The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
“It really is interesting. I think it can go on a lot longer than you imagine. And we would just say, let the markets tell you. Go with what you see in the markets because it will come out. The markets will tell the story, even if they are manipulated, but somehow or another, you’ll get the message.”
– Mary Anne Aden
Kevin: This week David traveled to the New Orleans Investment Conference. You spoke about that last week. It’s an annual event that he goes to every year that has run for about four decades now. In fact, Don McAlvany, David’s father, used to go every year, as well. The focus of the conference and the people that David is meeting with is on Protecting and Building Your Wealth During Uncertain Markets. While there, David had a chance to sit down with the Aden Sisters. Many of you are familiar with the Aden sisters. We interview them at least once a year. They had a conversation together about the markets that I think you will find very interesting. The sisters are co-editors of the Aden Forecast, which is a monthly newsletter that focuses on the U.S. and global stock markets, especially precious metals and international interest rates and bonds.
Before we move into the interview, we here at Weekly Commentary want to extend our thanks to our listeners for our continued growth and support. Thank you, also, to our YouTube listeners for now over 10,000 subscribers. Thanks also to our iTunes subscribers. Some of you listen on iTunes and others listen on the mcalvanyweeklycommentary.com website. In all of those cases our listeners continue to grow every week. We deeply appreciate your support, your loyalty, your comments, your feedback. So thank you very much.
I also want to mention, with the tantalizing, exciting flood of new WikiLeaks, FBI case re-openings, Justice Department dance moves, and moment by moment changes in the election outcome predictions, today we’re going to take a look longer, beyond the election, past the election, and listen to David’s conversation with Pamela and Mary Anne Aden. Let’s go to that conversation now.
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David: It’s so good to see the two of you again.
Aden: Thank you. Same here.
David: I just wish it wasn’t once a year.
Aden: I know.
David: Well, we’re with the Aden sisters to discuss everything economic and financial, everything under the sun. There’s a lot to talk about.
Aden: All right.
David: Looking at 2017 and beyond, we can look and predicate some things, perhaps, from what has been happening in 2016. There has been something of a turn in the gold market. There has been, off of the lowest levels, a little bit of an uptick in interest rates, and stocks have kept their levels with the Dow above 18,000 now for quite some time. So, we’d like to take 2016 and say, where are we going from here? So kind of the big picture – where are we at the end of 2016? Pamela, do you want to start?
Pamela Aden: Well, thank you. And thank you for the interview. We find it very fascinating, actually. We think that 2016 has become a turn-around year for the precious metals, for gold, silver, and their shares, platinum. And the resource, not quite yet, but it looks like that will be following. And pretty much the decline that we’re in right now which could last until the end of the year will be a very important telling moment. But we feel that next year is going to be a great year for the metals. We’re looking at higher prices for the whole gold universe, and so we think it’s going to be a bright 2017 for them.
David: Mary Anne, Mark Mobius recently was talking about, from his perch at Templeton doing emerging market stuff, he says gold 15% up in 2017. That’s an easy number to hit. Don’t be worried about a rise in interest rates because real rates are the issue, and they may be raising inflation. Maybe you could comment on the bond market interest rates. Do you guys see any trends when you’re looking at charts that would be helpful for our listeners?
Mary Anne Aden: Yes. Interest rates have been coming down for over 30 years, and they’re still coming down. And we don’t think interest rates are going to be rising significantly any time soon, for a number of reasons, mainly the deflationary forces, the fact that it’s one of the main tools in the Fed’s arsenal of what to do to keep the economy afloat, even if it’s only at 1 or 2%, and this is central banks around the world. So we don’t see interest rates going much higher. Again, maybe a couple of years down the road. If the Fed does raise rates in December, it will probably be just a token, and we don’t think that will really have that much of an impact on most of the market. And it’s true, real interest rates, even if they did – but we don’t think they will because it’s just too big of a risk – but even if they did, real interest rates, we would agree, are the key. So that would still be good for gold. As for bonds, they’ve been very good. They’ve been great investments, especially the last couple of years. They’re still good, but we’re thinking that they might be getting a little tired. But until they turn around, we would still stick with the bonds.
David: When we look at where we’re at today, Pamela, versus four years ago – new election, two new candidates – what do your instincts tell you? What is different today than four years ago?
