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  • Former Fed guy Dudley suggests using FED to oust Trump in 2020
  • Sugar Daddy Draghi Leaving ECB – What gifts will he leave?
  • Summers warns “zombification” of economy due to central bank policies


The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

20-Year Race: Gold (487%) Beats Buffett (386%)
September 10, 2019

“When we factor in where we are at as a country in the context of how we price all of our assets, for the dollar, what course is it on? Is this the last chapter, and is it characterized by a bang – a lot of violent regime change – or a whimper – where the evolutionary process just leads us toward greater and greater irrelevance? Time will tell.”

David McAlvany

Kevin:Wow, it’s good to have you back. You were with you dad and your mom and family over in Europe, and fortunately, you sent the tape for the listeners to hear a couple of weeks ago, you and your dad talking. I saw last night, Dave, the pictures of where you recorded that program on Adriatic.

David:We were at Umbria when we recorded that and just looking out over the countryside, sitting right above a series of Etruscan caves. We’re talking about places where people stored things and hid things thousands of years ago. It was a pretty remarkable trip.

Kevin:You ended that trip with a triathlon, like everybody does when they take a relaxing vacation the last thing they want to do, the first thing you want to do, actually, is go ahead and run a race that is 70 some-odd miles.

David:(laughs) I’m fairly certain that in 24 hours I was able to crank enough cortisol through my body to eliminate all the benefits of several weeks of vacation.

Kevin:You were telling me a story. You and I were talking last night about playing the long game and how important it is not to burn out early if you are actually playing the long game. You are the author of the book Legacy, which is all about long game, but your race taught you something, didn’t it?

David:Yes, it did. I am reminded of it because there are parallel lessons here. If you are an options trader you are focused on what happens in the next two seconds or two days. Maybe if you are a long game thinker in the options market it is two weeks. But that is your perspective. The longer term perspective may incorporate years or decades.

Kevin:If you’re Warren Buffet, it’s a lifetime, or generations of lifetimes.

David:Yes, and so I think there is that option of thinking in very short terms and it makes you into a person who is making very different decisions. So, to me, my preference is for the long game, and when you are racing you certainly have to keep that in mind.

Kevin:You said your race, your swim, your triathlon, and fortunately, I’ve gotten the chance to do this once, a half ironman with you. You sort of got addicted to it. I moved away from it after doing one. But you said your swim was the fastest you have had, a personal record, there in Austria.

David:That’s right. We were in Zell am See, Austria, and I did my fastest swim ever, the most beautiful bike ride I’ve ever been on.

Kevin:And it’s a fast bike ride, too. It was close to probably a record bike ride for you, at least personally.

David:I’ve actually had better races, but it was a solid effort given the terrain.

Kevin:But you pushed, and you put everything into the first two legs because you told me the run was misery.

David:The run was really tough.

Kevin:It is a half marathon distance, just the run alone.

David:That’s right. Usually the first mile is no fun just because you’re transitioning off of kind of thick legs from the bike ride, 56 miles on the bike. And this time it was mile seven before my legs began feeling natural again, the lactic acid from the ride. We had this pitch that went from 4½% to 8-9%. And then it ended in a small mountain town, Dienten, at about a 14.4% grade.

Kevin:This is the bike you’re talking about.

David:That’s right. That’s the grade on the bike. And then I pushed it downhill pretty hard and just didn’t leave anything in the tank. So again, just kind of a lesson, you have to take a measured pace in all things in life, and when you don’t there is pain. And then all of a sudden these other lessons. I am suffering in the first seven miles here, ready to quit, and I’m finding all of these weird emotional outlays. I’m thinking about what should have gone right on this trip, and my wife should have done that – amazingly irrational.

Kevin:You start finding fault because you’re in pain.

David:Oh, totally. It was interesting to see it, to experience it, to move past it, then reflect on it and say, “Wow, this is amazing. I set myself up for a very difficult thing because I wasn’t playing the long game, I put out too much effort up front. And then all of a sudden I have to deal with this warped and twisted emotional response to pain. I love the lessons learned in the context of struggle, and I’m reminded that so many things in life, so many opportunities we have to walk through some version of suffering, and for some people it is far more significant and far more acute, the loss of a loved one, or what have you. These are all opportunities for us to reflect, to grow, and again, I think what we are all overwhelmed by in the minute, in the day, if we have a longer-term perspective, all of a sudden it doesn’t matter quite as much.

Kevin:The word is expectations, as well. Part of the reason you were experiencing the pain and getting angry at things you normally wouldn’t on that run is that you had expectations that were not being met, and we see that in the investment world. I’ll give you an example. When Bitcoin exploded, that all of a sudden became the new norm for people. It was like, “I’d like to see my 1000 go to 20,000.” Well, that can’t be an expectation, it’s not a long-term type of thing.

Another thing, though, let’s transfer it over to what we have been seeing with Mario Draghi and the central bankers, but I’m going to just single out Mario Draghi because this week he is probably going to continue to give gifts that create unnatural expectations in the market. That’s just free money, quantitative easing, buying every bond out there until there are negative rates.

