Podcast: Play in new window
- Left Cannot Ignore Electoral & Popular Sweep
- Head Of $11 Trillion BlackRock Likes Hard Assets
- When Will Western Investors Move To Gold?
“The adjustment is beginning in their investors’ minds to a higher-for-longer environment, an adjustment to debt and deficits which are not quickly resolved, not by a person, not by a party, but this is a dedication to resolving an issue which may take decades. And that’s partially through economic growth, that’s partially through an increase in revenue, that’s partially through a reduction in deficit spending. But until we get to those long-term solutions, we deal with critical issues. And Rieder is saying, avoid the long end of the curve. Rieder is saying, take a look at hard assets.” —David McAlvany
Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
David, a lot has changed in a week, but I can’t help but think of a man named Onoda Hiroo, who after World War II, Japanese soldier, he fought on 29 years. He was on a Philippine island, and he absolutely refused to believe that the war was over, even when Japanese generals and commanders would come and try to talk him out. He could not believe that.
I can’t help but think that that’s a lot like Arizona and California right now. My wife and I turned on Jimmy Kimmel, and instead of him being funny, he was just standing and crying and talking about the end of the world. And we watched Saturday Night Live on Saturday night, the opening skit, we thought it might be funny, but instead they just really stood and cried and talked about the end of the world. I’m just wondering, is the war over or is it just beginning?
David: Yeah, it’s a great question. Well, yes, a lot has happened in the last week. We’ve got President-elect Trump in line for another four years. The cabinet positions are being lined out, and yet a full week later, they’re still counting ballots in Arizona and California.
Kevin: Yeah, it’s like the Japanese soldier on the island. Why are they still counting, Dave?
David: It’s hard to believe that in states like Florida you can finish the count the day of the election, while states home to Silicon Valley and some of the greatest hardware and software inventions ever, they can’t figure it out. The vote count a full week after the election day is still going on. In my mind, election integrity has a black eye from that kind of incompetence.
Kevin: Well, and last week you were critical of both parties, and had a little bit of cynicism going, but there seems to be an overwhelming message that’s being sent to the United States right now.
David: Reflecting on my pre-election comments, I think they were adequately critical of the parties running, maybe overly cynical about the American public. Whether you regard the election outcome as a good thing or a bad thing, there was uniformity in the political shift. It was across ethnic and socioeconomic lines, all swing states, a significant shift in the African-American and Latino communities. There was a sea of red on the American map, 49 out of 50 states shifted red with a wide margin, enough margin in the popular vote to give Trump an unambiguous mandate to fix a few things.
The exit polls noted that inflation, immigration, and a fixation on cultural issues which don’t help the middle class were top of mind, and threats to democracy ranked high as well, with a good number of those citing that concern voting for Trump, interestingly. So, the shift towards Trump included a surprisingly large college-age contingent, and of course the minority contingents I just mentioned. But maybe minorities have figured out that rhetoric is insufficient to make your life better. And that a strong economy—that tends to lift all boats. The opposite, if you’re looking at strong inflation, that uniformly sucks the tide out from under those same vessels.
Kevin: Yeah, Dave, the question was asked of Kamala, what would she do different than her predecessor?
David: That was the question asked on The View, and “nothing” was the answer. I think the public handed down a referendum, a referendum on inflation, a referendum on social issues that have been pushed to an extreme. Exhibit A, ask an African American male if trans rights and arbitrary gender choice are accorded the same stature as race and the battle for civil rights in the 20th century. “I don’t know about that,” might be the response. So in one sense, it’s almost like we had the Bud Light election. Maybe it was simply inflation, but that raises my first concern.
Kevin: Right. And I think it’s important to note that markets actually are beyond the men. I came on when Reagan was in office, and then of course we’ve seen just the string of presidents since. And actually, what you see is, Republican or Democrat, the markets sort of do their own things. Now, I’m not saying there won’t be a benefit, necessarily, from particular policies put into place, but Dave, we’ve got a very, very high market right now and a lot of debt.
