Podcast: Play in new window
- Devaluation? Dollar Loses 10% In Six Months
- Can Powell Lower Interest Rates Without A Dollar Crash?
- “90 Deals In 90 Days” – Only 2 So Far
“Germans and Italians asking to repatriate their gold holdings from the US. This is not an insignificant sum, $245 billion in bullion they’d like to have onshore. If nothing else—if nothing else—it’s a sign, it’s a signal of distrust. Confidence in US institutions, many of them, has already waned. If we create a confidence crisis in the currency, inflationary impact could take us back to double-digit inflation rates.” —David McAlvany
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Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
Well, David, one of the things that I love about technology is you can sound like you’re sitting right next to me, and this time you’re not, you’re actually doing a little bit of spearfishing. I’m quite jealous, but I do love the fact that we can still do the Commentary.
David: So in the Caribbean, there’s a small set of islands, St. Kitts and Nevis, and Nevis is a place we’ve come to for many years. Down here in the Caribbean, it’s interesting, we have this book on a table, it’s Peterson Field Guides to Birds of the West Indies. And this is a bit of trivia that very few people would probably know, but the name James Bond came from Ian Fleming writing some of his screenplays while he was in the Bahamas, and a copy of this book was at the place that he was staying. And guess who the author’s name is? James Bond.
Kevin: Really? Really?
David: James Bond, Birds of the West Indies. And it has nothing to do with anything at all unless you care about the White-Rumped Sandpiper or 15 varieties of swifts or whatever. So anyways, it’s good to be in the sun.
Kevin: Yeah, and Ian Fleming, when he wrote James Bond, he was actually writing about characters like himself in World War II and after that. So it’s amazing, there’s a lot we don’t know about a person. We seem to, if you bring up Ian Fleming or James Bond, you’ll say, “Oh, I know who that is,” but the honest truth is you don’t really always know the backstory.
David: Yeah, this week we’re visiting the birthplace of Alexander Hamilton. Nevis is the island that he was born on. Hamilton was perhaps the most creative and innovative fiscal policy and monetary policy administrator combined. Very rarely do you have those two things. And I could say that stretches through all of US history, first Secretary of the Treasury and later the Chief Architect of the First Bank of the United States, the precursor to our Federal Reserve. And this from a man born of, there’s some controversy as to the nature of his birth, but here in Charlestown, Nevis.
Kevin: Well, Dave, Hamilton, obviously he’s back in the forefront because of the musical, and great music in Hamilton, but there’s a lot of mixed feelings about Hamilton and the way he handled central banking and fiscal policy. America really was affected by Hamilton’s decisions.
David: Well, without Hamilton, our country would be quite different. He borrowed from the Bank of England much of the structure for our own national bank. And sort of in the interest of disclosure, I grew up with more than a few biases and assumptions about Hamilton’s contribution, most of them unfavorable. Reading Ron Chernow’s biography of Hamilton marked a departure from those biases and what turned out to be mostly false assumptions, and it served as a significant life lesson. Be as well-informed as you possibly can be before having strong judgments of people. People are infinitely more complex than we give them credit for as we routinely reduce them to caricatures. But I’m still working towards giving people the benefit of the doubt.
Kevin: Yeah. So with Hamilton, Dave, I’ve had those same biases because looking back, central banking seems to me like such a dangerous thing, but a central bank that’s connected to the government, when it becomes political, that’s probably when it’s the most dangerous, isn’t it?
David: It is. And in the next few weeks we’ll get to talk with another gentleman, Mr. McWilliams, who looks at the history of money as an evolutionary process and sort of the story of humanity. And he does a great job of showing how central banks have come to play such a critical role in the expansion of money and credit to meet the demands of trade, to meet the demands of commerce.
And there is a tendency, I think, having grown up around the gold business, to think of the gold standard as the end all and be all. And there are attributes of it which are really remarkable, but there are limits to it too. And so back to your comment on central bank independence, fast-forward from 1789, the year that Hamilton became Treasury Secretary, 1791 when the bill was passed which birthed our first central bank, of course, long before the Jekyll Island Club, we take for granted that the Federal Reserve is not directly answerable to the Oval Office.