David:It was really interesting being in Italy as the government is collapsing and reflecting on the Italian head of the European Central Bank, who is a former Goldman-Sachs guy. He is now retiring and Christine Lagarde is coming on board quickly. So this is one of his last meetings, the ECB meets Wednesday/Thursday this week, Draghi has always delivered the goods.

Then of course, next week the Fed meets, and at this point the Federal Reserve Committee is divided on cutting rates. Should they cut them at all? Should it be 25 or 50 basis points? It’s really a fascinating environment because if there is one thing I’m grateful for at this point, it is how the markets have all these things figured out. You’ve heard the Efficient Market Hypothesis where we know what is going to happen and it’s all priced in. There is no such thing as surprise in the markets today, and I’m grateful for that. I’m grateful that we have it all figured out.

Kevin:And the problem is the market is based on surprise. That is what new information is.

David:(laughs) I apologize for my sarcasm. But the issues are many because you have German industrial production which is falling and it fell more than expected in July. Germany is the engine of growth in Europe. This is why it matters so much. If you look at German GDP versus the European Central Bank assets, there should have been lift in the German economy from all the quantitative easing that has happened there, but it hasn’t helped. It hasn’t happened.

You have the muscular moves by the ECB, and that is running alongside German GDP even as it is running out of gas, as it is continuing to slow. And so the German economy remains weak, low rates and massive liquidity from the central bank there sloshing around. Despite the lack of economic impact, there is this expectation that Draghi is going to go out of office with this hot announcement, deeper cuts with rates, more bond buying. It will help make a smooth transition as he leaves the post, again, remember, because Lagarde is taking his place shortly. And of course we all reflect, what kind of legacy does he want to leave? He definitely wants to go out on a solid note.

Kevin:Thinking this through, normalization of rates – they have talked about that now for ten years, that is, raising rates back to what would be a normal economy. But instead, going back to your race, when you push too hard too long, you are going to lose somewhere in the end. And have we done that with the Draghi influence and the Bernanke and Yellen influence, and now the Powell influence?

The Bank of Japan – we can go ahead and talk about all the central banks – they have been absolutely applying every bit of energy that they possibly can, emergency type of energy. There is no way to normalize. In fact, at this point, is there any way to go anything but negative rates?

David:I love that idea that there is energy use and you are just making a decision as to when and how to spend and use that energy. And beyond race, you can supplement and fuel as you go, but even your body has limits in terms of what it can take in in a given period of time. And if you take in too much energy, like you want to transfer fuel to energy, you can actually create problems by adding too much fuel to create the energy that you desire.

Kevin:There is something that happens in a race when you stop getting enough oxygen in the fuel you go anaerobic. Anaerobic you can use for just a little while, but I’m wondering, are we seeing the exhaustion of Germany, which really does lead Europe? Are we seeing that we can’t normalize rates, but actually what we are going to have is deeper and deeper negative rates.

David:Yes, we have talked about that with the IMF paper saying deep, deep negative rates are a real possibility, and we are told that they can be far more negative in nominal terms than previously imagined. That is the academic argument. As we discussed a few weeks ago, this is, I think, one of the contributing factors to a slowing European economy. When you start lowering rates, you have banks that play this vital role in stimulating economic activity. They take in deposits and they put out loans. This is called intermediation. It is the process whereby deposits come in, loans go out, and those loans are to accommodate consumption or investment by small businesses, other things like that.

This is what we discussed a few weeks ago. Within the European banking community, depositors have the memory of the bail-in. We go back to Cyprus and Greece, and now you have the real-time interpretation of bail-ins via negative rates because that is essentially what it is and that is what Carmen talked about last week when we replayed that. It is just another form of theft or pickpocketing, as she described it. Bank depositors have slowed the flow of money into the banking system, and that has slowed the quantity of small loans out of the bank as well.

So this low-rate environment is crippling the normal intermediation process that banks have, and yet we don’t see the dots being connected by academics. When we were in Italy, we spoke to a number of people about real estate lending, and at present in Italy it is virtually non-existent, so you have very low volumes of transactions of people buying and selling homes because it all has to be cash transactions fully paid out. That definitely impacts the volume of sales.

Kevin:Well sure. Bank intermediation. I read something yesterday about how the negative rates have actually caused the zombification of banks. It is creating the living dead – that’s what a zombie is, a dead body that comes to life, but it really has no life in it.

David:That is actually what you read yesterday. Larry Summers, when he was at Jackson Hole, he was saying, “Look, this is the reality. You guys think this is going to work, but keep in mind, we are doing the zombification of the banking arena, and I don’t think this is going to turn out quite the way you want it to.” So even Larry Summers is now saying, “Look, low rates, negative rates, deeply negative rates – you’re playing a very dangerous game.”

Kevin:So they have broken the very thing that stimulated the economy in the past.

David:Exactly. So the role of finance within the economy is a pretty big deal. The role of banking within an economy is a big deal. And when bank intermediation is broken, which it is in Europe, keep in mind if we do the same thing, negative rates brought here to the U.S. are likely to cause the same issue. You already see it in terms of velocity. We did mention this a few weeks back. Velocity is the rate at which a dollar, or any currency, turns over in an economy. It is at such a low level on both sides of the pond, both sides of the Atlantic, and yet central bank academics are not connecting the dots of cause and effect.