David: Yeah. Here’s the risk I see: markets are in fact beyond the men that get elected, beyond political parties, even beyond policies. In politics, those things matter to varying degrees, but price trend—price trends are driven by conscious and subconscious feelings that inform and motivate greed. And greed has a public expression, it’s risk taking. Fear has a public expression as well, that’s the curtailment of risk and the selling of assets.
There’s a significant temptation for the new Trump White House to look at the market reaction since last week and claim a mandate from the market, and attribute the bump in prices to the market’s expectation of policy success being on the horizon. Lower taxes may in fact drive economic growth, but I’m doubting that this translates into financial market stability. If the financial markets run out of steam here, or frankly over the next two years you’ve got to watch below, and I think certainly watch out in the midterms.
Kevin: So, whatever side a person was rooting for, it would be a mistake to tie the markets to that, because honestly, markets do have to correct when they get to be too high. But the outcome was unambiguous. Most Americans really do want change.
David: Yeah, I think it’s dangerous to associate with so wily a thing as the market. And so, yes, while it was unambiguous that Americans want change, what kind of change, how you translate, obviously there’s machinations and a degree of reflection amongst the Democrats to say, “What did we do wrong? How could we do this different?” I don’t think they’re asking the question, “How could we be different?” They’re pretty content with the policy postures and positions they’ve taken. So, the market peak is what I have as a primary concern.
Again, if the incoming president, if President Trump is to associate with so wily a thing as the market, I think there’s a danger in that. The market’s current position has everything to do with incredibly loose financial conditions, not the policies of the past administration. Trump’s tax policies whip up, and I think add to, what is already an existing speculative or animal spirits in the marketplace. And of course there’s hopes that those tax savings will translate into earnings after tax and allow companies to buy back more shares and play the games that they have been playing for years now.
Kevin: You might remember early on when we started the Commentary, you interviewed a man who was in the Reagan administration, and he shared with us that Reagan absolutely hated Volcker because Reagan got in, and no one would argue—I think very few people would argue—that Reagan had some excellent economic strategies that helped the economy over the eight years that he was in. But when he first came in, they had to suck up and have a recession. Volcker raised rates dramatically to beat inflation, and Reagan was not all about that, remember that?
David: Well, that’s right. And I think looking at the past precedents for where we’re at and where we’re going can be helpful. There’s no direct duplications from the past into the present, but John Authers from Bloomberg reminds us that there appears a similar full-throated market endorsement if you go back in time to the 1920s—Herbert Hoover in the months following the election in 1928. Overvaluation was baked into the cake already. The market was not signaling infinite growth ahead, but rather it was signaling an irrational and unsustainable blow-off top. The Dow:gold ratio hit a record of 18:1 there in Hoover’s early days, just prior to its collapse to a 1:1 ratio. That is gold moving higher, the equity market moving down 89%. And again, in 1928 at the point of election, the market was moving higher and it continued to move higher immediately after the election, and you could have assumed that it was a vote of confidence for Hoover’s great policies that were going to be implemented throughout his term, up to 1932.
Kevin: Yeah, so in 1932, of course, we had the major changeover to FDR, and Hoover went down in history as a man whom a lot of people thought caused the depression. And this is why it would be wrong for us to think, “Oh, well, gosh, Trump’s in office. There’s going to be some good economic policies, some tax changes, so let’s go buy stock. With the price:earnings ratio at 38 right now, you want to be careful what you tie your narrative to because if you want a Republican administration in four years, you don’t want to blame them for the stock market rise right now.
David: Yeah, market structure is fragile, and there are some similarities. Margin activity—going back to 1928, 1929—margin activity went ballistic there in the first year of Hoover’s term, and Fed liquidity in the stock market, it fed the malinvestment dynamics. And there was this man, Hoover, an unsuspecting president stepping with swagger and confidence into a trap set for a bear, and it was not pleasant. Extraction was not possible. He did not win a second term. It wouldn’t be the case with Trump, but it could certainly have an implication for JD Vance that the GOP would be wise to, at this point, describe the markets as they are, richly valued, unlikely to meet forward expectations.
Why? Because I think, again, the party’s future hinges on it. Trump will be gone in four years. The Republican Party could be swept out with him. And so JD Vance’s future political path I think rests, to a degree, on disassociating from the current market excess. Call a bubble what it is. Don’t lay claim to this dynamic, or you’re going to be living in a political Hooverville.