And here in recent weeks and months, judging by the rancor from President Trump, Jay Powell should be checking in for marching orders from the commander in chief. Anything else is in subordination, or at least, as the President would put it, incredibly stupid. But the independence we’re accustomed to today only emerged after a long period of financial repression in the US, where bondholders were under-compensated and were asked to finance the war machine and then the rebuilding that followed it, receiving suppressed instead of market-determined interest rates. It was one of a series of episodes where government bonds were referred to as certificates of confiscation. Fed policy was coordinated with the Treasury, and that came to a close in 1951 with the end of interest rate caps.
Kevin: So Trump, a lot of what he uses as leverage against those he’s trying to make deals with or to get to basically yield to what he’s wanting, I wonder how much leverage he has to bully Powell. Does he have much leverage, do you think, other than just rhetoric?
David: He really doesn’t have the leverage, but it’s not to say one man can’t attempt bullying another. And there have been degrees of influence and pressure placed on Fed leadership by, I think, every president Arthur Burns was perhaps the most notorious pushover. He served as the 10th chairman from 1970 to 1978. Nixon nominated him, Nixon kept him on speed dial, and Nixon dominated him. So there really was no Fed independence even though the dividing line started in ’51, and technically there should have been. It was just a question of how strong was the man in the chairman’s role.
The ninth chairman would not have mixed well with Nixon at all. William McChesney Martin had serious backbone, and he took the opportunity to say no many times during his tenure, one of the longest seated chairmen, 1951 to 1970. But it was a different structure that he inherited after the Fed-Treasury Accord in ’51. And his was, again, by personality, a principled personality that kept him almost puritanical in his implementation of monetary policy. Martin came of age right at the turning point in US fiscal and monetary history when the central bank was separated out from the Treasury Department’s influence, again, 1951.
Kevin: When I came to work for your dad back in 1987, Dave, Paul Volcker was still the Fed chairman. And I remember one of the Commentaries that we had back in the, oh, gosh, this was probably 15 years ago, you were interviewing someone who was on the Reagan administration at the time that Paul Volcker was raising interest rates. From a political standpoint, Reagan and his administration just hated Volcker. He was a cigar-smoking independent, and he was doing something that politically wasn’t making sense.
David: I can’t remember the gentleman’s name that we interviewed, but I just remember his book was way too long—and he’s written a number of them that are all in this sort of four- to five-hundred page— He could have said this in less—
Kevin: They were good books. They were long, though, yeah.
David: Well, yeah. The next self-assured and independent personality in the chairman’s role was Paul Volcker, not a puritan, but unmovable for other reasons. I think of him as being to monetary policy what Churchill was to wartime leadership, the right man for the time. And coincidentally, both loved cigars.
Kevin: They did. Well, okay, so let’s talk about this because I was just on the phone with a client of mine and she was asking about gold, and I moved right to the dollar because I said, “Well, is the government continuing to spend more than they’re taking in? And the central bank, are they basically having to make sure that that works?” She said, “Well, it looks like they are spending more than they’re taking in.” I said, “Well, then gold is probably going to do quite well.” So let’s talk about the dollar, Dave, because the central bank, not only the government, but the central bank has quite a bit of an effect on the value worldwide of the buying power of the dollar.
David: Back prior to 1933, the dollar and gold were money, and our currency’s credibility was unassailable. The dollar’s value was equal to a fixed weight of gold. Then you fast forward to Bretton Woods and we again had a loose credibility boost from associating the dollar with national gold reserves and leaving our foreign creditors to decide how they preferred payment. The dollar was held to be as good as gold.
What changed in 1971 in terms of how our currency’s credibility was regarded was that without gold convertibility, you had to place confidence in the system’s managers. It really was the birthplace of the Fed’s tenuous relationship with the global community. Are they credible? Are they worthy of confidence? As goes credibility and confidence in the Federal Reserve, so goes credibility and confidence in the world’s reserve currency, the US dollar.
Kevin: And don’t you find that that comes and goes? I mean, look at the volatility in the dollar just over the last few months.
David: Year-to-date, dollar volatility provides some commentary on the global perception of our central bank as an institution, and certainly reckless spending habits on the fiscal side can come to bear on a currency eventually. We’ve got the big beautiful bill adding over $3 trillion to our debt, so this is a feature of our fiscal policy.
