Podcast: Play in new window
- Bessent: "End Intox With Detox"
- Anxiety High With Uncertainty Of New Rules
- Personality Test Identifies Trump With Churchill, LBJ, Castro, & Jack Nicholson
"We may or may not be able to grow our way out, but the efforts to shrink the scope of expenditures and drive economic growth via economic expansion instead of government expansion—two very different means of driving the economy—that's being put in motion in one place on the planet today. One place only. The USA. It's something like a corporate turnaround. First, manage your outflows and cut all unnecessary spending. Then drive growth in the areas you have the greatest advantage, building back with a much reduced budget. Turnaround specialists are rarely loved within the organization that has ossified and is in the process of being restructured, but that process can be a matter of survival." —David McAlvany
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Kevin: Welcome to the McAlvany Weekly Commentary. I'm Kevin Orrick, along with David McAlvany.
David, we just met with Morgan Lewis, and he had some interesting statistics to talk about. Are we possibly going to go into a recession? I hate to say, my mind wandered. I mean it was very interesting listening to the statistics coming out of all the economic sources. But I started thinking of the chicken coop meter. I live on five acres and we used to run a chicken coop. We don't now, but every neighbor around me, I was thinking about it while he was talking. Every neighbor around me has started a chicken coop in the last year or two. I hear roosters all around me, and I was thinking, I wonder, yeah, could that be the price of eggs or do you think maybe that's a precursor to people realizing things are going to get tight?
David: Yeah, it is obviously partially an egg issue or they just don't want to pay 12 bucks for a dozen, a dollar apiece. All of a sudden your cheap protein source has gone the way of the dodo bird.
Well, yeah, I think there is also an adjustment to what may be harder times. This is where we've often talked about a two-tiered economy and what economists will sometimes describe as a K-shaped economy where some are doing very well. One of the legs of the K goes up and to the right and is fine, and the other leg goes down. And I think the middle class, the lower middle class has been under pressure for some time in the continuation of the inflation trend, whether it's in price of a dozen eggs or a gallon of milk, or even just a marginal 2% increase off of a base level which was much, much lower four or five years ago. It's compounded negatively, and their income is not keeping up.
Kevin: Well, and Morgan was bringing out, he said, you know, the gold thesis that we've been talking about for so long may really showing itself right now because he quoted Scott Bessent, who was being interviewed on Meet the Press, and Meet the press basically said, "Okay, this period of detox, are we going to go into a recession?" And Scott was like, "I've taught on this and we were going to have a crisis anyway."
David: And we may have a crisis,
Kevin: We may have a crisis.
David: But here's what's different. We're taking steps to do something different versus what we have done in the past, which is intox over and over again in response to crisis after crisis. We've seen credit explode higher as a way to save the system. And we've gotten to a level that that is not in any way sustainable, and we cannot go that way again. So detox versus intox, that is the only way forward.
Kevin: So even last year before we knew Trump was going to be president, before Scott Bessent was in— Last year at this time, Dave, our conversation on gold was about price moves. And I'm not going to say that we want to say that we predict prices. I can't at all. But the things you were saying about gold and the price of gold a year ago, and then today, over the last few months, let's go over that because I think it's important to go back and say, "All right, well, was it right or wrong?"
David: Well, there's many ways of framing things, and one framework when you're looking at price action for a particular asset is doing some technical chart work. Last year at this time we were looking at the consolidation in price dating back 12 years and the potential breakout between 2160 and 2200 an ounce, right around that level, beginning the process for an initial move to a targeted range of what we predicted would be 2650 to 2850 in 2024. And we did see that materialize in 2024.
We then suggested another wave higher to between 3000 and 3250. We've already hit the lower edge of that range, and we may well reach the upper edge $200 above the recent high. We may see that this year we're in the short run overbought. We need to digest the move from last year and year to date of around 14%, thereafter on a much longer timeframe.
Again, we go back to that 12-year consolidation. Based on the time spent in consolidation from 2012 to 2024—that cup and handle formation—measuring both time and distance from the lows of 2015 to the breakout level at 2160 to 2200, 5,000 an ounce is quite possible. 8,000 an ounce is not unreasonable. And again, this is through the lens—this is the framework—through the lens of technical analysis, not with any reference to fundamentals, not with any touch points or events that drive market participants.