Pamela Aden: Unsettling, uncertainty. People are upset. You feel anger more now than you have. Especially, the election is bringing up all this anger. But you would think that it’s like an iceberg. It looks calm on the top, it looks like things are okay, everyone is kind of just going to work and coming back, if they have work. But underneath there is so much uncertainty and I think that’s what people are really feeling right now, whether you are an investor or an individual, really. You’re feeling a lot of uncertainty in the world, and with reason. There are a lot of uncertainties.
David: That picture of the iceberg is a little bit like what we saw happen this year in England. There was some indication of discontent, but it surprised everyone how much there actually was when it came time to vote. Do you think there is room for surprise? I know we’re just coming into the election, maybe it doesn’t even matter.
Pamela Aden: I think we’re in for some surprises. It just feels like it. It’s what we call the Black Swan because something can come out and hit you from left field and all of a sudden it’s there in your face but it was always brewing. So we feel that’s a real possibility. It could be election-related, but it doesn’t look like it’s going to be a real smooth election. And this is a first. So we’ll have to see what happens. But regardless of who wins, really, when you get to the economy and the basis of what it is, there is already so much in motion that major trends won’t change because of who is elected, they will just be adjusted a bit. But basic deflationary pressure, a recession likely for next year if this struggling recovery doesn’t recover better. So we have all that facing us that causes the uncertainty.
David: Mary Anne, when you look at central bank policy now, what are the significant changes that we could expect as we move into 2017, or is it just more of the same?
Mary Anne Aden: I think it’s going to be more of the same. I don’t see any radical changes. If anything I see changes to more manipulation, more stimulation, more Fed managing – when I say the Fed I mean all the central bankers – everyone has been following Japan for 20 years. They started way ahead of the rest of us. And everyone keeps following Japan even though it hasn’t really worked out for them. Their growth rate is less than 1%, nevertheless, everyone follows them. Now Japan is buying stocks because they’re running out of bonds, so they buy stocks. So I just think there is going to be more of that until the economy, the global economy I’m referring to, can really start moving – at least get above 2%, get up to 3%. – until we start to see things normalize. And who knows when that’s going to be.
David: It was Larry Summers just a month ago, suggesting the same thing. Maybe we need to allow for monetary policy that intervenes and buys stocks…
Aden: Right, that is a shocker.
Aden: Right.
David: All of a sudden we take that definition, one of the key mandates of the Fed, price stabilization, and all of a sudden that’s not relating to the currency, that’s relating to select asset classes. Where does that insanity end?
Aden: That is insanity. What do you hear about that? We thought it was insanity when they first started buying bonds. We thought, “How can that be?” And then, they’re doing it, and so far, it’s bad, but it’s a crutch, though.
David: The discussion more recently of fiscal policy shifts – I guess, depending on who wins, in a matter of days, you have a variety of ways to approach an increase in revenues. Then you might have idiosyncratic ways of spending, too. So some will spend on social programs, perhaps, others will spend on infrastructure projects. Who do you think the target is for more revenue, number one, and where do you think the extracted knowledge will flow?
Aden: The revenue will come from the rich, I think – higher taxes. That’s what I’m assuming. But we don’t know exactly how it’s going to be structured. God forbid there’s a recession because then revenues will just fall. And then, how that’s going to be spent is, I think you were right on when you said the infrastructure – I think that’s something that everyone has agreed on, to bring in more jobs, build bridges, do that sort of thing, and I think that’s what they’ll probably hope to do to stimulate.
David: As investors, the three of us would say, if you’re going to put money into something you’d like to see a positive rate of return. You don’t necessarily have the same calculus at the level of government. You can have government spending and at the end of it not necessarily have a rate of return that was positive, or anything that is generative of growth in the future. If you had to choose where to spend a trillion dollars…
Aden: If I were a government? If I were the president?
David: Yes, embarrassing as that may be (laughs), if you had the privilege of spending a trillion dollars where do you think there would be a positive rate of return?
Aden: Definitely infrastructure, I think, is very needed. I would say a better school system in the elementary level at high school, and there is a lot of room for improvement there because there are fabulous universities, but to go from high school to that is a big difference, so I think that is needed. I really like to try to produce income, and at the same time help socially. I like a combination of the two. Many times it’s only social, or it’s only the other way. There isn’t a nice in between, so I would try to make that in between much better.