But a creditor may still be satisfied with sufficient remuneration for financing our debt. There is the role of the Fed in setting interest rates, in setting the compensation rate for our creditor. I would suggest that the global markets are growing more concerned about the dollar, not because of our debts and the unsustainable levels we’ve reached, but should the central bank chair ever be forced to do the will of the US president, you’re likely to see that “sufficient remuneration” for financing going away and a currency crisis emerge in earnest.
Kevin: Lest we be heard wrong, I mean Powell is not Teflon. In other words, the Federal Reserve may not be his first priority. I mean, he’s played politics in the past. Just look at last year.
David: Well, I think the Federal Reserve is his first priority, but he is a human being and he certainly has his own sets of biases. Powell has played politics. His 2024 rate cuts were, in my view, not justifiable. But what may be more important, given that the dollar is at a significant crossroads technically, and when you look at how it plays this hegemonic role, the chairperson, whether it’s in the present or the chairperson of the future, being sufficiently obstinate, being sufficiently independent, to do what is right, not what is easy, and certainly not what is popular, this is where we see the rubber meeting the road.
In a democracy, pressure forms around pockets of self-interest. Voter blocks become vocal. Politicians listen and pressure then gets applied. And again, I’m prepared to criticize the 2024 rate cuts, but playing politics is still different than playing the pushover. And so I see what he has done in the past. It’s very important that he not be a pushover, and it’s very important that that role is never filled by someone who simply does the bidding of the president.
The dollar story going forward may take on this element. Our foreign creditors care, and the bond market internationally cares, to see monetary policy distinct and separate from democratic and sort of election-dependent players who have a history of ruining a lot in the short run just out of opportunism, and frankly, out of job security.
Kevin: So Dave, you were talking about the dollar technically being at a critical level. Do you think Powell’s going to have to move one way or another?
David: Yeah, I believe Powell must move considering the data, and this is again, a point of criticism. First, it’s, we’re going to be data-dependent, and then we’re looking for our forward projections, and then— It’s almost like he’s trying to read the tea leaves and at times appears to be ignoring the data.
But I think the role that he plays has to be shielded, or at least if there is the perception that he’s making decisions on the basis of what’s coming from the Oval Office, that has its own set of ramifications. The audience watching is a global one. The dollar is under pressure for a variety of reasons. If the world perceived our monetary institution to be under the thumb of this or any future president, I think we see the dollar get sort of marked to market at much lower levels, reflecting the impact of credibility—really credibility going away.
This is no longer the gold standard. We’re in a new era. Trust is earned, and trust is easily lost. So independence is a part of that institutional trust structure. Yes, the Fed missed the inflation episode, assuming that it was going to be transitory, but if you reflect on the state of where the financial markets are today, we’re back at all time highs. And back to the absurd valuations of late 2021 and late 2024, price to sales, price to earnings, the Buffett ratio, not all of it is rational. Not much of it is sustainable. The tough part for Powell is that lowering rates with asset prices pushing to all time highs is reckless, and it’s reckless accommodation on his part.
We have 4.1% unemployment. We’ve got the PCE measuring within 70 basis points of the Fed’s target. We have a tight labor market, we have economic activity not yet showing recessionary symptoms. To cut rates in an environment like this would be the opposite of what William McChesney Martin and his sage advice was decades ago. Take away the punch bowl before the party starts. Well, this party is raging, and in essence, if they were to lower rates in this environment, it would be dangerous. The party is in full swing, and Trump wouldn’t mind a complete blow-off in asset prices. He’s a debt guy. Now he’s a crypto guy. He wants whatever is best for risk assets. And I think this is, in the end, quite dangerous.
Kevin: I can’t help but go back and think, when I was in college, I remember my Money and Banking class taught by Dr. John Cochran, and he was a tall, lanky guy. He kept probably $5 worth of change in his pocket, and he just nervously would rattle that change, Dave, as he would pace back and forth in front of the blackboard. It was pretty compelling, actually. I wasn’t that interested in economics when I first started in college. And he actually got me interested because he was so interesting. He’d rattle that change, he’d walk back and forth, and then he’d put something on the chalkboard and he’d ask the class a question such as, “If asset prices are hitting all-time highs and inflation is a problem, what should the Fed do? Raise or lower rates?” And of course, we would’ve looked like fools if we would’ve said lower rates. But at this point, isn’t that what you’re saying, Dave? That Trump’s calling for—and there’s this demand for—lower rates in a period of time where we really do have bubble dynamics.