So timeframes for those price projections are largely dependent on, and we'll see it materialize with, financial market pressures, with public policy anxieties, with geopolitical discord—where the fundamentals still matter, I think, a very great deal. So we're in this instance, as in many others, weaving technical chart analysis in with fundamental factors.
Kevin: Yeah, well, and that's the thing, the fundamental factors a lot of times are not predictable. So taking geopolitics out of it, what would be the ideal scenario for gold?
David: The ideal scenario for gold, setting aside geopolitical discord, is a mix of variables we'll explore in some detail with a research group out of Greenwich, Connecticut—Hedgeye—in the weeks ahead. In several weeks we'll dig into this a bit more with them. I'll be speaking at their investor conference on the East Coast, that's in early April, and you'll hear from their founder, Keith McCullough, on the podcast later in the month of April as well.
From that group's perspective, there are quadrants that link together the movements of several fundamental factors. GDP is either shrinking or growing, so it's moving one direction or the other, and inflation is either increasing or decreasing. So these two factors—GDP growth or economic activity—and either an increase or decrease in inflation, blended together, create a context for growth or, conversely, pressure, and serve as an intriguing framework for analysis from their research asset allocations. So gold stocks, bonds, crypto, they're interested in a myriad of assets. It's just, I think it's important to continue to add to the frameworks that we use in reference.
Kevin: Dave, often we've talked to Neil Howe, who wrote The Fourth Turning, and that is a model framework that is workable. And a lot of times a person will say, "Well, I don't know that I necessarily agree with that particular model." Well, that's fine. You don't have to. Run something through a particular model and see if it works. And that's been a good framework, but there are a number of models. You're talking about Hedgeeye. There are a number of models that you can experiment with without necessarily signing on religiously.
David: Since the time I took a real interest in the markets back in the late '90s and went to work on Wall Street shortly thereafter in 2000, I've benefited from frameworks and models, and prefer to know many of them and judge whether fresh events make one framework more or less relevant than another. Dow theory has been helpful. The study of liquidity dynamics has been helpful. Noland's emphasis on credit cycles and a measuring of excess growth in money-like instruments—it's been helpful. Fundamental metrics like Tobin's Q, the Shiller P/E, the Buffett ratio, those are less effective as timing tools and serve as more like a GPS tool. They give you a picture of where you're at and what lies ahead. All helpful, but a certain flexibility is required in using the tools. Some tools remain relevant and others less so. Right now we've got Google and Apple Maps on a smartphone and that gets you anywhere you want to go. One of the original devices used for navigation, the TomTom, it's lost relevance. Yeah, it did the job and now something else does a job even better.
Kevin: Well, and you bring up the TomTom, you brought up GPS. It's funny, this weekend my wife has a puzzle started on the table, and it just irritates her the way I build puzzles. I'm not good like her. She does it different than I do. So I told her this weekend, I said, "Well sweetie, I'd like to spend time with you. You do the puzzle." And I got my celestial navigation books back out and I just practiced the calculations and everything because it's a model.
Okay, so celestial navigation is different than doing, let's say, astronomy, where you're looking deep into space and you're looking at planets and their moons. Celestial navigation, you almost have to pretend the old-fashioned way that you just have this dome of the sky that comes— You have the stars rise, they go up to a certain level. It's basically resetting the model that you're using for the practicality of what you're trying to do.
So I want to talk about this because we talked about personality models yesterday when you and I were meeting, and that's something that should enter the conversation.
David: Yeah, you know, innovating and iterating in our analysis is important. Integrating new ideas keeps us from missing things that have changed and evolved, sometimes away from us. Like the case with TomTom. In the year 2000—I think it was 2001—I owned a palm device, a Blackberry.
Kevin: I remember those.
David: I jumped ambitiously from a Motorola flip phone to a Blackberry, and I also had a TomTom for travel with the required— You download the maps, you upload to the device—the maps onto the device prior to travel to a new city or country, and yep, you had to have a separate power cord for each device. It was just a tangled mess.
Kevin: Well, and there are models that none of us use anymore. They need to be relevant.
