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- Bill King On Russia, Iran, China, & Bretton Woods III
- Should Trump Expect The Reagan Double Dip Recession?
- DOGE Attacks The Grift & Skim Government
“The gold is an okay inflation hedge. It’s an enormous political hedge, and that’s what’s going on. China, especially Europe. Europe is in deep, deep trouble. Now the good news is that Trump might force them to do the major restructuring that they need to do, just like some company that’s going down and all of a sudden, the vultures of private equity start taking positions and you start saying, ‘That’s it. We got a position there, and guess what? If you don’t cut all this stuff out, we’re just pulling your funding and then you’re going to go to zero.’ That’s what Trump’s giving to Europe, reform or guess what? You’re going to go to zero.” —Bill King
Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. David, I’m really looking forward to this interview. We talk to Bill King at least once a year, maybe twice a year. I was talking to a client just before we stepped into the studio. This guy is pretty sharp. He works at a lab that works on nuclear fusion. He listens to the Commentary every week, and I said, we’re going to go interview Bill King right now. And he goes, “Oh, I love Bill King.” He says, “Now, I do have to listen two or three times, but I love Bill King.”
David: A lot to unpack for sure, every time. The perspective that is sort of from macro to micro, taking the 30,000-foot view and then getting right into the trenches, daily market activity. No better guest, I don’t think, that we’ve had in the 18, 19 years we’ve been doing this.
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Bill King, always great to have you on the program. I feel like we’re in touch daily as we read the King Report without fail daily. In fact, my oldest son is a bit of a news junkie and he too has enjoyed the King Report as he’s gotten older, freshman in college now and probably better read than most his age, and I have you to thank for that.
So let’s start with some contextual issues, and then drive towards specific market and asset class considerations. Really big things changing, potentially the re-engineering of the global trade system on the table. Tariffs are part of that, maybe change tax policy internationally factoring in. Expand for us what it means to be at the intersection of significant trade policy shifts, political re-engineering here in the US, and a morphing of geopolitical commitments.
Bill: You know, these are changes that probably are more profound than even when Reagan came in, and probably more profound than the Republican Revolution in 1994 when they took the House for first time since with the ’50s. Since then, they’ve had the House more than the Democrats, when you go back all those years between the ’50s and whatever, thirty-some years, the Republicans seldom had the house.
So some very profound changes. And the big one, of course, is Trump is trying to dismantle the administrative state, the deep state. And this is something all the way back to Reagan people talked about, but it hasn’t happened because of entrenched interests in the United States Congress and in the executive branch and even the judiciary, and it’s happening so rapidly. And then of course, the same thing is you’re getting Europe. Europe had the changes with Soviet Union went down ’91. The wall went down, what, ’89 and then you saw that they brought in the euro, the EU, all this stuff is unwinding.
And then even China, China’s having all kinds of issues now. They have so much debt, they’re straining to get their economy going. There’s all kind of hints of political unrest and Xi’s trying to hold on. So we don’t quite know. I mean, the one thing the Fed is right, is they’re saying, “We had to wait because we don’t know how this is going to play out.” Well, they’re looking at the tariffs, but there’s things far bigger than tariffs going on. Trump’s talking about dismantling the IRS, reforming the Postal Service, maybe privatizing. I mean, these are huge, huge changes. Getting rid of the Department of Education, downsizing things, and these are stupendous changes. If you say, “Well, this is going to be good in the long run,” that’s true. But if you start dismantling hundreds of thousands of workers, you’re going to have a recession.
The question is, how severe does it get? And that’s what kind of, I think, the stock market the last two days is figuring out. I think we mentioned this a couple of weeks ago, that Trump and his team are making a bet that we’re going to reform and we’re going to cut this all loose. But on the other hand, we’re going to get private industry going. We’re going to cut taxes, we’re going to cut regulations, we’re going to put tariffs here to make people come back and manufacture. I think today Apple came out and said, instead of a plant they were going to build in Mexico, they’re now going to build in the US. We’re going to deport all these people out of here. Well, that’s going to have an effect on the labor supply. It’s more than that. It has effect on demand. All these illegals that come in here, are getting some kind of payments, otherwise they couldn’t exist.
If you saw Walmart, came out, had good, not good earnings, just slightly better than expected, but they’re saying, “We’re going to have a tough time.” So it got hammered yesterday. You’re seeing layoffs devolving as people are starting to understand that these illegals go back, millions of customers, and you’re cutting the welfare off to them, you’re cutting the benefits off to them. That’s going to be a hit on the economy.
Of course, the next thing is, where’s all this money’s gone to, where’s the grift? How’s it been recycled? Whose pockets it went into? So there’s a lot of things sitting out here that, in my view, everybody wanted to buy the stocks. Oh, Trump, we’re going to do all this. Kind of replaying what we did the first time, but this is far different. People forget, Reagan came in and we had that double dip recession in ’81, ’82 and then finally, you got it going again. We got it going.
So we don’t know. We don’t know how this is going to play off. And the problem you have are stocks are priced for perfection. They’re historically extreme evaluations, especially in the Mag 7 and the FAANGs, the tech. But as we’ve been saying here, if you look at the stock market, most of industry has been trading sideways since January, some have been trading sideways since December. And this week, they tried breaking off, they tried breaking them out. Expiration week, they tried this, they couldn’t get it going, and as you know by Wednesday, In the letter we said Tuesday and Wednesday are really important sessions for stocks. The stocks got hit in the morning, and then in the afternoon you could see the manipulation trying to get them going. They made minor new highs, but when you make minor new highs and you can’t generate a buying surge, that means you don’t have too many shorts and you don’t have any people that are sitting on the sidelines.
That means this is just traders trying to get something going, and that’s why we said Thursday and Friday are going to be important. And then we got whacked yesterday. You had a little rally in the afternoon, sizable rally. Today was the first time where they whacked them in the morning and then they whacked them again in the afternoon. So the last hour and a half or so was flat. It was Friday afternoon, was expiration, people taking profits, whatever, in here. So you were at an inflection point in the stock market and you had real ugly days here the last two days, so you got to be careful on that.
The other thing here is, the bonds are waking up a little bit, but the other thing tha— The people got excited about the bonds and they should. They’re talking about, “Well, we’re going to cut spending, we’re going to do this,” all this stuff with the DOGE people.
The problem is, the DOGE people are really digging into the discretionary spending, and the problem you have is the non-discretionary. And you saw that, I think it was Rand Paul tried to put into the budget resolution of a trillion and a half of cuts, and it didn’t pass.
I understand that you can reform the government, you can close down different departments and the waste, that we want to go from 2 trillion deficit down to one this year and eventually make it zero. You’re going to need a different Congress. There’s still too many old guard Republicans in there, and they’re not a big enough margin there. Maybe 2026, 2028.
So I think that’s one of the things with the bonds. I can understand, you start shaking the bonds, you start getting them to cover, and you also start shaking money out of Europe to come here. That’s one of the reasons you see the gold just pouring into the United States here.
They don’t like what’s going on in Europe. Part of it is the US is telling these people, “Yeah, we’re done. We’re done. The World War II order is over. For 80 years we protected you and you guys didn’t have to spend a lot on defense, and we got Air Force bases and military bases here, and then you put tariffs on our goods and we allowed you to do that so we could play global cop, but nope, no more.”
