Podcast: Play in new window
- S&P 500: More Declines Than Advances Every Day In December
- China Adds 160,000 oz of Gold
- Send Questions To in**@mc******.com
“We’re at this moment where, again, credibility gets thrown out the window for the Fed. And I think that is the final stage of a bull market in metals, where your central bank credibility is lost and investors go scrambling in an effort to survive a loss of purchasing power. And I think in this case, you’re also talking about ramifications that are well outside of any central bank’s control, and that is geopolitical issues.” —David McAlvany
Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
Dave, before we start, let’s just remind our listeners this is the last day to submit questions for our upcoming question and answer programs over the next two weeks. So those questions can be sent to:
David: In**@mc******.com.
Kevin: Yeah, in**@mc******.com.
Well, I’ll tell you what? This has been a great week. I feel like I lived a month through this week just because of your birthday. What an amazing celebration at your house, various nights. But I was very honored to be invited to meet some of the people that you knew back in college, Dave, relationships that you’ve kept going all these years.
David: Well, actually we had friends that came into town and some of those relationships go back 50 years. So we covered every decade from when I was a wee small lad to still a truncated and underdeveloped wee small lad. I was a late bloomer, so it was about college before I actually added a little bit of height. So then the timeframe of developing college friends and then professional friends, and it was a phenomenal week.
Kevin: Dave, it wouldn’t surprise our listeners to know that the people who did fly in for your birthday, who you had affected earlier in life, [The Intentional] Legacy is the name of the book that you wrote about—just what we’re all about. And I listened to your friends. Some of them I had heard about, but I had never met. And I listened to them each saying, “Hey, this is how you affected my life.”
And it was very poignant because I realized there’s just been a lot to you all the way back. And at the end of the evening with these friends who had known you, well, one of them had known you since you were a child. He’s a professional musician. And he pulled a guitar off the wall, very impromptu. He took the first two minutes to tune a very out-of-tune guitar—so it was very impromptu. But what he did was amazing to me. He sang the various stories that people had told throughout the night at the dinner table. He wrote a song and sang it.
I could tell it truly was a gift, but talk about a poignant moment. That was completely unexpected, and I really had no idea somebody could do that. I mean, I don’t think he forgot a single story.
David: Yeah, it was very special. Family and friendship have played a central part in the last five decades, and I can’t imagine the future much different than that. So spending time with friends from across the country, very special week.
Kevin: Okay, so we’re going to get into business here. This is the week of the Fed decision. And inflation hasn’t gone away, Dave, and things feel awfully loose for loosening of the interest rate. What do you think?
David: We are in a new world. People know who Jerome Powell is. There was a day when the Fed chief was anonymous. Nobody took the time. Nobody really cared. But this week is particularly important.
The next Fed decision is here. The bond market’s pricing in 97% probability of a 25 basis point cut, a quarter of a point. But the interesting trend remains that in spite of rate cuts dating back to September when this cycle started, interest rates like the 10-Year Treasury have been on the rise. So 3.63 on the 10-year was the yield then, in September, and reached a peak this week of 4.44. So 79, 81 basis points roughly, an increase in the face of a 75 basis point cumulative Fed decreed cut.
So at some point you get the impression that the bond market isn’t seeing what the Federal Reserve is seeing. Their data is a little bit different. My suspicions rest on the focus being debt, deficits as two main concerns, with resurgent inflation being the third threat and something that market practitioners are keenly aware of, I think particularly in the bond market, because inflation, man, it’s no fun if you’re a fixed income investor. So there’s a keen awareness of that. The fact that this divergence has occurred and not gotten a lot of press I think is also an interesting tell.
Kevin: They call these guys the bond vigilantes because the actual free market usually knows better than necessarily the people who are artificially cutting rates.
David: Well, and we go back to our conversation last week, and the Adam Smith discussion of the seen hand versus the unseen hand. The seen hand says 75 basis points lower, we’re going to do another 25 this week, most likely. And the unseen hand says, “Well, we were 3.63, now we’re 4.44.” There is not a single rate cut cycle since the ’90s where this behavior to this degree has occurred.
