Podcast: Play in new window
- Morgan Lewis answers your question on Gold Recycling/Dollar Recycling
- Philip Wortman on Crypto and Gold
- What indicators does David McAlvany look at consistently?
Welcome to the McAlvany Weekly Commentary. Happy New Year! I’m Kevin Orrick, along with David McAlvany.
Well, I sure enjoyed the questions last week, Dave, and look forward to what you have to say on the questions this week. We’re never disappointed, are we?
David: No, and I’m grateful to be closing out another year with the Weekly Commentary. Kevin, thank you for your efforts throughout the year. I enjoy the engagement with our audience and am grateful for the questions that have been sent in.
You know, some of the questions are beyond what I have the capability to answer, so we bring in Philip Wortman and Morgan Lewis to tackle a couple of the ones that are just right down their alley.
Kevin: And I’m looking forward to that. Well, tell you what, let’s just go ahead and get started.
Jeff asks, “Do you see the stock market correcting, and if so, when will that happen? And will it be a minor correction or a large pullback?”
The second part of the question is the commercial real estate market, Dave, in America. “Is it still in trouble? If so, how will that affect the banking system? And thanks for your efforts in putting the weekly podcast together.”
That was Jeff.
David: The answer is yes. No idea when we have a market correction. We just know the context is set, and by any measure valuation, it will happen.
When is, of course, the billion-dollar question. A ’30s-style crash? I think that’s less likely. A ’70s-style crash, where performance in real inflation-adjusted terms ends up over a course of time being as grave as the 1930s? I think that kind of pressured environment is more probable. So it’s either large and all at once, or less extreme—minor, if you want to think of it in those terms—extended, and excruciating over time because of the impact of inflation.
Commercial real estate, there are really big refinance needs in 2025. Estimates are between one and two trillion dollars, and so it makes sense that we would see pressure in commercial real estate. But I think it obviously depends on liquidity dynamics at the time. Your ability to refinance that debt, if it is with commercial lenders or if it’s in the private markets, it all depends on the current liquidity dynamics and financial market conditions at that time.
Part of the commercial real estate market is finding a bottom, part of the commercial real estate market has yet to materially correct. So if we assume that there is another leg or another segment within that asset class—commercial real estate—then I think your banks—commercial banks—will see a lot of stress on their CRE portfolios.
Kevin: Dave, this next question reminds me of a conversation I had with a client the other day. He said he’s got a Wednesday morning ritual. He pours a cup of coffee, he listens to the Commentary every Wednesday, and I was surprised at how many people do that. They have rituals for actually sitting down and listening.
So James—this question reminded me of this—he said, “It’s been great listening to the show over the last few months. It’s become part of my Wednesday morning routine at this point. I’ve got a few questions, no pressure to answer any or all of them.” Dave, I know you’re probably going to answer them, so I’ll ask you the first one. “Are there any often overlooked market indicators that you’ll be paying attention to in 2025?”
David: Well, I love the rituals. It also reminds me of a friend of ours, a client of ours in Mexico, and that’s a common thing. Friday evening at the end of a work week, popcorn, a glass of wine, and the Weekly Commentary.
Kevin: That sounds like fun.
David: And he and his wife have been doing that for the better part of 15 years.
Kevin: Wow. Wow. So what are you looking at in 2025?
David: Yeah. Yeah, I think the market indicators we often talk about on the Commentary, we’re always looking at Tobin’s Q. We are always looking at the CAPE, or Cyclically-Adjusted Price Earnings multiple. It’s a 10-year rolling average of the PE multiple. We will continue to watch price-to-sales. Insider activity is very intriguing to us. Margin debt numbers are interesting.
And none of these are a market-timing mechanisms, but they all tell you more or less where you’re at in a cycle—advanced speculation being the extreme end of the end of a cycle, or moving towards value.
Kevin: Okay, so you’re not going to use two full moons in a month, or anything like that right now. Okay.
David: That’s right.
Kevin: All right. The next question from James is, “Any guesses on a Black Swan event in 2025?”
David: Well, I think all geopolitical events would fit that category, unknowable until they happen, but there’s plenty swirling to be considered a Black Swan in 2025.
