it on an equal basis. I think every direct attack on Israel will have a disproportionate response as a means of communicating to Hamas and Hezbollah and Iran that Israel is able to defend itself and project power regionally.
Kevin: Thinking about defense, we’ve had the luxury of having a very strong military for many years, but this is the year where our interest on our debt now exceeds our military expense, and that always goes poorly. Was it Niall Ferguson who came up with a law that basically said, “Once your interest payments on your debt exceed military spending, you’re on the road to losing hegemony.”
David: That was one of the points that was made in this weekend’s conference. Ferguson’s law states that any great power that spends more on debt service—that is, interest payments on the national debt—than on defense will not stay great for long. Now, Ferguson points to Habsburg Spain, the ancien régime in France, the Ottoman Empire, the British Empire, and would suggest that we’re there here in the US. A part of that is, again, just basic math. What are we spending on our military and what are we spending on interest? Well, the year’s over, the fiscal year that is. 2.1 trillion is the estimate for 2024 budget deficit based on a 12-month rolling average. Congressional Budget Office had earlier in the year put it as a max 1.9, but we’re still counting the damage from September.
Kevin: What does that total us up to?
David: Set a new record, 35.465 trillion. Fascinating, on the final day of the year, debt levels increased a full 143 billion. Final day of the year.
Kevin: Wow. In one day.
David: 2.1 could be conservative; 2.2, 2.3 when the dust settles. The first day of the new fiscal year, also very interesting. First day of the fiscal new year, 2025, 204 billion in debt brings us to 35.669 trillion. Off to a great start.
Kevin: I’ll say.
David: Yeah. Add to that the Treasury drawing down its cash balances by 72 billion on the first day of the year. In day one, 2025, you’re at 275 billion in required liquidity. Okay. Any surprise that interest rates continue to move higher?
Kevin: You said last week the bond market is just not playing ball with the lower interest rates.
David: Nope. Bonds are in protest mode, and I wonder when asset allocators are going to pay attention. Not that it matters, but this is kind of a side note. The Fed’s deferred assets surpassed 200 billion as we closed out the year. As a reminder, they call it a deferred asset. You and I call it a portfolio loss. Again, the way the Treasury and the Fed work together in a homogeneous fashion is that when the Fed makes a bunch of money, then they remit that to the Treasury. When the Fed loses a bunch of money—
Kevin: It’s a deferred asset. That’s interesting. I remember one time I had a few hundred dollars in the glove compartment of my car and I didn’t lock the car. Somebody went through the glove compartment, they took the 200 bucks. They left everything else, to their credit, but I didn’t realize that was just a deferred asset.
David: Exactly. Remittances to the Treasury are a negative 201.2 billion. Again, that’s just their paper loss. Shortfall has to be covered prior to the restart in remittances to the Treasury. What if corporations, what if individuals could run that kind of accounting game?
Kevin: Oh, it’s crazy. It’s crazy. Okay. A lot of our listeners need income, Dave, and if they can’t get it from bonds and it’s not safe in bonds, the old standby was the dividend yield on the stock market. Dividend yields have been amazingly low here.
David: And if you look at a couple hundred years of market history here in the US, what you’ll find is that at market peaks, dividend yields are very skinny, and at market troughs, dividend yields get fatter. The S&P dividend yield at 1.27% ties for the lowest yield since the year 2000, and we’ve just started a Fed easing cycle. We’re doing that with the highest price:earnings ratios in 60-plus years. Again, a Fed easing cycle with the highest PE ratios in 60 years, the S&P dividend yield of 1.27% tying for the lowest yield since the year 2000. Is this a cycle trough? Is this a cycle peak? For me, this is just, okay, stretched valuations, but this is really, for me, an inexcusable position for the Fed to have taken. They’ve kept their blinders on. The markets are percolating at levels that do not justify, do not justify—and we’re talking about the markets not justifying it. The economics don’t justify it either in terms of this 50 basis point move lower.
Kevin: Well, and I would probably disagree that they have blinders on. I don’t think they have blinders on. They’re just not doing what they say. They’ve got the Kamala glasses on because, Dave, months ago you said that we were going to see things manipulated like interest rates right before the election, dropping them when that makes no sense. The Taylor rule, just throwing that out the window. But then, also, look at what these unemployment numbers—these employment numbers that have just come out. How in the world can those be accurate?
David: You’re basically saying that this is the Fed’s version of wearing beer goggles.
Kevin: Well, we’ll call it Kamala rose-colored glasses. Okay.
