Podcast: Play in new window
- Morgan Lewis On Emerging BRICS / Gold Strategy
- Buffett Sells 2/3 Of His Apple Stock
- Gold Up 33% YTD Is Only The Beginning
David: “Friends of mine will point to the legitimacy of one news source or another as if pedigree matters. And ironically, all pedigree gets you today is uniformity, is conformity, is educated imbecility. What matters is integrity, and the mainstream media has demonstrated it has none. News outlets are dying because they failed to see the need for respecting the truth more than what they’re choosing as a priority, which is worshiping power and conforming to ideological pre-commitments.” —David McAlvany
Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
David, I just really enjoy our Monday nights before we record the Commentary. The Talisker scotch is— A lot of times people say, “Well, why is it that you like Talisker?” And it’s way too complicated to explain. It’s not just the taste of the scotch, it’s the years and years and years of friendship that went into it, and it’s just become the taste of when you and I meet.
David: Well, and it’s something that I think many people would appreciate in those terms. If they don’t like single malt, they certainly appreciate the depth of relationship and the ability to bob and weave and go lots of different places.
We’re going to start this morning by bobbing and weaving with Morgan Lewis. We just came out of a company-wide meeting, and I thought I’d ask him a couple of questions as it relates to foreign currency reserves, the BRICS nations, and kind of a continuation of last week’s conversation on that topic.
Kevin: Yeah. We had discussed last night, have Morgan come on, just because the Hard Asset Insights that he writes every week. They’re fabulous, but this one in particular this week was really good.
David: And it should be a part of everyone’s weekly staple. That’s a Saturday morning read along with the Credit Bubble Bulletin. Not to be missed.
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Kevin: Morgan, thank you for joining us.
David: In the office, we often talk about our debt issues. We talk about the transition for the US dollar system as it is today, as it could be tomorrow. And in last week’s Commentary, we did spend a bit of time talking about the meeting in Kazan, Russia, the BRICS meeting. The significance of that we’re still trying to figure out, we don’t know what exactly will happen. We know the intent. We know the desire amongst the parties involved to see a shift in the status quo. Give us some perspective, Morgan, on the important points that you’re connecting.
Morgan: Yeah. Well, I mean, I would say that nothing profoundly new came out of the Kazan summit, but there’s a lot we already know. And I think it confirmed some of the aspects that are powering the gold market, I would say, in particular right now. The BRICS, the criticism coming out of Kazan has been that they haven’t announced some alternative reserve currency, but I think that misses the point. I don’t think their intention is to create a US dollar-centric reserve currency model.
David: Take me back to 2015 when we had sort of a clear intent expressed by leaders within the People’s Bank of China as to the role that they saw gold playing in the future as they were literally just launching and developing this new thing, the Shanghai Gold Exchange.
Morgan: Yeah. We know that they are interested in an alternative to the dollar. The PBOC member in 2015 wrote a piece that was titled “The World Needs a New Reserve Currency.” In it, he referenced the intention to use the yuan for trade invoicing for commodities like oil and gas, and he said they would like to increase the uses of the yuan in trade using gold. So, this has been talked about for a long time.
I think people get a little tired of— The King Dollar narrative is brought up frequently to belittle these claims. And the idea being that they really can’t de-dollarize, and there’s no alternative to the reserve currency, and therefore they’re just talking. But this year we had Jeff Currie, the former head of Goldman Sachs commodity trading, very well-connected guy, very knowledgeable guy, come out and say on multiple occasions that what’s happening in the world is that the BRICS, primarily, are changing the global system on the margin from what he called dollar recycling to gold recycling, in his words.
David: And the gold recycling is sort of a stand-in. The old system of dollar recycling, whether it’s the petrodollar recycling or trade dollar recycling where trade surpluses from the Chinese or trade surpluses from OPEC countries were being recycled, literally recycled, into the purchase of Treasurys. And that’s how they kept their currencies from appreciating vis-a-vis the dollar. This is substituting Treasurys, taking it out of the equation or reducing it, and instead infusing gold into the mix.
Morgan: Yeah, it’s the old petrodollar system. It is, “I, as a foreign country, need dollar reserves in order to buy commodities, primarily oil, in dollars.” That’s the petrodollar system. That was the arrangement made between the US and the Saudis. So, if you had trade surpluses, you recycled them into treasuries so that you had dollar reserves to then go back into your commodity markets and settle trading.