Kevin: Okay, so this is a tag-on to that. “Will we see a market correction in public equities in 2025?”
David: Odds are strong. You know, I love the Barron’s article last week, “Embrace the Bubble.” In other words, hold your nose and buy the rip.
I think we’ve gotten to that point. It doesn’t take—and I’ve used this analogy many times in the Commentary—it doesn’t take much of a disturbance if you’re looking for some sort of critical trigger. We’ve spent enough time in the back country, living in the southwest part of Colorado, skiing and recreating and climbing peaks. You have to be aware of the environment. You look at the snow levels, you know what instability looks like, and you know when to go back to the car and go sit by a fire for the weekend instead of climbing a peak.
Kevin: Well, you want to watch what the experts are doing, right? Yeah.
David: Yeah. And we don’t know what would be the trigger, but we do know that the environment is fraught with possibility and opportunity for such an event. So odds are we will, and love that sort of socionomic confirmation, embrace the bubble.
Kevin: Well, and this fourth part of the question reminds me of what you’ve been talking about with insider selling, the executives selling their shares.
James says, “What are the corporates doing when they’re laying off and reorganizing? What are they seeing in the market that we’re not seeing? Public equities are at all-time highs, but corporate strategies seem to be bracing for a slowdown.”
David: Well, backdating a recession will likely occur in 2025. Maybe we get to the end of the year and then discover we actually entered it in the first quarter.
But between tariffs, geopolitical uncertainty, and other uncontrollable issues, these are things that are certainly in C-suite conversations.
The consumer—this is very obvious for folks who are watching retail—the consumer is tapping a lot more of the buy-now, pay-later offerings, suggesting that they’re fairly tapped out. So if you looked for one more critical shift, a resurgence of inflation would crush the consumer and flip the sentiment on its head.
Morgan, this next question, I’m going to pass to you from John. “If we assume that the new administration of President-elect Donald Trump and Congress are able to influence enough companies to start or increase manufacturing and production in the US in such a manner that the trade deficit shrinks by 10%, 20%, or some other percent by increasing domestic production and decreasing overall imports, will this decrease in the trade deficit strengthen the dollar and put downward pressure—be a headwind—on the price of gold?”
He asks a second question as a follow-up. “If the primary factor that leads to greater demand for gold is that as the federal government, Treasury and Federal Reserve decrease the purchasing power of the US dollar by deficit spending and monetizing the debt to pay for the debt, and President-elect Trump and Congress are to decrease the deficit to nearly zero, would this stabilize the purchasing power of the dollar and decrease the demand for gold and stop the price of gold appreciation?”
Wait, there’s more. One more question. “And yet a third possible question if the others have been asked or selected already. What factors would increase or decrease the recycling of US dollars for gold? How much does this recycling of US dollars for gold affect the price of gold?”
Morgan: Wow, that’s a whole lot of question. Let me try to tackle that as best I can. It’s complicated set of factors you’re putting together.
So starting with the first part of that question, I personally don’t expect Trump to meaningfully increase domestic manufacturing by dictate. I think he’s going to have to incentivize companies through profit. So I expect Trump will try to increase domestic manufacturing by enacting policies that weaken the dollar versus other foreign currencies.
The strong dollar is a consequence of being the reserve currency and Triffin’s dilemma that has hollowed out the US manufacturing base over time. So I expect weak dollar policies ultimately if Trump is serious after all about making manufacturing competitive or making manufacturing great again.
But remember, to be the issuer of the global reserve currency and global reserve asset means that from a structural standpoint the US must run a trade deficit to supply the world with the dollars needed to buy dollar-denominated goods and services.
So in my view, the US can implement policies to revive US manufacturing and reduce the trade deficit, or uphold policies that maintain reserve currency and reserve asset status via Treasurys. But at this point, US probably can’t have both.
And then on the second question, personally, I don’t think the deficit is weakening the dollar—at least not relative to competing currencies—because, in my view, the global demand for dollars, like I said, in order to purchase dollar-denominated goods and services internationally, the need for dollars for global trade overwhelms the negative fundamental impact of the deficit on the dollar.