If you think about what Trump is doing, there’s a lot of policies that Pat Buchanan was espousing in the ’90s. He said, “We want a Republic and not an empire. We don’t want all these global wars, all these foreign entanglements,” on and on and on, and that’s kind of what you’re doing here. But again, these are profound changes that are going to have huge effects, and they’re going to be a factor when you start cutting defense spending and defense contracts, suppliers, the consultants.
That’s the other thing. There’s a huge consultant class that feeds at the federal trough, and you expect these guys are just going to get pushed out. This can be a multiplier effect in the economy here. So I think you’re looking for some tough sledding here economically. Walmart’s already— They warned us. You see what’s going on with them. Walmart benefited here from all this illegal immigration. People came here and they got checks, they got benefits to go spend, with the state and local government, whatever they got from the NGOs. That’s the other thing we’re seeing now what happened. Put money into this USAID. They gave it to the NGOs, they poured it into different groups, and they gave it to the people. That’s all getting cut off, so they’re heading back. So you’re going to take a big chunk of demand out of the economy here.
How much, we don’t know. How fast can you get the private sector built up? There’ll be a transition, just like you had the Reagan transition. There’s going to be a transition here when you’re switching gears, just like you’re retooling a factory. It just doesn’t boom right away.
So I think it’s the market picked up here. They had the euphoria after Trump got elected. Then it fell in December, mid-January, and then these guys got all excited again. They ran it up here, and now I think anybody paying attention, you’ve had really soft volume. It’s been traders. This last rally from mid-end January to now has been traders and the public, and it’s exhausted. They can’t break it out and can’t force institutions in. and you’re seeing more and more the big money is [unclear]. At best, we’re going to wait because this is going to be tricky, what’s coming out.
And you don’t know where it’s going to end. You don’t know how bad this is going to get, and what else is going to happen here. And I’m not even talking about the legal things that are going to probably come down the line here. It can act to suppress demand. You’re seeing it in the consumer surveys. The Democrats are just despondent. They think inflation is going to go up, and if you start compounding these things, again, something we haven’t seen. You go back to the Reagan thing, but this is more severe. This is, what Trump and these guys are doing, and Trump said he was going to do this. First time, he didn’t do it. In fact, he brought in people from [unclear]. He brought in the establishment. He brought in Democrats that hated him. He brought in RINOs that hated him, and they stifled him and they did their own thing.
This time, he’s brought in true believers. He’s got a lot of billionaires in here that believe the United States is on the path to ruin, economically but also militarily and with foreign policy. And that’s why you see this, and you see the appointments he’s making. The personnel is policy. Last time he didn’t. He just did, mostly swamp people and he brought in people he should never have brought in on people’s recommendation.
This time, it appears that he spent a good deal of the last four years planning what he was going to do, and now he’s got people to execute the plan. That’s why it’s going this fast. He can’t do this by himself, but the people he’s bringing in here, it’s going to be interesting. And it’s going to be interesting the effect on states and municipalities because they’re going to have an effect on this stuff. The federal money’s getting cut off.
A lot of these big blue cities were bailed out, especially with the bills we’re paying for illegal immigrants, with the COVID. Biden cut them huge checks. Hundreds of billions of dollars going into these cities allowed them to cover up their deficits where now they got problems again. It’s not there. Trump’s not going to do it. He’s not going to cut them the check. In fact, he’s telling them, “You don’t follow my policies whether it’s immigration or transgender in women’s sports, I’m cutting your funding off.” So that’s going to be tricky. It’s going to be very, very interesting and nobody should be getting over their skis right here.
David: So the economy is distinct from the financial markets. What’s the short-term versus long-term implication of Trump’s goals, and how would you expect the economy versus the financial markets to respond on those time frames, short versus long-term?
Bill: Well, there’s been such a upward bias built into the stocks over the last couple decades. They’re going to get it last. You’re going to see it more in the currency markets, and the commodity markets will be getting it first, then the bond market. I think it’s very tricky for the bonds. You can see what they’re doing. I mean, you’ve had the worst, what, two and a half, three years in the bond market’s history for the drawdowns. People don’t realize that. You’re due for some kind of rally. You’re due for a 14/15-month rally in here, and I think you’re seeing it move up. And I think you get a lot of people are trying to cover their shorts and just kind of even up because you don’t know how severe these cuts go and whatever. Now the other problem you get is if you can only get your cuts in discretionary spending and you can’t get into the real meat of the budget, typically in recession your budget deficit goes up 50 to a 100%.
So he might cut 500 billion here and you’re down to 1.5, but that might go to 2.5 trillion, and then the bonds are not going to be happy. So he’s got people in here, Bessent, he’s got Lutnick, guys that understand the markets, understand what’s going on. The first sign that they got Trump’s ear is when he came out two weeks ago and said, “I don’t care about cutting rates. I’m more worried about the ten-year bond.”
And that was one of the things, the Fed started cutting rates and bond yields went up because they were wrong. They shouldn’t have been cutting. If the Fed cuts rates and bond yields fall, that means they’re doing a good thing for the market. When they cut short rates and the long end goes up, they made a mistake. And they didn’t want to address it, but then all of a sudden, they did the jumbo cut ahead of the election, which was political no matter what they said. They did another 25 and now it’s stopped.
Now you got all the doves. They have been clamoring for rate cuts, Goolsbee, Daly, and Bostic, they don’t want to wait. Well, funny what a change in administration does to the doves on the Fed. Now they should, but they should have been thinking that way three and four months before the election when we’re cutting rates that, gee, what happens if Trump wins? Isn’t there going to be uncertainty? Well, let’s cut rates. It makes no sense. It makes no sense what they did. Now they’re stuck.
I think that Trump has decided to keep Powell around because if this thing goes the wrong way, he’s going to lay it on the Fed because they’re stuck. And he’s going to say, “You cut rates when you shouldn’t have. You should have been holding the course. You were late raising rates to stop inflation.” And now, according to the Wall Street Journal and some other people put out, the reason they let the inflation go is because they wanted to get minority unemployment down and employment up, so they let inflation run hot.
They weren’t concerned with the inflation number in the aggregate. They wanted to see the minority unemployment down, and so they let the inflation run hot. Now, if the Wall Street Journal knows it and they published it, Trump and his insiders know that, and the Fed knows that it’s out there now. And we know that the Fed got very liberal. You could see it in the appointments they made during Biden’s administration, and that’s why they were doing this. They got into the climate. Where’s that in there? And the Fed’s excuse was, “Oh, well it could affect the economy.” Well, you know what affects economy more than climate, idiots? Crime. So why don’t you go into the big blue cities and show us how you’re going to stop crime, so to get the economy going and get more benefits for the minorities.
So it’s totally political. And as you know, they bowed out two, three weeks ago. They stopped all their climate initiatives in there. So he’s got the Fed over the barrel. People want them to be audited. They’re under fire. They’ve been wrong. And now you’ve got a guy in the White House and his staff that know. Bessent knows, Lutnick knows—he was the CEO of Cantor Fitz, where they have a huge presence in the debt markets. So people don’t know Cantor Fitz shows a third market equity firm for decades. In fact, my wife worked there briefly several decades ago, but they had a big presence in fixed income. And of course, they lost a lot of people in the World Trade Center on 9/11, but he’s got people who understand how the market’s working and what’s going on, understand what the Fed tries to do, and understands how the Fed leaks out and who’s really controlling the Fed. So it’s going to be interesting. Very, very interesting. I mean, they’re really trying to take the country back from the deep state, and that’s going to be tricky.