Again, you might ask, “Why can’t they?” I think this is back to this issue of the strategies that they are suggesting and employing are necessary given the amount of leverage that exists in the financial system. I’m not saying necessary as justifiable, but there is a logical sequence. When you have too much debt in the system, you have to control the variables that you can control.

Kevin:But now we get a chance to peek behind the curtain, because next week the Fed is going to announce whether they are going to be lowering, raising, or keeping interest rates the same. The peek behind the curtain is this: we have a stock market that is near all-times highs. They are telling us the economy is great.

David:2% from all-time high.

Kevin:They’re telling us the economy is great. So the only excuse for lowering rates would normally be that we need to stimulate the economy. Is there another reason at this point? Is that what you are saying?

David:I think it is a thin, thin argument. It is tough for the Fed, I think, to do anything when you have the S&P 2% from all-time highs, employment officially at 3.7%. And imagine if we are, in the next week or so, at all-time highs and they are cutting rates? I think history is going to record that as folly, and it is going to be interpreted by future generations in a fairly unforgiving way.

Kevin:And it is not just the stock market. Employment is another thing that the Federal Reserve really looks at, and a lot of times they will use high unemployment as a reason to lower rates. What do they do when it is low unemployment?

David:Right. So you have the official numbers at 3.7. Additionally, you had August ADP numbers, which were strong. You had July factory orders, which were stronger than expected. I guess what we are saying is, this is not a backdrop that justifies or says that Fed intervention is needed right now.

Kevin:Is it the global economy? Are we trying to save the globe?

David:Well, sure, that’s what everyone will point to is uncertainty. So we have to accommodate because of the uncertainty in the market. Where is the uncertainty tied to? Yes, the global economy is ugly. Yes, that includes the powerhouses in Europe and Asia. Yes, there is a broad swath of Latin America which is struggling. It is struggling now just to avoid recession. Then, of course, we have the disaster stories of Venezuela and Argentina, which are already in recession. But on a relative basis the U.S. economy looks better. It looks better than all of them.

I think this is something of a sticking point for the committee. Why you have dissent is, the rest of the world looks pretty ugly. The U.S. doesn’t really look that bad. Our manufacturing PMIs – Purchasing Manager Indexes – those are weak. They are at 2009 levels. That is nothing to write home about. But your service PMIs, they are okay. How does it make sense to be lowering rates at all? I guess you could lean on David Rosenberg, who would be the first to say corporate earnings have been under pressure, and he would argue that we are already in an earnings recession.

So looking under the hood of corporate America, things have been deteriorating. You have the broader economy – not so bad. You have retail sales that, even with the decline in home purchases and auto purchases, retail sales were pretty decent recently. But you look under the hood of corporate America, Dave Rosenberg says, “Earnings in a bit of a decline – we don’t like what we see for the 3rdquarter, and the earnings recession is already here.” So maybe that is it. Maybe that is what they are responding to.

Kevin:Sometimes the stock market can be a little bit like a spoiled child. Remember the tantrum a few years back when the Fed said things were starting to look good, we’re going to go ahead and raise rates? I think it was just a quarter of a point.

David:The taper tantrum.

Kevin:Yes, the taper tantrum. That’s exactly right. The market started falling hundreds of points instantly. And of course, they reversed course.

David:Back to your point about expectations being so key. There is a large expectation from market participants that the Fed do something – why now, I don’t know – but do something. And we know from experience that the market throws these tantrums when it doesn’t get what it wants.

Kevin:Yes, but we’re getting near the top. The Price Earnings Ratio – anytime it is above 20 you have to be nervous and we are at in the area of 29-30.

David:Again, we’re jumping from a regular standard issue price earnings ratio, closer to 20, versus the Shiller PE. So the Shiller PE, or what they call the cyclically adjusted price earnings multiple, you take out ten years and take out some of the volatility, that’s at 29, and it’s at the top end of the range. It’s not a record. The record was back in 2000. But stock market capitalization to GDP, what we call the Buffet ratio, that is at 142%. That is at the top end of the range. And your price-to-sales, looking at that as a valuation metric – that is at an all-time record high.

Kevin:I do have a question, though. I have often, from clients, been asked, “What if the Fed becomes political? That is sort of tongue-in-cheek anyway because the Fed almost always is political. They try to act like they are unique and unattached to the political system, but actually, guys involved with the Fed make political statements. I’m thinking of Dudley.

David:The distinction is between two words – remain and appear – because you could say, well, we’re supposed to remain objective. The reality is, you are supposed to appear.

Kevin:It’s all perception.

David:You are supposed to appear objective. One more thing before we move past valuations because this is really about timing and not valuations, but I think it is complementary. You have to remember, September to October is that period of time where you are getting to the end of the six bad months and you are moving toward the six good months of the year. Just looking at the stock trader’s almanac, six bad months, six good months, there is a time you want to be on the side, that you don’t want to be on. If you’re trading on an annual basis there is a way to manage an account that way.