So ultimately, that’s where the phenomenon of an international trend from dollar recycling towards gold recycling comes in. If oil and commodities start to be purchased not in dollars, but in local currencies that are net-settled in gold, then the insatiable international demand for dollars can ease and the dollar can actually be weakened.
Actually, gold recycling as an international trend that’s on the ascent is a net-positive for US manufacturing and ultimately, by extension, for the possibility of a reduced trade deficit.
David: So then the last part of that question, “What factors would increase or decrease the recycling of US dollars for gold, and how much does this recycling of US dollars for gold affect the price?”
Morgan: So ultimately, the use of dollars as an international settlement for goods and services creates such a demand for the dollar that we basically always have a strong dollar relative to other currencies.
So easy for me to say that, in my view, if gold recycling—which is to say international trade that’s done in local currencies and then net-settled ultimately in gold—that decreases the demand for US Treasurys in particular and, ultimately, reduces the need to spend dollars in oil and commodity and other transactions. So it’s easy to say that a weaker dollar is the likely outcome.
Now by how much would that affect the dollar and, vice versa, the price of gold? Hard to say as it pertains to the dollar. A lot easier to say that the impact would be massive for gold just because gold’s a small market, and even a marginal increase of demand for gold coming from global trade would have a monumental impact on price.
Kevin: Thanks, Morgan, and Philip. It’s nice to have you guys on the show this year. That’s awesome.
So our next question is from Todd, Dave. He says, “I love the Weekly Commentary. I’ve been listening to it for years. Here’s my question. With the way stocks are overvalued, as well as most other asset classes, with a stock market crash, how does gold typically perform? I think as stocks are sold off to raise cash and liquidity, this raises the dollar index, and gold usually drops quickly with deflation. Then the fed typically overreacts with a lot of dollar printing to prop things up, which leads then to inflation and a rise in gold.”
“I am a buy-and-accumulate-and-hold gold and silver investor, and may be a bit overweight in metals versus cash, but I do have plenty of cash to survive a metals meltdown. Do you think this is a time to maybe cash out some of the metals, take profits, be more liquid to buy back some gold and silver after the everything bubble pops? In other words, is this something the investor can reasonably time?”
David: Well, we come back to the Perspective Triangle, and if you have an adequate cash reserve and we do have a significant correction in the metals, you already have enough liquidity, and I wouldn’t disturb existing positions.
So Todd, thanks for the question. I agree with the scenario you laid out. Deflationary or extreme risk-off dynamics can hit initially, can initially impact the price of gold, and you’re right about its recovery as well.
My concern with trading that dynamic is that in the current backdrop we have too many geopolitical strains which can unexpectedly drive markets despite usual chart patterns and things like that.
Central banks are also very active on the buy side. During the global financial crisis, we were still in an era of net liquidations by central banks. That’s clearly not the case today.
So in terms of deep corrections, you do have this eager buyer, institutional buyer if you want to think of central banks as such. But there’s no doubt that if hedge funds get caught up in a de-risking and de-leveraging event, gold and miners should get hit.
So keeping a little dry powder is exactly what we’re doing—what we’re doing in-house. Throughout the last eight weeks, we’ve been taking profits, building out cash positions towards roughly 45%.
We are very resolute in our views on gold and the miners, but as asset managers, when we look at the COT reports, it suggests too much speculative activity in the space, and it’s that hot money crowd which can exacerbate volatility in the short run.
Longer term, frankly, you could ignore it. It doesn’t matter. In the short term, it can be painful.
So to contrast, my own accounts? Very little trimming, if at all. For clients—this is specifically in equities, right?—I don’t expect them to maintain the same level of commitment to the thesis, so we do our best to mitigate downside volatility.
The answer Morgan gave with reference to Dave Morgan’s idea that 90% of the move takes place in the last 10% of the cycle: unless you are a professional with disciplined strategy implementation, the odds are you will be out and on the sideline. I would not—I would not be out of a physical metals position.
Miners, on the other hand, have to be managed a bit differently. You’re talking about an asset class that, relative to the S&P, has downside beta of two and a half to three times, so your losses can accumulate very quickly. And so risk mitigation is absolutely critical. That’s where we’ve done some trimming.