Kevin: You’ve brought this up, especially with guests that you’ve interviewed. You’ve read books on the history of interest rates, and that doesn’t sound very exciting. But when we actually understand that the history of interest rates is actually the history of the price of time, that’s a little different.
David: Yeah. And interest rates are that, they’re the price of time. And the US, our prices are still on the rise, and at some point the increasing cost of capital is going to have a material impact on stocks. There is a threshold out there, it’s unknown until we’ve passed it, that will send equities down 20%, 40%, maybe even 60% from current levels.
This trend of higher interest rates despite lower policy targets was seen across the eurozone last week as well. The ECB, European Central Bank, cut rates, and interest rates jumped higher. It was an undeviating trend across the European countries—Italy, Portugal, Greece, Spain, France, Germany. So again, the ECB cuts 25 basis points and rates increase from 10 to 20 basis points. Not exactly, I think, what they were hoping for. That was the fourth cut by the ECB this year. They’ve cut rates as many times as the French have replaced prime ministers. They’re onto their fourth in 2024.
Kevin: Well, and I think it’s important to note that the central banks actually look like they have control of interest rates, but the truth of the matter is, they have to react to the reality of what the interest rate markets say. They can artificially do it for a short period of time where they say, “No, we’re going to go down and everything else goes up.” But even here, Canada, how much did Canada lower their rates?
David: They weren’t alone. The ECB was joined by the Bank of Canada—an even bigger week there, 50 basis points in cuts. And as a proportion of what they have yet to cut, Swiss National Bank also cut 50 basis points, from 1% to 50 basis points, half a percent.
And the head of the SNB, the Swiss National Bank, declared sort of a previous success story with zero interest rates. He likes zero interest rates. He thinks a negative interest rate, that era. He stated firmly that he sees this as a way to discourage further Swiss Franc appreciation. That was the direction for the Swiss going forward. That’s what he thinks is the way forward. And this is a flashback, money for nothing, without the awareness of what that low to negative interest rate environment creates in terms of asset bubbles and malinvestment all over the place.
So the exception to the rule was the Bank of Brazil. They lifted interest rates one full percent to 12 and a quarter. Inflation’s raging and in need of tighter financial conditions.
Kevin: So when we talk about tight financial conditions, that’s usually where money’s not flowing, and loose conditions are when things are flowing fine. Right now it feels like we’re extraordinarily loose. Is there a way that we can actually quantify that?
David: Absolutely. And this is where, again, our framework is so different than the Federal Reserve’s. They claim to be data dependent and they claim to be resolving a significant problem in the financial markets, which they view as tight financial conditions which need to be eased. Thus, they’ve been lowering rates. The Z.1 report was out last week, providing an insight into just how tight or loose the financial conditions are here in the US, at least through the end of the third quarter. And the highlights are worth a repeat as we enter the twilight zone of finance.
The financial sector expanded four and a quarter trillion dollars during the third quarter to a record 144 trillion—a significant increase in a single quarter. Debt securities increased 1.235 trillion for the quarter, and for the last 12 months now debt securities have increased 3.34 trillion. That’s a record. In total it’s at 61.46 trillion. The previous peak expansion was going back to 2007.
So again, just keep some of these numbers in mind as a relative comparison. If the last quarter was 4.25, the previous expansion for the full year in 2007 was growth in debt securities reaching 2.56 trillion. So 2.56 in a year versus four and a quarter in one single quarter.
Kevin: Wow.
David: So 30% beyond the previous record. So our question, why would you lower rates in this environment? Corporate credit issuance, corporate bond issuance, was 466 billion for the quarter. Not exactly [tight] financial conditions. You look at corporate credit spreads and you see that this is an incredibly accommodating environment if you’re a corporate borrower.
Equities inflated 5.8 trillion in Q3. Another part of the Z.1 report. One year growth of $21 trillion, just over 21.1 trillion. And for comparison, the pre-2008 expansion, and this is again going back to a full year number, 4.38 trillion for the year.