What appears to be happening now, and what Jeff Currie is talking about now, is that those countries want the added leeway and the safety of not having to rely on the dollar and having to rely on trade with the US in particular, or holding a reserve currency that is controlled by the US. That’s both because of the debt problems we’re having, the likelihood that we are going to be dealing with secular inflation to deal with that debt problem, that’s not very attractive for somebody who’s trading in their valuable oil for a US Treasury reserve note that, as Putin says, “Is depreciating at 8% a year.” If he’s saying 8% a year a couple years ago, well then, you can add a few percent to that, most likely, going forward. So, that’s not an attractive proposition. And at the same time, we weaponized the dollar following Russia’s invasion of Ukraine.
David: To some degree it’s to create some insulation from the intrusive nature of Treasury Department and State Department policies which are not necessarily in keeping with the priorities of these trade partner countries.
Morgan: Yeah, of course. And the key is that they need to find a way to trade commodities outside of the dollar. And if they can do that, then they alleviate their reliance on the dollar and the dollar system and on the US. And so obviously, they’ve been talking about it for a long time and it appears that now they’re doing it. And it’s on the margin at the moment, but they’re increasingly making trade deals in local currencies. And the idea is that basically they make agreements for their surpluses to be recycled in BRICS currencies. And then, the net surpluses are settled in gold, and gold becomes the new reserve asset, at least on the margin.
And like I said, Jeff Currie coming out and talking about that this year, at least to me, gave that entire narrative a whole lot more credibility. And if you go back and look at some of the comments made by officials in China, starting with the chairman of the Shanghai Gold Exchange, a while ago he said, “The Shanghai Gold Exchange will change the current gold market with its “consumed in the East, but priced in the West” arrangement. When China has the right to speak in the international gold market, the true price of gold will be revealed.”
So, I hear what Currie’s talking about this year. I look and see what the chairman of the Shanghai Gold Exchange has said on the record. And I look at what’s happening in the price of gold right now, and I find it to be very revealing, and frankly very confirming of what Currie’s talking about. We see that gold has diverged from real US Treasury yields. That’s virtually unheard of over the last 20 years at least. And gold similarly diverged from a strong dollar, also a head scratcher for any Western investor. And at the same time, I think maybe most importantly, we’re seeing that the price of gold has managed to go higher, significantly higher, even while inventories in the gold ETFs were being liquidated.
And at the same time, we’re also seeing that gold is outperforming US Treasuries. We’re seeing gold outperforming commodities and gold outperforming oil. And all of those would be what you would see if dollar recycling and Treasury recycling was transitioning on the margin in BRICS countries to gold recycling.
David: Yeah. It’s actually not that novel of an idea, it’s just kind of a return to either the gold standard or the gold exchange standard. Prior to 1922, you actually had to move ounces from one bank vault to another to net settle your trade imbalances. And then, 1922, the novel introduction was, “Well, let’s just do this via paper credits and debits. We don’t have to hassle with moving the product, but I’ll give you an IOU that says, ‘I’ll hold the gold, but I owe you X tons in settlement for this particular quarter or year, but we’re all squared up.'” And so, it is kind of a return or flashback to just having something stable in the global monetary system.
Morgan: Yeah. Like I said before, I think the Western debt has now become a problem. I think we’ve crossed a threshold or Rubicon with Western debt, and when you weaponize the dollar on top of that problem, I think the Western debt issue has become a significant problem. I think it was a problem, but one that could be ignored, and now I don’t think it can be ignored.
David: You mentioned in this last week’s Hard Asset Insights—thanks for putting that together each week. That’s a great way for folks to know what our thinking is on a weekly basis as it relates to hard assets. But you mentioned the 780 billion in annual trade surpluses from BRICS nations, and $12 trillion in global dollar FX reserves, trillions of private wealth held in sovereign debt, likely seeking an exit from medium to long-term Western sovereign debt.
So, what you’re describing is the new model. There’s a lot of money to flow through that model. However, there’s not a lot of gold to necessarily be involved in the system. Is there enough gold for this system to actually function?
Morgan: Well, yeah, there is. At the right price.