David: It’ll be tricky, looking at comments from Lutnick and Bessent and Miran. A weak dollar policy seems to be something that’s complementary to what they want to accomplish. What does that imply for equities, bonds, commodities, generally?
Bill: Well, they’re not saying weak dollar and if you put on tariffs in that and you want to change your trade picture and you want to cut the deficit, that’s a strong dollar. Because the argument’s always been, “Oh, it’s the trade deficit makes your dollar weak.” You go, “No, it’s your budget deficit that makes your dollar weak.” Well, if you got them both, you’re going to have a weak dollar. So you say there’s one cut off the other and how does that play out? I can’t remember the guy’s name, [unclear], he was always saying— he made the bet that you can’t prove that you can run a trade deficit without running a budget deficit type of thing. But we don’t know. We don’t know how much you’re going to cut, what’s it going to be, and how much would the tariffs work? The problem, people say tariffs are inflationary. US has minimal tariffs compared to the rest of the world.
When you take a chart and you see what the tariffs are, you say, “Well, how come there isn’t inflation in China and India?” They have enormous tariffs, and Trump and his people were right. We’ve been sitting there and taking this for decades so people could pour their goods into the United States and they won’t take ours. We’ll give you military bases and whatever here, and then you’ll protect us. Well, that deal’s off. You protect yourself and you’re not going to flood the goods in here. And now you’ve spent two or three decades importing radical people from around the world, and your countries are falling apart. You don’t believe in free speech, free— I mean, you just you go through the whole list, and that’s what’s going on in Europe. That’s why the gold’s pouring out of there. If you were somebody sitting there in Europe and you’ve got tons of gold, and you’re sitting there in Switzerland or Luxembourg and you see what’s going on in Germany, France, and England? Holy smokes, you’re sending your gold, your holdings to New York.
It’s just been incredible. It’s been pouring on. Of course, you’re creating shortages there, physical gold in Europe. Now, we don’t know for sure what the Chinese are doing. They have been big buyers for a while. It seems to me that the way they can control the gold there, there’s a lot going on in Hong Kong, Singapore, whatever, but I think that’s one of the reasons the bitcoin went bad. I mean, throughout what?, the 2010s, even into the COVID, you get 90% of the activity and bitcoin was coming out of Asia. It wasn’t until recently the US retail got in, but that’s how the Asians, especially Chinese, were moving their money to keep it out of government control was getting into bitcoin. I mean, that’s what kept it afloat for all those decades. The illicit money and the money trying to get out of China. I mean, it’s a big, big picture game.
And again, this thing is not just Reagan, this actually is the post-World War II world. That’s what’s coming apart here. And the alliances, the view of the United States is going to be in the world, and I think what Trump is doing, and people recognized this decades ago, but they didn’t know how to approach it. People understand that the strategic threat going forward is China. It’s not Russia, it’s China. Russia does not provoke us economically, third world country with nuclear weapons. And then the other, you could talk about Iran, but now Israel’s just absolutely destroyed their proxies. And I think eventually, Trump’s going to let them do what they want to do or need to do, and then you don’t have that radical Islamic threat there. And then Europe’s going to have to address that because their countries are going down the tube, where all the terrorists and things going on in their countries.
But if you look here at the other one is circled is Mexico. The two countries that are impacting the United States on a daily basis the most. It’s Mexican border and China. The fentanyl’s coming in, you got the illegal immigrants coming in that are blowing up our debt, plus the Chinese goods and services are blowing up our trade deficit, and that’s where I think he’s doing, he’s like, “You know what? The heck with that. We’re bringing the forces back here.” And you see it. We’ll take Canada. If you went for regime change in Mexico and blew up the cartels, it would be unbelievable what would happen here. The flow back of the immigrants here back into Mexico. [unclear] sent those people trying to flee that. I remember, I think it was in the ’90s, Vicente Fox was, I think it might have been Coca-Cola [unclear] the whole thing, he became president and he was a globalist, the whole routine.
And he came to Chicago because Chicago had enormous Mexican population for years, but they were flowing in and he made a speech that was absolutely maddening and infuriating because it was true, and I don’t think he realized the implication. Chicago then was giving benefits like crazy to Mexican immigrants coming in, illegal and not illegal, and people were getting upset. And this was under Daley in the ’90s. And Vicente Fox when he came here said, “You have to allow immigrants to freely flee Mexico, come to the United States, because if you don’t, there’ll be a revolution in Mexico.” So what you’re saying is, these people are so horrible, the Mexican citizens are fleeing and it’s a narco state. So what are you going to do? Empty out the whole country and just have the narco guys running the country and a handful of people?
So that’s what’s interesting. Again, you did that here in Mexico, it’d be really interesting to see what would happen in the country here, change the border, change the flow of the immigrant, the whole routine here. He said that. He’s telling you what he wants to do and he’s doing it, and I think it’s the other side with China. And the whole thing with cozying up to Russia is to pry them away from China. Now, China and Russia made this pact and whatever, and China and Russia have been natural enemies for a long time. China needs the resources. Russia’s a dying country, dying population, that’s all they have is resources, and they’re right next to each other. That whole routine there, that corner of the world. That’s when Nixon and Kissinger and these guys came up with back in the ’70s that these guys are really antagonistic here. We should be putting a wedge between them.
So I think strategically, what he’s looking at, he wants to take the narco state out of Mexico, get better political situation and better economy in Mexico, and that’ll stop a lot of the immigration problems here and the budget problems here. I think the other thing he’s doing is that he’s writing off Europe because of what’s going on, that the countries have had it. Most of the countries didn’t have a will to fight after World War I. We came in World War II, the whole routine, the Cold War. Then you had the Middle East war with all this stuff going on, and then their populations were dying, so they welcomed, they bought this BS that, well, yeah, we need workers. Let’s bring in all these immigrants for cheap labor. Instead they’re destroying the culture, destroying everything else, and now they got a real problem—debt through the roof, and Trump’s going, now you’re going to pay your own defense.
Now, how reliable are those countries going to be for those Air Force bases? Ramstein, Germany, you got the big one. Britain’s got the two. I can’t think offhand. That’s why he’s pushing for Greenland. He wants Greenland because it’s actually a little better for missiles or whatever to shoot over the top of the Arctic circle than otherwise. But you could see where he’s going, “I want Canada, I want Greenland. You guys go ahead. I don’t need the other bases now because it’s a shorter route.” China and Russia have both been trying to militarize the Arctic circle and that.
So you could kind of see where he’s going strategically. We’ll see how that works out, but that to me is pretty clear. He’s not being anything covertly here, and that’s why he wants Greenland. He wants Canada. He wants regime change in Mexico. He wants to drive a wedge between Russia and China, and kind of abandon Europe until they straighten themselves out. That’s kind of the big picture. And then here in the US, he just wants to downsize the government, get out of foreign entanglements.
David: Thinking about the politics of that, if we want to get a little fiscal, how much waste do you think he can cut from the DOGE and Trump efforts?
Bill: It’s enormous. It’s absolutely enormous.
David: As you mentioned earlier, the discretionary is, he’s got some flexibility there, but it’s not the bigger piece. The bigger piece is the non-discretionary. Can he cut 500 billion, more, less?