Kevin: Well, and so we talk about a price:earnings ratio of 38, Shiller PE of 38. And the last time we hit that, if I remember right, Bush was taking office—the second Bush. That was in the year 2000, and that was right before the tech stock bubble completely eviscerated the markets.
David: That’s right. So when we look at the current market, elevated valuations, the Shiller PE—that’s the cyclically adjusted price:earnings ratio—takes out the volatility which corporate executives love to game for their own personal benefit. The remuneration is tied to an improvement in earnings. So when you’re a new hire, you bring the earnings as low as possible and then game them to the upside. That kind of arbitrary volatility is taken out. That’s one of the reasons why this is a more reliable metric, the Shiller PE—or CAPE, as it’s sometimes referred to. It was last here at these levels, 38, in the early days of the new Bush presidency. That was 24 years ago, the year 2000, and that’s just months before the wreck in the technology space.
The risk is one today of disappointing expectations. The risk is that history will be as unkind to Trump as it remains unkind to the memory of Hoover. Was the demise of the equity markets and failure of banks in the 1930s attributable to dear Herbert and his policies? Or was the context of excess valuation, premium pricing, was it a result of the roaring ’20s and the surplus of credit and the rabid speculation finally running out of emotional fuel?
In terms of the global reach of the depression, we had in the 1930s trade wars, which definitely contributed to that being sort of a global dynamic. So perhaps there are some differences and some similarities, but I think the path ahead for us in the markets—and this is a dangerous path for politicians—I think the path ahead is fraught.
Kevin: Okay, so many of the things that we’ve been told we are supposed to swallow over the last four years, America basically pushed back, including, Dave, the electoral college. We’ve been told, “Get rid of that electoral college. Look, it doesn’t really represent the popular vote.” Well, what are they going to do now?
David: Get rid of the popular vote.
Kevin: I guess.
David: Yeah, no, the last four years I think were just put under a social microscope, and to some degree they were repudiated. The left will read that as an electorate which is unhinged and a society which is irrational. No, they didn’t like the electoral college in 2016. Now maybe they dislike the popular vote as well. The GOP will run ahead with this victory, and hopefully they’ll take account of some nuance.
Kevin: Well, and there was an argument of what the issues really were. What would you say the issues were?
David: Well, let’s start with what they were not. Abortion was not the issue that upset the election, and talking about inflation coming down ended up being, I think, a flashpoint. It riled people up because statistical diminishment of the rate of increase, if you’re a family paying bills, is still an increase.
And this is where, again, we did not see inflation go away. We just saw it increase at a slower pace, and it was off of the original base, which made it very uncomfortable. So the small effects from small increases compared to the original base cost are still a big deal. It’s one of the reasons why everyone loves using year-over-year and month-over-month changes because it obscures the larger impact from a base year.
If cumulative inflation since 2020 has been 21.4%—I think that’s far too conservative, but that’s what the CPI calculation is from then to now—if the cumulative inflation has been 21.4%, we get, let’s say, this week a 2½% increase. Compared to the base year, that 2½ is actually over 3%.
So there are two observations to make, base your realities and the real economic pressure experienced by households were a massive contributor to the election results. Didn’t matter that household net worth clocked in at all-time highs the day of the election. Not the issue because most people—you’re dealing with pocketbook poverty, you’re dealing with income insecurity, and that drove a protest vote.
We don’t have recession yet. Plenty of things to like as an investor. You’ve got prices in equities, prices in real estate, they’re at peaks—so again, this sort of all-time high in household net worth. But the majority of Americans would say that doesn’t change the fact that financial pressure is building on the home front.
Kevin: So I was talking about when Reagan took office. If it was Reagan’s choice, he would not have seen interest rates rise the way they did. We had Volcker in, and he radically raised rates and actually inflation and interest rates both came down. What can Trump do?
David: Yeah, it’s a good question. I don’t know that Trump can change that, actually bring prices down. Again, that seemed to be the biggest issue—that people can’t afford their lifestyle and they want something different going forward. And I think the perception is, here’s a business guy, maybe he’ll do a better job.