David: So—
Morgan: The biggest way to increase the gold market is for price to go higher. So yeah, as you mentioned, right now we have the ammunition for gold, so to speak, is in the form of that 780 billion in BRICS surpluses, at least in 2023, the 12 trillion in global dollar FX reserves along with those trillions in private wealth on the margin. If debt is seeking an exit into the gold market, they’re trying to squeeze into 265 billion of annual gold mine production. So, the price has to go higher to make that market larger.
David: It has to go quite a bit higher.
Morgan: Yeah. It has to go a lot higher.
David: So, I mean, if I were to bottom-line this, the conclusion would be we can build a case from a technical standpoint. You review the COT numbers for us, the Commitment of Trader numbers for us each week, and while we can make the case for gold correcting, there is this fundamental source of demand which is price insensitive. And so we’re kind of on the horns of a dilemma. On the one hand, we could see a gold price correction. On the other hand, we don’t have to with there being 780 billion seeking to squeeze into a $265 billion market.
Morgan: Yeah. Well, that’s what makes this so interesting. When the chairman of the Shanghai Gold Exchange references gold consumed in the East, but priced in the West, that underscores the dilemma we face in our analysis of the gold market. You would’ve traditionally thought that real Treasury yields rising would’ve certainly meant that gold would be falling. A strong dollar certainly would’ve meant that gold would be falling. And outflows from Western gold ETFs, certainly you would conclude that the price of gold would be falling. So these old relationships have all broken. And looking at the technicals right now in gold, looking at the COT report in gold, you would say the price of gold certainly should correct, but maybe it won’t.
David: So this time it’s consumed in the East, priced by the rest—and that is the rest of the world as they’re trying to resolve their trade imbalances.
Morgan: That’s right. The price of gold probably will correct, but I don’t think we can take that for granted the way we might’ve in the past.
Kevin: Well, thanks, Morgan. That was exactly what we were hoping for, Dave and I talking about last night, I’ve always enjoyed your analysis, Morgan. And the quote about how gold has been consumed in the East, but priced in the West, that seems to be breaking down right now.
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And Dave, what I think is really amazing is that the gold price has been rising while the dollar’s strong. It’s been rising against all of what the old model would say, based on the fact that the people in the room who are pricing gold over here in the West aren’t really the ones making the decision as to who’s going to be buying. The Chinese and the BRICS have been buying with both hands, and the central banks.
David: This certainly is an example of a complex system which is reaching its limits. And if we go back to the conversation we had with Joseph Tainter many years ago about The Collapse of Complex Societies, there is a pressure that is a part of any complex system—and a society is just another form of a system. And it would seem that while we focus on a moment in retrospect where we can say the system is no more, and it appears to be cataclysmic in nature, there actually is a slow and gradual building process. And this is reflective of that old phrase, how did you go bankrupt? Well, slowly and then all at once.
And that’s kind of the nature of complexity and its unsustainability. You’re finding the outer reaches of complexity and sustainability and then you just realize, nope, it’s not working. And I think that’s really what the BRICS are dealing with is the system that’s not working in their favor and what they like to move towards. We will be at a point in time. We’re not at that point in time yet. And so this is sort of the gradual transition from slowly—and then quickly,
Kevin: The thing that really struck me too about the meeting a couple of weeks ago was where it was. It was in Russia. That speaks volumes. One of the things that I really enjoyed about Monday night, Dave, before election day was we didn’t really talk much about the election. We didn’t spend a lot of time on it.
David: I mean, we’re interested in dozens of topics. And each week our discussions on Monday evening, we always record on Tuesday, the podcast, and they range from scientific theory to economic policy blunders, public policy, international relations, literature, spirituality. A lot of the time it’s just two friends talking about life. And the Commentary has helped facilitate something more important than the commentary: friendship.
Kevin: Yeah, friendship. And that friendship goes back to— Well, it goes back to the eighties, Dave. I mean, Reagan was in office when I first met you, so we’ve had a lot of time to talk about a lot of things, but I don’t want to diminish the fact that we have been talking about the election and thinking about the election. We’ve probably put many, many hours into it. It’s just at this point that doesn’t have to be the only thing we focus on.
David: Yeah, if we spent three minutes on the subject yesterday at most, we’ve already spent dozens of hours talking about it, dozens more if you think about the time spent reading, and of course it’s consequential. Of course we care. Of course, we voted—not necessarily as Mayor Daley of Chicago encouraged, early and often. Yes, we did vote early, but only once. Just for the record, only once.
