Podcast: Play in new window
- Elizabeth Warren Wants A 75 Basis Point Cut
- Supercore Inflation Still Running Hot
- Employment Numbers Point To Stagflation
“I think the Sahm rule implies recession. When you get an uptick in employment off of low levels, that move precedes a reversal in trend and therefore potentially greater softening in the labor markets. Yes, there is a softening. The question is, to what degree? I suspect a recession will emerge, but the pressure on wages remains on the upside. If that continues into 2025, inflation might re-emerge as that two-headed hydra only partially mauled by the Fed’s best efforts from that rate tightening cycle—the 2022 to 2024 cycle. The second head is raring to get back into the mischief of consumer pain and anxiety.” —David McAlvany
Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
Well, David, as I walk around the office, I see you are Mr. Mom this week. Your wife is in Korea. That’s got to be interesting. But how are you holding up? I mean, you’re driving the kids from here to there, three different directions all the time. Yet, you’re still doing what you do here.
David: Yeah. It’s pretty fascinating to bounce back and forth between dance, fencing, Civil Air Patrol, breakfast, lunch, dinner, checking up on homework. You realize that doing half of the job—there’s a difference between doing half and all. It’s 100% difference—
Kevin: Well, and the truth of the matter is—
David: It’s 100% difference.
Kevin: Yeah. You’re doing 90% more. Because let’s face it, your wife—
David: That is so fair. That is absolutely a more accurate representation.
Kevin: So what is she doing there in Korea right now?
David: She’s part of a global leadership group that looks at various cultural avenues where there needs to be a broader discussion, a more important discussion, a strategic discussion in the arts and education. Her focus is on the arts, and that’s in Bangkok the first week. And then she’s at another meeting in Singapore next week. So she’ll be gone for two weeks, and I will be either more gray-haired or more of a saint or…I don’t know. The next two weeks are a process of spiritual discipline, I think, for me.
Kevin: My wife asked how it was going, and I said, “Well, I saw the kids there and they were all engrossed in schoolwork.” So fortunately, at least there’s a little bit of discipline being applied. I didn’t see any of the three playing video games.
David: No, no. In fact, I had them sit at one end of the banquet table in our office so that I could walk by and monitor with a glance. And so…anyways.
Kevin: And check. Well, okay. So this is the week— I’ve been thinking about it, Dave. Because with what Elizabeth Warren had recommended that Powell cut interest rates 75 basis points, I started thinking about Goldilocks and the Three Bears. But in this case, let me give it a try, Goldi-Powell and the Three Bulls, okay? 75% basis point drop in interest rates—
David: Yeah. Not warranted. Not at all-
Kevin: At all. Oh, bad dad joke. Okay. But I’m thinking, 75 basis points would be too hot. 25 basis points, they are already playing down as too cold. And I’m wondering if 50 basis points is just right for Goldi-Powell and the Three either Bulls or Bears. It depends on how it goes.
David: Yeah. The main event this week is the Fed decision on rates. And this started with the ascent to current levels in January of 2022. And of course we’ve held those levels since. This would be the first cut in rates in four years. Cuts usually are advised if business activity is rapidly slowing or if unemployment rates are rapidly increasing or if the Fed calls an unscripted audible to save the stock market from excess volatility. We affectionately know that as the Fed put. They’ll step in and protect the downside for the leveraged speculator.
In this case, business activity is unimpressive but not weak, and unemployment is rising, but doing so off of a very low base. You would not describe it as a rapid increase. The equity markets are a short walk from sort of random heaven in near price perfection. You’ve got the cyclically adjusted price earnings ratio of 36, well into the 99th percentile of valuations. Let that sink in, 99th percentile. Unclear why the Fed is talking rates lower at all.
Kevin: Well, to pick up on your dad joke about unwarranted, I mean, I have to be cynical here. Why do we have a politician like Elizabeth Warren calling for a particular amount of basis point cut? What does she know about economics?
David: Well, could it be politics as usual? There’s the Elizabeth Warren immediate 75 basis point cut. You’re right. She’s not exactly known as an economics expert.
Kevin: She’s not exactly known as a lot of things she claims to be.