David: Yeah, workable tools are great, making sure they're still relevant is important. I'm never looking for replacements, but I'm always looking for complements to create a more robust and thorough framework for insight and understanding. So a search for truth does not assume that you already possess it. And sometimes people who fall in love with a model assume that they have come to hard and fast conclusions. They possess the truth. But I come from a different framework. I think— Search for truth, you don't possess it or have all the tools needed to discover it, you're always adding to your toolbox—or you should be.
Kevin: With economics and with personal relations, sometimes it's best not to take things personally.
David: Yeah. In some respects, the models I'm mentioning serve as complementary tools for market analysis, and they're like economic theories. Each theory is a siloed attempt at understanding and explaining and at predicting human behavior. That's the work of an economist. Theories and science are no different—conducted under certain circumstances, with thoughtful analysis that follows, and they're most relevant to a particular set of circumstances. These are your control elements, right? Yet these theories don't universally apply. They tend to lose helpfulness under other circumstances.
Kevin: You know, that's been the frustration with physics because we got to the moon with Kepler, Copernicus, and Newton. Einstein would not have been helpful at all in building the Saturn V and getting us to the moon. But Einstein was critical to GPS. You brought up GPS before, but without his theory of relativity and the understanding of the time change with light speed, what have you, the GPS wouldn't work. So you really need to pick your model for what you're going to do.
David: Yeah. The expert Keynesian has a day in the sun, where market behavior and agent choice make sense in light of that model. And then that day ends. Under different circumstances, it's Schumpeter, it's Menger, it's Friedman, it's Mill, it's Ricardo, it's Smith. They may provide the more important code for solving the mystery of human behavior and choice. Each framework is helpful. Each framework is incomplete. Assumptions vary, as do the theories of these men. And so outcomes and their helpfulness also vary. And I guess the point I'm trying to make is that open-mindedness to new ideas or cross-fertilization from a variety of old ideas. That's important.
Kevin: Well, and sometimes a war will just break every model. So let's go back to fundamentals and gold for a minute.
David: Yeah. Back to gold. The technical models suggest higher prices are highly probable. The state of the world, somewhat in disarray—probably an understatement—supportive of higher prices if we consider uncertainty, which is moving from the background to the foreground, and risk mitigation doing the same. Again, going from a background consideration to being very much forefront of people's minds. No longer an afterthought, it's a real priority. Geopolitical tensions are increasing to levels that we haven't seen in many decades. Path predictability for public policy has been lost. And so volatile reactions within the markets are more and more a feature, and becoming the rule rather than an exception.
Kevin: Well, and not just volatile markets, but I mean volatile emotions. Dave, you talked about uncertainty. Uncertainty is something that can be either met with calm or anxiety. Right now anxiety reigns.
David: Yeah, I think that's on the rise in response to Trump's varied policy initiatives. I'm noting a very strong division amongst friends, family members, colleagues—and the division is between irrational fear and irrational hope. Some see the policy shifts as entirely positive, others as entirely negative. And I chuckle a bit as the strength in opinions says more about the individual than it does the policies in question. Hyperbole is everywhere.
Kevin: Well, and you just look at the people who are firebombing Tesla right now. I mean, we need to have cooler heads.
David: I've spent a good bit of time through the years reading on personalities, another version of frameworks and models, but they're at the intersection of interpersonal relationships instead of finance and economics. Learning how people operate or are even hardwired is helpful to appreciating differences. It's too easy to quickly conclude and just write somebody off, say somebody's crazy or dysfunctional without understanding their unique design. So again, a series of research and studies have benefited from the Myers-Briggs, the Enneagram, and half a dozen workplace-related diagnostic profiling systems, which just give clarity as to who people are and how they best operate together.
Kevin: Well, and that's simply a model. Okay. I remember the first time I encountered the Enneagram, I really fought it because somebody was saying— They had me answer some questions, and they said, "Okay, what we're going to do is we're going to find out what number you are." Well, that really made me mad. Maybe that was part of my personality profile. But the longer that I've been around you, Dave, and your appreciation of that model, the more I've asked you, "Hey," whatever person you're talking about, "what number do you think they are, and what's the best way to actually show them love and compassion?"