So the scale is parabolic growth, 35% more than that in just a quarter, or nearly five times if you’re doing a year by year comparison, five times the increase in equity or stock market inflation.
Doug’s count on equities to GDP. He’s casting a wider net over more listed US companies, and he marks the equities to GDP at 312 versus the previous cycle peaks in the third quarter of ’07 at 187 and the first quarter of 2000 at 210. Again, I’m rushing through the numbers, but equity market cap to GDP, 312% at the end of the quarter, this most recent one. Previous cycle peak in ’07, 187%, or the year 2000 as we were in the tech blow-off, 210. So we’re roughly 50% higher than the highest number that we’ve ever seen. That says something.
Kevin: Well, and those high numbers that you’re talking about, both from ’07 and the year 2000, were right before a major crash. And so right now there seems to be loose conditions. It’s global, isn’t it?
David: It is. And because there’s such a free flow of capital, you have this sort of global scramble to get into the US speculative trade. We’re outperforming the emerging markets. We’re outperforming the developing world. Valuations in US equities are now twice what they are in the emerging markets. And the rest-of-world holdings of US financial assets surged close to $3 trillion in the quarter, 2.749 trillion. That’s a 20.5% annualized rate, 10.5 trillion over the past year. It’s on an accelerating pace. So we have record foreign investments in US dollar assets, which tally to 56.3 trillion.
Kevin: Okay, so there’s no lack of money coming in. Oftentimes I’ll hear about household net worth increasing, and I’ll think, “Well, why is that a dangerous thing? Well, what’s the matter with that?” But what you point out when we look at household net worth, if household net worth is extremely high, but GDP growth doesn’t match that, what you’re saying is there’s a certain amount of productivity that has to justify household net worth. Am I right on that?
David: Yeah. My nephew and his wife are in town, and we were up at the mountain this weekend skiing, and they’re new to the sport. So I was explaining body balance and positioning and how your shoulders and your knees and your toes need to be sort of in line. And if you’re leaning out too far, it creates some instability. And that’s exactly what we see, is just getting out too much over the end of the skis in the financial markets. And Doug’s the first to observe: no mystery right now why we have an economic boom.
Household net worth inflated by 4.76 trillion for the quarter, $17.25 trillion over a 12-month period. We’re at a new record in terms of household net worth, 168.8 trillion, a $4 trillion increase was what we saw back in 1999. That was the annual record, 4 trillion. Now we’ve got 4.7 in a quarter. I mean that’s just amazing.
Kevin: Again, that was a year before a collapse.
David: Yeah, the pre-global financial crisis, annual record, 6.87 trillion. Now one year growth of 17.27. It’s unreal.
So looking at those growth rates relative to GDP is helpful. In other words, how much asset inflation is there beyond what the economy is creating purely from speculative interest? So net worth relative to GDP ended September at 575%. Pre-pandemic the record was 535, pre-global financial crisis, 488%. And just before the tech wreck, 444%. So 575, never been seen. And I think it’s hardly sustainable.
Kevin: We’re kissing the tips of our skis is what you’re saying.
David: That’s right. Which could be fun, I suppose if you’re one of those high-flying ski jumpers, but we’re not. So just looking at equities alone, just looking at equities alone, US household equity exposure is currently 170% to GDP. And the previous cycle peaks, again, back to ’07, 105%, and there in 2000, 115%. So 170% today, 105 in 2007, 115 in the year 2000, Q1 2000, just before the market rolled over. So households have never had more assets positioned in stocks than right now.
Kevin: Last week you brought something up, and we were repeating what Morgan had shared, that if you had a room full of executives and you asked them if they were buying or selling their stocks, as a whole the executives were selling 90% or more to the 10% that they were buying—or the 5%. Or we talked about December, they were selling 99% of the time and buying 1% of the time. So between the Buffett ratio— If Buffett were in the same room, it’d be like, “Nah, I’m not buying right now. I’m selling,” The executives standing in the room, as a whole, it’s just overwhelming. Yet what you’re saying is households are holding more equities than anytime ever.