This next question is from Warren. He asks, “The AI phenomenon has all the makings of a bubble based on techno-optimism, and it’s impressive how realistic the answers [are that] one is able to get from these bots in real time. Troubling aspects remain, though. Is AI simply increasing our fragility, over-reliance on tech, weakening our mental capacities as we outsource our thinking to push the easy button? The AI generation with war applications seemingly has the potential to amplify the destructiveness of war rather than promote peace, unless I’m missing something.”
Then Warren transitions to a slightly different question. “So climate models seem to be biased towards alarmism, which may not have any basis in objective reality. I’m not sure if you’ve covered the population implosion story much, but since all climate models have population models that assume continued expansion and yet much of the world’s fertility is degraded and large swaths of population are set to decline, if CO₂ is not the main driving force and emissions are not the prime driver, are we simply being gaslit to cover for an underlying shortage of energy issue that’s politically inconvenient to acknowledge? Does it really all boil down to power and control?”
Philip: So unraveling these questions in earnest would certainly require significantly more time and a nuanced discussion and a little more thoughtful. So I would encourage you to call in some time and I’d be happy to follow up with some more details to my answers, but I would think the following would cover a majority of the considerations.
So is AI a bubble? Yes. There is no quantifiable ROI to date, even with the billions spent, and the efficiency gains one could project have not come to fruition. There’s expanding evidence that the use of AI en masse could even be counterproductive—again, broadly across sectors.
Now, this is a bit of a semantic argument, but I would caution you against your impression of how realistic the answers are versus how truthful they are. Now simulating realism, as in it sounds like a reasonable response, is the aim of these programs.
Put another way, recognize it is an imposter and is quite fallible. You can find tens of thousands of incidents where chat box models offer up obviously incorrect information. They can suffer from delusions and they will outright lie when pressed by a user.
Next, are we outsourcing our thinking? Perhaps in some sectors—college being the most obvious, having papers written, letting it all be regurgitated. But the reality is the long-term impact is certainly yet to be seen, and we’ll kind of get to enjoy the ride as we move forward.
AI as far as its manifestation for peace or for war, you know, these large language models are tools. So like any tool, they can be abused or used for helpful ends, and it just depends on who is operating them, who’s feeding them their diet, and then who ends up trying to use these in their proper or an abused application.
As far as the climate modeling, more often than not, models merely amplify a bias [rather] than produce constructive information with which you may reconstruct a paradigm. I’m not going to get into the nitty-gritty details of how climate models are constructed because it isn’t fruitful at this time.
I will, however, comment on the underlying shortage of energy in your question. As an example, we have plenty of options for low-cost energy. The US alone has 300 years of coal energy reserves at current consumption levels. We have trillions of cubic feet of natural gas that we can exploit—both here, domestic in the United States, and even inside of Canada.
I would say, overall, the considerations for the climate modeling and that infrastructure could come down to a redistribution of wealth, and I think it should be left.
Kevin: You know, Peter asks a two-part question. I’ll ask the first part. It has to do with tariffs, Dave. That’s been a conversation you and I have had over the last few weeks, especially with Trump talking about it.
Here’s Peter’s question on tariffs. He says, “If the incoming administration successfully places tariffs on incoming goods—and he can break it down any way he wants, selective countries, market sectors—how soon will investors or consumers expect to see the impact on the market and the consumer in months and years?”
Let’s talk tariffs, Dave. If the administration is successful, what are we looking at?
David: Yeah. Well, it’s worth remembering that the largest part of our economy is services, and not goods.
So services are about two-thirds; goods, one-third—roughly. If inflation on goods is higher—and we’ve had this from COVID to the present, call it 25 to 35%—it is actually on the smaller part of what the consumer bears on a month-in, month-out basis. In terms of the consumption piece, goods are impacted, but on a net basis, it’s not as big a deal. So the consumer will feel it, but not as radically in our economy as it might be felt in others where you’ve got a different consumption profile, goods versus services.
Trump is, I think, looking for a quid pro quo. Tariffs will be the worst for countries that export a lot to us, but don’t import as much from us. On the other hand, if we can move agricultural products, if we can move energy products, perhaps even some manufactured goods into those foreign markets, there’s an opportunity for that quid pro quo, and the tariffs on their inbound goods won’t be significant.
