In Transcripts

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

“This kind of interventionist behavior on the part of central banks all around the world – this is where gold gains traction again, when people say, ‘You can’t make heads or tails out of interventionism and the only way to hedge against a blow-up is to have some exposure to something that will last even when the dust settles.’”

– David McAlvany

Kevin: David, I’ve got you on the line here in South Africa. I have to say, this brings back memories. When I first came to work for your dad back in 1987 you were taking trips with your father to South Africa. I think he ended up going over there over 30 times in just a few years, but you’ve had a few trips over there, yourself. Now, you’re there with your son. Boy, it seems like all things come around.

David: It’s been almost 30 years, I think, just in that neighborhood, between 25 and 30 years since I’ve been in this country, and a lot of things have changed in some respects, and in other respects, nothing has changed at all, and we’ll discuss that a little bit. But it’s a fascinating place to be at this point in time where you’ve got emerging markets which would include Brazil currently in a recession, near depression. Russia has been struggling financially. We have China who is facing massive, massive shifts in terms of politics and power struggles inside the country in South Africa. These are your BRICS. These are what Goldman-Sachs created an acronym for, as the countries which would redefine not only the emerging markets, but the global economy.

Kevin: I think we should probably talk about why you’re there, Dave. You were asked to present a white paper on economics for a group of very successful economists, businessmen, people who are known worldwide for actually going, and doing, and making a difference.

David: Yes, it was an interesting summit environment where some of the best and brightest from the business community, from 25 different countries, and six continents, were there to discuss development issues, poverty issues, educational issues, best practices as it relates to entrepreneurship, and many of the things which these practitioners in the trade of business, believe are door-openers for a new tomorrow, and a better tomorrow. When we look at the strains that we see in the global economy, there are doers, and this was a group of doers.

So, my paper was to look at business cyclicality and to look at the ebbs and flows in the marketplace, both the financial markets and the larger economy, and argue effectively that this is fine. The cyclicality, there’s absolutely nothing wrong with it. In fact, it’s very healthy for there to be an ebb and a flow, and remembering the conversation that we had with Tomas Sedlacek where he suggested that it’s just not healthy to try to have only good days. Sometimes you have good days, sometimes you have bad days. Of course, he was referencing our emotional lives, and I think that this, too, is the case where central banks have basically been trying to give us some form of Zoloft, or Wellbutrin, or some sort of mood-enhancing drug so that we never experience the ebb, but only the flow.

Kevin: Dave, I think you’ve used Joseph as an example, as far as cyclicality goes – seven lean years, seven healthy years, seven lean years again. We see cyclicality all through history. We also see it through the Bible.

David: One of the interesting conversations as we were standing out at a barbecue – a number of people gathered for barbecue yesterday – the conference was over and we stood out and looked over the Indian Ocean and had a conversation about what kind of storehouses that I had in mind. This conversation was with a business owner from Indonesia, one of the largest business owners in all of Indonesia, and both in the natural resource space, but also business interests across a wide array of areas within the Indonesian and Asian economy.

We talked about a number of things. We talked about the obvious financial storehouses. First, just a word on what a storehouse is. Going back to the Old Testament idea of putting grain into the storehouse – it did not go into the storehouse in order to sit there, in order to rot. There is a difference between a storehouse and a hoard, and Joseph was not hoarding. Joseph put something away so that in the future he could put it to good use, and that is exactly what he did. He took everything that was in the storehouse and put it to good use.

When I think about the nature of a storehouse, from a financial standpoint, that is the role that gold plays, to some degree, as a cash equivalent, or as a cash alternative. It represents a storehouse, not a hoarding of assets. It is something that does allow for future productive use. That is one of the things that we talked about in this conversation as we looked over the Indian Ocean, listening to the waves crash on the shore.

By the way, I would not have gone into that water for a swim. Of course, there are many parts of this part of the world where there largest of the largest great whites love to feed on seals and anything that resembles a seal, so we looked at the water, but did not dip our toes in. I take that back, my son did tip his toes in, but with very clear instructions to not swim, just to let the water lap up on his ankles.