David: Yeah. So we have the what, and that’s these statistics that we’ve been talking about. This is what is happening. Who is doing it is equally important. And why becomes FOMO, the answer to why are they buying now? This is the fear of missing out. So who is doing it? This is where we come to insider selling being between 90 and 99% of all insider activity. We covered that last week, but just to let that sink in a bit.
For the insiders, the corporate executives who get to look at their own books and get to make decisions about their own balance sheets, of all the activity from insiders, 90 to 99% is liquidations. So that’s the who, because we know there is a lot of buying, but it’s the retail investor. Buffett’s cash position, the largest as a percentage of Berkshire assets in history. So can you appreciate the contrast? Yet with success and speculation comes an extrapolation for greater returns still. And of course there’s implicitly greater risk, but that’s largely ignored when euphoria reigns.
Kevin: So the households are owning more stocks than they ever have. But actually, from what I’ve been seeing, I read something that seven stocks make up 70% of all of the gains. And so it’s not really across the board, is it? It’s a very crowded trade.
David: That’s right. Last week might’ve been flashing a final signal prior to the Fed meeting this week. The S&P 500 advance/decline ratio has been negative every day in December. A streak like this, according to Morgan Lewis, has only occurred 11 times in the history of the index. This is a breadth issue. We’re back to a few concentrated bets, a few names that are lifting the indices in spite of broader-based underperformance. Think of it as a thinning out of the ranks. Now all you need is a little desertion, and the financial lines begin to break.
So while the S&P 500 index is moving higher, the percentage of stocks just—these are some of the technical indicators we look at—the percentage of stocks over their 50-day moving average has gone from 80% over the 50-day moving average to the mid-40s. So deterioration’s already occurred. It’s an unhealthy divergence to see the prices of stocks or the indices moving higher. It’s really the indices, not all of the stocks. Again, this is just supporting the weak breadth readings. Percentage trading over their 200-day moving average was 80% in October, and it’s quickly closing in on 60%.
If that wasn’t enough, Barron’s cover, the headline for the Barron’s cover this last week, just fabulous as a contrarian sentiment indicator. And frankly, if you read the Barron’s headlines, they’ve always been this way. The day they’re bullish on gold, you should sell a lot of it. The day they’re bearish on gold is the day that you should be buying it. The day they’re bearish on stocks, back up the truck.
Kevin: But they’re bullish, right?
David: The quote is this, “Stocks Could Gain Another 20% in 2025. Embrace the Bubble.”
Kevin: Embrace the bubble.
David: I kid you not.
Kevin: Is that really what it says, embrace the bubble?
David: I kid you not. Stocks could gain another 20% in 2025. Embrace the bubble.
Kevin: All right, well, I will say, though, you had a friend over at Barron’s. You interviewed him several times here on this program before he passed away. He was a contrarian voice for his own paper, wasn’t able? He wrote for Barron’s. Was it Alan Abelson?
David: Alan Abelson lived in Westchester. Great guy. And he was a mentor to so many of the writers that we still enjoy reading, including Jim Grant, who was a Barron’s columnist back in the day, and Richard Russell, who was also a Barron’s columnist back in the 1950s. So Abelson predated them writing even before that.
Kevin: I didn’t know Richard Russell wrote for Barron’s.
David: Oh yeah, that’s how he got his start.
Kevin: Really?
David: That’s how he got to start.
Kevin: I had no idea.
David: So David Rosenberg had this to say, “My big concern is that looking at how everybody is so concentrated in the same trade and everybody is all-in on their asset mix and portfolio managers have almost no cash to deal with redemptions, that when that day happens, where are the buyers going to be? Given the incredible concentration of money in the stock market, there’ll be a stampede, but there will be nobody on the other side of the trade.”
Well, I should just add to Rosie’s comment that Buffett may be on the sidelines. Buffett will spend his cash, but he tends to do that when there’s blood in the streets.
Kevin: Okay, but how much would the stock market need to fall before Buffett would be interested again?