There are some weaknesses to doing it that way, but the point being, we have had, historically, a number of our major market dislocations in that September to October timeframe. So it is really important that the market holds together here and now. We can talk 2020 elections and we can talk Bill Dudley, I’d love to, but the idea that we get very far down the road, we need to get past September and October without a major market dislocation. Otherwise this is a season of natural stress and strain.

Kevin:Do you remember a few years ago we looked at how many Democrats were in the Federal Reserve and it was over 90% of the Federal Reserve.

David:It has nothing to do with their hiring policy.

Kevin:Well, here is my question. Let’s say you don’t like Trump, and let’s say for the good of everyone in the world, you think that maybe Trump shouldn’t be president in 2020. What do you do if you’re at the Fed?

David:Yes, well, I’m glad that Bill Dudley is no longer at the Fed.

Kevin:Right. He is still an influencer though.

David:Well, he is. He is. He was head of the New York Fed from 2009 to 2018 and he is going to be talking at the next Grant’s Conference next month of course.

Kevin:You’re going to that.

David:And I wonder if Dudley’s comments that he made recently to Bloomberg, I couldn’t believe it, one of his comments advocating that the Fed interfere in the 2020 election.

Kevin:No more the Russians, but the Fed.

David:Yes, isn’t that interesting how it is wrong if it is the Reds, but if it is the Feds, it’s just fine.


David:Well, we live in an interesting world. Bloomberg quoted him, late August, saying. “There is even an argument that the election, itself, falls within the Fed’s purview. After all, Trump’s election arguably presents a threat to the U.S. and global economy, to the Fed’s independence, and its ability to achieve its employment and inflation objective. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome of 2020.”

Kevin:Hint, hint.

David:He’s no longer at the Fed, he can say whatever he wants, but you’re right, he is an influencer. And just as a reminder, Dudley was one of the Goldman transplants into the Fed. He served as New York Fed President about ten years, 2009-2018, and I listen to those words and it sounds reasonably nonpartisan.

Kevin:Oh, it was just an objective warning to make sure you stay objective.

David:Because we care about the global economy and we care about monetary policy effectiveness.

Kevin:Right. Right. Well, I have wondered, and clients have wondered, are they going to pull the rug out from under Trump? You and I have talked about this on the Commentary, as a possibility.

David:Yes, because if there are sympathetic orders within the Fed, to Mr. Dudley’s thinking, the markets suffer and you are going to allow Trump to take the brunt of the financial market deterioration in the social and political backlash there in the 2020 election. On the other hand, you have Powell who is talking about extending the business cycle. So what does that imply? It implies activism consistent with our current age. It implies rate cuts. It implies market support on any major correction. It implies the Powell put, so to say. It implies that downside risk, in extremis – he has it covered.

Kevin:Recently, my son and I watched the movie, Free Solo. I think you said you had just seen it, too. But the thing about free solo– what was he climbing, El Capitan?

David:That’s right, at Yosemite.

Kevin:Yes, and it had never been.

David:Free solo was climbing without ropes.

Kevin:Yes, which means if you make a mistake, it’s a really, really long fall. You have time to think about it, actually, I think, before you hit the ground. But how do you manage money in an environment where if you just miss one handhold, you fall long enough that you have time to think about the complete destruction of the economy. Yet, how do you manage money? We have clients flying in this week, meeting with Doug and Lila and you and Robert, and the question is going to come up – “How do you manage money in such a dangerous environment?”

David:And we’re not taking the risks that the Fed is, because the system, itself, is precariously perched on some cliff edge. That is the reality. We have gotten so above our heads in terms of the kind of leverage that we have in the financial markets, that these guys with Ph.D.’s can pretend to have it figured out. We talked to William White years ago at the Bank of International Settlements, it is art, not science, and we get it more wrong than right. And yet, they have conveyed, or created, this idea that it is just the numbers, and it is just science, and it is just probabilities and we have just got it.

Kevin:So you’re going to use ropes, thank you very much – ropes, carabiners and the things that would actually keep you from the long fall.

David:Well, for us, managing in this environment is not without a challenge because you have global financial conditions which are frail, you have the U.S. financial markets. Contrast that and financial markets between U.S. economic metrics. But U.S. financial market metrics are pricey. U.S. economic metrics look not so bad, particularly in contrast to the global metrics, which are abysmal. And then, always waiting in the wings you have the central bank community defending what is a completely over-leveraged financial system. So if you see any price volatility, the fear is that price volatility morphs into liquidity concerns for particular financial market entities and then solvency concerns, a replay of 2008 and 2009. So, as an asset manager, you have the interventionist X factor, which is real. There is money that can flow from the Fed, and it can also flow from the Treasury if you’re talking about fiscal intervention.

Kevin:There are still tools.

David:Yes. There are announcements that can be made. But even then, it is up to the market to buy it, and to believe that what is being said and what is being done will be effective.

Kevin:And they have been trained to do so. Let’s face it, the market doesn’t think for itself anymore. More and more, when I’m talking to somebody, especially somebody new who has not worked with us before, they show us their assets – the 401k and what have you – and I will say, “What are you invested in? Tell me – stocks, bonds, what have you?” They have no idea.