David: Yeah. The challenge with any model is that it's treated as something that's totalizing and reductionist, and you have schools of thought developed and you're either a member of that school of thought or not. And you get some of that from the structure of scientific revolutions, where Thomas Kuhn is talking about the textbook way of approaching things and you're either a part of the community or you're outside of the community.
And I think the challenge with models is to recognize their limits, recognize how helpful they are, but also some of their inadequacies. The Enneagram— Of the ones that I just mentioned, the Enneagram stands out as by far the most revealing, in-depth, and powerful tool of the inter-personality studies that I've looked at those models. So I won't lay out the details here. Books have been written, so just a few terse lines won't suffice. But to understand, for instance, to understand our president, he's an eight on the Enneagram.
Kevin: So, Trump is an eight?
David: Eventually that becomes helpful in judging him by real merits and demerits instead of hasty generalizations. Other eights—and they're sometimes known as the challenger type. These are people who are powerful, they're dominating, they're self-confident, they're decisive, they're willful, they're very confrontational. Generally they're excessive in their appetites.
Kevin: So who would that be in the past?
David: Lyndon Johnson, Winston Churchill, Jack Nicholson, FDR, Fidel Castro, Golda Meir.
Kevin: I see that. That's interesting. Jack Nicholson's in that.
David: Yeah. I mean each in their own way, pushy, demanding, insensitive, bullying. Golda is probably the only non-cigar smoker on that list.
Kevin: Does Trump smoke cigars? I don't know.
David: It's just back to appetites and being excessive. Right? So appetites are something that they're not afraid of. They tend to be, again, lusty in a more full and encompassing sense, not just sexual, but maybe that's his expression of lusty.
Kevin: And they don't seem to try to win popularity contests at all.
David: Yeah. This is how they're experienced by others. There's a great good that can come from men and women uninterested in popularity contests, and particularly pushy. I would encourage anyone to explore the Enneagram as a means of understanding a level of personal complexity you may otherwise fail to grasp and be in a position where you're writing off too early or simply misreading people around you—in this case, in the public square.
Kevin: Dave, I've been blessed to know you since you were 12. I came in knowing your father, and really he's one of those guys that people like to follow because he is absolutely committed. He sets his eyes on a particular goal. He's mission-oriented, and you're not going to tell him any different. But to be his son, I think the Enneagram really was helpful for you to square away how you can interact with him.
David: Yeah. I talk about this a little bit in The Intentional Legacy where we are so influenced by our fathers. I used to struggle to understand my father, his drives, his motivations, his habits—the good and the bad—his fears. When you see things as a bug, you want to fix it, and you can criticize those aspects. When you understand certain qualities as features instead of bugs, it changes your engagement. And so many of the avenues towards grace that I've discovered have been through this model, this grid for understanding personal growth, development, interpersonal interactions. Without understanding others, again, it's just easy to write them off. And without a framework for complexity, when you have conflicts, they're likely to abound and just remain unresolved.
So there is a redemptive object in trying to understand people. It's not, again, to reduce them, but it's to see your way forward. You may want to do your own study of the Enneagram. There's the Riso and Hudson. They have a secularized version of the model. Richard Rohr has an interpretation more consistent with its genesis. He's a monk, and he's writing about the monks a thousand years ago—close to that—from the 1200s. And he's writing from a redemptive and Christian perspective.
Kevin: So a thousand years ago. I mean, so this is an old model.
David: Yeah, what I appreciate about the Enneagram is how it evolved in a monk community close to a thousand years ago, seeking to understand how, in community, they could appreciate differences—appreciate differences and apprehend a path towards spiritual growth and maturity that would vary according to the different personality traits they each had. So personality quirks are sometimes with us from birth, sometimes they're shaped through life circumstance. There is a continuum of growth in this model that accounts for someone being not only a particular type, but, on a continuum, more or less developed as a human being. And I think with understanding comes insight. With deeper insight comes correspondingly better understanding. Models, in the end, they may be reductionist and never fully capture reality, but I think they do remain helpful to a point.
Kevin: Well, and I can just say watching you, because to be honest, I haven't really studied it much, but I've watched you in interpersonal communications with people that work with you, and I have seen you step back and actually, rather than react, you've just basically said, "What would be the best way for me to handle this particular personality in this particular time?"