David: Well, I mean, she probably has some familiarity with Das Kapital and the Communist Manifesto. So there is economics that she’s actually pretty proficient with. Bill Dudley, the New York Fed, card-carrying Democrat, says 50 basis points is important to get out ahead of labor market weakness. That echoes Wall Street. They have their own philosophical bias, which is not the same as our favorite indigenous person in Congress. Wall Street’s world view is a mixture of greed and avarice, and it’s greed and avarice on steroids. Growth regardless of the quality is good as far as Wall Street’s concerned because greed is good.
They are the financial version of Lou Ferrigno, growth at any cost. Steroids, that’s fine. The Wall Street betters are now at a 70% probability of a 50 basis point cut on Wednesday. And I think they’re doing their best to bully the Powell Fed into that 50 basis point cut. And he knows that they’ll throw a tantrum if it’s anything less. The reality is, bull markets are fed on cheap credit and 50 basis points is meaningful to the Wall Street community. Their vote is to do whatever it takes to extend the trend. They like growth, and they’re not really concerned what the cost is down the line.
Kevin: Well, so the incumbent politicians want to see lower rates, much lower rates. Wall Street wants to see much lower rates. But the division, the gap between rich and poor, is only stimulated, at this point, by loose monetary policy.
David: Well, that’s the interesting thing because from Warren’s perspective, she may want to help the proletariat. But cutting rates at the level she prescribes, ironically, only pushes asset prices higher, exacerbates the divide between rich and poor. Does very little to finish the job of lopping off the inflationary hydra’s second head. And it would—I guess you could argue, again, the cynical view—throw a few more votes for the Democrats clinging to the stock market gains as an indication of Biden era success.
But that’s not the case if you’re talking about how the average person feels. Financial Times article two days ago about Las Vegas, specifically the State of Nevada, and how Kamala’s going to have a hard time winning their votes because cost of rent has doubled to tripled in the last four years, and the cost of groceries is anywhere from 100 to 300% higher. The working man and woman in Nevada, working hotels, casinos, what have you, they are looking back and saying, “We had it better under Trump. That’s who we’re voting for.” That’s a fascinating thing because I don’t know that any basis point cut, whether it’s 50 or 75, is going to woo them.
Kevin: That’s the land of bread and circuses in its own way. And bread’s been skyrocketing there and Circus Circus—oh, sorry—circuses have been skyrocketing. So if Powell were conservative right now, would he disappoint? I mean, 25 basis points. At first, it felt like, “Why is he doing it at all?”, because we still have inflation. Now, they’re trying to make it sound like that’s the weakest of the cuts.
David: And there are indications of weakness in the labor market, which is what he’d have to focus on. I do think he’d be wise to step cautiously, 25 basis points at most. I think a part of that’s given how vocal he’s been on being data dependent. Last week, we had the month-on-month supercore CPI, an increase of .327%. That annualizes out to 3.924%, close to 4%. Supercore is the measure of inflation. I mean, again, if you’re talking about CPI. He loves PCE as well. But the supercore is what he’s preferred. That supports no cuts. None at all.
Given that he knows how the statistical sausage is made, you look at some of the absurdities built into the CPI print. Exhibit A would be the cost of healthcare insurance. Statistically, it is said to be down 31% over the last two years. The metric is based on medical insurer’s retained earnings, which is a really weird thing to use as a proxy for healthcare costs.
Kevin: I think about supercore, you have to be careful when you say, “This is what I’m going to focus on,” when it starts to bite you back. It reminds me of, does your supercore bite? And it’s like—
David: Yeah. It’s not my dog—
Kevin: It’s not supercore. Yeah. It’s not my supercore.
David: Yeah. I think he should step cautiously. He knows that’s how the sausage is made. And if he’s watching supercore, if he’s watching some of those things, if he’s watching the excesses within the financial markets, he would be cautious.
Kevin: Okay. But last week, you said there are two major indicators that are looking like we’re going to be in a recession soon. So will he be looking at those indicators instead?
David: Well, take the other side of the argument. Not the Warren argument, not the Wall Street argument, because Wall Street would be aghast at this line of thinking. But a 50 basis point cut would be warranted if you look at the fragile nature of the markets today and know that unemployment can rapidly deteriorate in the context of a recession. Again, that’s the theme that Wall Street would prefer to ignore. No one wants to acknowledge the possibility of a recession. But the Sahm rule and other indicators—an un-inverting yield curve, as we discussed last week as we talked about the leading economic indicators—they imply one is coming. And if you’re talking about recession and what that adds to the unemployment figures, it adds 2% to 5% to the unemployment rate. So your 4.2%, which is not a terrible number, can quickly move to an elevated 6% to 9%. And that’s problematic.