Bill: Well, see the good news, if you listen to Musk, is he thinks he can cut a trillion out of the Medicare, Medicaid fraud and the Social Security. I mean, when you think about this, and this has been going on for decades and you understand why Washington is so corrupt, both parties, and why they keep voting to give money to Ukraine and all this, when it really doesn’t benefit us. It’s because the grift and the skim. This money’s being laundered. They give money to Ukraine. What does Ukraine do? They buy stuff. Who do they buy it from? They don’t have the industry. They buy it from whatever companies they’re being told to. Now what are those companies relationship with our elected officials? They’re friends, they’re contributors, they’re family members. We know that with Mitchell McConnell, we know this with Kerry’s kids, we know it with Biden’s. I mean, you go through, Pelosi’s, they’re all involved over there with these countries.
That’s why Hillary went for Secretary of State with Obama because she controlled the funding. But that’s where you could see where was the skim and the grift, where did it all go? It’s enormous. Now the problem is, if indeed Musk is right and he said, “Well, there’s 394 people receiving Social Security benefits and 21 million are over 100 years of age.” It’s total fraud and these guys have ignored it. I think 157 million people are working here. Now some are taking Social Security and that, too, but if our population is 334 million or whatever, and not everybody’s qualified for Social Security is drawing Social Security, so we’re looking at probably at least a hundred million claims that are false.
And then you can do the same thing in the Medicare and Medicaid, because that was one thing. The United Healthcare, they’re going after them [unclear] for the fraud and Medicare, I think they said. Medicaid, whatever one, I can’t remember. But those are big entitlement amounts: Social Security, Medicare, Medicaid, and then the military budget’s around 800 to 850.
They already said, “We’re going to cut that 8%.” And again, what’s the fraud? What’s the skim in that? We’ve saw stories of the forty-thousand dollars toilet seats, the two-thousand dollars screwdrivers, but the big thing is the consulting contracts in that. [unclear] Stacey Abrams. Biden throws her 2 billion dollars. In two months, she had just started this PAC with a hundred bucks. They’re not doing anything. Here’s 2 billion. Now someone else got 5 billion. I mean, it’s over the top.
So you’re right, this stuff adds up, but when you’re 36 trillion in debt, that’s a lot of five and 10 billion dollars to cobble together, and so that’s who you don’t know. Trump and his people were also talking about using assets here in the US, forest land, timberland drilling, all different lands that the United States owns and how to leverage that. He’s trying to look at this from a business standpoint and how to fix the balance sheet.
Again, if it works, it’s going to be fantastic, but it’s going to take time. It’s just like turning your company around. You come in, you fire people, you cut stuff down, and you want to build back up. There’s a transition and we don’t know how long, we don’t know how severe it’s going to be, but it’s pretty clear what’s out there. I don’t think there’s anything secret what they’re trying to do here. I think it’s pretty much on the table.
David: So even a marginal if not a dramatic reduction in government spending—makes sense—triggers a recession. Doesn’t make sense that the equity markets can hold up in the face of that.
Bill: That’s correct.
David: What’s your 30,000-foot view on the equity cycle?
Bill: We know it’s historically overvalued, no matter how you want to slice and dice it. We also know it’s been the handful of stocks, Mag 7 [unclear] keeping this thing buoyant, and they’re ridiculously overvalued. We also know that they’re overplaying AI right now. And that’s one of the things I think you can look and see where he stocks them in the video, whatever. The air’s been coming out of that a bit. Now instead they ran to Facebook. That was up, what, 20, 21 straight sessions or something ridiculous. That’s not natural. They’re not breaking through anything new there. I mean, they’re trying, but you get too much money floating around. You can look at the Fed reserves, the Fed’s trying to keep this thing going. The problem now is even though the economy’s rolling over, you’ve got CRB index breaking out to the upside because the food, I mean go look at the grains, they’re all going berserk. Eggs went to a new high. I think the national average is 8.03 now a dozen, I think I saw a print today.
Now the oil had a big run at the end of December, early January on the cold, and now it’s just been trading sideways. Gasoline’s been moving up. It looks like to me the seasonal rally, which tends to begin at the end of February, began a couple weeks early here. But you see the different commodities, the food commodities are going up. They’re breaking out here. I mean, they’re at the highest level since what, April of 2023. There’s a nice big chart. You see a nice big saucer bottom, two years trading in the bottom, nice big saucer, and now they’re moving up in here.
So that’s going to be tricky in here. He wants to drill more oil, get the oil down. I think the oil’s starting to show that. We’ll see what happens with the gasoline. Just kind of demand it should be coming out of here. It should be economic headwinds here. And Walmart told you that. Walmart told you that yesterday, and who would know better than Walmart when they’re looking out ahead, what’s going on. The other one you keep an eye on too is Amazon. Yeah, everybody had euphoria. Trump’s in. He’s got a great plan for the future here, but what happens over the next two years? Don’t know. How good can this get? Don’t know.
David: Food commodities are breaking out. We had the UMich jump into 4.3, and the concerns of inflation are there. What about bonds? There are a lot of factors in the rates market. What factors do you see as the most important over the next 12 to 36 months?
Bill: The bonds is still going to be your budget deficit, but the other problem is your structural inflation. People that, they’re concerned if you get rid of all these illegal immigrants out of here, we’re going to have a shortage. Well, really? But what if you just laid off 300,000 federal workers with jobs? Well, they’re not going to pick tomatoes or avocados or whatever. They’re going to go on welfare, eight months or whatever. So that’s the thing we don’t know, and that’s why I said, well, you can see your budget deficit go up. We’re cutting spending, we’re letting you guys go, but we’re giving you eight months severance and these other guys, you’re losing your jobs from government and then you can turn and get to welfare. So if you’re making, for a number, $120,000 and then you apply for welfare, I don’t know what it’s going to be. Is it 3,000 a month or I don’t even know.
So you are saving money. You see what I’m saying here is you’re still putting them on the welfare, and then your state, local, whatever, however that impacts what their benefits and what they’re drawing down in here too, and today you lose your private insurance and go on Medicaid and Obamacare. Don’t know. Probably how it will go, but again, we have to watch and see how this plays out and how all these transitions [unclear].
So it’s a time to be very careful. I mean the Feds tell you. They said, “We can’t do anything until we see what happens with inflation and when we see what happens with Trump.” That’s pretty much why the market’s been trading so. The Fed recognized it. The market recognizes it. If you don’t have the Fed pumping money, the equities have got a problem. The bonds I think are going up just because it’s a contra move with the Feds not pumping. We can be relieved a little bit here. Trump’s saying the right things here, but now we’ve got to see how it plays out.
The other thing is Japan. Japan’s got issues going there and their 12 years of easy money. Their rates are going up, and people don’t understand how important Japan was funding the world, especially the big hedge funds and the big trading companies. You’re borrowing money in Japan. The yen was 80 and it went to one, whatever. You made a fortune because when you go to Japan and borrow money, you’re short the yen. So if it goes from 80 to a dollar to 150 and you’re doing this on 10 or 20 to one leverage, you made a fortune, and then you just keep borrowing. But that game’s ending. You see what’s going on with their two-year notes and the yen strengthening in here.
So that’s another thing that is unwinding here is the yen carry trade. That’s where everybody financed themselves, private, everybody. You saw that disruption in the summer when the yen got whacked down to what? 146, 145. Oh, my gosh. People were in panic because when you borrow, they were giving you the cheapest borrowing in the world. If you borrow there at zero or whatever it was, you’re short yen. Whatever currency you’re short. So when that started strengthening, it cost you a lot more than the one or two hundred basis points, especially on the leverage around when the yen started moving 3, 4, 5%. They were killing people. So that’s the other one to keep an eye on is Japan with the carry trade because they’ve been financing the world, the asset bubbles around for 10, 12 years.