Kevin: You got to the restaurant about 10 minutes late. And I had been reading Owen Barfield’s, Poetic Diction, which is really an analysis of meaning. Owen Barfield was a good friend of C.S. Lewis and JR Tolkien, and was part of the Inklings. And he wrote this book back in the 1920s to really look at how language loses its meaning over time. How very powerful metaphor and what language is in the beginning isn’t what it is over time. We’ve become very accustomed to certain words and we change meanings. But the reason I think I’m really drawn to rereading this book right now, Dave, is that the media is saying anything. There really is no underlying narrative. Meaning seems to be completely— It’s like we’ve just eliminated meaning from our language.
David: And it’s very common these days within the academy for language to be appropriated. In other words, it has new meaning and new cultural references.
So we gather, we sit, we swirl a Scotch, we catch up on recent musings. And certainly as we reflect on the world that we live in, there is a sense there’s a growing anger in the world. I think that anger is to some degree proportional to a lack of real human connection. Monday evenings for us, there’s this relational centering that occurs. I told my godson years ago that most people, even if they’re in conflict, would most likely get along after a glass of wine and a little curiosity.
Does that remain the case in a post-truth world where our references, our language is shifting and we don’t even know what people are talking about, what they mean by what they say? The media coverage in this political cycle has literally by saying anything, they’ve said everything. It’s been like a monochromatic art display. It’s like monotone speech, monophonic melody, no variance. It barely seems real. And I think that’s partially because it’s become uniform of necessity. There’s been a forced conformity. So uniformity, conformity— Mainstream media has its creeds, its dictums, its sound bites. And they’re repeated so often it almost feels like a Philip Glass piece. Note, chord progressions that are just repeating over and— And that’s really not fair. I like Philip Glass.
Kevin: Yeah. Well, I think I introduced you to Philip Glass, if I remember right. But you know the old joke, how does a Philip Glass tune sound? Well, Philip Glass, Philip Glass, Philip Glass, Philip Glass, Philip Glass, Philip Glass. Yeah, he does use repeatability. But what they’re repeating right now, Dave, lacks meaning.
David: Friends of mine will point to the legitimacy of one news source or another as if pedigree matters. And ironically, all pedigree gets you today is uniformity, is conformity, is educated imbecility. What matters is integrity. And the mainstream media has demonstrated it has none. News outlets are dying because they failed to see the need for respecting the truth more than what they’re choosing as a priority, which is worshiping power and conforming to ideological precommitments.
Kevin: And when you talk about pedigree, I mean it used to be Ivy League was a pedigree, but at this point, Ivy League is really just caught in the weeds.
David: But again, it’s just a mark of uniformity and conformity. If you’ve graduated from XYZ University, it means that you have been implanted with a certain set of ideas. And again, this is back to that sort of ideological precommitment. For us, truth matters. And in a post-truth world, what you have with the mainstream media today is that they’re all grasping for advantage and a struggle for power and money.
Kevin: It’s just pure propaganda is what it is, Dave.
David: Science has been through a similar upset. Science has been exploited as a cultural cudgel, and education, as we just mentioned, it’s sunk into mere indoctrination. The news is today straight propaganda with no pretense of care for truth and no need for a tie to reality.
Kevin: And it’s sad that science has lost actually its meaning because I have seen signs in the neighborhood that say “science is real.” Well, what are they trying to say, that science is real? What they’re really trying to say is their science is real.
David: And searching for understanding, if this is something that is a life pursuit, it includes a degree of humility. And that is altogether lacking from news outlets. They presume to already possess it. And so here’s— Again, if science is real, well, data is data. Data is critical, but meaning within the data is even more so. There you have interpretation, interpretation of the data, which is how we derive meaning. And at least in the days of first order and second order scientific inquiry, it included assumptions.
It included theorizing about the best explanations of the data and a testing of an explanatory theory of the data. So the data was considered the data, but you didn’t necessarily know what it meant. That’s why you had explanatory theories of the data. But all of that, again, was based on sort of first order questions and second order questions, which left you almost in a unique role. Scientists assumed the role of philosopher and ethicist for the moment in which they laid out the significance of what they were looking for and the meaning implied by their tests. That’s what we talked about a few months back in terms of Popper’s idea of falsifiability.