David: Mary Anne, Mohammed El-Erian, who was with PIMCO for years, has described the U.S. market – this goes back maybe three years ago – as the cleanest dirty shirt. Is that still the case?
Mary Anne Aden: I would say yes. Probably, yes, because you have other countries with – everyone has problems, some are worse than others, but I would have to agree with that, yes.
David: Can we, by extension, say that the U.S. dollar may not go through this terminal or catastrophic collapse? Because again, relatively speaking, although things may be bad here, they are likely to be worse elsewhere?
Mary Anne Aden: I think you’re absolutely right on that. I think that the U.S. is the strongest of the weakest, if you want to think of it in that way, because everything else is weaker. So the U.S. looks good, but it’s also not out of the woods, and it can’t be out of the woods by itself anymore. We all have to go together. So that’s where the struggle is coming, is that, yes, people will continue to look for the U.S. as a refuge, and as a safe haven. So that means it’s dollars, and that’s where the dollar has been rising lately, and actually could even rise further, but we’re looking at numbers on the dollar index that look like it’s still in an almost two-year topping process – the dollar.
David: Two-year topping process, implying that we do have either sideways or down move.
Mary Anne Aden: Yes. After the rise we’re having now, yes.
David: So where would you see the high end and where would you see the low end, if you said the next administration has its hands full, but we see a range of this on the high and this on the low for whomever takes the oval office?
Mary Anne Aden: The dollar has developed a beautiful sideways band, pretty wide – not that wide, but say 95-102 on the dollar index. So that’s pretty much the band we’re looking at. And whichever way it breaks out of there will determine…
Pamela Aden: It will be very telling.
Mary Anne Aden: Yes, that will be very telling, because like you say, if people in other countries get really nervous and keep on coming into the U.S. dollar as a safe haven, then it’s going to break out on the upside, which would not be good for gold. But we tend to believe it will be on the downside.
David: Maybe supportive of small or mid cap stocks with your multi-nationals suffering as they translate their earnings back into U.S. dollars and pay a pretty significant price. Do you have a feeling one way or the other on international exposure versus U.S. domestic equities?
Mary Anne Aden: Yes. I know a lot of people are saying it’s important to diversify globally and all that, but there are not all that many markets internationally that are doing way better than the U.S. market. So we, personally, have been advising that our clients just stay with the U.S. market, and primarily NASDAQ – tech type stocks. And those have done well. They’re holding up there. And going back to the interest rate dilemma, as long as interest rates stay low it’s very, very good for the stock market. So even though the stock market has been sluggish, it’s kind of chugging along, it hasn’t been going gangbusters, really, but it’s bullish, it’s still going up, and it will hold steady despite the fact that it’s overpriced and all that, as long as rates stay low.
David: So it is overpriced. If something is overpriced you could say it has more inherent risk. So how do you judge risk in a world where the old risk metric is irrelevant – cost of capital, interest rates – they no longer contain a meaningful message. So how do you judge risk?
Mary Anne Aden: Well, they do in the sense that they’re zero, but yes, risk has changed. You’re absolutely right. The risk that you used to think of when you were weighing out something, whether to buy or not, is different now. For the moment it’s different and who knows how much longer this is going to last. It lasts as long as it lasts, but interest rates are an influence, the Fed is an influence. Unfortunately, that’s what has really overcome the stock market, except for the tech sector has been strong on its own. But if you look at it just as a general market basis, that’s why it has that chugging look. And it’s very interesting, it started chugging right after they finished tapering. Ever since taper ended there’s a chug in the market. It’s not bearish, you can make some money on it, but it’s chugging.
David: So since the fall of 2014 it’s kind of been just barely moving along.
Mary Anne Aden: And that’s pretty much when transportation started collapsing. Right then it peaked in that December. It was within a month after tapering ended that transportation hit a peak.
David: Tell me how that makes you feel. On the one hand you have the Dow at an elevated level, you have the transports peeling off to the downside, and you all have taken on some responsibilities with Dow Theory Letters, Richard Russell’s work of decades. This is a classic Dow theory nonconfirmation, is it not?
Mary Anne Aden: Yes, it is.
David: So with a nonconfirmation, do you stay invested in equities, or do you not? Or do you stay in equities but just remaining very nimble?