And there’s some recollection that 2016 to 2020 was not a bad period of time for the US economy. So will Trump change that and actually bring prices down, not just oversee the rate of increase slowing? Will Trump avoid being associated with a bear market in equities that takes 40-50% of the value of stocks away? That’s hard to fathom.
And again, I would come back to: the market is not the man. There are trends in place—liquidity dynamics, credit dynamics, interest rate dynamics, debt market dynamics—that have— The legacy here goes beyond Biden. It goes beyond Trump before that. It goes beyond Obama before that. We’re talking about the cumulative misallocation of capital over a 20- to 30-year period, and the question is whether or not we can continue down that road or if there’s a comeuppance.
Kevin: Well, and liquidity always seems to be the key. Liquidity comes at a cost. Right now liquidity comes at the cost of inflation. So bringing inflation down may not actually be something that he can do if he wants to continue to apply liquidity.
David: Yeah, I mean markets run on liquidity, markets run on enthusiasm, and those two are more correlated than most would like to admit. Excess liquidity, lower rates, that encourages risk taking. It encourages risk-taking by consumers, by business managers, by investment speculators.
So cheap rates and— If interest rates are cheap enough—this is the dark side—you foment the classic inflation problem of too many dollars chasing too few goods. It’s one of the classic definitions of inflation. We’ve had Powell reinforcing this inflation trend, complementing the fiscal policy excess with financial conditions that remained too loose.
And now in retrospect, it’s interesting because you’ve got Jeremy Siegel suggesting that Powell may have actually helped Trump with the victory, with inflation being the defining factor and Powell doing not enough to solve the inflation problem.
Kevin: Powell has been bucking back against Trump ever since he won, saying, “you don’t have any authority over me.” Could it be that Powell could pull a Volcker and actually decrease liquidity?
David: Right. Well, would he voluntarily increase interest rates? I mean there is a case to be made for it. We talked about the Taylor rule, and when we were talking about it last—this was shortly after Jay Powell had lowered rates 50 basis points—we said at the time that according to the Taylor rule he actually should have increased rates 25 basis points.
There is an academic case to be made for tightening financial conditions, not loosening them. To lower your rates at this point, you’re doing a major favor for the Treasury Department because you’ve got so much in debt that’s rolling over this year. 2025, $9 trillion rolling over. That’s a lot of money at higher rates than it was before. We already have an interest component problem, and so you’re just basically making it a bigger issue in 2025.
Would Jay Powell like to do a favor for the Treasury? Maybe. I don’t know. Higher rates, that’s a recipe for truly tightening financial conditions. And the dark side there is that higher rates truly tightening financial conditions puts an end to the bubblicious market values that you’ve got in equities and real estate today.
Kevin: So at that point, we would have tighter liquidity, what we’re talking about, the fuel for the market.
David: Yeah, this is where it stretches to those three areas, whether it’s households, business managers, or what have you. Inadequate liquidity—consumers have to make tougher choices. They have limited options. Business managers, too. They’ve got a narrowed field to play on. Every capital allocation decision is a different kind of risk proposition if you’ve got higher rates.
And of course you’ve got the investment speculators, they face an increased bar to succeed if you’ve got higher rates. So higher hurdles with higher rates. It’s like a literal set of hurdles. There is a height threshold that will trip you up regardless of your talent on the track field. So you look at higher interest rates, and they are consequential to the leveraged speculator, to the business operator, to the household.
We looked at BlackRock. At the end of last week’s meeting—that is, the FOMC meeting and Powell’s press conference—BlackRock Managing Director, Global Chief Investment Officer of Fixed Income. He commented—and this was a Bloomberg interview with him immediately following Powell’s press conference—it’s debt and it’s deficits that remain center stage, even as investors ignore both the quantity of debt and its interest costs. So again, you’ve got this bifurcation, somebody who’s a professional in the field who’s looking and saying, where do the risks lie after Powell has lowered rates another 25 basis points? What are the problems? The equity markets are going crazy to the upside, 1500 points in a day. For the Dow, everything looks to be excellent and superb, and that’s not the way he saw it.