David: From a cycle’s perspective, how do you view the credit cycle, the equity cycle?
Bill: Well, it’s more than a cycle. That’s the financing.
David: Yeah, yeah.
Bill: This is a cycle. Well, this is more secular. They made the determination 12 years ago. Now they’re saying we’re stopping this. If they turn it into a cycle, they’ll get killed. You can’t play this a couple months of a cycle, even a year and a half. You can go look at the chart. This went on for a long period of time. That’s why people play the currencies with the big leverage and made the big money because they walk for a long time. Stocks jump around and go over and you get news comes out, but by and large when the currencies move it’s because of the policies, and they can’t be reversed that easily. And if they do, then you get these crazy, you’re talking third world kind of people. And people don’t want to hold the currencies. You go back and they talk all these legendary traders in here. They try to talk to Bruce Kovner and some of these guys.
If you want to talk to Soros, Soros got his [unclear] in the stock market. He became a joke. He made his money in the currencies starting in the ’80s and whatever. I remember when I was in New York, brokerage firm in the ’80s, the junior traders were covering him. I remember the one guy, I was in the black desk, come [unclear], go and talk to his traders. He wasn’t a factor. He made his money in the currencies, he caught the Plaza Accord there in ’85, he caught the Bank of England, but that’s what they all caught in the ’90s. First the carry trade here with Greenspan in early ’90s, but then after ’95 when Japan decided they were done breaking their bubble, they went to the zero interest rate. They all piled in.
That’s when these guys had 4 billion and the yen again, it was, whatever it was, 70 or 80, and they just poured in borrowing the yen because it went to zero, and then it just went berserk. And on the leverage, again, you had 10, 20 to one leverage. Hedge funds had 4 billion, all of a sudden were 16 billion. And then the money just kept pouring into them like, “Oh, you guys are geniuses.” So that’s why you had the stock market bubble there in ’98 and ’99 because these hedge funds, they just got so gigantic from the currency trade that they, well, what are we going to do? Well, let’s buy this other crap. But that’s where the big money comes in the current season, the big guys play because those good things typically go for a while.
David: What does it look like to unwind all that leverage?
Bill: That’s tough. That, you don’t know. We had the first glimpse there over the summer. I mean, you think here, when you talk about how we had a financial crisis in ’08, the housing market topped in ’06. I know plenty of people on Wall Street in the fourth quarter of ’06 were warning, “That’s it. Look out.” The houses are coming down, Bernanke, the supposed genius. “Oh no, no. Prices only went down the Depression. Ain’t going to happen.” Oh, yeah right. Plenty of people saw it. The Bear Stearns hedge funds blew up in July of ’07. Bear Stearns blew up March of ’08, and you just go— Lehman in September, and finally in October, that’s when AIG went down. That’s when it scared them because AIG was so big and so vast and they were going down because they were on the wrong side of the credit default swaps, which is basically insurance against default. Fancy word for insuring your bonds against default.
AIG said, “Oh, look at all this money. Look at these premiums. This is easy money.” They didn’t understand how bad these products were and what was inside of them and how Wall Street and the banks had done, but it takes a while. Look how long that took. As they say, how do you go bankrupt? Two ways, slowly and then quickly. And that same thing with the markets. Stock, same way. They’re building a top, building a top, building a top, building a top, and you had a break here the last couple days, but unfortunately, that’s just how this stuff works. You got to watch it and everybody’s on edge because this is something really profound that is going on here. Nobody has a good grip on, not only where it’s going to go, but is it going to last. It’s like you plan all you want for war, but then once the battle starts, then it becomes logistic and tactics and whatever. And that’s where we have to see what’s going to happen here and now.
But I think you’re right. I think the stock market, I would not be involved now. They’re betting, they’re looking at, “Oh yeah, Trump’s going to do all this and it’s going to be great in the next 10 years.” I don’t see it in any other markets saying that. The other markets are saying, “Well, we can look past this valley. We don’t know how deep it is or know how wide it is, but we’re just going to bet that, yeah, we’ll get through it.” And I think you’re starting to see the cracks in it, that it’s not going to happen.
Same thing happened when Reagan came in. People forget that you had the big rally when he got elected and then it got hit in January and then it rallied up, and then I think it was March, April, it made a top in ’81 and then it turned down when the economy turned, and then it got crushed until July of ’82, I think it bottomed. Then you started the run, which some people think is still going on today.
David: How do you explain the tightness in credit spreads and almost the non-existent costs to credit default swaps today?
Bill: There’s money sloshing around in the system.
David: Yep.
Bill: There’s so much money now that has been created over the last couple of decades, and it’s out of the bank hands. Yeah, yeah, you could say JP Morgan, these guys, fine, but the private equity, the hedge funds, these guys are all in credit. They won years ago. They’re like, “Man, we’re going to go on credit. We’re going to issue credit. We’re going to be involved in credit.” It’s just like mortgage bonds, just like the movie The Big Short said. It used to be your guys, your S&L would write the mortgage and they’d have it, but it didn’t.
What happened is we write them and we securitize them and sell them to investors, and that’s what’s happening with credit now. So the credit is different. It’s not just you’re getting a loan from JP Morgan at prime or prime plus two or whatever you qualify or your subprime bond. This stuff is being securitized and spread all over the street. And you hear a few people say, “Hey, the same stuff that happened with the subprime loans, mortgages back in 2005, 6, 7 starting to happen with the credit market too, and that’s why there’s just too much money. What are you going to do? Will you keep buying? Things are overpriced. So that’s an issue here and it’s decentralized.
David: What signals do you think are coming from the gold market?
Bill: It’s just the uncertainty, and political uncertainty, especially in Europe. Gold is an okay inflation hedge. It’s an enormous political hedge, and that’s what’s going on. China, especially Europe. Europe is in deep, deep trouble. Now the good news is that Trump might force them to do the major restructuring that they need to do, just like some company that’s going down and all of a sudden, the vultures of private equity start taking positions on you, start saying, “That’s it. We got a position there. And guess what? If you don’t cut all this stuff out, we’re just pulling your funding and then you’re going to go to zero.” That’s what Trump’s given to Europe, reform or guess what? You’re going to go to zero. So that’s going to be interesting. Some people are already doing that one. Oh, hey, this is good. The European stocks are going up here.
Well, this is good because Trump’s going to force these guys to clean their house and do everything. Oh, that’s a hell of a bet to make. Especially when you have that ingrained socialism there for a lot longer than US. Their socialism started in the 19th century. Ours didn’t start till Roosevelt, really more after World War II. Roosevelt started programs, but it’s really after World War II and everything started going. So they had almost a hundred-year head start on the socialism. It’s been to Europe, but it’s really baked in there more. And that’s what you’re trying to— Good luck. Good luck there. You’re going to increase your defense spending and you’re going to stop your immigration and reform your economies and you’re going to take your tariffs off and you’re going to have to be competitive now with the United States. You’re not going to dump all your stuff in here. So it’s interesting. I mean, I don’t know.
David: Gold is an uncertainty hedge. It’s a political hedge. Central banks have left their mark in the pricing over the last little while. We’re seeing some institutions and family offices taking more of a strategic look at the asset, and we really haven’t seen that to a great degree. Retail demand has collapsed since November. It’s kind of an interesting thing. It’s kind of like the masters and PhDs and the masters of the universe, they’re saying, “Maybe we should own some gold.” Main street’s saying, “I think it’s time to sell at 3,000.” How do you read that?