Mary Anne Aden: Hold what you have and keep a close watch on it.
Pamela Aden: Very cautious, that’s the key.
Mary Anne Aden: But a cautious bull. If you want to put the bull in box…
David: Yes.
Mary Anne Aden: It’s strange because I don’t know if you remember Richard PTI, which is a very excellent indicator as to the trend of the market. That’s bullish.
David: Right.
Mary Anne Aden: And then you have the NASDAQ and the Dow Industrials, not too long ago hitting record highs.
Pamela Aden: September for NASDAQ.
Mary Anne Aden: Which is bullish. But then it’s the transportations that keep lagging. It’s telling us something, like you said, the nonconfirmation. So that’s where we’re very cautious, but leaning on bullish, especially because of interest rates. But going back to what you were just saying, I just wanted to add, I don’t know who it was that said abnormal is the new normal, because things aren’t normal. They haven’t been for quite a while, and that is because of the central bankers, because of the zero interest rates, or very low rates. And so all that kind of makes – okay, stocks are expensive, but you still go ahead and stay in the market, and you do things that you wouldn’t have normally done in more normal times.
Pamela Aden: And plus the need for income has become so important. And where do you find income? For a lot of people it gets to be a desperate situation because there isn’t an easy income anymore. Real estate has gotten the benefit of that doubt. And rightly so, especially in certain cities, it has been great, a great investment.
David: So really, when you look at the entire financial landscape, there is no asset that can afford an increase in interest rates. If you look at the interest rates rise and the impact on real estate, that would be catastrophic. The bond market – pension funds may be able to hold things to maturity, they’d be fine, but the average investor may not be able to look at their statement month to month and stomach what they considered a non-volatile asset.
Aden: Yes, and that’s just if it goes up 1%, which is a lot from today, and that would be really bad for so many things.
Aden: For stocks, for bonds, like you said, for real estate.
Aden: For the bond market and all the debt, it really hurts the debt. And so, it’s not easy. It’s not an easy thing that they can just raise rates out of nothing. There was an impressive article in The Economist just about a month ago about how much the U.S. owns the mortgage business today and how they just accidentally became the owner of most of the mortgages in the U.S., and it’s going to be going up to over 1 trillion next year. And that’s another thing that the U.S. is owning now. The government is owning mortgage market throughout all its branches, which has never happened before, and now they’re talking about, like Larry Summers, saying, “Hey, let’s do stocks now.” So they’re in everything.
David: I mean, there is the assumption that they can buy this paper and sit on it forever, and so it doesn’t matter what the volatility is. If there is volatility in the future we’ll get as much stability in the marketplace today, and any volatility in the future doesn’t matter because we’re dealing with a balance sheet that doesn’t have to be marked to market, and who cares?
Aden: Well, you can argue that, and a lot of people do. Like, so, does it matter? Yeah, maybe it doesn’t (laughs).
David: And this is the crazy thing. I had a young man approach me the other day, and it was almost like a conversation I would have had with my ten-year-old son. What is the difference between a million dollars and a trillion dollars to a ten-year-old? Virtually nothing. It’s inconceivably large numbers. And that was the case that this young gentleman was making. 20 trillion dollars – who cares? It’s not real money. These are just entries in a computer screen. Change the entries. There is this lack of concern, at some level, with having so much debt, and with having so many assets tied to low rates. Are we now at a point in history where we do everything we possibly can to keep rates low? And is there room for the return of the bond vigilante which says, “No, I don’t think so. This is a bad bet. We’re going to drive the market.” Because ultimately, the market is more powerful – maybe I’m wrong about this, but it seems in the past the market is more powerful than any particular government administration or central bank. So when do we see a revolt? In the marketplace, I mean.
Aden: Well, you know, that’s the big unknown, which makes it all so fascinating. I mean, it’s sad, but it’s also fascinating, uncharted waters. These things have never happened before, so it really is interesting.