So Rick Rieder says, No. The three takeaways are that real assets are reasonable, that debt is the key factor to focus on, and that you want to stay at the short end of the curve. Which is a subtle way of saying rates will be higher for longer with grave consequences for longer-duration bonds. That is not Wall Street consensus. That is not how investors are positioning, but he is not a guy that you can ignore.
Kevin: So let’s talk about where a lot of the big money has moved to over the last few years, and that’s private equity. They’ve been holding on to assets, and really are quite illiquid. What does this look like going forward?
David: Well, again, this ties in because it’s the higher-for-longer theme, and rates have not come down fast enough to have been of benefit to private equity companies and their portfolio companies that they’d like to take to market and get rid of. I sent out an article to some friends of mine—this is the Financial Times November 9th article talking about how large endowments are struggling, and this is your Ivy League universities predominantly. They’re struggling with returns from a shift in dynamics in their private equity and venture capital funds. They chose many years ago what’s called an illiquidity premium. That is, they bought assets which were not particularly liquid, not in the public markets; they’re in the private markets. But they were willing to exchange liquidity for a higher rate of return, thus the term illiquidity premium. And many are now issuing bonds because they’re not getting the expected payoffs from those assets.
They’ve not been able to liquefy, they’ve not been able to sell them off, and that’s because there’s been a lack of IPOs, a dearth of deal making to the tune of $3.2 trillion. You’ve got $3.2 trillion at last tally—nearly 30,000 companies that are sort of the pig in the Python. This is the inventory of companies that private equity groups have bought, intended to sell, and can’t sell because rates have gone higher and their multiples don’t work anymore—so the inventory of companies to be sold at higher multiples than the multiples they paid too much for. The article points out that you’ve got mediocre returns at places like Yale and Princeton for the first time in a long time. And the quote from the article is, “they’ve fallen victim to the prolonged high interest rate environment.” The article quotes a previous commentator guest, Hunter Lewis. He was prescient enough to see this as an opportunity 30 to 40 years ago, and it was a compelling thesis then.
Today, private equity and going to the private markets is a bit of a trap. Again, you’re exchanging liquidity for something that only works in the context of declining rates. How does that work in reverse? If we have higher-for-longer; rates in fact over the next two, three, four years move higher instead of lower; now you’re talking about endowments that have 30 to 40% of their assets tied to something that is basically a sinking ship.
Kevin: So speaking of sinking ships, the longer bond market— If it’s higher-for-longer, bonds are going to be hurt. How does that affect equities?
David: Yeah, and I think this is where Richard Rieder was silent, but you can fill the gap pretty easily. And this is just understanding the relationships between the cost of capital and the performance of the equities markets. If higher-for-longer in the increased cost of capital at the long end of the curve is a reality going forward, the bond market will dictate where the equity bull is led. Just imagine the bull market in equities. It is the beast. It has a ring in its nose. Something as small as an interest rate, that’s your ring. That is going to determine the behavior of the beast. Rates go higher for longer, that’ll shift the liquidity dynamics in the market and the levels of enthusiasm that are currently in equities. New all-time highs in your major indices, that’s what we have now.
The Fed still wants to argue that we have tight financial conditions. They want to loosen those financial conditions, and here we have—the week of the election, the day after the results—Powell still discussing the need to loosen excessively tight financial conditions. And yet you look around, you’ve got manic buying of risk assets consistent with the theme of loose financial conditions, not tight financial conditions.
Kevin: Last night you and I talked about a redefinition of words. These days when you have a conversation with anyone, you have to actually start with the definition of terms. And this just reminds me of this. We have, what, tight financial conditions according to Powell, when really we’ve got a price earnings ratio as high as it’s ever been?
David: Yeah, the Shiller P/E, the equivalent highs from the year 2000. You’ve got the Buffett ratio which blew out over two times, so that’s at record levels. You’ve got margin debt in excess of $810 billion. Again, that’s borrowed money to go buy on a sure thing—
Kevin: How is that tight conditions?