David:And I think one of the things that is a differentiator here is the age of the person questioned, because if you had money invested in 2008 and 2009, you may have confidence in the system, but it is not without doubts, because you have a muscle memory that is a pain memory. It is, “Uh, I don’t want to do this again. Uh, I had a nest egg and that nest egg got cut in half in 2008-2009. I can’t do that again.” So age does have a bearing because that would mean that you went through the turmoil and travails of the global financial crisis.

Kevin:Money managers, as well. A lot of these money managers were not there in the 2000s.

David:Well, I think that is an absolutely critical point to make. The majority of asset managers today had not graduated from college, and had zero experience coming through the global financial crisis. This was only ten years ago, but the majority of asset managers today are sub 40, even in their late 20s and early 30s. They were not around, they have no exposure. All they know is, if there is a problem, the Fed intervenes.

Kevin:You don’t see much gray hair. You do, however – this week, Doug’s is coming in. You have a little bit coming in. I’m sorry. You guys have been through a few of these.

David:I will not use Grecian Formula.

Kevin:(laughs) I talked to Jim Deeds yesterday, 87 years young, and this guy is still actively engaged in watching the market, but he is completely dismayed because he looks at money management these days. What I was saying is, many of the clients that I talk to that are new don’t know what they are coming out of because these funds now have new names like the 20-year fund, or the 30-year fund, or they will put the date of retirement on the fund and there is just an automatic way that you manage that kind of money. But you ask what the mix would be – are you actually managing? Are you buying and selling stocks based on certain company attributes? And they’re not. And that really is the market. You said the market has to buy it, but if the market is just buying everything, when do they panic?

David:I think what I am focusing on, too, is that the market has to buy that intervention as an X factor. When you have an announcement from the Fed, or from the ECB or from the Bank of Japan, there is still this opportunity for the participant to say, “Is this believable or is it not?” In moments of crisis people feel more, people think less, and they tend to defer to authority or lean on professionals, particularly if they are messaging and the solutions that are proffered are convincingly communicated.

And the effective communication is perhaps the greatest tool that the central bank community has. What they can and can’t do in real interventionist terms still hinges on the public’s validation of the strategies, and it comes down to this one word – belief – belief that those strategies are adequate. So the hinging and holding things together, or the unhinging process, one way or the other, is purely psychological.

Kevin:Somebody must be seeing something because the dollar is still strong and gold has been putting on more and more and more gains. Yes, it has come back a few dollars here in the last few days, but look at the last couple of years.

David:I want to go back to the comment we made earlier about just having some perspective and how if you are trading options sometimes you forget the big picture. How is this for a big picture? Warren Buffet versus a one-ounce gold coin? 1999 to the year 2019 – a 20-year stretch, and as Berkshire Hathaway is weighed in the balance, it is found wanting. Gold is up 487%, Berkshire Hathaway, 386%. The best management that money can buy, the smartest investor, maybe, known to man, at least in this generation, perhaps the most influential way to invest, value investing, long-term investing…

Kevin:He is being beaten by a little silly one ounce…

David:Gold coin. Now, so would you say it is noteworthy that the dollar is strong, the markets have held together. They are a few percentage points below all-time highs. We’re talking the NASDAQ, the S&P 500, the Dow. And here we have gold last week reaching $1558, silver is nearly $20. That was last week, not this week. What we have referenced on the Commentary is this gradual and quiet move of gold off the lows of late 2015, December 2015, at $1050 an ounce. And we have described how the movement in metals has really been eclipsed in terms of the market awareness of this, it has been eclipsed by the strength in the stock market. And it has basically given us a stealth bull market in precious metals.

Kevin:Is it not that all the big markets start in a stealthy quiet way? That’s an early phase.

David:Yes, it is. And so the activity of the last 90 days is shining more of a spotlight on the metals. Silver confirms the move higher here with its most recent move, and the confirmation of a longer-term trend in the metals began with gold surpassing and holding above that $1365 to $1380 range. And then, as I mentioned, silver confirms on the upside again. You have that ratio shrinking from the mid 90s to the low 80s, very constructive – very constructive. And it would be constructive, too, to see the $1500 level in gold hold.

Will it? Maybe it does, maybe it doesn’t. I think we could go back to that $1365 range and still be in a very good place, $1365-$1380. I’m not saying that we will go there, I’m just saying that a correction is in order, a cooling off is not a bad idea, and I will tell you, it’s a really tough call. I want to own gold now, and I’m not selling it or trading out of it on the basis of potential volatility. This is very short-term. You look at the next couple of weeks – it is a tough call. You have central banks that are doing their thing. The next two weeks are going to be very interesting between the ECB and the Fed, and what we have seen is a move higher as a function of Fed activity and central bank activity move higher in terms of gold prices.

Kevin:So the trend is intact. What you are saying is, maybe buying when you do see a drop in the metal – that would be wise.

David:So that really big picture of starting at under $300 an ounce and moving to now $1500 with an interim high of $1900 back in 2011-2012 – that long-term trend is still intact. There are some short-term gyrations. I guess what I am saying is, rather than chasing prices, buying on pull-backs. We actually have one now. Silver is now a $1.50 off its peak. So short-term guidance is, patiently put money in the metals, and the 17s is great for silver. Set the short-term guidance next to the long-term guidance, which is that we have re-engaged a multi-year uptrend in the metals.