Kevin: Yeah, falsifiability. It’s interesting. Yesterday, Dave, Tory came back from his cruise over in Europe, over in the Mediterranean, and he showed me a picture. He said, Kevin, I was thinking about you while I was in Florence. He showed me a picture of where Galileo spent the last 11 years of his life, from 1633 until 1642. He was under house arrest. Well, most people know the story, but I mean Copernicus before Galileo said, “Hey, wait a second. I don’t think everything circles the earth. I think maybe we circle the sun.” But we didn’t actually have a lot of empirical proof until Galileo looked in a telescope, and then he made a little bigger telescope.
So Galileo took Copernicus’s work and he said, “I’m looking at my telescope, and he’s right.” He’s looking at Venus, and he sees that it goes through phases like the moon. And it’s like, “Well, that wouldn’t happen if it’s circling us.” And then he looked at Jupiter and he saw the moons of Jupiter. And so many things opened up at that time when he actually looked into his telescope. And unfortunately the science of the day, I know the church is blamed, but actually the quote, “science is real,” people of the day were the ones that just couldn’t handle it. They said it doesn’t work. It changes their philosophy. But falsifiability, the problem was he was falsifying something that didn’t philosophically fit with the larger model.
David: So if we’re forced to think in a certain way and are only allowed one conclusion, that goes against the notion of falsifiability. A conclusion could be otherwise. That’s the shorthand for what it means. A conclusion could be otherwise. The scientist is no longer a scientist. If you can’t falsify the theory, they become an ideological priest, when falsifiability is set aside. And that’s precisely what we find in the news media today. An ideological priesthood with dogmatic pronouncements, ex cathedra, it cannot be otherwise. The interpretation is final. Discussion is disallowed.
Kevin: You know what it reminds me of? The book Exit, Voice, and Loyalty that you turned me onto.
David: Yeah. Problems emerge when you demand loyalty and are not provided a voice or an exit. If there’s one book I’d recommend, man, I love that book. Exit, Voice, and Loyalty by Albert Hirschman. I’ve read a lot of his other books. He’s a sociologist. He’s looking at organizational behavior, which has broader application to the body politic today. I think it’s important to keep that in mind. There is an outcome today which would largely curtail our First Amendment rights and control public dialogue. That’s like sealing the valve on a pressure cooker. And this is really important if you important if you understand the exit voice and loyalty concept. It’s important that you have the ability to communicate when you’re upset with something in the system. Encouraging and facilitating civil discourse is not the same as defining appropriate and allowable speech.
Kevin: We’ve got to be allowed to disagree sometimes.
David: Well, and it’s again the notion of really good scientists. You get a bunch together, the more they’re thinking as a group, the less likely they’re making progress. The more they have different theories, and there’s a competition for proving out what is the truth of the matter, that’s where you begin to see real progress. The history of Western culture and thought is one of disagreement and one of dialogue and one of progress. If you take away falsifiability in the public square, the possibility that you are incorrect, and you take away a form of intellectual integrity, I think that this is, again, something that’s prerequisite to civil engagement.
Kevin: In a way, it’s a form of bullying. Bullying to make somebody believe a truth that may not be real.
David: Again, I love the sociologist’s insight on this. It applies to a corporation, it applies to a country, it applies to even a family. And so tell me, I must believe one thing, bully me into compliance by demanding loyalty, and the organizational structure may not bear up under the strain. Voice is a requirement in a free and civil society. Define appropriate speech as the academy, as our academics have attempted to do. And you begin to degrade the quality of progress.
Kevin: And this goes back to Barfield looking at meaning. There’s an underlying meaning in everything. That’s one of the things that— C.S. Lewis brings this up, the very fact that we as human creatures believe that there are more things to be seen than just what the surface visible is, is actually proof of God, and that we know that there’s meaning behind it. Politics right now though, is trying to eliminate that and just turn it into a random arbitrary bullying.
David: Well, and we’ve heard this notion of identity politics. I would suggest there is identity beyond politics, truly identity beyond politics, and meaning beyond the grind of the news cycle, which seems to be one of the more soul-sucking aspects of our cultural retrograde. There’s hope, I think, for us as we move through this election cycle. There’s hope beyond policy preferences and political personalities, but you have to exist. You have to have the possibility of existing in an open space for the heart and the mind to appreciate and realize it.