So it just depends on how much they want to play. Any country that refuses to increase US goods importation will feel it. So China, for sure. But as you look at other Asian trade partners, I think we’ll work things out. South Korea, Japan, those are a couple that come to mind.
There is a natural friction that comes from tariffs that biases the economy towards higher inflation. The consumer would feel that on a lag. So the question about when, is it months or years, I think halfway through 2025 certainly is a timeframe for seeing an immediate impact from tariff announcements, a repricing of goods, and I think it certainly gives enough time for the Democrats to sound the inflation alarm in front of the midterms.
Kevin: And Peter’s second question reminds me of is the cart before the horse or the horse before the cart? He says, “Is the excessive value of the equity markets driving the economy today, or vice versa?”
David: That’s a great question. Doug Noland’s treatment of the Z.1 report last weekend was all the data you need to support the thought that the US economy, showing the strength that it is, is tied to the expansion of liquidity in the system, and we see that show up in things like equity and debt and the expansion of those asset classes. Total system liquidity is on a moonshot.
And, of course, a consequence of that is that asset values are screaming higher. Economic activity is, too. There is that piece, yes. It is excessive valuation which is driving a lot of economic activity and enthusiasm, but we should not forget that a huge part of our GDP growth, at least in recent years, has come from deficit spending. So as long as the government has a long leash and can spend as much as they want, then I think you continue to see a strong economy.
12.23 billion—this is last month—12.23 billion per day is what the government spent. It’s more than what they brought in in tax revenue. So deficit spending of 12 and a quarter—let’s call it 12 and a quarter billion a day. So yes, there’s appearance of economic vitality, and that will remain as long as we continue these practices.
There is an irony that if Vivek and Elon can influence a cut in government spending, while it’s better economics and while it puts us on a more sustainable path, it’ll be hard to avoid a recession. We’re addicted to debt, financial markets are addicted. Valuations—you see that in the equity markets—have moved to absurd levels.
But outside the financial markets there is also an addiction, and the economy must have this deficit spending for growth in GDP. That’s where these things are, unfortunately, tied at the hip.
Kevin: Yeah, Dave, sometimes you have to endure some pain to actually have health, so that recession may not be a bad thing if they do the right thing down the road.
Andrew says, “One of the most frustrating things are the measures that we have in place to give us a picture of what’s happening in our economy. It seems that they are getting worse, not better. With constant redefining of standards and revisions each month, is there anyone anywhere that can come up with a matrix that could be a better indicator of what’s happening or what has happened? I just read that they may revise all of last year’s GDP numbers to show that we’ve actually been in a recession. What?” And he has three exclamation points after the What.
David: We’ll often look at John Williams’ Shadowstats, and he does a great job of looking back to the old models, the older ways of calculating various government statistics, and then comparing and contrasting them.
He’s a tough read organizationally. He’ll have two salient points in 45 pages, so it’s a lot of work. But just say, “Andrew, this is a challenge.”
Kevin: He’s thorough. He’s thorough.
David: He is thorough to the point of dryness and statistical death, if you’re the reader.
Kevin: You interviewed him, by the way. Do you remember that?
David: I know. I think precisely once.
Well, yeah, Andrew, it’s a challenge. It’s been said that life is a moving target, and that is a fair assessment of government statistics as well.
If we take the latest measures of inflation as the best, and we have to look back in time, we have to look at the 1970s history, and it has to be rewritten. We have to tell folks that lived through that period, it really wasn’t that bad. Conversely, if the ’70s was real, then we today are being toyed with. What’s in the basket being measured? What are the weightings?
There is a theoretical justification for shifts in the way that these things are measured. Part of that is that consumers are adaptive, but I think there is also a convenience factor when thinking about Social Security and the cost of living adjustment.
We could just as easily look at labor statistics tied to seasonality, tied to the birth-death adjustments, and we routinely see these things estimated and then revised, estimated and then revised. And so we respond in real time to the first report, never looking back to see how things have been shifted after the fact.