Kevin: That is good to hear that, Dave, because it’s your inclination, normally, to jump in the water with sharks. I have pictures that you have sent me when you were in Hawaii, and you even encouraged your son that he shouldn’t be afraid of sharks. So, it’s good to hear, I realize that the west coast of South Africa has the largest great whites in the world.

I want to go back to what you were talking about on the storehouse, because I think that’s a fascinating concept, Dave. So much preparation, or prepper-type of behavior, is motivated on exactly what you said, hoarding, which is fear-based – there is a fear of a lack of future security – whereas what you’re talking about – productive use of a storehouse is very different. That is faith-based activity. In other words, you have faith in moving forward and that that storehouse will someday be replenished again sometime.

I look at the central banks right now. In a way, the central banks have behaved so poorly because there is a fear that we will never be able to make it back again, so we’d better go ahead and just carry on the debt, a little like what we talked about with Richard Duncan last week. We’re so deep in debt at this point that we’d better continue to go further. What is your thought on that as it relates to a storehouse?

David: I think just, one, to come full circle to the conversation that we had with Richard, I don’t think the solution is throwing even more amounts of money at it. I was just in a room full of doers and makers, and that is different than people who know how to print funny money, and know how to take from others and redistribute. We were in a room where ideas were batted around, again, about education, about entrepreneurship, about specific poverty issues, both in Africa, and in Asia, and throughout the world, looking at some really fundamental development issues.

And the answer, in every instance, was not throwing money at the problems. That was not it at all. That, in fact, would have been a laughable solution because we now have a solid record, not just decades, but near a century, of experimentation with throwing money at social and poverty and development issues, and we still have those issues in the same countries where that has been experimented with. Investment in human resources, the development and mentorship of individuals – that is a very different thing.

Again, you’re dealing with people, at this conference, who know how to build teams. You’re dealing with people who know how to build corporations. You’re dealing with a different kind of spirit, altogether. So, the idea is looking at Joseph storehouses and saying, “Well, sure, there is a time when you need to put more away for seven fat years, in anticipation of seven lean.”

But there are these other storehouses which are just as relevant. We can talk about the physical financial storehouse of gold, but we can also, I think, benefit from looking at the other kinds of storehouses, things like developing an emotional storehouse. Do you have excess emotional capacity? What is your bandwidth at an emotional level, at an intellectual level, at a spiritual level? Are you able to give, and give, and give, beyond what you would normally be able to give, in a context where you are dealing with, not just a lack of food, but a lack of other resources, as well?

Kevin, if we’re right about there being some challenging times, financially, ahead, then it is as important, or more important, to consider what is in your storehouses. Again, that is on a very broad basis, not just the financial piece.

Kevin: David, we’ve talked in the past about resiliency. Resiliency is sort of a broad word, but it is becoming in vogue. Instead of preparation, become resilient. And I think this is more what you’re leaning toward at this point. You’re saying you need to have storehouses emotionally. We know you have to have a storehouse spiritually, a storehouse physically, a storehouse with legacy with your family. Your book that has just come out in first copy print that, actually, will be available for everyone in November, is about legacy. That is building a storehouse in future generations and taking from the knowledge that you have gained from past generations. I think this is what you’re talking about, isn’t it? Resiliency in all forms.

David: Certainly, at a relational level, I remember reading a book, maybe a decade or more ago, where it talked about, in the context of relationships, adding to an emotional bank, a love bank, if you will, knowing that at some point there may be withdrawals, and you never want to get to a point where you are at a zero balance, or overdraw the account. You always add to those emotional reserves in anticipation of the day when they may be drawn down. Again, you don’t want to go negative.

I can’t help but reflect on where I’m at – 25-30 years ago I was here with my father, and I brought my eldest son with me on this trip. It was an absolutely fantastic trip, to paint a picture for him of the transitions that have taken place in South Africa – the things that have changed, and the things that have not changed. It’s very interesting, because we had many opportunities to visit with people across the political spectrum here in South Africa, and to learn what the frustrations are with the current regime in power.