David: Well, of course he could look at an individual deal and negotiations and the details of that deal may be more compelling. But if you’re just looking at the Buffett ratio as a trigger, as a buy signal, you’d need a 50% market crash. So we’re talking 22,000 on the Dow, 3,000 on the S&P. That’s sort of like Mudville being right ahead.
And again, just to contrast this, you go to the Reddit WallStreetBets. These are the guys that love the meme stocks. Their sentiment gauge last week took out the post-pandemic highs. This is when we were getting stimy checks and everybody was buying things on Robinhood. Today is the joy at its peak. We have peak prosperity with the belief that the next administration will deliver even more outrageous wealth. But the Z.1 numbers are telling you that like a ripe banana, you’ve already got spots showing, and then the best days are probably already behind you.
Kevin: Yeah, really Dave, since the election, I’ve been trying to put my finger on it. What is the motivation for trade right now? And there’s not really a fundamental motivation, but there is a hope, a hope trade where people are like, “Wow, Trump got in. I need to do something.” It’s hopeful, and hope will carry a market a lot further than you think.
David: Yeah. Well, “hope springs eternal” is a phrase that some people will recall. It comes from Alexander Pope back in 1733. I think the hope-springs-eternal catchphrase is probably better replaced by delusions of grandeur. I think that fits better today, consistent with last week’s reference to the investment classic, Extraordinary Popular Delusions and the Madness of Crowds. We have a financial market that today has surpassed the wildest moments of the Mississippi or South Sea bubble. Yet, yet the expectation, as in the final days of a speculative mania, is for growth towards infinity and beyond. So—
Kevin: Buzz Lightyear.
David: It’s always imagination which is the driving force of speculative excess. And it’s imagination, too, that’s the driving force in a market crash because it’s just an extrapolation of either trend without end. And we go back to the Barron’s quote, “Stocks could gain another 20% in 2025, embrace the bubble.”
Trends don’t need triggers. They just need exhaustion. So you run out of buyers and the market turns down. You run out of sellers, the lows are in, and we’re far closer to the former, right? 170% household equity ownership to GDP, never been higher. How many more buyers are out there?
Kevin: Well, if you keep giving them free money, though, Dave, I mean if interest rates keep going down, aren’t we manufacturing free money and just throwing it into the wind?
David: Well, absolutely. And the freer or the cheaper that money gets, the more confident people become. You see the margin debt numbers increasing again. There is still this bias to cut rates and feed this beast. The Fed may have sent a shot across the bow via their favorite man at the Wall Street Journal. This week Nick Timiraos laid out the case for a pause in rate cuts, and we saw his opinion in the Wall Street Journal echoed in Barron’s as well. But it’s important to note that his opinion pieces in the Wall Street Journal are often the foreshadowing—kind of the forward guidance through unofficial channels—of a shift in policy.
Kevin: How do you think the stock market would handle if he paused and didn’t lower rates?
David: I don’t think the equity markets are prepared for a pause in rate cuts at this point. Cheaper credit has been priced in, the disappointment and expectations could very well bring out your first round of sellers. Maybe their excuse is, “Well, we just want to bank the gains for 2024.”
But to Rosenberg’s earlier point, are there sufficient buyers on the other side? And also to his point, within mutual funds and ETFs, cash positions are low enough that redemption requests will force selling. And the question remains, who will be the eager buyer at these prices? It’s not Buffett, it’s not the corporate insider. And you’ve got the lumpeninvestoriat, if you will—your uninformed retail investor. They’re already all in. And that’s what those earlier numbers are telling you.
I mentioned margin debt. It tallies now to 815 billion. 935 billion was the peak of all peaks in the everything bubble back in October 2021. Household net worth at that time was 142 trillion. Now we’re at 168.
Kevin: Wow. And all I can think about, again, I’m going to just picture this, okay, you’ve got this room full of executives who say, “Look, I’ve been selling my stock.” Then you’ve got Buffett who says, “Look, I’ve been selling my stock.” Then you’ve got the actual index, the S&P 500 where declines have led the advances all month long in December. Isn’t that what you said?