If you thought that an outcome on November 5th, 2024 would shift the historical tide, you’re wrong. As Charles Mackay reminds us in 1841. That’s when he published his book, Extraordinary Popular Delusions and the Madness of Crowds. He says, “Men, it has been well said, think in herds. It will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”
Kevin: By the way, we put that on our required reading list for clients many years ago, so I’m glad you brought it back up again. It’s Extraordinary Popular Delusions and the Madness of Crowds. Also, Dave, you and I both read a book by Gustave Le Bon, The Crowd, and there is no rationality. There is no real meaning when a crowd goes mad.
David: And that’s why, when I look at November 5th, I think actually there’s a longer journey, a long journey back to critical thinking, a long journey back to civility. But it takes decades, and it takes demonstrated leadership. In essence, we have the leadership we deserve. It reflects us. And this election was about a contrast between personal self aggrandizement, the cult of personality versus a tragically pathetic diversity, equity, and inclusion candidate that couldn’t survive a presidential primary and was only on the ballot as a last ditch effort after the party’s incumbent literally had lost his mind.
Kevin: Well, and we’ve had a lot of people who were running for election that maybe I disagreed with, but Dave, this time, this time was different. And that’s an understatement.
David: I’ve talked to at least a dozen people 25 years and younger, who have asked the question, is this the best we could do? Does this represent our best hopes and opportunities for leadership? Never in US history have we had two less presidential candidates running for office, so I come back to this conclusion. It reflects us, a culture that thinks and operates according to greed and selfishness, with a desperation for praise and approbation that belies an even more desperate internal insecurity. This is a culture that largely agrees with ideological compliance and conformity. A culture that has already been, dare I say, intellectually colonized. In the age of social media, the questions are, am I rich enough? Am I popular enough? Am I pretty enough? Am I powerful enough? We have comparison and keeping up with the Joneses, which has become neurotic, it’s become even pathological. And so what we have is two presidential candidates where persona is everything, which means pretense is everything.
Kevin: Let’s look at the positive though. You interviewed Neil Howe again this year, and Neil Howe talks about what comes after a fourth turning. Do you think the younger generations are going to actually reject the absurdities of today?
David: It’s a great question. I think that the experiences of tomorrow will shape their perspectives and their decisions the day after. Will younger generations resist this hollowed out existence where persona is everything and where we are just trying to be the prettiest, the richest, the most popular according to our Instagram feeds? I don’t know. Do they see our political theater as a theater of the absurd? I think when they live with the consequences of that theater, that’s where you begin to see decisions which are made which are very different.
I don’t know who will win this week. We’re recording this before the election is complete, but we get what we deserve. We reap what we sow. The wages of banality is hopelessness. Unreal people don’t solve real world problems. And that’s what we’ve asked two people to do.
Kevin: Owen Barfield in the 1920s when he is writing about the losing of meaning, how words over time start to become so common that we lose the actual impact of where it came from in the first place. He tied it in, actually, I thought it was fascinating that he tied it into monetary inflation. He said it’s a little bit like the difference between a solid currency or the printing of currency. The more you print, the less valuable it is. And you and I have talked, especially the last 11 or 12 years since Mario Draghi said, “we’ll do whatever it takes,” which was, we’ll just print however much we need. We have talked about, the Federal Reserve really has mainly been about perception management. You’re talking about personalities. People know who their Federal Reserve chairman is. It used to be that nobody knew, but people know now. Powell is in a corner. Do you think the math now is going to actually force out the personality and the perception management?
David: I think the conversation about markets is a safer conversation. We’re less likely to step on toes. Maybe we can transition to markets. It’s at least where math separates the absurd from the sane. Why do we harp on fiscal issues? Why do we harp on the implications, the consequence of misallocated capital? Because in that space, in that world of cause and effect, it’s pretty easy to engage with. Even if the effects are delayed, and reality seems to be suspended for a time, ultimately there is a balancing effect.
Kevin: Is it really like a two-sided coin? Greed on one side, fear on the other?
David: Well, certainly when you’re looking at markets, they move in long waves from greed to fear. You have monetary policy and fiscal stimulus that can exaggerate those waves or trends. But all trends revert to the mean. There is a balance which is sought. It never stays, but the market is constantly seeking it, that’s that mean reversion, eventually.