The ANC has been in power since the transition roughly 22 years ago, and they originally followed the vision of Nelson Mandela, and it was a very bright and hopeful period, in that period of time. Thabo Mbeki took the baton and took it farther, as an administrator, not necessarily someone with the vision of Mandela, but as a reasonable, even-handed administrator.

And now, with Jacob Zuma, we have the third generation, if you will. And just like a legacy, very rarely does a legacy live past the third generation. We find a wasted opportunity. We find resources squandered. We find a man who was given a birthright and he sold it for less than a mess of pottage. He has wasted an opportunity. The time that he has been in office he has stolen funds. There are no less than 750 corruption charges against him, and yet, he will probably be re-elected.

Why? Because the alternatives, one, with the DA party, is viewed by many in the country as a front for the old apartheid regime. It’s not, but that is the way it is viewed. And people will say, yes, and where they have become dominant, that is, the DA party, the trains run on time, it is very safe, it is very clean. And where the ANC is dominant, it is treacherous, it is dirty, it is not well managed. Because what has happened is, just like, perhaps, a third-generation child who inherits a massive amount of wealth, but is not prepared for it, does not have the character to manage it well, they have sat back and basically taken, and taken, and taken, and stolen, and stolen, and stolen, from their own people.

So, you now have a reaction to that from within the ANC, a brand new party, the EFF, and this is Julius Malema, and he represents a new and radical shift, but it’s a shift to the left, and he has made many statements that would have you, as someone who is aware of history on this continent, and in the southern part of the continent, be concerned that Johannesburg could become the new Harare, and we could be looking at, if the EFF were to come to power, the same kinds of nightmare stories that have taken place north of here in Zimbabwe.

Kevin: Last year, Dave, when you were meeting this same group of men in Singapore, you met Craig Deall and Ben Freeth, who had had land taken away and family members lost with the horrors that had occurred in Rhodesia before it became Zimbabwe. You’re saying this radical shift to the left in South Africa, if it continues, could lead to things similar to that?

David: And that’s really only if the EFF party comes into power and replaces the ANC. It’s complicated. People are preferring the corrupt evil that they know, as opposed to, really, the evil that they don’t know with the EFF. So, it could go that direction, but my guess is that we have another period of sort of status quo with the ANC, with Jacob Zuma, and it does not become more radical, it just stays as corrupt as it has been.

So, you’re dealing with leadership that is lazy, that is entitled, that is, quite frankly, dealing with some of the transitional issues that you saw, similar, in India, after they gained independence from Britain after about three or four decades. They went through a period of soul-searching and significant change, politically, in that same timeframe. It was growing pains, I guess you could say.

Now, the problem with growing pains in South Africa is, they don’t have the wind at their backs, financially. We have all of the BRICS countries and many of the other commodity-producing emerging market countries which are not emerging, the are submerging. They have been stuck with a resource blessing, which is also a resource curse, and they have not diversified their economies enough.

Think about this. In the 1970s and 1980s when we traveled to this country very frequently as a family, they were 70% of the world’s total gold production, and a very wealthy, well-run country. Today they produce less than 10% of total gold production, and their largest export is wine. There is nothing wrong with exporting wine, and as a matter of fact, they make some wonderful wines, which we have enjoyed while we are here in country.

But here is the issue. That is an entirely discretionary export. It is something that, you watch the global economy ebb and flow, and it will have an impact in places like Bordeaux, it will have an impact on places like Napa Valley, it will have an impact on places like Stellenbosch, the wine region here in southern Africa. It is because, again, these are discretionary dollars, and when things get tight, people don’t buy as nice of wine, people don’t buy wine as often. It’s one of those first things to go.

So, I think we’re back to looking at the world struggle for some part of the global economy. I remember, it was about a year ago, we had Tomas Sedlacek on the program, and he said, “An economy tells us much more about itself when it expresses its weakness, not when it is at full strength.” Do you remember when we had that conversation? He said, “We can get to know it much better when it is bare and humble, than when it overflows with pride and despises everything other than itself. Strength frequently hides the essences of things, while weakness reveals it.” And we have that here in Africa, but I think we also have it in the global economy, as well.