Kevin:Yes, but it is not the American buyer. This is a worldwide phenomenon. You talk to an American and they have no interest in gold.

David:No, I think it is a function of the global economy, it is a function of the concerns that dysfunctional relationships are proliferating. It is a function that under the surface concerns about consequences coming from the monetary policies already in play, and still those monetary policies yet to be announced, obviously, this week, next week, between the ECB and the Fed.

The bull market in metals is a function of the concerns relating to the gradual, maybe even the violent overthrow someday of King Dollar, at some point. And I think it is also a function of yield, where you look at the interest rate market, and this goes back to the conversation we had with Dick Sylla a couple of weeks ago. It is nearly 17 trillion dollars in bonds with a negative nominal yield. And it is fascinating, if you chart the quantity of bonds at negative yields with the price in gold, both are moving in lockstep. So maybe it is a function of having no yield in the fixed income market where the price of gold is moving higher, tracking the quantity of negatively yielding paper.

Kevin:So it looks like we are going to have more negative yielding paper. But the long-term trend – there are things you can do within the metals as they rise. You were talking about silver looking attractive in the 17s. What is also attractive about silver right now is, you can get 80 ounces, roughly, for an ounce of gold. And at some times those silver prices get up to where 80 ounces would buy two ounces of gold.

David:The way I look at it is, buying silver at 17 is like buying gold at a 40-50% discount. So 60 cents on the dollar is what you are paying for gold if you are buying silver today. I think establishing reasonable cost basis, riding the long-term trend, that is an effective way of compounding wealth over multiple cycles, and gold illustrates that. We are near record levels in the S&P 500. We’re not near record levels in gold. We are still $400 away from that. We are still over 100%, more than that, away from silver exceeding the old highs.

Yet, looking at gold, it has still outperformed stocks over the past two decades. Pick your indexes, as we were picking on Berkshire Hathaway a minute ago, but from the turn of the century the NASDAQ is up roughly 60%, and the Dow is up 130%, not adjusted for inflation. You may be the critic out there that says, “Wait, wait, wait. Choose a different starting date for those returns.” Okay, well, we could end up with different numbers, even the critic has to explain why gold and silver have moved, in this period of time, because they move on an emotional and psychological basis. There are a number of people in the system who are opting out of the system because they see problems with the system, and so why does the Dow-Gold ratio sit at half the level it did in the year 2000?

Kevin:Right. And the Dow-gold ratio – you just take the price of the Dow and divide that by ounces of gold. Still, we are a long way away from where we were in 2008.

David:I guess what I am saying is that you have seen progress made in that ratio, and it implies something about there being a trend in place. Even though financial assets appear to be the most important thing to own in a portfolio, there are a number of people who would second-guess that and have already positioned in metals, and you see it reflected in the ratio.

Tell me what this implies. This is even more powerful to me, at least this week, this month, and for 2019. TrimTabs Investment Research counts August as the 5thmonth of this year in which insider selling has topped 10 billion dollars. So get this. For August that is an average of 600 million dollars a day of insider stock sales. That is per day.

Kevin:These are people who know what they are doing because they own shares in their own company.

David:Of course. And if you listen in to some of the earnings conference calls with the CEOs, whether it is in the tech space or whether it is in the consumer space, these guys are not particularly encouraged, and maybe they are a little concerned because of the tariffs and trade and that creates uncertainty, and that is leading them to lower forward guidance. But I can tell you, they are operating and taking personal action to protect their personal balance sheets, and you have to go back to 2006 and 2007 for those kinds of numbers – 600 million dollars a day in insider stock sales?

Again, TrimTabs put the number together. But I think, when I look at the Dow-gold ratio, when I look at the insider selling, there are some signals here that don’t matter for someone who is trading on a daily basis, who is looking at options trades, but absolutely matter, and absolutely tell you what you need to know if you are concerned about a longer term or a bigger picture.

Kevin:Dave, today marks the anniversary of September 11, 2001. You actually had a direct connection. You, fortunately, were not at the World Trade Center when that happened, but you had been recently before that.

David:I was at Morgan Stanley when the towers came down, having recently finished my training with the company in one of those towers. And from then to now, again, reflecting on the markets and reflecting on gold, still, there has been a trend change. And the underlying factors driving financial market excess have increased. The excesses have increased. The debt levels we are willing to sustain at a private, corporate or governmental level have increased, they have multiplied. And now we are in the position, relative to our economy, relative to GDP, that in order to maintain our debts with the current level of economic activity we have, you have to manipulate rates to the lowest possible level.

So again, all of these things fit tightly together. Controlling the rate of interest is a required path for the global central planners to prevent the wheels from coming off, as interest expense would blow up the equation. You have to think about that interest expense. We have more than doubled the national debt. If you look at, again, corporate balance sheets and private balance sheets, the one factor that makes this doable, workable, manageable, is that interest component, which means, yes, central banks have to be active heretofore.