Kevin: A lot of people don’t take the time to read what you read, and this is one of the reasons I think a lot of people listen, is because you’ll sit down and read a 100-page report from the Bank of International Settlements. Do you think Powell has read the advice from the BIS?
David: I think so. I mean, he’s at the heart of American central banking, and the BIS is at the center of global central banking. If he read last week’s BIS report on the yen carry trade, he would have plenty of reasons to worry over the fragile market structure. And all he has to do is remember back six weeks to August 5th. Overnight you had instability, and this was uncontrollable instability across asset classes and across all geographies. I think if he read that, if he’s looking at and considering the game of Russian roulette being played in the repo market with the basis trades stretching to the trillions, if you’re looking out on a 12-month horizon, I think you could be afraid of a market free fall, the kind that he can’t control.
In that case, a more aggressive cut now would be consistent with the global bond market signaling trouble on the horizon. It’s way out there, it’s not in the next three to six months, but in 12, yeah, that’s what’s getting priced in.
Kevin: Talk about a rock in a hard place right now. We still have inflation and we have recession. We’re facing that. Oftentimes, the markets will discount forward and tell us what they’re expecting. So what are the markets themselves thinking interest rates look like they’re going to be directed towards, up or down, over the next, what, 12, 24 months?
David: Well, when you say inflation and recession are present, it was Jamie Dimon last week who said he’s not taking stagflation off the table, and that’s that nasty combination of both, where inflation sticks around, recession emerges, you get the combined effect, and it’s terrible for the consumer, both from a job stability standpoint and, of course, I think on the recessionary side it has a major toll on the national budget. 2025 fed funds, going back to that 12 month horizon, 2025 fed funds are being priced by the market at around 2.85%. That’s dramatically lower. That implies cut after cut after cut after cut.
In fact, it implies multiple 50 basis point cuts between here and there, so low in fact that you can only conclude that trouble’s brewing. And again, most people are not thinking 2025, December 2025. But what does the bond market see that it does not like? I think you have to answer that question, and perhaps that is what Powell’s looking at. At least, if I were taking the other side of the argument in favor of a 50 basis point cut, it would be with something in view that frankly Wall Street stock traders would be ignoring completely.
Kevin: Living in Durango, we live about 12 miles from town, and I can hear the train coming down the canyon for a long, long ways before it actually comes back to Durango. You know the Durango-Silverton Train. I think about sometimes looking at these interest rate moves going forward. Morgan Lewis on your team, Dave, this is a biggie for him. He listens to the train whistle 20 miles away and goes, “All right, do you see what’s being discounted in the markets now over the next year or two?” And I think he probably, looking at this 2.85% level, like you said, it’s dramatically lower, that means that there must be an emergency built into the markets right now.
David: And again, going through that BIS paper makes perfectly clear that the yen carry trade was only partially unwound. Looking at the yen today relative to the U.S. dollar, we’ve moved well below the August 5th lows. Have traded to 140.5 this week. It’s currently at about 141.27. A forced unwind of leverage would not be welcome. So again, that 50 basis points could be more of a prophylaxis for market panic. The markets, this is amazing, they’re at a very interesting juncture.
Kevin: Yeah. I wonder if Captain AI, artificial intelligence, is just not around right now to save them.
David: Market sentiment is turning negative, and that’s where AI and some of those big trades that have been put on by hedge funds, individual investors, mutual funds, everyone— Tech leadership has been lost, and, as we’ve noted before, when the general’s dead, the troops scatter. So to see a broader disarray in the equity markets after the leaders have taken a hard one, questions on the timeline are emerging. People are beginning to ask a question they should have asked in the lead-up to the July 10th peak in a lot of those stocks: will AI deliver those new-era results in a short time frame? When will it boost profitability for individual companies? When will it transform the way we do business?