David: Nonfarm payroll surprise to the upside. Set aside the seasonal adjustments and your birth-death modeling, which padded the numbers with roughly an extra 100,000 jobs. Set that aside. The headline number, which everyone pays attention to, just give them the benefit of the doubt. It suggests that the Fed was incorrect in dropping rates 50 basis points. On top of that, you’ve got the ISM services numbers. They were equally supportive of that conclusion. The service sector is supercharged. Unemployment rate drops from 4.2 to 4.1%, average hourly earnings are 4% over where they were a year ago. And if you look back over the last two decades, the average increase on hourly earnings was 2.5%. The previous high was 3.6% back in December of 2008. Hourly compensation is running hot, but, again, we go back to the rose-colored lenses, the 2% inflation target is going to be reached. I guess we’ll see about that.
Kevin: These hurricanes, Dave, can that be considered fiscal spending at this point? Are we going to see some economic effect from that?
David: Yeah, absolutely. I mean, ample liquidity flowing from the Fed. With the hundreds of billions in hurricane relief in the pipeline, I guess we’ll see what Martin ends up exacting in terms of a toll there in Florida. But with Helene behind us and Martin pending, this is a couple hundred billion dollars in relief in the pipeline. Economic activity should be very robust as we close out the year, not necessarily because of it being a healthy form of spending. This is kind of the broken-window fallacy. Things are looking better because we broke a window and had to replace it. The Fed accommodating with lower rates just adds fuel to the fire. That last mile getting us to the inflation target of 2%, I think, is the toughest. I think the bond market knows it. The fed funds target reversed higher by 22 basis points last week, and the implied fed funds rate for year-end 2025, also last week, rose by 44 basis points.
Kevin: That’s the bond vigilantes actually saying, “Interest rates are going up, not down.”
David: Oh, that’s right. The three-month Treasury bill sits right at 4.5%. You’ve got the Fed who wants to loosen financial conditions, you’ve got the market that is tightening them, and I’d love to see if James Carville is right. I think we know which is more powerful between the Fed and the bond market. You remember his old quote: Used to think that if there was reincarnation, I wanted to come back as the president or the Pope or a 400 baseball hitter. Now, I just want to come back as the bond market because you can intimidate everybody.
Kevin: Carville said that?
David: Yeah. Yeah.
Kevin: Yeah.
David: Because it’s true. Ultimately, policy is irrelevant when the market decides something is off. I think there’s enough people in the market that see that something is off. This is not just in the last three weeks since they made that decision. The flow of funds from global markets, as an example, back to Japan, also an interesting trend to watch. 192 billion according to Bloomberg, the largest flow of funds back into Japan in 14 years. If you’re looking at the super buyers of Treasurys alongside the Middle East and China, this is a megatrend to keep an eye on. Now you can add Japan to the list of people who are going net negative in their Treasury purchases at about the time we need ample buyers, interested buyers, feverish buyers of our Treasurys. It’s not there.
Kevin: Our hopes that inflation has actually been cured were ill-founded. Even with the longshoremen strike being over, food prices are still going up.
David: Well, I mean, I think the strike being resolved provides some comfort on the inflation front. But as Bloomberg noted last week, food inflation is still rising, with the worst ever drought in Brazil pushing up food prices at the fastest rate in 18 months. In the last week, you could say you can pray for rain, but as we saw in North Carolina, you don’t always get it where you need it. They don’t need it in North Carolina and Tennessee. They sure as heck need it in Brazil and a lot of other ag-central locations in the world. The Bloomberg Agriculture Spot Index increased 7% in the last month, and that’s the most since Russia’s invasion of Ukraine. On a lag, that hits your grocery bill, but the Fed says we’re nearing that 2% target nonetheless.
Kevin: Well, Dave, I’m going to wrap back around to the presentation this weekend, because even though it’s specific just to our MWM clients, the condensed version, or at least the highlights, are going to be talked about on Thursday. Morgan’s presentation on gold, I’ve heard it now twice. I heard it at the longer presentation on Friday. It was fabulous, and really being a gold bull already, I’m just more of a gold bull. But then Morgan did it again today with charts for us and the company. But for the person who wants to hear how to protect yourself from the things we’re talking about, definitely tune in on Thursday. The gold market is set to jet.
David: Yeah. I think it’s very important. We’ll cover a lot of ground. We’ll have each of us presenting for 7 to 10 minutes. What took us five hours, we’re going to be cramming more than 10 pounds of mud into a 5-pound sack. It’ll be well worth your time and you’ll have the opportunity to listen to it or read the transcript thereafter if you want to go back and, of course, review the charts that are shared and things like that.
But I think the gold market is at a very interesting juncture with the central banks basically flipping the script. They’re not interested in Treasurys anymore. They’re not interested in US dollar assets anymore. They are interested in something that they’re in control of. I think they’re interested in gaining control even as others around the world are trying to keep control. If there’s sort of a grand theme in today’s commentary, I would say, if you care about any control, whether it’s personal autonomy or how a nation operates, you do have to pay attention to the gold market because it’s telling you there’s a tussle afoot. How this plays out is going to be absolutely critical, not only to your personal, social, and political freedoms, but also to your financial and economic well-being.
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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.