Bill: Because it’s expensive. [Unclear] came out and say, “We’re going to split gold 20 for one.” Retail will pour in. Retail doesn’t want to play big tech. That was always the issue, why do you split your stock? That’s why Buffett never split. “I don’t want the retail in here. I want serious people in here.” That’s the problem. How many [unclear] ago did they start going to the fractional gold coins? They’ll go silver. I mean, that’s why people make a bet with silver, that they’ll find silver because it’s cheaper. And that’s why some of them went to the cryptocurrencies, and the problem is the gold. It’s a big number. So they think it’s expensive—relative to what? I mean, again, literally if you split gold, you see the retail will be in there like crazy. How many times you see that? We’re going to split the stock.
You go through and anybody goes to business schools. Stock split does nothing for your company. It does nothing. But invariably, the stock rally is very strong on the stock split. Why? Because retail say, “Oh, it’s cheaper. I’ll buy it.” It’s so psychological. It’s kind of like diamonds. For decades, the wealthiest people bought diamonds, and part of that was the people that fled World War II. Even gold was only $22 or 32, whatever there. You could put an enormous amount of wealth in a toothpaste tube full of diamonds as opposed to four or five gold coins. So that was the choice for a long time there to have diamonds. And of course, it was also the reason people in Europe, you always wanted to have Rolex watches, in case you wanted to flee and you want to bribe the border guard. “Here’s a Rolex worth several thousand dollars. Let me through.” And carry it around with you, in case you had to leave fast.
But yeah, the gold, and it’s been historically, well, actually, say, after the first run-up in the ’70s when they finally let go, cut loose from 32, started moving up, the retail got in there, in the stocks, whatever. But the gold, since the ’80s, it’s really been the big private money, serious money. And the people that want to buy gold, you’ll see gold pop up in that. But it’s not like when you see what they do, the games they play in stocks, especially the high beta stocks, the Mag 7 stocks, well guys are manipulating them. They’re pushing them up.
The serious people, the big private wealth aren’t there to manipulate gold higher. They want to buy it and accumulate it as cheaply as possible. Now you get JP Morgan and some of these other people that trade gold. Are they going to play games with it? Yeah, we know that. We see the records, we see the criminal charges against them for the spoofing and manipulation of some of this other stuff. Yeah, the traders and these guys will do it, but the gold, the big private, serious money, the generational money, they’re careful buyers.
David: Yeah, it’s an interesting setup. Silver may play catch-up, the industrial demand side, depending on how severe recession is. There could be some headwinds on the usage there. It’ll be interesting to see how it plays out. Some discussion recently, going back to the balance sheet, US balance sheet, and trying to figure out how to make our assets look better. Does revaluation of the US government’s gold position, does that help? Does that imply an increase in the money supply? What do you see as a move from 42 to mark-to-market?
Bill: Well, if the gold— if the inventory is as big as it’s supposed to be at Fort Knox, I think it has a minor effect on the currency because the currency, it doesn’t make sense. I mean, there’s so much dollars floating around the world. It’s not that big of a difference. The dollar policy is a reflection of stock of your government, and that includes your budget deficit, your military, your industrial base, and your budget. That’s what your currency represents. It’s really the stock in your country, and gold’s just a part of it. Now, with that being said, if there’s a problem where they’ve been lying about how much gold is in Fort Knox, God knows where the gold market’s going to go. The effect will be on gold and silver, gold, silver, and platinum with it. But that’s going to be the interesting thing. And more so than that, what it’s going to do to the gold market.
It’s going to, well, where did it go? Where did it move to? Who was doing this stuff? Well, anybody that knows anything about the gold market understands that probably started in the ’80s, but especially in the ’90s, that these guys were putting a lid on gold. The commercial people who said, you have people coming in and they buy gold, even wealthy individuals and whatever. And when all the banks and these guys and the trading big metal companies got in their trading the gold, well, you have a demand for gold. What you have to do is you supply the gold and most of these guys run hedged inventory. So you’re long gold, you’re short futures, so you don’t get whacked against it. So somebody comes in and they buy your gold inventory, then you got to turn around. You got to buy futures. So that’s your hedge, how it works. So what happens is, you start getting where people are buying gold and you have to sell people gold and you don’t have an inventory, right?
Where do you get the gold? Just like your stock. Somebody wants to buy stock and you’re shorting it to them. So if I start shorting you gold, as a dealer, I have to buy futures against it, right? Because I’m now, I’m going the other way. You want gold? Here’s gold. If I don’t have it, I have to deliver you gold and I’ll go buy a futures contract. Well, to deliver the gold, I’m borrowing it, just like you would borrow IBM stock to deliver if you didn’t have it. You were shorting IBM. So if you don’t have gold, these guys can short it. What they do is they lease it from the Fed. And you could go and you could google that Fed leasing gold, central bank’s leasing gold. And there was a lot of the gold bugs were screaming that this was beyond natural demand for gold, that these guys were giving these guys cheap gold to sell. At least give it to them. See if I can go borrow gold from you, say I want to borrow it, you’re going to charge me for it.
David: Yep.
Bill: But if the Fed wants gold down and go, “Here, here’s the gold, have it for free.” Well, from my standpoint, the futures are set up for premium for interest. So if you’re going to give me gold at zero or below interest, I go in and I sell it and I do my derivatives and it’s free money. I remember years where the silver arb—I’m just going back into the late ’70s and ’80s. Guys were making 15, 16, 20% just arbing physical silver against derivatives. And the same thing in stock. When I was trading any options, you had to borrow stock and there was a cost. And then when Merrill Lynch and the other firms started figuring out what we were doing, they had the stock for free. They would destroy the spreads because it was costing me, for a number, 400 back when rates, interest rates, were 16%, whatever. It was costing me 10%, whatever. They were getting it for free. They just destroyed spreads.
And that’s kind of what happened here. People think for many decades in the gold is the central banks were just leasing this stuff out, giving it away to keep a lid on gold. So what happens if people start taking delivery? That’s where it gets screwed up. So if I’m, for a name, I’m XYZ metal company and people want to buy physical gold and I borrow it from you, and I place it in the London Metal Exchange or the COMEX in New York, and it sits in there. But all of a sudden people start taking delivery from me. Well, what’s the Fed doing? What if people took delivery on all this gold that they were leasing out and lending out? Don’t know. And that’s why for decades people have been saying, want to see, want to audit the Fed? Want to see if they were playing any of these games? Want to see Fort Knox, where the gold went, the gold vault there in New York City.
That’s why they really want to audit the Fed. I mean, their balance sheet’s their balance sheet. What do you think they want to find? What they want to find is what’s in the vault there in New York City. That’s all these transactions going on. That’s what the people were talking about. They want to see that.
Will it impact the dollar? In the short term I don’t think it’d be as much as some people think, but the big impact was going to be in the gold market, especially the physical market, if it’s not there. And that’s the question. And then you’re going to get the, where is it? And then there’s people could get and have some criminal liability if they were selling gold that they were not authorized to sell from the US stockpile.
David: Are there any dots to connect between the migration of metals from Europe to New York at present and the market over the last three, four weeks shifting from contango to backwardation?