David: Well, it is below the one trillion high watermark that was the fall of 2021. So this would put us at sort of the second-highest level. And again, we were talking about 2021, the height of the everything bubble. All these things imply loose financial conditions. So let’s go back to bonds. The Financial Times article—and the title says it all, “Inflation Worries Seep Back into the US Bond Market”—the article highlights the evidence in interest rates that inflation is in the early stages of a comeback. I was reading through the article, and I got a little salty halfway through because they took a purely partisan, and sort of in a political fashion they blame Trump for the reflationary impact in the bond market.
Kevin: Seems a little early, doesn’t it?
David: Well, they’re referencing the rise in the two-year break-evens from below 1.6 to now 2.6 as supporting evidence of inflation and the expectations of inflation creeping higher. Except that—except that—that indicator has been moving higher since September, not—as the article suggests—since November 5th. So, well before an election outcome was on the table. This is mis-attribution at best, misinformation at worst, misdirection certainly.
Kevin: Well, they may as well start blaming Trump early because they sure blamed him late for a lot of stuff. The last four years they basically blamed Trump for everything instead of taking responsibility for their policy.
David: Now, I’m not saying the market is wrong about a structural and protracted inflation problem, but the shift higher in rates and expectations of inflation coincided with the Powell cut by 50 basis points, not the Trump win six weeks later. No one wants to believe that cheaper credit fuels inflationism, but it does.
Kevin: Yeah, cheaper credit fuels inflationism. But how about cheaper fuel, Dave? That’s one of the things I remember from 2016 to 2020. Fuel was cheaper because we were actually producing a lot of it.
David: Well, I think we’re at the upper limits of what we can produce. There is a little bit more margin there from our fields. Oil prices and energy costs—if there’s one good news point on the inflation front, that’s it. Oil prices and energy costs, they are at an intriguing juncture. You’ve got relief on the regulatory side in the next administration. That’s arguably going to increase production during the next four years. And so if we’re at 13.4, 13.6—that’s 13.4 million barrels per day production—maybe we get to 14 or 15 million barrels per day. Natural gas is already cranking, and it’s oversupplied. Oil’s about to follow suit in that oversupplied position. If we don’t quickly increase our export capacity, prices are going to be under pressure, commodity prices. So, bad for the energy investor, good for the consumer.
Green initiatives, yes, they’re taking a backseat for the next four years. You’ve got natural gas being the biggest beneficiary from the standpoint of electricity production. So energy investors, in my view, are going to see varied results. Great time for an energy toll booth. Yeah, if you can capture the benefit from contracted flows, great. Licenses for natural gas export terminals, I don’t think they’re going to be held up any longer. So perhaps there’s some relief on the oversupply side of natural gas in the US market.
I think we’ll also see leases in the Gulf of Mexico, which are going to be freed up from bureaucratic red tape. That’ll improve flows and availability. But again, that doesn’t necessarily improve the margins of your operators. So yes, there’s further impact in terms of pressure on OPEC, negative impact for them. But as for inflation, that’s your spot of good news. Prices at the pump will likely come down—probably after Trump refills the Strategic Petroleum Reserve. But that is a positive point on inflation.
Kevin: Well, and before we finish up, I really do want to address, gold’s corrected a little bit down here over the last week since Trump came in. And I think a lot of people associate that with Americans basically selling gold. And that’s not really happening. What actually is— The Americans never really bought gold. They hadn’t been part of the market up to this point. In fact, the ETF inventories continued to fall—that’s mainly a Western buying phenomenon. We have seen the dollar rally, however, and we have seen gold holding high. It just continued to go up. We needed a correction. Dave. Talk to that a little bit, though, because we really have not had the Western investor participating. So probably they’re not the real truth of the reaction right now that we see with Trump.
David: Well, we’ve mentioned this the last couple of weeks, that we expected a correction in the price of gold. I think it’s very important to come back to the distinction between secular and cyclical markets. Secular take place over a long period of time, cyclical over a short period of time. And so, to maintain a secular trend is one thing; to have cyclical, or shorter term, volatility is something altogether different. So when you’re talking about a market trend, the first definition, coming back to your point earlier, “What are we talking about?” We’re talking about a secular trend which is very much in place, and a cyclical correction which is all too normal.