David: We often refer to the quote, “I’m not dead yet,” coming from the—
Kevin: Monty Python.
David: Yeah, Monty Python scene. And if inflation is not dead yet, lowering rates becomes very, very dangerous. We had Bloomberg columnist John Authers this week remind his readers that a good modern example of politicized monetary policy was in Turkey. Just look back to 2021. He said, “Following a bizarre theory that rate cuts reduce price rises, he,” and he’s speaking of Erdoğan, “fired several governors until he found one willing to put it into practice. Rates fell, and inflation exploded 86%.”
Kevin: So obviously the answer is no, you don’t lower rates in a period of inflation. But what we’re talking about right now is more speculation here in America. We don’t have necessarily double-digit inflation, but we’ve got all-time highs on a lot of these markets.
David: Yeah, our setup is different. We don’t have double-digit inflation already, but lower rates in the midst of bubble dynamics certainly emboldens speculators, boosts the wealth effect, maybe brings enough inflation back to get us in 5 to 6% inflation range. And if you stoke inflation, you promote an exodus from bonds, which could serve up a similar circumstance to last year. Remember, Fed policy was loosening. They cut interest rates. We talked about that a moment ago, what I would consider Powell’s mistake. And yet long bonds, we had yields rising instead of falling as expected.
But we are in different circumstances. The dollar is in a precarious place. Dollar sentiment is negative amongst reserve asset managers. If that sentiment were to be entrenched and expand through the global investment community, currency crisis becomes more probable. So Trump wants a lower dollar. I’m not sure he’s cognizant of all that comes with that.
Kevin: So that brings us to last week’s interview with Edward Fishman, Chokepoints. Economic warfare is fought when you control the narrative with your currency. And I’m just wondering, a weaker currency, do we still have that kind of leverage?
David: Well, some of these things are not so textbook in terms of economic warfare via the Treasury and Commerce Department, and it’s proven to not be popular with the rest of the world. Insulating from our foreign policy objectives via the Treasury and Commerce Departments leveraging the financial flows and limiting access to technology, that is shifting global behavior.
And even in the last two weeks we’ve had the Germans and Italians asking to repatriate their gold holdings from the U.S. This is not an insignificant sum, $245 billion in bullion they’d like to have onshore. If nothing else—if nothing else—it’s a sign. It’s a signal of distrust. Confidence in U.S. institutions—many of them—has already waned. If we create a confidence crisis in the currency, the inflationary impact could take us back to double-digit inflation rates.
Kevin: Also, when you’re talking about the dollar dropping 10%, Americans probably don’t even feel that, other than in the form of higher costs of goods in the form of inflation. But if you’re a foreigner and the currency that, let’s say you’ve invested in some stocks here in America and you’ve invested using U.S. dollars, you still have to convert that back to your own currency. So are the foreign investors at this point ahead of the game or are they behind because of the drop in the dollar?
David: Yeah, if you look at your year-to-date gains, the average for the S&P, the Dow, NASDAQ, let’s call it 5%, you already have a loss of 10% in the U.S. dollar. And that’s meant that foreign investors, post the rally, off the April equity market lows, they’re underwater 5%. So 5% gain in equities. Once you factor in the foreign currency losses, you’re still down five percent on U.S. equity positions. Meanwhile, the euro has increased almost proportionally to the upside versus the dollar. And whether it’s the DAX or the CAC or the IBEX in Spain, they’re up 18 to 20%. So you’re looking at this differentiated performance and saying, “Do I really still want those U.S. positions?” It’s a quandary.
Kevin: So when a person is showing uncertainty in a currency, they may sell the dollar. But you’re saying that Germany and Italy, they’re requesting gold. That’s the next step, isn’t it?
David: Yeah, and I think it’s a little ironic because Germany and Italy requesting their gold back in the context of geopolitical uncertainty, actually, you would think they would want a stake of capital in a very safe place. And yet we are, the U.S. is, the source of geopolitical uncertainty.
The U.S. should be seen as a safe jurisdiction, but that’s not the case today. So, Trump’s attacks on the Federal Reserve chairman, this is where I think it factors in very significantly into how people view our institutions and view our currency.