GDP—as we previously mentioned—GDP is unanchored. Conveniently, government spending is buried in it, and the irksome part of that is deficit spending. So how healthy is the economy? Yeah, and again, what we have to say is that GDP growth coming in towards 3% is very healthy if you’re okay with top-down economics. But if you’re wondering, stripping out the governmental contribution to GDP or deficit spending contribution to GDP, looking at the economy from the bottom up instead of the top down, well, it’s not so strong. Things are not always as they seem. It’s important to recognize the official statistics as the primary inputs for investors and asset managers.
And I mention this because investing has often been described—and I think it’s aptly described—not just as a beauty contest, but as a judgment call on how the judges will vote in that beauty contest.
So you may look and see a crooked smile, you may listen and hear a song sung off key, but you’re left to not just have your judgment. You have to judge what the judges will judge. How did they see it? And that’s why, even if you are suspicious of the official statistics, know that the judges have a different measure.
But this is where I gain some comfort. In the final analysis, the markets function not as a voting machine—which in the short run it certainly is—but as a weighing machine. Warren Buffett said as much back in 1993, referencing his mentor Benjamin Graham—kind of the ultimate value investor. He said, “In the short run, the market is a voting machine reflecting a voter registration test that requires only money, not intelligence or emotional stability. But in the long run, the market is a weighing machine.”
So, Andrew, we must apply our own thoughtful process, our own intelligence, to an otherwise emotionally unstable market. Statistics are what they are. Account for them as you look at votes cast, and don’t forget to apply a better standard of weights and measures.
Kevin: And so I’m glad we’re not flying an airplane with the measures on the dashboard that we get from the government, right?
Sometimes you’ve just got to look out the window. If you think your airspeed is inaccurate on the dash or any of these others, look out the window if you’re under visual flight rules.
David: So, Philip, the next question is for you. “What new role will AI play in investment strategies in the coming year?”
Philip: Well, the flippant answer is to avoid anything with exposure to AI, be it chip manufacturers, data centers, software as a service, utilities, uranium, nuclear, or hydrocarbon providers with deep AI ties or any expectations attached. I believe that will be a winning strategy for 2025.
Now, if you mean as a tool for investment decisions, that is a different conversation. Utilizing LLMs—and I’m going to use that consistently for large language models—to collate data, allow rapid modeling deployments of seemingly disconnected variables, and further quantifying of these variables with varying weights to test against historical trends, yes, they can be insightful.
If you can competently forecast those results and make a claim of future trends, it can add an extra layer of analysis for discussion, and may reveal unseen patterns which may offer an analyst an edge.
David: So in some sense, you’re talking about the difference between the investment craze which we’ve just witnessed—taking things to valuations which you might say are unsustainable—contrasting that with the technology as a tool—much like the internet was a bubble in ’99, 2000, but we’ve seen the internet be very transformative in the decades that followed.
Philip: Absolutely. And the caveat, of course, is that any LLM is only as useful and competent as the data it is force-fed. So, of course, as an example, if the LLM deployed as a chat PT like UI, it can be fed a diet of Maynard Keynes, Karl Marx, and Kamala Harris speeches. And if you query it, by its very nature—if I might employ that type of language—it is impossible to receive a response with their merits offered by a Friedrich Hayek, the cultural analysis of Alexis de Tocqueville or any prose of William Shakespeare.
David: So garbage in, garbage out.
Philip: Absolutely.
David: Okay.
Philip: Now, of course, that’s clearly an intentionally absurd reduction to illustrate a severe point: that any LLM will replicate and intensify your biases. So, therefore, as an analyst, the results of a model must be deeply scrutinized—even if you agree with the results, and perhaps even more so.
So, I guess to answer the question more directly, will LLMs play a role here? Yeah. The important distinction will be the weights given to our model, and that will necessitate a long and well-drawn-out process of checks and balances.
David: Well, and some of those AI models are things that we can create and have created internally.
Philip: Absolutely.
Kevin: Okay, next question. “Hello, McAlvany Team. What are your thoughts on the health condition of Germany, France, UK, United States, China, Japan, and their health as it relates to debt-to-GDP? It seems that all the major economies of the world are teetering, and the next major crisis could be the salvo of their demise. My question is about the emergence of a global currency. Will it be the CBDC, the Central Bank Digital Currency backed by gold, or some other instrument that brings stability? What organization would implement a new currency? Would it be the UN?”