If we were concerned about being at the end of a secular trend, here would be a classic hallmark: you get to the end of a secular trend, and it, too, has something of a blow-off. The performance is extraordinary, and ultimately unsustainable. And your rate of change in a calendar year, 12 months, is typically between a hundred and 150%. Have we had a rate of change, an increase in price, of between a hundred and 150%—
Kevin: No.
David: —in gold, silver, platinum? No. I mean, a 30% gain is a heck of a gain, 36% gain is a heck of a gain in a calendar year. But that is a normal two steps forward—and yes, we’re normal, in this context, taking one step back.
Kevin: Well, and Morgan Lewis last week when you had him on, Dave, explained what actually has been happening to gold. And that is, we have a replacement of the dollar recycling going on into gold. And he explained that last week. Any listener who did not listen to last week’s Commentary, I would highly recommend listening to the 10 or 15 minutes that Morgan was on, because that is really critical to understanding the gold market going forward.
David: The two of us sat in the room watching the Fed present last week, and then, as you—
Kevin: You and Morgan?
David: Correct. And then Richard Rieder took the stage at Bloomberg and was answering questions. And it really was remarkable—a pinch-me moment—where we’re listening to this guy, and he could have been on the MWM team, the McAlvany Wealth Management team, talking about hard assets and the trends of higher-for-longer and inflation being stickier than expected. And we’re listening to him going, “You understand what this implies?” That when a scion of Wall Street— Again, this is an $11 trillion asset manager.
Kevin: Yeah. BlackRock. 11 trillion.
David: 11 trillion with a T. Okay, there’s only two—
Kevin: That’s not a country, that’s just a fund.
David: Right.
Kevin: Yeah.
David: Right. When he starts to suggest that, no, the adjustment is beginning, in their investors’ minds, to a higher-for-longer environment, an adjustment to debt and deficits which are not quickly resolved, not by a person, not by a party, but this is a dedication to resolving an issue which may take decades. And that’s partially through economic growth. That’s partially through an increase in revenue. That’s partially through a reduction in deficit spending. But until we get to those long-term solutions, we deal with critical issues.
And Rieder is saying avoid the long end of the curve. Rieder is saying take a look at hard assets. Now, he didn’t mention gold by name, but the king of hard assets is gold. And I think, to me, this idea that what has been an off-the-radar trade for most Western investors is coming to be on the radar, that debt and deficits are not going away quickly and that the implications of interest costs continuing to go higher, as we’ve mentioned previously—
For next year, 2025, interest expense will be higher than our Social Security expense, the largest single line item. That has implications for our financing of credit. These are things that we know. We know that Trump is committing to seven and a half trillion in fresh spending over his four-year tenure. That is new deficits on top of the already assumed— Congressional Budget Office assumed two trillion per year. Right? So we’re not talking about identifying the problem and in so doing solving the problem. There’s that classic phrase; “If you can identify a problem, you’re halfway to its solution.”
Kevin: Well, do you remember the old phrase, Got milk? I’m just thinking we better ask our listeners, Got gold?
David: Well, it’s a reasonable question, and I think to look at cyclical weakness, to look at seasonal weakness— You understand, this is classic. This is classic. We have the Indian wedding season which picks up the price from August to October, and then sometime by mid-November you’ve got weakness, and it sustains through sometimes even the end of the year, with the next pickup in price being the Chinese New Year. So this is a seasonal weakness on top of an election reaction. Great. Perfect. If you’re not paying attention, here’s an opportunity to add to your ounces at a lower price.
What is the ultimate market low? Is this a 10% correction? Is this a 20% correction? I don’t know. I kind of hope for the bigger one, partially because I’m not finished adding ounces, partially because I know that the long-term—the secular—trend for gold is much healthier. If you go through what was a 12-year consolidation and then a breakout at $2,200 an ounce, 2,150–2,200, if we can retest that level, retest the level that we broke out from, you’re talking about a five to 10-year period of growth ahead for gold. If we do not retest 2,100–2,200, I think you’re looking at a much shorter duration for the gold bull market and a much lower ultimate price. So you may not like a lower price today, but you’re setting yourself up for a much longer-term and much more stable trend going forward.
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Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. You can find us at mcalvany.com. And you can call us at (800) 525-9556.
This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.