David: Yeah, without a framework of understanding, without a theory that provides some explanation for the facts we observe, it's a bit messy. Throw in fear, throw in frustration, and you're not going to get very far in grasping and appreciating the person or the events you're dealing with—in this case maybe even current events. I'm finding commentary to be far more reactionary than it needs to be and lacking in real insight as I read through dozens of different news rags. This administration led by Trump, frankly, it's messy because it involves people, but the last administration was messy, too, because it involved people. You've got different people with different aspirations, differing needs, different goals and priorities, different fears and foibles. And we lose a lot when we're limiting ourselves to caricatures and hasty generalizations. That's rarely helpful.
Kevin: Yeah, I was thinking about that this morning when I was walking, I was thinking about some of the name-calling that has been going on on both sides, where, yeah, it may be funny at the time because it maybe characterizes the way that person is acting in a political scheme, but it's really not helpful, is it? Because you start seeing that person as the new name.
David: Well, our emphasis on Miran's paper, Steven Miran's paper from November, has been for one reason to get to the strategy behind the actions being taken by the current administration. What are they trying to accomplish? What are the probabilities of success? What is actually afoot?
Kevin: Well, and I have to wonder, Dave, whether you're Republican or Democrat, when you've got—how many social security recipients that are dead—wouldn't you think that both sides would want to clean that up?
David: Right. I think so far the biggest reveal has been how uniform the degree of waste is that exists within our administrative state. And if you listen to Steven Bessent and Miran, a number of others, this is clearly— DOGE is a part of it, but purging millions of Social Security recipients from the roles who exceed 120 years in age? That's just an example. I think the biggest question on the table, and frankly it's not being asked in very philosophical terms, what is the role of government? Are there limits on the scope of government? Are there responsibilities that over time have either been ceded from the states to the federal government or captured by unelected bureaucrats that once resided with the individual.
Kevin: Crisis and Leviathan— When you interviewed Robert Higgs, I honestly thought that the government was just going to grow forever until it completely collapsed. And that looks like that may not have to happen.
David: Well, the scale of government is quite large, and, as we explored with Higgs, crisis has been the catalyst time and again for the increased role of government, the scope and scale in everyday life. Returning power to the private sector from the government sector, we know that's popular amongst libertarians and conservatives. It's fairly unpopular amongst those that see no issue with cradle-to-grave statism. This is the dynamic afoot in the White House. Shrink the administrative state and let the free markets allocate capital more efficiently. Differing political philosophies will side with or will object to the changes being introduced. Is this a disruption to the status quo? Absolutely. Will they succeed? No one knows. And certainly there's a question being asked of Bessent and others: Is this going to catalyze a recession? Possibly.
Kevin: Probably.
David: Will the financial markets take this in stride or will excess leverage in the system run out of institutional support? Again, we come back to Bessent and detox. Detox is one way that Bessent has described what we're likely to experience. Is that a good thing? Perhaps? Is it an easy process? Certainly not.
Kevin: Well, and you talk about uncertainty and how it builds anxiety, and Morgan pointed this out this morning. He said, "To understand what detox looks like, you need to see where they have intoxed before." And he went back to 1987. That was my first year here, the Greenspan bailout of the stock market in 1998, Long-Term Capital Management, 2002, the housing bubble.
David: Which was basically being created as a means of propping up the economy—the intox on the other side of a collapse in NASDAQ.
Kevin: And that led to 2008, the global financial crisis. And then of course there's COVID, 2020, there's Silicon Valley Bank back in 2023. So each time, what was the intox, Dave, that will now have to be detoxed from crisis like this in the future?
David: Massive amounts of credit growth as a means of papering over problems. Change—this is where the markets become quite volatile—change introduces uncertainty. Uncertainty tames the bold risk-taking that we see in the market. And here we return to our models. Credit growth has created bubble dynamics, which are not self-sustainable. Remove the credit growth, and guess what? Markets are vulnerable. Remove liquidity from the system, and asset prices are likely to decline.