David: That’s exactly right.
Kevin: So what you have is households holding the bag. When you talk about who will buy, they’re holding a very, very expensive bag of stocks right now.
David: Why will they buy? That’s the fear of missing out. It’s an emotional function that has people doing the opposite of the classic buy low, sell high. Not the way it happens in the real world.
Kevin: So the Dow, the Dow’s been going down. So the Nasdaq, that’s been putting in new highs.
David: Sure. Prior to today we were off 1300 points from the Dow’s peak in early December. The Nasdaq, the Nasdaq 100, those are the indices which are putting in new highs, Friday of last week. You do have select sectors that are outperforming, kind of in line with our earlier comments on breadth. But broadly speaking, it looks to me like the market doesn’t need much of an excuse to hit the exits.
So maybe Powell provides the motivation. Is it a pause this week and the forward guidance of a cut in February? We do have inflation which showed up in the most recent PPI. Core CPI readings suggest the battle’s not over. Same with the PCE, which the Fed likes to look at as well. Nothing crazy in terms of those inflation statistics, but when you couple that sticky inflation—particularly on the services side—with strong retail sales and other economic stats that support growth, cutting seems very out of place.
Kevin: Well, now let’s look at China because China, there was a lot of talk about Chinese stimulus just throwing a bunch of credit into the market. And where is it?
David: They released data in recent days, no positive movement for the past month. The last week’s stimulus promises we mentioned in the previous show, they didn’t give any details. They didn’t reveal the big guns. And so the announcement was pretty much a dud. They had a day of gains in the Chinese equity markets. All gains were reversed by the end of the week. And it raises a couple of questions for me because to me the big questions are, first of all, why did they not pre-announce their most recent round of military activity in the South China Sea? And it was, again, sort of balancing out just the economic and the financial market statistics. They got quiet all of a sudden, and they usually do announce their military activity. They didn’t do it this last week. So why are they not pre-announcing their military activity?
And the second is, why are they holding back from specific stimulus commitments when the economy and Chinese confidence, they need a boost. They desperately need to get specific. So those aspects are ominous to me, and suggestive that geopolitical events may be closer than anyone desires.
So keeping the details of fiscal commitments seems like it’s almost the ace up the sleeve, so that if they need to, they can respond to the Chinese public. I guess keeping those details out makes sense if you’re not sure how the Chinese public or the world responds to greater military muscularity.
Kevin: I remember 1989 before Saddam Hussein had Iraq invade Kuwait, there were four major buys of gold in the Middle East through Saudi Arabia. They were preparing for war, and you could actually see it in the gold market. So that was back in the day, Dave, when you could call and talk to somebody on the trading floor in New York and say, “What just happened? Who’s buying?” And four times, I remember Saudi Arabia was a big buyer of gold. Now the Chinese, they’ve restarted their big buys.
David: Yeah, they’re back in the market, for November 160,000 ounces. And that’s after six months of silence. Bloomberg reports, they had 18 months of consecutive stockpiling up until April, and then we get a little weakness in price. Maybe that brought them back in, there in the month of November. Of course, they don’t always report their purchases in real time, but their new official total is 72.96 million ounces.
Kevin: A guest that you’ve had several times on the Commentary, Ambrose Evans-Pritchard, wrote a piece talking just about how weak Russia really is and how close to collapse they are. That doesn’t always bode well. I mean, we’ve got Assad who’s left Syria, and you’ve got other elements coming into Syria right now. Russian weakness. Russia still has some weapons that we don’t want them to use.
David: Well, Reuters added to our commentary last week on Russian weakness being exposed by the fall of Assad in Syria. What they added was that Xi Jinping’s ambitions in the Middle East were also curtailed by the fall of the Syrian regime.
Kevin: So China, too.
David: Yeah. Just a year ago, Assad and his wife were treated to a six-day visit to China, and Xi at that time promised Assad assistance in, he says, opposing external interference. So really we get to the end of this two-week period, and it leaves both Russia and China with fewer options in the Middle East.