Financial sovereignty in the form of gold holdings, that’s more than symbolic, and the request for repatriation is more than symbolic as well. Tear down confidence in the institution that legitimizes the U.S. dollar, and the dollar itself is a risk factor to be weighed and managed. Central bank independence post-Bretton Woods is incredibly important.
Kevin: Well, Dave, you talked about when we were on the gold standard, and it was quite different, and granted, there are limitations to a gold standard, and some of those limitations are what keep us out of the trouble we’re in right now. When you’re not on a gold standard, money supply can expand almost indefinitely, and that seems to be happening now with our own money supply.
David: Yeah. U.S. money supply growth, we got rid of M3 a number of years ago, so just M2, up 4.5% in May. It’s sitting at a record 21.94 trillion. Money supply growth is still regarded as an important tool in assessing the medium to long-term inflation risk. That’s not the case with the Fed. They’ve basically said, “This doesn’t tell us much.” By the time you factor in velocity of money, which is not a constant factor, not sure that it’s particularly helpful. And yet, the ECB and the PBOC, a number of banks in Europe and globally, look at this and say, “Actually, it’s quite helpful.”
We quit publishing M3 in 2006, and we use interest rates, we use inflation expectations more these days. But what I would suggest is that if you combine the M2, M3 growth, money supply growth, with total system liquidity, which is something that Doug Noland harps on pretty regularly, and that accounts for financial innovation and leveraging of financial assets as money-like instruments. If you combine those things, you can glean important insights on the trajectory of inflation. Record M2 plus financial markets reaching for the heavens is suggestive of persistent inflation in the years ahead, for what it’s worth.
Kevin: So, we’ve talked about money supply. One of the ways that the Big Beautiful Bill was sold to all of us was that there were many deals, whether it’s tariffs or different ways that this will work, that will ultimately help pay this off. What are you thinking about the deals that Trump is putting together? I mean, are they working so far?
David: I think it’s worth remembering, Lutnick talked about this 90 deals, we’ll have 90 deals in 90 days, and we’re now on top of the deadline. We’ve pushed out the date, or the deadline, until August. And so far, we have two in the bag.
Kevin: Out of 90. Yeah.
David: So, no one’s rolling over easy on trade. This introduces, frankly, a lot of headline risk.
Kevin: Yeah. So, when you’re talking about headline risk, the stock market is influenced by headlines, aren’t they? I mean, the S&P 500, the Dow?
David: Absolutely. And when you get into the summer months, you’re dealing with typically lower volumes of trade. A lot of traders are on vacation and away from their Bloomberg terminals, and you look at the last push to and past recent high levels.A Seven percent of the S&P 500 members are at 52-week highs. So, the indexes are saying, “This is incredible.” And yet, divergence like this is, frankly, quite dangerous. When you’ve got 93% of the S&P 500 companies not hitting all-time highs, again, the divergence is telling. It’s really a trader’s moonshot to these levels, not a sustainable trend unless that divergence closes. We need to see all of those other companies pick up pace to the upside.
Your non-FAANG, your Mag 7 stocks need to kick it into gear, or there’s significant big downside. Which again brings me back to this headline risk. If Trump decides to play hardball yet again, we have the equivalent early-April announcement, and he starts breaking things, and he starts threatening people and countries. And all of a sudden, we’re back to market chaos like we had in the first few weeks of April. What’s the difference between today and tomorrow? It is one headline, it is one tweet or launch on Truth Social, and you’re back moving to the downside in the equities markets.
Kevin: So often, you’ve pointed out the difference between the financial markets, like what we’re talking about with the S&P 500, and actual underlying economics, the economic markets. What are you seeing for the economic markets going forward into the fall?
David: Well, it’s mixed. We’ve got economic statistics which may weaken in the coming months. We had auto sales, which are disappointing. A lot of demand for whether it’s auto or computers and electronics. That demand was pulled forward with the threat of tariffs impacting prices. And so, to see a slowing in sales over the next few months won’t come as a surprise.
I think there are several indicators worth noting. The Bloomberg Economic Surprise Index has a growing number of metrics coming in weaker than expected. You’ve got the deMeadville International, they publish an Economic Barometer Index, and I’m frankly not familiar with the component parts, but it too has weakened considerably through April, May, and June. And that’s been in sharp contrast to the S&P, rallying where typically that index is moving in lockstep with the S&P.