Mary Anne Aden: I think it can go on a lot longer than you imagine. That’s why we say, let the markets tell you. Go with what you see in the markets, because it will come out. The markets will tell the story, and even if they are manipulated. But somehow or another, you’ll get the message. For example, let’s just take stocks. Yes, there are a million reasons why you shouldn’t be in stocks, but they’re doing okay. And the Fed doesn’t want to rock the boat. They’ll do all they can to help the boat. So they’re just excessive right now. I think they’ve locked themselves into, “What do we do next?” But it’s not that they’re going to allow – well, allow, they could maybe allow anything, and other people continue to think that illusion of wealth, rising stock market, everyone feels good. They think, “Oh, everything’s pretty good.”
David: In a market that is influenced by central bank optimism, this question, do fundamentals matter anymore? And do technicals tell the same story they used to, when Summers or Bank of Japan, or to some degree Mario Draghi can step in and just buy everything, drive prices higher, yields lower? What are technicals telling you?
Pamela Aden: We’ve seen a clear difference of activity and interactions in the market since 2013. That’s where it all kind of really clearly shifted. We’re going to show some of that in the workshop. Right after the trans, there’s like a click-off of what happened after all that, after the trans came the big collapse in the commodity market, oil market. And so all that happened after 2013. And that was after tapering, but then other central banks are tapering, I mean they’re [unclear], but looking at just the U.S. there has been a lot of changes in relationships in the markets, but there is still a relationship. So we go with that. Like Mary Anne was saying, we have to go with what we see now because it could last a long time.
David: Pamela, what are the most interesting charts you’re looking at today? It could be the geekiest chart that just doesn’t – I mean, to you it makes sense and it’s brilliant and it’s really fascinating. What’s the most interesting?
Pamela Aden: Oh, there are several. I don’t know if I could say just one.
David: Then three, five – you tell me. I’m very curious.
Pamela Aden: Well, for gold – and I like real basic, simple things in many ways. We have this book we developed that we look at, we update every day, by hand, because it really gives you a good feel for what happened that day – the news of the events and how they affected the markets. So that’s a very important afternoon routine we do, among other things. But I like gold in the 23-month moving average. It’s been perfect for identifying the major trend. I used to have another one – we went back to the drawing board a few years back because the 2008 financial crisis kind of changed the perfection of it all. But this one is very good, and that’s at $1200 for gold.
David: Right. So the 65-week has come up from $1180 to about $1213. The 23-month, you are saying, is right around $1200, which would represent support in your opinion?
Pamela Aden: Yes.
David: So that’s what you would divine from that?
Pamela Aden: Yes. Well, that’s a good one. If it breaks it, I don’t if I would say, “Uh-oh, this turn-around is not real.” I wouldn’t say that. It’s just that, then this correction is going to be steeper. And it’s supposed to be steeper compared to the rise it had this year. So this rise and the correction is so far normal within a move like that. So we’re not concerned about this. We’re looking forward to it, in fact, because we think that last hurrah up to the August high – we thought it was peaking, for example, for this year in July, if you can relate to those.
David: That was a good call.
Pamela Aden: But then we had that last hurrah with the Brexit so that ended up pushing it down another month or two. So we’re all kind of behind schedule based on that. And so, who cares? I’m getting more specific than I should, but…
David: Any particular charts that stand out to you?
Mary Anne Aden: The gold chart, I think, is important, like Pam just said. Also, the one I think that will tell a huge story is the 30-year yield, as I mentioned. That has been coming down since 1981, however, many years – that’s 35 years or so.
Pamela Aden: That has a beautiful mega-trend.
Mary Anne Aden: That has a mega-trend that is just amazing.
Pamela Aden: Since the 1950s.
Mary Anne Aden: If that ever turns around – at some point it will – at this point it would be above 3.25%, I think, on the yield, to turn that around and say it stays above it, that would be phenomenal because that would mean this whole deflationary period of the last 30 years is coming to an end. These are mega-trends that will take years to finally get turned around. But that would represent a whole new era and put on a different thinking cap. We would not be thinking deflationary environment anymore.
Pamela Aden: In fact, we tell our children, because we experienced when the bonds collapsed in the early 1980s. In 1981 we had 20% on the 30-year yield, we had high double-digit rates. It was crazy in those days, it was going up and down, and the bond market was in the pits. We had a friend, who is still a friend today, a very good friend, that bought bonds during that moment. In that moment no one would touch bonds, they looked at it horribly. He bought a lot of 30-year bonds. And just five years ago they matured. And he’s been collecting 15%. The short-term rates were at 20, but the long-terms bonds were 15.