Leverage has this scale, and it only makes sense at these numbers if you believe you can control the interest component. But that move toward market management is shifting the buying habits of individuals. It is also shifting the buying habits of certain central banks, particularly emerging market central banks, and it is shifting them in the direction of gold.

Kevin:When you try to control too much, it goes out of hand. Remember [Richard] Buchstaber, when he talked about A Demon of Our Own Design, the idea behind trying to control or manage risk oftentimes gets you into trouble. I also think of Tainter. Remember when we interviewed Tainter, The Collapse of Complex Societies?

David:Joseph Tainter.

Kevin:Yes. His whole point on the collapse of societies, or even when you have catastrophic events like when the shuttle blew up, you have a million different working parts, and they are all under complete control, or you think, until one thing goes wrong. With the rise of gold right now, aren’t we seeing the rise in gold paralleling the dramatic need to control everything?

David:Yes, I think you could probably chart it, and I’ll have to figure out how to do that, demand for the metals increasing seemingly in proportion to the measures taken to manage outcomes. Anyone with a sense of history knows that the requirement to control, when it gets to the point where you must insert yourself into the equation in order to control an outcome, it implies that control has already been lost. It is a little bit like a parent – when you have raised your voice, all you are doing is signaling that circumstances are already beyond your ability to influence, and now you are just desperately trying to rein them in and use what power you think you may still have to get a desired outcome.

But how people respond to you is still tied to this view of what you do and what you say, I’m still going to make a judgment as to whether or not you are credible. So even if you raise your voice, is this credible? What you do, what money you spend – is this credible? There is a judgment, and again, there is a psychological component here which is kind of an unbound problem for the designers of these outcomes.

Kevin:In a way you have two worlds. You have the world of perception, and I have to admit, my perception is, you talk about the changes since September 11, 2001, the changes have been remarkable, but probably the greatest change in the financial markets is the control from the central banks and the negative interest rates, this massive infusion. Yet at the same time, Dave, gold has risen six fold.

David:Right – six times from its lows in the early 2000s. That outpaces the S&P, NASDAQ and Dow, and it should tell you something about the underlying tensions that exist in the financial markets. It should tell you about the perceptions of a number of investors who would say, “I don’t like what is developing politically, I don’t like what is deteriorating geopolitically.” That ties into our conversation with Harold James. He wrote the book, The End of Globalization, in 2008. He was gathering his research from the decade that preceded it. So he is looking at the end of globalization dating back to 2000, 2001, 2002. He is not talking about because of the trade in tariff issues between Trump and Xi today. That is merely a symptom of what has been in deteriorating function for a long time now.

So the political and geopolitical spheres, we have risks that are not yet accounted for in the S&P, in the NASDAQ, in the Dow. The markets don’t adequately reflect it, and I think it is just important to recognize that. It is not a message. The message that gold is sending, and the lack of a message from the financial markets, is not a message that many investors have grasped, but I suspect that they are going to over the next few years. The metals complex is higher for a reason. Gold stocks are up 40% year-to-date because of a reason, and a lot of it deals with this dysfunction in the system.

Kevin:There was dysfunction in the system in 1969. We have talked about how long ago that feels, but actually, that was the last time central banks were buying as much gold as they are right now. I thought it was interesting, this meeting at Jackson Hole a couple of weeks ago – look what Carney said about the dollar. It sounds like 1969.

David:That’s right, it’s about regime change. Mark Carney from Bank of England would love to scrap the international monetary system. He is highly critical of it being unipolar and as dollar-centric as it is. Again, it is rich, right, coming from the Bank of England? Maybe he has forgotten that we hold the baton that the British passed to us, or we took from them.

Kevin:Now he wants it back (laughs).

David:Yes. So you could say, is this an issue of nostalgic regret? Maybe they played their hand poorly in the 1940s after the war. Or is it like a Brit at the Snooker table? Have you ever played Snooker, where somebody else’s loss may be your gain? That’s very British – very British.

Kevin:But what he is proposing is a currency to replace the dollar, a little bit like what Facebook proposed.

David:It could be the libra, it could be something else. I have a hard time imagining Facebook’s libra being allowed to supplant national currencies.

Kevin:I do, too.

David:But that is because of the political cost, not because there might not be some demand for it, but I think you can manage that demand and make it go away if you want to maintain the monopoly. And I can’t think of a central bank that doesn’t want that monopoly. In fact, coming from Italy, I think the Italian central bank is regretting having given that monopoly over, and may, in fact, want it back someday.

Kevin:When you had Barry Eichengreen on, he had written a book called Exorbitant Privilege, and it was about the U.S. dollar being the world’s reserve currency. And granted, the word fair, or fairness, is really not even fair to bring up in the program because nothing is ever fair, but it is really not equitable to the other countries that have to pay back their own debt, and we just print money to pay ours.

David:I think the economics have long argued for that more fair world. I’m always going to be a little bit suspicious of perhaps some deeper philosophical motivations behind that. It is not just a pragmatic argument of functionality and what would work best. But a basket of currencies, I think the significant shift here is that you have academics like Barry Eichengreen arguing for the demise of the dollar from a positive standpoint. Now you have policymakers standing up to cry foul that the monetary system, the system incumbent, which is us since Bretton Woods, and of course it differs in many respects from the post war system, but it is still anchored on one system. It is anchored on the U.S. dollar.