And without answers to those questions, now a certain sobriety enters what was really a craze. So soon maybe the answer to all those questions, but perhaps not soon enough. If it’s in the next decade, that’s a long time. That means there are dozens, up to 40 quarters and quarterly reports, of potential disappointments. Expectations already set to infinity may be hard to meet. And that’s I think what the equity market now has to deal with. Got a little too far over the ends of its skis.
Kevin: Yeah, so those AI firms that were just leading the way, they really have not recovered from the August 5th debacle.
David: And the general markets have. So there’s been some rotation to value, and that’s I think the state of play. Equities have found their feet following the August 5th selloff. The leading AI firms have not. And even at lower prices, in some instances 20% to 30% lower, they’re still sporting PEs—that is, price/earnings multiples—which are 45% higher than the median S&P 500 company.
Kevin: So they’re still overpriced?
David: Yeah. And that was noted in the BIS paper, that we are still in this state of extreme overvaluation. They are cheaper than they were, but they are not cheap.
Kevin: How much of the paper was actually devoted to the yen carry trade? Because in a way that sounds to me like that’s how we’ve been funding almost all of this.
David: It was about 20 pages of 94, and the BIS paper highlights the funding currency for leveraged bets. That is the yen. It highlights the destination currencies, the emerging market currencies and the Mexican peso, which we’ve discussed. It’s generally concluded that the shift in rates globally is really about a shift in global monetary policy towards lower rates. And those shifts have come fast. The interesting thing is, that is one view. There are other ways of looking at that. And again, if you look at the global bond markets, you’re seeing moves into government debt driving those bonds higher and the yields lower. That could also be taken as a cautionary signal of people shoring up their positions and battening down the hatches.
Kevin: So unemployment, do we continue to look at unemployment and say, “All right, is this really something that they’re going to have to focus now on?”
David: Early August, we got the non-farm payroll numbers. Not impressive. The two-year Treasury’s response was a four standard deviation move. So again, those rates have moved lower and they’ve moved fast. But the August 5th unwind was across all asset classes. It was across all geographies, with the most heat being felt in the companies that have been hedge fund favorites. The truth is, hedge funds have been a winning play. They’ve been a winning allocation, not because of superior positioning. It looks almost identical to what you have in a common portfolio—what is, again, very common holdings. They just hold those positions with an amazing amount of leverage.
So when the providers of that leverage see market dynamics shift, and leverage is forced to decrease, the assets that are widely held by those leveraged speculators have to be sold off. So the yen carry trade unwind—that hit exacerbated the volatility, and it will continue to do so. That’s where, again, being aware that the yen carry trade is only partially unwound is pretty critical. These are leveraged trades. They’re big ones. You’re talking about FX swaps, forwards, currency swaps with the yen on one side of the trade now totaling—still totaling—to $14.2 trillion, as noted on page 16 of that report.
Kevin: So the Bank of International Settlements, they’re looking mainly at financial numbers, but I wonder, I’ll never forget when you had us read the Barton Biggs book on just how much a geopolitical event can affect— We really don’t have any room for error right now with all the debt that’s in the system, yet we still have these looming geopolitical types of events over in Asia, Europe, Middle East. What happens if that’s triggered?
David: The 2024 review, which is what this BIS paper was, covered a lot of ground. The yen carry trade was just the first part of it. Later on in the paper there’s discussion on geopolitical strains and its impact on global trade, and they’re talking specifically about trade-trade relationships, and the flow of goods. The scale of capital flows is immense, and it implies—actually it requires, I think, a healthy and cooperative international backdrop. That is unwinding. This de-globalization trend is a real one. The de-dollarization trend is a real one. That unwind of trade cooperation taking place in the context of highly leveraged cross-border bets, that’s even soaring. It’s a very interesting recipe.
So the primary focus in that section was on trade risks, not necessarily capital flows, but I think both need an intense focus. Anyways, if you have the time, it’s not quite a hundred pages, 94, so I think you can handle it. But it’s central bank analysis. Go for it. You’re looking for the September 2024 review.
Kevin: I’ll be honest with you, Dave, on a lot of these, I just trust that you’ve read it and I want to hear what you have to say, but I want to go back to something because a lot of times, you tell a lie long enough and people will start to believe it. And I think maybe the lie right now that’s being told is that inflation has been cooled and that they actually can start making decisions on interest rates, ignoring inflation.