Mary Anne Aden: He locked in 15% for 30 years.
David: Massive appreciation.
Mary Anne Aden: And then the bonds.
Pamela Aden: Yes, so he had a double bonus there for 30 years. Those are the kinds of things you would say, “Okay, we won’t see that in our lifetime, but you could. You could see that.”
Mary Anne Aden: (laughs)
David: That’s moving to the other end of the spectrum, but at this point, let’s say we do reach an inflection point. And Mary Anne, as you say, 3.25 being a turning point, a demarcation line. We’ve passed that line. How would you position a portfolio? Because this is a relevant conversation for Omar – you’re advising your kids, your grandkids, and saying, “This is a generational shift.”
Mary Anne Aden: It is. And it would have to be, again, you play it by ear, you let the markets tell you. You wouldn’t want to be in bonds. Stocks would probably be okay until rates became – let’s talk about, say, generational – eight, ten years down the road. As interest rates start to really move up you’d want to get out of stocks, and you would want to be in gold.
Pamela Aden: But then in stocks, going back, if you think, history is good for the present, 4% was pretty much the more or less tipping point for the stock market. When we look at stocks to long-term interest rates, on a 30-year yield, 4% and above would start really hurting the stock market. In this case I would say it’s lower because zero is so zero. So it’s different now.
David: Couldn’t you also say that compared to the old days you have corporations which have levered up, so the amount of debt they have on their balance sheet means that 4% rate structure is…
Aden: Dangerous.
David: Yes. Now all of a sudden all the corporations are working for the bankers.
Aden: Exactly. So nowadays, again, like we were saying, there is no more normal when you talk about how it used to be normal. In today’s market it might be 1½ percent, what used to be 4%. So that’s something we would play by ear as it is happening, be watching it.
David: Are there greater risks on the horizon, or greater opportunities on the horizon? Where do you see the greatest risk? Where do you see the greatest opportunities?
Aden: I think the greatest opportunities are in the metals market right now after this four-year bear market and the way it’s been moving this year, it moved a lot higher than we were expecting for this year. It’s not just gold by itself – the gold universe and everything surrounding it – the dollar, the situation, the uncertainty today is at a very high level. And there are so many other things that are kind of turning, looking, that enhance a bull market for the future, like next year, and to continue on. So we think that is a good opportunity.
David: And any risks, Mary Anne?
Mary Anne Aden: There’s a lot of risks (laughs). There are. But there’s always risks, and you just kind of take it for what it’s worth, you take it as you go, and in this current situation I don’t see a huge risk right this minute, but again, something could come swinging at us from left field and it’s like, “Oh my gosh, something we’re not expecting.” So you always have to be cautious for that. But as far as just talking markets, I don’t see anything that’s a huge risk right this minute.
Pamela Aden: Yes, it’s called a wall of worry.
David: So, a model portfolio heading into 2017 – new administration, maybe Hillary, maybe Trump – what is the appropriate allocation? The model portfolio would be, in percentage terms, a little bit of gold, a little bit of cash, a little bit in stocks. What does that look like for you?
Aden: I know this is considered high, but we generally, as a rule of thumb, we will put the largest allocation in the markets that are the top performers. And right now the top performers are gold and silver shares, silver and gold. So we are recommending 40-50% in the metals sector, and a little bit in cash, and the other divided between stocks and bonds.
David: And then bonds – any caveats there? Low duration? High quality?
Aden: U.S. government. We always go for the longer-term treasuries.
Aden: That’s not to say others aren’t good, either, it’s just that we stick with that.
David: Well, I can’t tell you how much I look forward to our conversations and being together here in New Orleans each year. We need to have you come and see us in Colorado sometime.
Aden: Yes, we would love to.
David: Or frankly, better yet, we’ll come down to Costa Rica to see you.
Aden: Yes, that sounds good.
David: You’re coming up on your fourth decade in Costa Rica. Is that right?
Aden: Yes, that’s right.
David: Okay, well that’s clearly your neighborhood now. We’ll bring the whole family down and spend some time with you.
Aden: Oh, we’d love it.
Aden: Yes, that would be great.
David: We’ll head to the beach and spend some time with Omar.
Aden: Yes, that would be super. Let us know ahead of time and we can make a nice plan.
David: We’ll do it. Great to see you again.