The Federal Reserve’s Business Activity Gauge is under the zero line. It’s bounced off the -20 level three times over the last three years, and only the COVID period sucked it even lower, ultimately to a low of -80. That, I think, is a metric to watch. Conference Board’s Leading Economic Index. Those indicators declined several months in a row, but not significantly enough to suggest a recession, just sort of slowing growth relative to 2024.
Interestingly, the LEI, leading economic indicators, have been in decline since early 2022. And so, you have some observers who have basically said, “We can now discount that as a helpful predictor of recession.”
The Coincident Economic Index, which is also published by The Conference Board, it continues to advance to new highs. And both of these tend to move in tandem during an actual recession. So, we need to see the Coincident Economic Index roll over and catch up to the downside.
Back to the LEI. It did trigger a recession signal in May, but with the extreme rally in equities, it appears that concerns are limited. So, if equities run out of steam, you already have the signal triggered, which was an objective warning also triggered during COVID, and prior to that in early 2008 and in 2001, as we were heading into real doozies, recessions that people don’t have a hard time remembering.
And again, we come back to summer dynamics. Summer advances in price, if you’re talking about the equity markets, and of course, that’s on low volume, it’s easier to move one direction or the other, but when you have summer advances in equities, in the face of economic weakening, really should that accelerate, that opens the door to very dangerous market dynamics in the fall.
We’ll be watching the bond market, we’ll be watching the currency markets very closely. While the safe haven rotation from equities to Treasuries is normally expected, and we could ordinarily expect to see the 10-Year Treasury move down as low as 3% from the current 4, 4-and-a-quarter. In this environment where the dollar is weak, it’s so tough to call. Anything could happen.
Kevin: Okay. So, let’s go back to Trump and Powell though, because let’s face it, with the kind of debt that we have and adding over 3 trillion to that, we’ve got to roll that debt over. And so, you can see why Trump is pressuring Powell to lower rates. It would save the government a ton in interest payments if they did that.
David: Oh, yeah. The extra rhetorical pressure on Powell relates directly to interest paid on the national debt. If Trump got what he wanted, it would spare us 500 to 700 billion in interest expense. And again, you might say, “Well, then why are we grousing about that? We should just let it happen.” The trade-off is a sell-off in the U.S. dollar. Thus far this year, we’ve rolled over 3 trillion in outstanding Treasuries, and all of that was above 4%. There is still another 6.3 trillion to roll over in the remainder of 2025, so a total of 9.3 trillion this year.
And so I understand Trump’s motivation, but it might have been wise to take a fiscal hit and tighten spending while you are in control of the House and the Senate and the Oval Office.
Kevin: Do you think they would ever really do that, though, taking the fiscal hit while the Republicans are in control? That makes sense for America, but I mean, does it really make sense for reelection? Do these guys actually ever really do this? Look how partisan the passing of the Big Beautiful Bill was.
David: Yeah. I mean, the Republican support of the Big Beautiful Bill was so unanimous. It just suggests that even when you control the executive and legislative branches, fiscal reform is too unpopular. The budget is politicized, completely politicized, regardless of the party. What Trump has rightly described as the uniparty, I think he even called it the Porky Pig party. It’s typical of a democracy, and it’s not very different from what we had with Biden or Obama. As we learned many years ago from Giulio Gallarotti, universal suffrage has its benefits, but a big trade-off is increased political sensitivity to government spending. Again, a reason to be concerned about monetary policy being politicized, we’re at that sort of inflection point.
We talked a number of weeks ago about the dollar trading below 98. It has. It’s traded as low as 96-and-change, and is 97-and-change currently. It needs to rally. It needs to rally hard. And if it doesn’t, again, I think this is where we’ve said over and over again this year, the equity markets are not the place to watch. You need to watch the currency, and you need to watch yields. The real story in terms of financial flows will be marked by what’s happening with our currency, what’s happening with US bond yields.
Kevin: What you’re saying is, we’re probably going to have a break one direction or another, and it’s going to break hard. Now, don’t we have, in the markets, built-in right now, a very strong bet against lower yields? In other words, there’s a bet against— Aren’t the longer bonds being shorted massively right now?