Kevin: I would like to go ahead and shift to the global economy at this point because we got the GDP numbers here in America last week, and they were sorely disappointing. That comes right on the heels of getting the durable goods orders, which was also sorely disappointing. Talking about economic weakness revealing your true self, we seem to have no wind at our backs here in America right now, and now that we’re getting close to zero interest rates, we’re starting to see that without an economic restart with easy money, we’re probably not going to have an economic restart without a depression or a recession of sorts, are we not?

David: We just finished the Democratic National Convention, and the view there was that the economy was doing very well, and that is an idea that Mr. Obama has been a champion of. And at the DNC, the pom-poms were out waving, celebrating the fact that the U.S. was going from strength to strength. And in point of fact, we are, today, the one bright spot in the global economy. Contrast that with two years ago when the assumption was that China would lead us out of recession and into a strong global performance at an economic level.

And so, the themes that we have been fed, whether it was the emerging markets which would pull us out, or China which would pull us out, the U.S. is the singular bright spot, except for one thing (laughs). We have an earnings recession, which in every instance in the past, when you’ve had a major earnings recession you’ve ended up with a bear market in stocks. And yet, the stock market trades near all-time highs, but with the average investor either out, and glad to be out of the market, or absolutely clueless about the dangers inherent in their stock portfolios.

As you mentioned, GDP figures came out this last week, and we’re not so bright, up 1.2% versus what was expected, 2.6%, and if you look at that on a year-on-year basis, this is where you have to say, we are on alert – on high alert – for recession. After that, what we had with the durable goods orders, we were expected to be down 1.3%, and we were down even more than that. We were down 4% last week, looking at the durable goods numbers.

What does that indicate? It indicates that we have very weak business spending, and if business executives were enthusiastic about the direction of the world economy, and the direction of consumers, and the growth of their businesses, would they be ramping up for it? Would they be gearing up for it? Would they be spending in anticipation of it? And the answer is yes, yes, yes.

But what we have in the numbers is quite the opposite – no, it’s not happening. Business spending is not attractive at all. You have J.P. Morgan and Goldman-Sachs who both have suggested in the last ten days that it might be time to move to the sidelines for a couple of months, and that is, specifically, talking about equity investments.

I just want to say, we’ve had that conversation, and have suggested it for some time. It’s not warranted. The risk in the market does not warrant any possible reward that you might get from it, and that quite frankly, it’s okay to miss out on some growth occasionally, particularly when you have such a radical disconnect between asset prices and economic fundamentals.

One of the most helpful things that came from last week’s conversation with Richard Duncan was the distinction between capitalism and creditism, and I think it is clear that capitalism is dead, and that we’re addicted to credit. As addicts to credit, as beneficiaries of easy money policy, it is worth noting the dangerous territory that we’re in. You have the S&P, which is at new all-time highs, you have the NASDAQ, which is at 16-year highs.

And yet, if you look at the sell signals which gain from a technical standpoint, looking at the MACD last week, and you look at the volumes which are not increasing on the other side of a technical breakout – let me just repeat this. You have the S&P at all-time highs, the NASDAQ at 16-year highs, and yet the volumes, which should be following through and driving the price even higher – they’re not there.

Kevin: And that’s always been an indicator in the past. When you have dropping volume, and rising prices, that’s always been an indicator that you’re coming into a correction period.

David: That’s right. So, it looks to me like this is a time to be nimble, as an investor. That was one of the challenges and suggestions made by an asset manager here in South Africa – didn’t take quite as bearish a view as we have, agreed in principle with where we are and where we are going, but suggested just being nimble. And I think that’s absolutely correct.

My one counterpoint to that notion of being nimble is just this. We always assume that we’ll get out when we can, when we should, get out. My suggestion is, if you register concerns with economic fundamentals in the picture, weak, at present, as they are, don’t try to be the last man out and maximize every last dime of possible return. Be a little early. It’s better to be a little early, than even a second late.