David: Well, I mean, the key argument has been: we’ve had these restrictive levels for so long, now it’s time to let go. That’s the claim, that these higher levels of rates have been highly restrictive, and that it’s cooled if not killed the inflation issue. And if you judge by the activity, if you judge by volumes, if you judge by pricing in the fixed income markets, in the equity markets, in the real estate markets, the opposite is true. And there are some measures of, again, financial tightness, which would say, actually, we’re far looser today than we were when this whole tightening cycle began. We’ve got four years of no decreases in rates, two years of only increases, and asset markets have been on fire, so in equities, depending on your measure, I really liked looking at Mark Holbert’s— He had a great comparison between the 1950s, 1970s, the year 2000, and the present. We are at 95% to 100% of the same in terms of peak valuation in almost every category. We’re talking about the Buffett indicator, price/earnings multiples, price to book, price to sales.
Actually the CAPE, cyclically adjusted price earnings multiple, is up there in the 99th percentile. Current price earnings multiple’s 27.7 is only in the 91st. Only—I say only—in the 91st percentile. We talked last week about how you could have a spike in that number. That’s what we had in the year 2000. A decline in earnings and prices held at these levels would resolve with a blowout to the upside and the price earnings multiple. That’s exactly what we had in the year 2000, that Wile E. Coyote momentary gravity suspension trick. And it’s super fun while it lasts.
Kevin: You brought up the Buffett ratio, and we’re not talking about Jimmy Buffett and Margaritaville. We’re talking about a guy who really— You ask the average man in the street, if there’s a name that has to do with stock ownership, they’re going to say Buffett. They’re going to think of Buffett. And I noticed last week in Jim Grant’s report that Buffett right now is at 88% cash. He doesn’t like stocks at all right now.
David: Well nearly 300 billion in cash, and that equates, if you’re looking at it as a percentage of the equity portfolio, it’s not 88% of his total allocation in cash. Relative to stocks, he has an 88% position in cash.
Kevin: That’s historically very high, though, for him, isn’t it?
David: It is. It is. And it’s its own version of an indicator. The Buffett indicator looks at the replacement cost of stocks and current prices, and he would say things are overvalued. And I think he’s been complaining all through his early nineties. Now he’s 94 years old. All through his early nineties that it’s tough to find a good deal, and that’s how he makes money. He buys things when no one else appreciates them. He buys value, and he’s not finding value today. That’s the reality.
So not a lot of tightening of financial conditions if you’re looking at the financial markets. Things are still very expensive. Maybe the exception to that is bank lending. Not as robust. So that might be the one spot to look at for a tighter set of financial conditions resulting from that elevated rate environment.
And we’ve seen the knock-on effect, the knock-on effect in real estate, the kind of— I forget what they call it. Kind of a lock-in syndrome, where people are reticent to move. Mobility has been lost because they have a decent mortgage rate and can’t afford to be mobile. The cost to them would be an increase of 50% to 100% in their monthly housing expense. So they’re stuck, and we’re not seeing a huge turnover in real estate inventory.
So yes, there are pockets where activity has cooled, even if prices have been relatively unaffected by that higher interest rate environment—or brought lower as expected from the pressure of those high rates. They are few and far between, these pockets, regardless of the Fed’s subterfuge on the topic of tight financial conditions.
Kevin: So let’s go back to the jobs market. Is he basically going to focus on that for these decisions going forward?
David: I think so. I mean, I think the Sahm rule implies recession when you get an uptick in employment off of low levels. That move precedes a reversal in trend, and therefore potentially greater softening in the labor markets. And maybe that is the Warren bleeding heart in anticipation of this, or maybe it’s what Bill Dudley sees. Yes, there is a softening. The question is, to what degree? I suspect a recession will emerge, but the pressure on wages remains on the upside. If that continues into 2025, inflation might reemerge as that two-headed Hydra only partially mauled by the Fed’s best efforts from that rate tightening cycle—the 2022 to 2024 cycle. The second head is raring to get back into the mischief of consumer pain and anxiety.
Kevin: Something that’s been amazing, too, is we’re spending money we just don’t have. Deficits on a monthly basis right now, David, are exceeding what the deficits were on an annual basis when I first started working here.