Kevin:You introduced me to Thomas Kuhn and just how long it takes a scientific revolution to occur. When you have a paradigm, when you have looked at the solar system, let’s say, for a long time, as something that circles the earth, your mind gets set that way. And then you get somebody like Copernicus who says, “No, I think that it actually circles the sun,” well, that can get you killed.

So, we’re talking about regime change. Can it happen quickly? Does it happen slowly?

David:It’s a challenge, and Kuhn would say it takes a long time and then it happens all at once. So it’s a gradual process, and then very sudden. And there are violent aspects to regime change, and the most violent is when the old regime realizes they are on the way out and there is a fight for survival. That happens in academia. That happens in politics. I was only too pleased to see the former leader of Zimbabwe passed away in the last couple of weeks. He would be a classic case in point. Any time there was opposition against Robert Mugabe, you would just start seeing the body count increase.

So in real terms, when there is a challenge to the regime, the costs go up. I don’t know at what juncture regime change becomes a real issue with the U.S. dollar. If you look at the environment we are in now, it seems that if the global economy begins to suffer, that reinforces dollar incumbency in the global monetary system. I think this is one key reason I would not bet against the dollar in the years ahead. In a world of relative valuation, the dollar may be a big loser, but still a winner compared to the rest.

Kevin:Is this why you don’t try to bet one way or the other, you just buy gold?

David:Right. I’d rather own gold than short the dollar. Here again, we have the gold story. Over time, the price of gold reflects the strengthening or weakening of your dominant currencies. At times the dollar buys more gold when the dollar is strong, or less gold when the dollar is weak. We don’t recognize dollar weakness in absolute terms because of this whole relative strength issue. We compare ourselves to the euro, right now we are stronger than the euro. Or the euro has been weakening in recent years. The pound sterling has been weakening in recent years, the Indian rupee weakening in recent years. Gold tells the real story of the big currencies.

Gold and yen, perfect example. Gold, in yen terms, is already at all-time highs. We will see that reflected in euro terms, we will see that reflected in dollars shortly. Is that 12 months, is that 36 months? Don’t know.

Kevin:Does it really matter, though, if we’re playing the long game? We talked about your race? If you would have paced – maybe you didn’t have the fastest swim, but maybe it was a minute less than what you put out. And let’s say on the bike maybe you didn’t pedal as hard when you were descending, but maybe you rested a little bit. The long game is so important. Your run probably would have gained by you actually focusing down the road instead of just in the moment.

David:Yes, what if I said, “I need gold to be at a certain price by 2025 because that is when I am going to retire.”

Kevin:Right. People do that.

David:They do. And now all of a sudden you take what is a long-term trend and you are trying to force this X factor in, which is your arbitrary retirement date. It could be 2021, it could be 2019. Again, you are changing the variables, and I think the short term versus long term – there are too many things in play today that can shift the equation, shift the conversation, shift the outcome in the short run. Our concerns are long-term concerns. But in the short term you have issues of trade and tariffs with China. You have China, who may be very well at the turning of the tide. Who knows?

If you take a long-term perspective, we may be passing the monetary regime baton to the Chinese. Not in the next three to five years, but I mean, listen, if you tune into Xi Jinping’s admonition to the politburo here recently, he says, “Guys, we need to be preparing for a long struggle. We won’t be through this” – again, he is not thinking of just trade and tariffs, but he is thinking about the trajectory of China – we’re not through our struggle to get to our appropriate destination until 2049.”

Kevin:Now, think that through for a second, Dave, because I’ve been here 32 years. I knew your dad at the age that you are right now. You will be about the age that your dad is. Now, your dad is 79? You will be 75?

David:Yes, exactly, 2049 I will be on the eve of my 75thbirthday. You will have over 100 years since the institution of the Bretton Woods program. Maybe at that point, perhaps the Chinese will have moved away from their mercantilist model of growth and shifted to internal consumption, and a service-oriented economy. I think, reasonably, if their percentage of global GDP has at some point between now and 2049 surpassed ours, again, total contribution to global GDP, if theirs is larger than ours, then guess what? The evolution of the international monetary system will be away from dollars.

And perhaps it is not with the violence that regime change implies, but perhaps it is a more gradual evolutionary path. This is, again, long game-short game. The long term matters to me. I am grateful to have a little vacation time. It was a wonderful, wonderful time with family. A great time with my mom and dad, who live in the Philippines. We get to see them once a year, and this is it. But I’m pacing now, with those timeframes in mind. 2049 sounds like a long time from now, but the way you play the game is predicated on what your timeframes are. Mine are with the next 30 years in mind, not with the next 30 days, or the next 30 seconds, or whatever.

I guess, when we factor in where we are as a country and the context of how we price all of our assets for the dollar, what course is it on? Is this the last chapter, and is it characterized by a bang – again, a lot of violent regime change – or a whimper, where the evolutionary process just leads us toward greater and greater irrelevance? Time will tell.

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