Bill: Yeah, you’re just running in shortage. I mean, Europe—and it’s been going on for a while. They’ve got shortages of metal there. And again, all these big trading houses plus the big hedge funds and traders— Guys have been operating for many years, if not decades. All of a sudden these disruptions show up in the market. They can’t borrow. It’s just like if you were a trader here, then you trade Treasuries all day and you’ve been trading for decades. All of a sudden, as they say, the 10-year’s in short supply. What do you do if you’re short and you can’t get, and they’re out there short? I mean, it can absolutely be devastating. So that’s what’s going on there. I think part of it’s the people want their gold out of Europe, and there’s no question. That’s why it’s coming this way.
What people missed in 2008 was, besides the market issues, there were custodial issues. You saw the custodial banks get crushed because they didn’t have the securities. They were lending out stuff and then when the music stopped, they didn’t have them. And I know this because we had customers that could not make delivery of stocks because their banks wouldn’t deliver. Well, how could you not deliver? You’re supposed to have it. They played fast and loose with it. So that’s around the custodial issues about who holds the gold. And that was the thing. And they tried to keep quiet in the 2008, 2009 when, it’d be up there when these days nothing’s going on. Now you see like Northern Trust or State Street, JP Morgan, they would just get crushed.
And I know this because we had one of the local Chicago pensions with one of the local banks that was lending their securities, lost a ton of money, and they were saying, “How can you do that? We’re supposed to get free money.” That’s what happened. They were lending stuff they didn’t have. And when you do that, you get bought in. And now all of a sudden, they’re trying to pass that cost on to you that they’re paying for ridiculous amount of money. Instead of making a few hundred basis points, all of a sudden you’re getting crushed because you’re getting bought in. So that’s some of the ripple we don’t know. We don’t know the nature of where that gold’s coming from. I’m guessing it’s investment accounts and they want a better custodial place for it. Remember a few years ago they were talking about how the Germans wanted their gold?
David: Yep.
Bill: Remember? They were talking, “Oh, Germans don’t want it in New York.” It was flowing over that way?
David: Yeah.
Bill: Can’t remember if that was under Obama or whatever, but they were just reading the tea leaves. We don’t like the political situation. We want the central bank. A lot of central banks kept the gold in New York, especially after World War II and afterwards, the gold went back over that way so the Nazis couldn’t get it. So now, we don’t know. We don’t know how much is the central bank gold coming this way? Is it private citizens? Is it metal firms? But there’s a custodial issue now in gold. You got to break in, is it a market issue where you’re buying gold because you want to own gold or is this just custodial, where you just want to place it there? But that does create an issue because that means the people that if you were lending it out or borrowing the gold or using the gold to facilitate trades in Europe, now you got a problem. If it’s leaving the LME, if you’re doing transactions on the LME or based on LME and all of a sudden the gold is gone, that can screw up transactions.
David: This is absolutely fascinating. So this may sound like an absurd question—given the context, maybe it is. If we could think through kind of The Gone Fishin’ Portfolio, you’re not watching the market action over the next year, but what’s your optimal allocation, one year, five years? Is that just a bad idea, you have to stay engaged?
Bill: Yeah, I think you want to have—and I think you’re seeing it in the precious metals. And I think that’s what’s going on here is I think that’s what people are doing is you want fixed income and a hedge case, something happens overnight that you just can’t account for, a short-term fixed income. You don’t want to be on the long end. Two years in there. We did that before the election here is we were looking at this and we’re going, well, the way the bonds are starting to go, we did one year and two year. And then we figured out, well, it gives us a chance to read what’s going on. And I think we’re just going to keep rolling them the same way, one year and two year. And I’ve got core gold holdings in here and not adding to it here right now because again, I want to see how this stuff starts playing.
But you can’t get too far over your skis here right now. You got to let this play and you got to just make sure you’re not leveraged up here. That’s why Buffett’s, what, 27% cash, his greatest ever? He sees something that he doesn’t like out there. He’s at a point in his life here too, when he’s in his nineties, whatever. What’s his long-term? Well, he’s managing for his customers, shareholders, so he’s got a longer term, but he’s raising cash, the same way, doesn’t know. If he knew, he’d be betting money. He doesn’t. And I wouldn’t be surprised. He’ll nibble at certain things here. So he’s doing oxy, energy. He’s doing some defensive things like that, but Buffett’s always been a big bet on the consumer. That’s what people didn’t understand about him. He eschewed the technology until he got involved with IBM.
Even Apple’s a consumer stock. He finally figured it out. It was tech for years and then, oh no, really it’s consumer, so let’s buy it. Buy Dairy Queen, buy Geico. He’s betting on Americans consumer. And that was a good bet, especially with the government deficits. Government’s going to send out welfare checks, they’re going to send out employee people, they’re going to do business deals. And that’s what— Coca-Cola. I mean, Buffett was betting on the American consumer—and now even the Burlington Northern, when he bought that in 2008 with the crash, I mean, he’s just crashing. He’s like Burlington Railroads. They move the goods. They move the goods towards China, whatever. They’re going to move the goods. So he bought Burlington Northern.
Yeah, I mean the signs are all there. It’s time to be very careful. Very, very careful and wait and watch and don’t guess. Don’t guess right now. Oh, yeah. Again, in the past you get a new administration come in, you go “Well, they’re going to do this, going to do that.” But what these guys said they’re going to do and they are doing is revolutionary. We might look back years from now and say, “Wow, this was the biggest— It’s looking that way. The biggest change in US since Reconstruction. Really, you’re blowing up the Roosevelt political economy, socio-political economy Roosevelt put together in the Depression. The start of the socialism, cradle to grave socialism, government program, the deep state, on and on and on. Big government. That’s Roosevelt ushered in big government. You call it socialism, fascism, whatever you want to call it. He ushered it in. And now, for the first time, it looks like they’re really trying to blow a big hole in it.
David: How do your vested interests throw a stink and maybe try to pull the rug out from under the administration?
Bill: Well, they’ve been trying, but they’re having a tough time because the mood is right. I mean, the climate is right to do it. In part—and I think it goes back to the crash in 2008. The powers that be, and Bush was in charge. He made the deal with the banks, the big banks. Nobody went to jail for this stuff. I mean, what these guys did in the rating agencies, and it was incredible what they did to people. And then they did the COVID. 12 years later you did the COVID on them. And that was even worse because you put people out of business and they didn’t come back. And then you also changed behavior where people don’t want to work from home. To me, that’s the two big things, is allowing Trump to do this is they’re still upset about 2008 and they’re upset about what happened in 2020, in 2021, in there, 2022, that period.
And that’s why his popularity is— They want people punished for this stuff. And the big thing I think he’s doing, people said, Trump’s going to go for revenge and all these people that tried to impeach him, the January 6th stuff, the Russian collusion and all that. Anybody has half a brain looks and see, yeah, there was a lot of crimes committed in doing this stuff. But just like with Nixon, when they impeach— Nixon, as it turns out, he had no idea what’s going on. He was being railroaded and the history and the papers documents show that, but the media’s trying to hide that. And the reason they were able to impeach him, people said that. ’73, ’74, you had the worst recession since the Great Depression. And when they were going to impeach Clinton, Clinton’s stooges and the media were going, “Oh, don’t impeach Bill. The economy’s doing too good and the stock market’s in a bubble.” Well, they didn’t say bubble. “Oh, look at how good the stock market’s going.”