Seeing where you are in a cycle is critical to capturing growth. It’s even more critical to wealth preservation. If I say 43,325 or 5,878, those are just numbers. Looking at those numbers in a larger context, the Dow Jones Industrial Average and the S&P 500, looking at those numbers, an investor can ask, where are we at in a bullish trend? Are we at the beginning of a bullish trend? Are we in the middle of a bullish trend? Are we near the end? And Conference Board Consumer Confidence Survey, asking specifically about the expectation of stock prices increasing over the next 12 months, in the month of October it was at the highest level of certainty for further gains in the 37 years of the conference board’s monthly polling.
Kevin: Wow. That is herd mentality applied to markets.
David: Absolutely. Now, if you look at the American Association of Individual Investors, the AAII sentiment survey, emphatically bullish. You might discern that we are, on these data points, very late in the growth cycle given the uniformity of belief given the herding. Their asset allocation survey—which is a little bit different than their sentiment survey—AAII asset allocation survey gets to the actual stock exposure, not just the feelings of the group. And the actual stock exposure is approaching 70%. Now, in the last four decades, in the last 40 years, the only higher numbers are between 72 and 75, which was in the late 1990s.
Kevin: Right before the tech stock bubble blew up.
David: That is herding at its finest. Consider added to these data points, if you will, the insider sell to buy ratio, 4.9, versus the local high of 5.4 in February of 2021. That is a five times liquidation to every share purchased.
Kevin: These are insiders, the big money, the people who run the companies.
David: Company executives who are saying, I’ll happily take the price today versus the price tomorrow. And then you consider the fresh record high in Berkshire Hathaway cash as Buffett and company scale back their largest single exposure. And of course they’ve been selling Bank of America and some other shares as well.
Kevin: But this is Apple. They’re selling Apple stock.
David: Apple, their position’s been reduced by two-thirds, so their cash now tallies to 325 billion. That’s an increase of 94% in 2024. In the second quarter, stock liquidations at Berkshire Hathaway were 75.5 billion. In the third quarter, 34.6 billion. And then they had another 10 billion in revenue which they basically did not reinvest. They’re leaving that in cash. This is the eighth consecutive quarter for Warren Buffett of net selling their equity positions.
Kevin: Didn’t he have over a billion shares of Apple at one time?
David: Dating back to 2018, a billion shares of Apple, it’s now reduced to 300 million, so again, a two-thirds liquidation. In the third quarter, this is the first quarter since 2018 that Buffett did not buy back his own shares.
Kevin: That’s telling.
David: You might ask the question, is Berkshire overvalued too? I think I have an answer. The Buffett indicator, which he used in 2001 and two to say, here’s why I know the stock market is cheap. The Buffett indicator is at 1.92 versus its previous 2021 high , 2.1 times. And again, what is the indicator? It’s the US equity market cap divided by US GDP. And again, just bear in mind, Buffett likes to put capital to work when the ratio is at a 20 to 40% discount, not a 92% premium. So .6 or .8 versus the current 1.92. And his classic quote, “Be fearful when others are greedy, greedy when others are fearful.” That’s what the 94-year-old says.
Kevin: And that’s why he makes money, because he’s not the herd. The average US investor is greedy when others are greedy, fearful when others are fearful. This is Gustave Le Bon, The Crowd, or Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds.
David: Now, just going back to our conversation earlier with Morgan, I think this is one of the merits of gold ownership when others are fearful the safe haven asset is selling at a premium, not a discount. And it allows for a lateral move from premium valuations to discounted assets. In that sense, it’s like cash on steroids. Does that make sense?
Kevin: Yeah. Well, your dad used to say, “Keep your powder dry.” What you’re saying is if cash wasn’t devaluing so quick, you’d just go to cash and you’d wait until the market comes down. Right now going into gold is adding multiples to that.
David: Yeah. Well, I go back to Doug’s comments from last week’s Tactical Short call. By the way, this is kind of implicit to our Tactical Short product, it’s designed is to create more liquidity in a down market. He says, “We live in a world of seemingly stark inconsistencies: confounding incongruence, record stock prices, unprecedented household wealth, and incredible technological innovation. At the same time, society is resentful, deeply divided, and insecure,” and then elsewhere in his comments: “It’s commonly viewed as the most dangerous geopolitical backdrop since World War II. Yet stocks are at all-time highs, and market optimism remains at extremes.”