Valuation metrics suggest that we are at the end of a cycle, not at the beginning, and they provide a map for what lies ahead. We don't have an idea of the timing. Timing remains unclear, uncertain, but the trend is clear and the factors driving excess risk-taking, they are being reined in. With a change in the financial market backdrop comes the reality that not all assets are created equal. Not all assets are on a sustainable trajectory. Some assets absolutely warrant your attention, and others don't.
Kevin: Yeah. Yeah. It reminds me, a couple of months ago. As you know, I had an emergency appendectomy. Well, we got to the emergency room, I was in pain, but it was going to happen. They were either going to do surgery on me or the appendix was going to burst. One way or another, I had a crisis that I had to face. Now I could either be proactive and have them take the appendix out, which—praise the Lord—it had not burst, right? But yeah, it was going to happen. I think, as we look here, the thesis on hard assets, Dave, that you've had, whether Trump or Harris or whoever won. We had an appendix that was ready to burst.
David: That's right. I mean, the hard asset thesis was supported by either Harris or Trump in terms of the victory in the last election. There is a math which drives a compelling case for reform, for investment, for a very different path. And so Bessent's comment about moving into a period of detox and avoiding those sharp interventions where the debt markets cover everything over, perhaps the long-term course of action is dramatically different. If you're looking at one party versus the other, yeah, you can see a very different playbook. But as the Financial Times wrote on the 20th of this month, debt expansion is a global issue. Interest costs are excessive relative to GDP. Interest costs on that excessive credit growth have reached a breaking point globally. 3.3% of GDP is the average for the richest countries in the OECD. That's the average interest component heading into 2025. 4.7% of GDP here in the US, 2.9% in the UK, 2.1% in France, 4.1% in Italy. And we're running out of runway. 45% of OECD sovereign debt matures by 2027. So being in a higher rate environment is highly consequential to the treasuries of your developed economies.
Kevin: So if we want to know what detox feels like, we just need to see wherever government debt has been applied in the past and say, what would that look like if it wasn't there?
David: And know that a huge credit intervention is not really on the table. So government debt has been the marginal fix for all things since the global financial crisis, and it's ramped up even more dramatically since COVID. The ability to resolve this overhang of debt does not lie in Washington. It's not in London or Paris or Berlin. The attempt being made by the current administration, harnessing the strength of the global markets—this may seem counterintuitive because it looks like through tariffs we're dismantling the global markets—but the attempt is to harness the strength of the global markets, of individual choice, of personal incentives driving household income. And that, they're hoping, will get the job done.
Kevin: You know, there was a time, it was 1996, I was in Dresden, Germany, Dave, and there was a lady giving a tour. Now, Dresden, Germany, just a few years before was part of East Germany, so it was part of that Soviet Union complex. And communism, you may not be able to get toilet paper, but you know that you're going to be taking care of. Everybody's paid the same amount, and it's just extreme poverty.
It doesn't work in the long run. But I remember talking to this lady. She had three jobs. She was a teacher, she was a tour guide and I can't remember what the third one was. And I asked her, are you happy that the Berlin Wall has fallen? And she goes, "You know, it's a mixed bag." She says, "It's hard. It's hard." Because she said, "I'm right now having to work three jobs to pay for what was paid for back under communism. Now I didn't have the same standard of living, but I sure didn't have to worry." And I'm just wondering if that's not a feeling that we're going to— You talked about the status quo. The status quo is going to change, isn't it?
David: Yeah. The goal of long-term economic growth is a counterbalance to an unsustainable debt level. Bessent's right. We were on a clear and unavoidable path towards crisis because of the quantity of debt that we have and the way that our economy is engineered today. Re-engineering the system towards long-term sustainable economic growth is the attempt being made.
Kevin: Do you think we can grow our way out?
David: We may or may not be able to grow our way out, but the efforts to shrink the scope of expenditures and drive economic growth via economic expansion instead of government expansion—two very different means of driving the economy—that's being put in motion in one place on the planet today—one place only: the USA.
So we've got tears being shed over the loss of American exceptionalism. That may be premature, along with the death of American leadership. And it says something like a corporate turnaround. First, manage your outflows and cut all unnecessary spending. Then drive growth in the areas you have the greatest advantage, building back with a much reduced budget.
Turnaround specialists are rarely loved within the organization that has ossified and is in the process of being restructured, but that process can be a matter of survival.
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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.