So that was another reason why he had that bubble there in the nineties because his [unclear], Bob Rubin was there, Treasury Secretary, they were out there. “Don’t, don’t fool around with impeachment. You could crash the stock market and hurt the economy.” So I think Trump is doing here, and with Musk is, you want to get people pissed off? Show them that the insiders have been grifting and stealing trillions of dollars of your money. They’re going to demand Trump start throwing people in jail for both parties. That’s who I think they’re going this way instead of, “Well, let’s go get Adam Schiff for destroying documents or the Russian collusion, or…” You pick all your villains. Pelosi, you name them, the people involved in this stuff. We’ve seen from congressional reports what they did that wasn’t kosher. But no. Let’s go and show how these guys have been stealing your money and squandering it, and giving it to their buddies. Get everybody really good and pissed off, and then they’ll be demanding. Then you start throwing people in jail for that and then it just kind of trickles in the other areas. I think that’s the other thing he’s doing and it makes perfect sense.
David: It reinforces the mood. Is that enough for him to continue in that same vein, if you end up with a major— All the liquidity that’s there now, all of it starts to dissipate, real contraction in available credit. Prices start to contract to—10% correction is no big deal, but what about a 30, 40% move lower? Does that change the mood?
Bill: Well, what we don’t know here is because we’ve got a big change in the market that you have so much passive money now. In the past, people traded more like Buffett. Things got too expensive, you sold them and you bought something that was cheap. That was your rotation. Tech stocks are too expensive. I’m buying oil. So oil is too expensive, I’m buying consumers. And you sat down and you look at where these things trade relative to each other, relative to where you were in the economy, where they should be traded. It’s not just where they are right now. It’s where you are in the economy, where you think it’s going, where you should be buying these things. And then you got to the point where if everything was overvalued, raise 5, 10, 15, 20% cash and waited. But now if you’re passive, you’re invested all the time. What happens?
That’s why we’ve been going straight up, and the trader games, traders are fooling around in here. You don’t have, “well, this is overvalued” because if you’re indexing and you’re passive, there’s no such thing as overvalued, right? That’s it. There’s nothing overvalued. I just keep buying it. We’re never going to sell. Oh, yes, you will. When are you going to sell? Just like when you said. We don’t know where the threshold is, but it’s when the stocks start going down and people start taking the money out, and then it’s going to get to— We don’t know. We don’t know. Because then where’s your value buyers? The only people said you’re value buyers, but if you turn most of the institutions into indexers and passive, they can’t be value buyers on the way down. They got to just keep selling what the money comes in. Then you got a hope Buffett and these guys and the few value players that are still left, private equity, are buying stuff and we just don’t know.
Now, how does that happen? Well, after the ’87 crash, I can’t remember what Ivy League, run experiments on behavior of investors. So what they did is, they put groups in and what they did is they crashed markets and then they rebound them and they watch people. And what they found with the markets is, if you crash markets and then they bounce and you crash and bounce around, people kept playing. They kept playing the game. But where people cashed out and went away is if you just had nothing, where you were doing nothing. And you just kept going down a little bit, come up and then kind of roll over, and that’s where people got disgusted and gave up. So if you’re looking for insight, that’s where you’re going to be looking here. That’s kind of what happened in the ’30s where you kept going down and down, you get little bump ups, you kept going down. They hit the big rally in ’37, everybody got excited, and then we got cut in half in ’38, and then, there you go. We’re going real ugly here.
And that’s when people thought Roosevelt made the decision, we got to get into the war. Otherwise, economy’s going to go to zero. Well, you have a difficult time, but that’s kind of why, especially with passive money, when people sit there and they’ll watch it and they’ll watch it, it goes up, it goes down. But if you just get worse, keeps grinding lower, grinding lower, and they say, I can’t take this anymore. Just get out. You’re not getting the rebounds. And we don’t know where that is. Now, there’s always could be some exogenous shock, like you had to cover something, but typically the behavior is the slow, nothing happening, grinding out, and you’re not getting any. Over a period of time, you’re not seeing any gains. That wears people out, and when they start giving up.
And we don’t know, this is going to be a very interesting experiment, but we get a full-bore secular bear market here that lasts for a few years, how the passive and the indexes are going to hold up in this stuff and how far it can go because you’re not a value investor. You can’t buy, you can’t say, Vanguard, oh, I’m an indexer. If the money’s gone, I can’t buy. People withdrawing, I got to keep selling. And you’re not keeping cash hordes around, right? Are you keeping a balance? No, because you got to be fully invested all the time. So when things are falling, it’d be interesting to see how that plays out.
David: So one, what’s the probability of a full-bore secular bear market? And two, our current cash balance on the management team is about 46%. Is that enough?
Bill: Yeah, I think that’s quite a bit, especially depending on what you got with the other. You can have 80% cash and then just be wild on the other end with your other 20. So that depends on what you’re doing on the other end.
David: Right.
Bill: But yeah, it’s just everybody’s got different levels, emotionally and also what your financial situation is. But you got to be defensive right now. And what you’re really doing now is what the new traders, the old school should tell you, “Hey, you’re speculating.” What came from speculare, means they’ll observe. And that’s what you’re doing. You’re watching and you’re waiting.
And that’s the problem now, is everybody running around with their hand-helds, trading online, they all want action. They just want action. And if you don’t get the action, they’re going to go away. That’s what he said. But by the same token here is, that’s a good way to get in trouble. You’re gambling and you’re not an investor.
David: So what’s the probability of a secular bear, full-bore?
Bill: Well, here’s the thing is, when was the last time we had a secular bear? They’ve been trying to avoid this forever. That’s like you had the ’08, ’09 and they just pump money like crazy. They’re afraid they have a secular bear in equities. Probably ’80, I guess you could call it ’80, ’81, ’82. But really, from ’66 down to ’82, you kind of traded sideways and went down. And when you adjust for inflation there, you’re getting hammered.
David: Yeah, yeah.
Bill: That was a good period of 16 years maybe in there, top to bottom in there, before you turned around. You could see ’87 crash, you came down. But you could just see how you kind of ratcheted up in here. But yeah, I don’t know when you could say you’ve had your last secular bear. COVID was a totally different thing, how that thing came down. But you want to see a secular bear. Look what happened in bonds the last two and a half, three years. That’s the secular bear market. Previous to that, for 38 years, I think the longest down period was 14 or 15 months. They’re usually between, usually year, not quite a year and a half, where your reaction moves. Look another way, the ’29 top, I don’t think you got back above that to what, ’53 in there or something like that?
David: That’s right.
Bill: That’s kind of a secular situation there. That ended in ’49 and that’s when you took off in the big, that’s really when things turned around in ’49 and took off. So yeah, we don’t know. This is different dynamics in here now.
David: Never a dull moment.
Bill: But that’s the thing, a lot of people don’t pay enough to the structure of the markets and what’s going on. So new things. It’s just like when you had all these derivatives, people didn’t understand, so you had the ’87 crash. That’s what portfolio insurance did for you. It just crashed everything. And also because you were able to computerize. In ’86, SuperDot came out and you put 10,000, up to 10,000 shares of stocks, so then you could just zip stuff to the [unclear]. Before that, all the computer trading was done—the program was done—by hand. People ran hand-held tickets, and then in the ’86 SuperDot, low 10,000, and then it got wild. And then you finally had the crash. And that was a structural change. Same thing when you got options and futures and you could see the stuff, let alone when you were starting to do credit default swaps and [unclear]. You get structural changes that people aren’t paying attention to what’s going on. And so that’s kind of what we’re doing now.
David: Big structural changes. It’d be super interesting to see how it plays.
Bill: Yep.
David: Well, thanks for joining us. We want to have you back on sooner.
Bill: Sure, anytime. Anytime.
David: Appreciate it.
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You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany and our guest today, Bill King. 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.