So if you did not get a chance to join us for the Tactical Short call last Thursday, there is a transcript and the audio. I would encourage you to go back and listen to it. Very valuable information as we sort of engage with the markets this week and in the quarters and years ahead.
Doug sees the excess liquidity in the credit markets today as a driver of these sort of late cycle phenomena where we can ignore these fundamental issues and we have this sort of temporary and dangerous disconnect.
Kevin: On last week’s Commentary, we also quoted Paul Tudor Jones, and Doug did again, but this time it was referencing the Minsky moment.
David: Yeah. And just keep in mind that all markets are mean reverting. Paul Tudor Jones, sort of anticipating a Minsky moment in the bond market, says “financial crises percolate for years, but they blow up in weeks.” And this election, frankly, it’s just one potential catalyst.
Kevin: Well, and it may not even be the election. I mean, gold is higher by what, 30, 33% this year based not on US politics as much as it is what Morgan was talking about, a recycling instead of into dollars, a recycling into gold.
David: Well, that’s right. The move year-to-date in gold higher by 33% is one signal that global investors don’t care what the catalyst is. They care about the gross instability layered into the current market structure and into the global economy. As Morgan noted, there’s also the presence of the price insensitive buyers working on a multi-decade process of de-dollarization. This sets up very bullish dynamics longer term.
Kevin: Well, back to equities. You talked about Buffett, but when you want to watch what the guys who run companies do, so insider selling is a big deal.
David: Yeah, sentiment is one thing. It’s very positive today. But insiders are selling and valuations are at reach levels and the government bond market globally is fraying at the edges, there is another way of looking at these things. These are peripheral supports to a safe haven that has universal appeal. And when I say universal appeal, it’s important to recognize what gold is doing in other currencies. Gold in rubles, 267,000 rubles, up from a hundred thousand in 2022. Gold yen, now at 416,000 yen. Indian rupees, 230,000 rupees per ounce. In yuan, 19,500. In Mexican pesos, 55,000 pesos for one ounce of gold. So I mean, in the West we have a perspective on gold which implies a stable currency, and therefore I think our imagination is very limited. But take away the constraint of a stable currency and prices can do anything.
Kevin: Well, you’ve got the dollar at 103, and one of the reasons the dollar is where it is is because of all these other currencies being weaker. But that doesn’t mean the dollar’s strong. So I have a question for you, Dave. Right now, in my lifetime, I’ve never seen so much anger in politics. What’s it going to be like when unemployment isn’t at a low number? What’s it going to be like when the dollar doesn’t work anymore, when people are actually really, really uncomfortable?
David: Well, and this is I think one of the things that whoever wins this week, they’re going to be facing a real challenge to manage this country. US politics are today a blood sport, and that’s with household net worth at record levels. That’s with GDP growing. That’s with unemployment under 5%. Do you think we get along better when those trends are mean-reverting? Do you think we get along better? I don’t think so. Politicians, are they in a better space? Are they in a place where they can operate easier with budget deficits exceeding 10% of GDP or 15% of GDP instead of the current 7%? What do you think the Treasury Department’s going to do? Are they going to be content with the current tax code when interest becomes our largest budget line item, which is slotted for next year, if you just let that sink in.
Kevin: Yeah. More than Social Security and the military spending.
David: Will they take kindly to the bond market ripping control and credibility from the Federal Reserve as interest rates march higher? When inflation bounces, are you going to have US households more or less forgiving of whoever is in office? The asset gap between rich and poor is one thing. We mentioned household net worth being at all-time highs. Clearly that’s not equally or evenly distributed across the country. What about the income gap, where all of a sudden inflation’s back on the table, and people who are already stressed are even more stressed and moving towards desperation? Now, when you take away Fed credibility, you open the door for a market-driven devaluation.
The flip side of the coin is a nominal increase in the price of gold that today seems like a stretch. Can we see gold at 5,000? Can we see gold at 25,000? I mean, again, it’s hard for us to imagine because we see things through the lens of a stable currency. Just ask the Russians what 267,000 rubles per ounce means to them. Ask the Japanese what 416,000 yen per ounce means to them. And the Indians and the Chinese and the Mexicans and the whole world, they already recognize what a destabilized currency system looks like. We’re the ones who are sort of the last man standing. But as one of our favorite analysts has said, “The dollar is merely the best-looking horse in the glue factory.”
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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 mcalvanay.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.