One of the things that I can’t help but reflect on, being here in South Africa, is the massive difference in the exchange rate. When you look at currency values, it is really helpful to step back and with a 30-year perspective, know that the currency is telling you a very important story. If you look at the current moves in the rand, they were very, very weak, and actually, in the last few months have improved. So you might say, “Well, things are getting better, right?”

This is why it is important to step back and see the forest instead of just looking at the trees. When I was here traveling with my father, the exchange rate was between 3½ and 4-to-1. On a 3½ to 4-to-1 exchange rate, we would bring investors down here to South Africa, and those tours were five-star across the board. And of course, they cost the equivalent of 25 cents on the dollar. Today, the exchange rate is not 4-to-1, but 14½-to-1, and it’s been as bad as 19.

So, the long view is that in spite of a positive change, politically, from apartheid to a more fair system today, the opportunity to advance the country has been squandered, and the stock, if you will, of the country, that is, the currency of the country, tells all. Not only have they been downgraded time and time again in the debt markets, but the currency tells you that what could have happened here in southern Africa, and been an example for the whole continent, again, has been an opportunity that has been squandered.

I don’t know when, and I don’t how, that opportunity will arise again. It certainly won’t be under the leadership of Jacob Zuma, but nevertheless, I think, as we look at our own situation in the United States, it is helpful to get these mile markers, the exchange rate, if you will, over time, because on a day-in, day-out basis, you don’t really know where you are. Are we up a dollar? Are we down a dollar? Are we up one point relative to the euro? Are we down one point? It’s too much information, and it doesn’t really contain anything of meaning.

But if you can step back and say, “Actually, the U.S. dollar has been on a similar trend for nearly 20 years.” What does that say? In this case, we’re getting the benefit of being the one bright spot on the planet, and as the one bright spot on the planet, the U.S. dollar is stronger than it would otherwise be, as we’ve seen flight capital out of the emerging market, and even weaker economies, into our own economy, and into our own currency. Does that last forever? Not.

Kevin: David, I can’t help but remember what we talked about a couple of weeks ago, when you talked about that exchange rate difference in South Africa. I still think of the krugerrands that your dad would have had in his pocket – one ounce of gold worth at certain amount of rand, worth a certain amount of dollars. Now, those krugerrands today are worth four times, in South African rand, what they were before. And they’re worth just about three or four times in U.S. dollars what they were before. It depends on the timeframe that you’re looking at. So, when you’re talking about stepping back, you have to have something of a consistent measuring rod to measure things with.

It just seems to me like the person who would have stayed in gold during these periods of time of uncertainty, not necessarily as a prepper, but as a person, like you are saying, who stays nimble, watches the changes, and then employs the difference. You could sell that krugerrand today and actually create a business opportunity when the opportunity presents itself.

David: In front of me I have a Mining Weekly. It is a news rag that is published here in South Africa. And of course, they still do a lot of mining here. One of the editorials, about a four to five page article, discusses gold as a hedge against uncertainty. It goes into the World Gold Council’s comments here in the last week or so, that gold is attracting a brand new class of investor. They’re seeking it because of its quality, they’re seeking it because of its liquidity, they’re seeking it as a hedge against market uncertainty, and of course, it has always played a role where there is weakness in the economy, or where there is strange goings-on at the level of politics, or intervention.

This is interesting because you’re dealing with sophisticated investors, as this new class of investor into gold, who look and say, “What about intervention risk? What about political risk? What about economic risk?” Not just market uncertainty, but look at all the interventions in the marketplace today. How do you make heads or tails of that and create some sort of a hedge position against major systemic upset? We have more of the same in terms of bank intervention from the Bank of Japan here in recent days, where they have decided to double their ETF purchase scheme. That is, the central bank is stepping into the stock market to buy stocks and monetize stocks, thus boosting the stock market.

Now, you tell me if this kind of behavior, interventionist behavior on the part of central banks all around the world, does not merit individual investors, and in this case, the World Gold Council, and this particular magazine is suggesting this – this is where gold gains traction again, when people say, “You can’t make heads or tails out of interventionism, and the only way to hedge against a blow-out is to have some exposure to something that will last, even when the dust settles.”

Kevin: That’s great advice.

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