David: Yeah. I think that’s the caveat on yields going higher. I can make a great case for yields going higher. If the economy rolls over, there is a natural tendency to migrate to Treasuries. There is also a huge short position in US Treasuries today, five and 10 year particularly, so intermediate bonds, which if forced to cover could take yields considerably lower in the short term. The short position is at record high levels. Large speculators are at a net short position of 37%.
That’s nearly the inverse of commercials, which are at a 19-year-high, 33.5% net long. Which again, it means that yields can break hard the opposite direction. For an investor, how does this translate? Well, I just don’t think you want to make any big bets, and I wouldn’t make any interest rate bets if you can afford it. Probably want to have max duration on a bond portfolio of about two years. Yields are likely to break hard one direction or the other, and we’re not sure which one it’s going to be. I think the longer term trend is clear for higher rates. But again, with such a short position, anything can happen in the short run.
Kevin: Not just here though, you’re probably not going to be making any bets on bonds in Britain as well. England, stay away from right now on the bond market?
David: Well, what you see in the UK is the same here in the US, which is that the bond market is sensitive to fiscal largesse. The UK is flirting with a bond market problem. As we discussed fiscal largesse in the US, even the suggestion of cutting spending has created a political crisis in the UK, to the extent that the Chancellor of the Exchequer, Rachel Reeves, may be relieved of duty for wanting to cut spending. She’s doing the right thing. She’s trying to save money, but at that suggestion, she’s on the edge of being sacked.
The politicians want to keep British fiscal largesse in place. As soon as the scuttlebutt of her being sacked was out there, British bond sold off, yields moved higher because the bond market looks at this and says, “No. It’s actually a good idea if you show some fiscal responsibility.” What politicians want and what markets expect or what they want are very different these days, not just in the US.
Kevin: This is probably why I continue to buy gold every two weeks, Dave. It hasn’t had a bad run this first six months.
David: No. Gold finished the mid-year with 27% gains. Silver right at the same level, about 27% gains, just a little over. I think it’s super important to reflect on what that means as a market signal. We talk regularly about gold. But I think it bears mentioning, again in the context of equity markets priced for perfection and the dollar breaking down, US dollar weakness with equity market weakness—should we see more of that in the months ahead—and pressure felt in the bond market, those three things would be a gold market trifecta—the kind of setup that could take gold to a 50% gain, full year. I would anticipate silver exceeding $50 an ounce if gold is able to regain its momentum after a two and a half month pause.
Kevin: Dave, we don’t just talk about markets. Obviously you’re spending time with your family right now. You’re a very busy guy all the time, so it’s good that you’re taking a little bit of time off. But you were saying] that things continue to change. Not just in markets, but things change in life. We need to bring value to the right things.
David: Yeah. We haven’t been back to Nevis since before COVID, and so some of our favorite restaurants are gone. Some of the people that we used to spend time with, they’re not here anymore. Things do change. My free-diving mentor is lack Nevisian in his late sixties, early seventies. He lost his wife last year, and I couldn’t find him anywhere on the island. After two days of searching, someone led me to his modest accommodation under a tarp in the middle of a mango grove. Godwin Nesbitt, his leg was badly infected. I was able to arrange for some antibiotics. When he saw me, he smiled like I’ve never seen him smile before. He said, “I never thought I’d see you again.” We drove to the beach and swam for two hours this morning. Brought my boys along. We were able to bring in enough grouper for a huge bowl of ceviche and just shy of a dozen lobsters, but you do reflect. I realized Godwin might not be here the next time I come to the island.
Just as it is mistaken to judge a person without knowing enough of their complex backstory, my lesson from Hamilton, so too, it’s a mistake to take any relationship for granted. Life is fleeting. Mr. Nesbitt may not be here when we return again.
I look forward to a lifetime with my kids of spearfishing. It’s one of the things that I love most in life. It’s something that, frankly, like mountain biking, if you’re not focused, you can get in trouble. It requires 100% focus. Somehow it pushes everything else on my mind to the periphery, and gives me the opportunity to completely unwind, but I’ll never hunt a fish without the memory of this gargantuan man taking me to the best reefs on the island. He’s generous. He’s open-hearted. Hadn’t been in the water for four months. After the swim, he looked like a boy with a Cheshire Cat grin.
I worry about the dollar. I worry about our debt, and return to things I should probably worry even more about—time with friends and family. You can never store away enough memories. Frankly, some of those are more precious than gold.
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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.