David: And I think this is another point to be made when you’re looking ahead. There is a motivation to get rates lower because interest costs are screaming higher. I think last week’s deficit data was largely ignored, and I think it does matter in the conversation today. It does have relevance to the broader issues of US dollar weakness, and definitely it has direct application to gold strength. You had a surprise increase in the monthly deficit of over $80 billion.
That’s not good news for the US solvency narrative, and it’s not good news for the US dollar. It was, I think, helpful for those of you that own ounces of gold and silver. Very helpful if you own more than a few. Perhaps this too could be left for cynical thinking. But we’ve got less than 60 days to the election, and the incumbent government has opened the floodgates of spending, topping off the bennies to their constituents. That drives economic activity, and of course it’s with money that they don’t have. We’re locked in this $2 trillion deficit, which will get added to the total debt burden going forward.
Kevin: So, Dave, it’s a lot of money, but why don’t we go ahead and look at it. I mean, what was the deficit number for this last month?
David: The consensus estimate was 295 billion. By no means a small number. It came in at 381 billion.
Kevin: I remember our deficits being that on an annual basis decades ago.
David: If you unpack that a little bit more, you had 307 billion. That was the inflow. You had 688 billion. That was the outflow, what we had in outlays in spending. That leaves you with $381 billion for the monthly deficit. 381 versus the 295 expected. It’s actually 86 billion. Imagine thinking that a 295 billion deficit is sustainable.
Kevin: But what’s 80 billion amongst friends? I mean, especially before an election.
David: So the estimate was that we were going to overspend our revenue by $9.5 billion a day. The surprise was it turned out to be $12.3 billion a day for the month of August. That’s about half a billion an hour.
Kevin: Wow.
David: Who’s counting?
Kevin: Right. Amongst friends, again.
David: Who cares?
Kevin: Yeah, but, you know, the guys who are buying gold right now do.
David: And I think that’s right. The current gold investor cares, and that’s a global audience of people who see what to us has been rationalized as sustainable. No wonder gold is on the move. The dollar is on the verge of breaking down, technically. And this is where the conversation about this week’s interest rate cuts, I think, is particularly apropos. A 25 basis point cut would help hold the line in terms of dollar technical strength. 50 basis points would pressure the dollar lower still, and gold would keep the bit in its teeth racing ahead from here.
Kevin: And that’s why I brought up in the beginning, is this Goldilocks or Goldi-Powell and the three bulls or is it Goldi-Powell and the three bears? And a lot of that might have to do with dollar strength.
David: To sort of get back away and look at this from a global perspective again, I mean, the dollar is sensitive to interest rates. Sensitive to sustainability from a balance sheet perspective. Doug Noland made an important point on one of our weekly calls after going through last week’s release of the Z.1 report. Rest-of-world holdings of US assets are massive. If you take rates lower and you take the value of the US dollar—the currency—lower, those two things combined, those rest-of-world holdings are being given reasons for reconsideration as long-term allocations. You buy an asset for what it can deliver in benefits, not for what it takes away. And so if he lowers rates too much, you’re beginning to edge closer to this point of decision amongst the international investment community. Powell has to be careful not to do too much, or he hits the foreign holder with both a jab and a hook sequentially. Lower income from diminished rates and a lower currency value, you lose your rest-of-world audience, and funding those deficits? That becomes a problem.
Kevin: And that’s the thing we have to keep in mind. 10, 15, 20 years ago, we didn’t have any competition. At this point, with the BRICS and with the countries that are talking about other currency options, we really do have someone to think about.
David: Yeah. I mean, we’re talking about deficits of $2 trillion a year, that’s negative compounding at an almost 6% annual rate, 5.7%. If you force the foreign buyers of U.S. assets to become sellers, you’re marching toward the next, and maybe it’s the final, act of the play, where you’ve got QE to infinity as the Fed is forced to buy what foreigners won’t buy, or what foreigners are now selling.
Kevin: So, do you think that’s what gold is smelling right now?
David: I think so. I think gold is sniffing it out, perhaps. Whatever gold is sniffing out, reaching to new all-time highs, it’s worth paying attention to. Gold is telling you something here. I’m not Powell, and I’m glad I’m not Powell, but if I was, I’d choose 25 basis points or I choose nothing at all. And a part of that is because the dollar is vulnerable here, and gold in dollar terms is signaling at least that much.