David: Well, obviously, the question points to a global solution, and I’m not sure that’s possible if you’re talking from a monetary perspective.
Monetary sovereignty is not something quickly given up. In Europe, there was a greater-good argument rooted in a century of war and horrific destruction, and they decided it was enough of a case. We should tie our economies together, tie our currency together, and give up that monetary sovereignty.
But it’s been a Frankenstein experiment that has not been without problems. Doing it on an even larger global scale doesn’t seem feasible. We discussed statistics earlier. Methodologies determine the numbers. When we’re talking about GDP, when we’re talking about each of those countries, how are we adjusting for purchasing power parity? Are we counting debt (which a government argues that it owes to itself)? And so you’ll see a whole range of statistics depending on a particular sausage recipe.
If you see or you hear something different, just bear that in mind because there’s variance in some of these numbers, but I think it’s sufficient for us to approximate. Debt-to-GDP for Japan, 233%; the US, 115%; the UK, 95%; France, 99%; Germany, 58%; Italy, 122%. And then if you go and look at the IMF numbers for all those countries, you can add 10 to 20%. Again, it’s just depending on what your sausage recipe is.
If you keep rates low, any of those debts are manageable. But if markets migrate interest expense to higher levels, the math doesn’t work. We’re seeing that with the US. We’re seeing that in real time. Interest expense exceeded defense expenditures this year, and they will be the largest budget line item in 2025.
It’s worth just pausing, thinking about. Interest expense exceeds defense expenditures last year, and in 2025, it’ll be the largest budget line item.
Kevin: Larger than Social Security.
David: Right. So I see the emergence of country-specific digital currencies run by the central bank, but I do see that as an unfortunate expression of financial repression in the years ahead.
If you can track, if you can help influence the flow of capital—I think there’s a lot of presumption here—better influence and control economic growth, that’s a top-down view, a command-and-control view. Not my preferred outcome, but one that seems very likely.
Crypto is morphing not into a system of greater decentralization and autonomy—and that’s where it started 15 years ago—but towards a system of greater centralization. Financial inclusion is one of the catchphrases used. We want to help everybody, lift everyone out of the mire.
Kevin: Okay. But to that question, if it is the CBDC, the Central Bank Digital Currency, what about gold?
David: Well, it might not be coincidence that central banks are adding a lot of gold. If you’re going to change the monetary system and do it in a radical way, there has to be some anchor. You have to assume that if the public is open to a significant shift in the way money is managed, that something has occurred, and that something is not likely to have been a confidence-booster. In fact, it might be that thing which causes there to be second guessing of legitimacy, whether it’s the Federal Reserve, the Bank of Japan, People’s Bank of China, the European Central Bank—any central bank.
So now we go back to habit. Now we go back to historical precedent. Now we go back to humanity. What appeals to humanity in the context of crisis? Probably not a coincidence that central banks are adding to their gold holdings. If they did move to a Central Bank Digital Currency, I think it would have to have some reflection of trust in vitality or veracity. Where is the truth in this? What can be trusted? Gold. It’s elemental.
Kevin: This next question sort of applies to that. He says, “My next question is about the US Treasury note. I don’t have confidence in my government. I could be a simpleton, but I don’t understand the wisdom of investing in debt. How can our Treasury promise a rate of return when their debts are in the trillions and interest payments that,” like you said, David, “will, in short, put them into bankruptcy? They will never be able to climb out. Inflation is here to stay, thanks to our fiscal malfeasance. Glad we switched to precious metals, probably the most important move in my investment account.” What do you think about Treasurys, Dave, and debt?
David: Well, I agree with everything said. Your metals positions are the most important investment allocation you can make. I totally agree with that.
I further agree that notes and bonds should be avoided.
T-bills are a different asset, and I say that because you take on a totally different risk profile when you’re extending maturities. And it may sound contradictory, but in a domino sequencing of financial failures, your T-bills and your Treasury paper, they’re still the most secure liquid asset, knowing what we know today.
Notes and bonds are a different kind of animal altogether. They’re a directional bet on rates, and I think that’s a dangerous bet.
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Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. You can find us at mcalvany.com, and you can call us at (800) 525-9556.
This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial adviser to assess your suitability for risk and investment.
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