Kevin: So we know China’s been buying gold again, and they have been. I mean, the last decade has been dominated by Chinese buying. But let’s go ahead and talk about the gold market, Dave, and what the charts are telling us.
David: Well, over the past three months, we’ve basically said two things. One is that the chart’s exhausted, and it’d be normal for gold to correct. Does it correct off of 2800, 3000, 3200. Where the turn occurs is unknown until it’s occurred, and it did at 2,800. We do have these geopolitical issues in the backdrop, and so we have to be aware that the market can become very event-driven very quickly.
So geopolitics is something you cannot ignore in this environment. The chart certainly suggests, and if I were just looking at the chart, I’d say, sure, we’ve got more of a correction ahead. And I guess you could support that also by looking at the US dollar where you’ve had close to an 8% rally off of the lows, which were set back in late September. So we hit 100.15 and most recently 108 towards the tail end of November.
And so this almost 8% rally in the dollar is equated to about a 7.5, 8% decline in gold. The rally in the dollar could certainly continue. We’ve got tremendous weakness in emerging market currencies. We still have an unwind in the carry trade, which also exacerbates the weakness in those yen carry trade currencies, which gives a boost to the dollar as well. And so we could continue to see trading pressure in the gold market.
I think as long as the story about inflation is something that people are no longer concerned about, maybe investors begin to move on from their interest in gold. But looking at old, old charts, 110 years worth of inflation statistics, it’s very interesting to see that every period of inflation has had an initial wave followed by a significant decline in inflation, ultimately followed by a higher peak in inflation.
Kevin: Yeah. And I was looking at that chart and thinking, Dave, how do we communicate this to people who are just listening to a Commentary? And I thought about it. It’s a waltz pattern. It’s peak, trough, peak.
David: But higher, a higher one there.
Kevin: And a higher one. So you’ve got peak, trough, and then higher peak, bump, bump, bump, bump, bump, bump. And looking at that chart, we’ve hit one peak, we’ve now hit a trough, and the next bounce, we could actually have higher inflation than we did last year.
David: Yeah, taking out the 10% number is not unrealistic. And this is— Again, the pattern of inflation, you get some policy response, which certainly helps in the short run, but you look at the amount of liquidity, which we talked about earlier through the Z.1 report—through that lens—and there is a lot of liquidity. The lowering of rates by 75 basis points, all they’re doing is throwing fuel on the fire and almost guaranteeing that inflation comes roaring back.
But in this 110-year period, we’ve had three periods of intense inflation, north of 10%, in some instances reaching even above 20%. And the declines have been steep, very steep, following that first initial peak in inflation. But the secondary peaks have always been higher.
Kevin: It’s like a bouncing ball.
David: It’s always been higher.
So to me, it’s the conversation, the feel—the Fed is one. We’re at this moment where, again, credibility gets thrown out the window for the Fed. And I think that is the final stage of a bull market in metals where your central bank credibility is lost and investors go scrambling in an effort to survive a loss of purchasing power. And I think in this case, you’re also talking about ramifications that are well outside of any central bank’s control. And that is geopolitical issues.
And sure enough, you look at the peaks of inflation, and they did relate to war. So we’re talking about the mid to late teens. This is 1917, 1919. That timeframe is when we had inflation north of 20%. You go back to World War II, and same thing. We went well above 10%, came all the way back down to zero, only to surge back to 20 there in the late 1940s.
Then of course we had the 1970s and ’80s where we went to 14, 15%, declined back to 5, and then took out those highs, went all the way to 15%. So we’ve got an interesting pattern in terms of inflation. We’ve got an interesting setup in terms of the financial markets, and we have a very interesting setup in terms of geopolitics. So I don’t think this is a period of time where you would want to be lightening up on your metals position. In fact, I’d take the lead of the Chinese Central Bank here. If we get any weakness in price, I would be adding to positions.
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Kevin: You’ve been listening to the McAlvany weekly Commentary. And don’t forget, you’ve got one more day to send us questions for the question and answer program that’s coming up—or programs that are coming up—over the next couple of weeks. And 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.