Kevin: Yeah, and this is not just a domestic issue, what we’re talking about. I mean, you’ve got fiscal stimulus worldwide being called for. You brought up earlier in the year how many elections are happening this year, or have happened this year? And it seems like it’s not just our leaders who are calling for spending a lot of money fiscally, but worldwide.
David: That’s right, over 80 this year. So, you’ve got 80 incumbent governments that would like to open the floodgates, fiscally speaking. If inflation bounces higher off these levels, part of this ties to global governments and what they want to do, what they’re intending to do, what they desire to do in the context of their own elections. Fiscal stimulus is far more inflationary in a shorter term than monetary policy stimulus is. So, you’ve got Draghi asking for 880 billion in fiscal stimulus in the eurozone, that pan-European bond offering. You got the Chinese who are expected—this is Gavekal research—stimulative measures of at least 1.4 trillion, at least. And maybe that’s a drop in the bucket.
Kevin: Look at what Trump will spend if he gets in.
David: Just on China for a minute, because we are talking about credit expansion already on track for 5 trillion in China this year, on top of 5 trillion last year. So, we’re talking about not just credit expansion, but now direct fiscal stimulus of 1.4 trillion, and then Trump’s promised 5.8 trillion in fiscal stimulus if elected. We could have 8 to 10 trillion in global fiscal stimulus coming into 2025, and that might flip the inflation script at a very inopportune time when you’re talking about the central bank community already celebrating victory over inflation. I think I’d just say that it’s not dead yet.
Kevin: Yeah. And even though Trump, the 5.8 trillion, we have no idea what the Harris campaign would spend if she got in because she hasn’t really outlined anything.
So, let’s go to gold for a second, though. I imagine the gold room, pretend like you walk into a room and we see the demand, the people who are actually buying gold. You’d have the jewelers walking around. You’d say, “Okay, how are the jewelers doing?” And then the industrial demand for gold, because there is some industrial demand for gold. There’s investor demand for gold, so you’ve got these different groups in there and then you’ve got—
David: And central bank demand
Kevin: —the central bankers. That’s what I was going to say, the big, big guys. Jewelry demand isn’t that impressive right now.
David: Well, in terms of the total scale, it’s always been impressive. But you’re right, it’s fading with higher prices.
Kevin: Well, and investor demand—
David: Or just sticker shock.
Kevin: Yeah, investor demand, I mean, it’s there. But I mean, look at the United States right now, Dave.
David: Yeah, the last couple of months both Chinese and Indian jewelry demand is off. Investment demand frankly hasn’t let up in certain geographies. In India, that is in large measure due to the change in gold import duties. Duties were dropped from 15% to 6%.
Kevin: That’s significant.
David: Is there any surprise that gold imports in the most recent month tripled? You lower the cost of getting it in country, and all of a sudden people are stockpiling. That would be in anticipation of jewelry sales and investor demand. But if, as expected, India increases its imports in the second half of the year, increases by 50 tons—and that’s what the Indian Gold Group is looking at—on top of Western investors continuing to trickle back into the market, maybe we see a cyclical year-end finale closer to 3,000 an ounce.
Kevin: Well see, that’s the thing. You’ve got gold hitting close to all-time highs, or hitting all-time highs, and you really have segments of the market that haven’t even excited yet.
David: Well, in that respect, in the West it’s very true. Gold is not over-owned here in the U.S. Here’s a couple of proxies. GLD held 1,286 tons as of August 2020. Roll the clock back, that was the last interim peak. Now we are breaking out to new highs. So, you’d expect with new highs, that demand’s got to be on par with where it was at that peak back in 2020. Not the case at all. We’re now closer to 870 tons today. It’s down 30%. Down 30%. Our old friend Ian McAvity, he ran the Central Fund of Canada. Now Sprott has the product. It’s traded as a closed-end fund, so you see demand hit the price in a very relevant way. In this case you’re talking about currently it’s trading at a 4.65% discount to net asset value—
Kevin: So, that doesn’t show a lot of excitement in the product.
David: Right, discounts imply lackluster interest, premiums show high demand. How can there be lackluster interest with gold trading at fresh all-time highs? A stone’s throw away from 2,600? It’s geographical. It’s philosophical. It’s the debt doom loop that we’re already in.
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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 advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.
