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About this week’s show:

  • Gold up 20%, Silver up 28% in four months
  • IF gold dips in price, add to your position
  • Goldman Sachs predicts 3 FED interest rate hikes…Huh?!!!

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

“If inflation expectations move significantly, you have the self-fulfilling cycle of real inflation rising. That occurs, and now your bonded cash-holder that had a better, or theoretically safer, risk profile than the stock owner is now in real trouble. I assume that if the average cash and bond-holder is making a migration on the basis of negative real returns, you are going to see a significant surge in gold and silver buying.

– David McAlvany

Kevin: David, lest we sound like we are just perma-bulls on gold and always saying, “tomorrow it’s going up, the next day it’s going up,” there are times when even in a long-term bull market you say, “You know, I think we might have a pull-back here and here is the reason why. It is not going to be a serious long-term pullback, but you brought up the commercial shorts and the commercial long contracts. And a few months ago you pointed out that the commercial long contracts were extremely high for their habits, which turned out to be a very nice positive indicator for a nice move that we have had. Now they are short. Now the commercials are hesitant on a further move up, at least for now.

David: Just to clarify, I don’t know that they are hesitant on a further move up, but these are folks who are in the business, operating with gold all the time. Some of them are miners, in fact, where the difference between $1050 and $1300 is pretty significant, and if you can lock in $200-$300 in profit per ounce now versus what you had in December, you will do that. And on future production if it happens to be at $1400 an ounce or $1500 an ounce, you might even hedge some of that production as well. So putting on a hedge is the same thing as shorting the market, and what it does is it established your price. You are bringing product to the market, but you have established your price using a future contract to lock in the profit that you have on those previous ounces.

Kevin: I’m glad you bring clarity to that because a short position for a person who already owns the product is merely a hedge, basically saying, “You know what? I like the price right here. I’m going to go ahead and take a profit.” For the guy who goes out and does what they call a naked short, that’s not what we’re talking about here. The commercials are not taking naked shorts. They own gold. They have it in the ground, above the ground, they have it at the refiner. They are just locking it on.

David: We’ll have more data this week. We don’t have it yet, but going back to April numbers, the COT, or Commitment of Traders report, has changed pretty significantly since the beginning of the year. The last time we discussed this, as you mention, the nature of commercial gold producers is very interesting, and we have seen a shift in the numbers from very low short gold positions to pretty high short gold positions at the current time.

So commercials are about 70% short out of their total long and short contracts, and you might see that number get as high as 85, 88. Rarely does it get any higher than that. But they can increase their short position and I think the increase in shorts has been very quick and very heavy as gold has moved from $1050 to $1300. But again, it reflects those producers in the marketplace who want to keep making $100, $200, $300, $350 more than they would have made otherwise.

Kevin: For the person who is adding to a position – the reason I bring this up is because for the person who doesn’t have any gold or silver, shame on you. You should be buying, forget about short positions, forget about price, it’s a hedge against the dollar. But for the person who is looking at this market saying, “You know what? I’ve owned gold for years. I’d like to add a little bit more. Or silver. It might be worth getting the liquidity ready and waiting for a little bit of a pull-back here, just in case those short positions are paying off on the other side, and jumping in.

David: Just to add to that, not only is gold a hedge against the dollar, it is also a hedge against central bank insanity and political malfeasance. So you can look at it as a hedge or an insurance policy against a variety of things, and the dollar may be the tip of the iceberg. Arguably, over the next three to four weeks, the short positions we have been describing, I think, will increase. And they may, and they should, exceed 80% of open interest. It will not only signal, but it will likely trigger a correction in the price of gold.

And that is okay. After we have seen a 20% move in gold over a four-month period, a 28.5% move higher in silver in the same timeframe, silver is kind of the caboose following the engine. It finally came around the corner. It was underperforming, underperforming, and then finally caught up, which is a very good signal, long-term, that silver participated in this move, but it would be normal to digest those kinds of gains, 20-30% gains in a short period of time. And yes, we will see a variety of more short-term investors or traders sell out and capture their gains. Miners are in the same category, your precious metals miners. If you look at the HUI index – the HUI index, the gold bugs index – it has moved from 110 to 228. The XAU, which is another gold share index, has moved from 45 to 90.

Kevin: They have both better than doubled in the last four months.

David: Right. So four months and 100% later, a correction would be normal, but trust you me, the big moves are still ahead of us.

Kevin: This brings up a good point, because I had mentioned if you’re thinking of adding to a position, sometimes people try to play the market where they subtract from a position, and I remember listening to Jim Deeds a couple of weeks ago. He was laughing at his own mistake. He had made quite a bit of money on the gold move back in the early ’70s, but he actually cut himself short by about five-fold because he sold too early. So for the person who is looking at this as a long-term cycle that is saying, “This central banking is not working, this monetary policy is not working,” it is not wise to sell out and try to time these downturns, is it? It’s worth adding, but not subtracting.

David: Right. I tend to think, if you were back of the napkin figuring how to plan where you put dollars as they come in, and as you save them, I tend to think in terms of four buckets. Some of what I earn and save goes into cash, some of it goes into gold and silver, some of it goes into real estate, some of it goes into stocks and bonds. And those four buckets, if you will, are just something that I intend to fill. Now, what is the size, scale, and scope of those buckets? When I think of gold and silver, I do have a lifetime goal. How many ounces of silver, how many ounces of gold, would I like to own on my 85th birthday?

Kevin: And you’re not there yet.

David: I’m not there yet. But what’s interesting is, lower prices allow for speedier accumulation, so that perhaps sick and twisted psychology of a decline in price, for me, it’s a happy day, as it is for my kids because they say – literally this happened two days ago. The kids got their allowance, and they’re like, “Dad, you know, what do you think about the price of silver?” And I said, “Well, it’s over $17 dollars now.” And they’re like, “Ooo, it’s gone way up.” That was bad news for them.

Kevin: Right. They’ve been accumulating, I know.

David: And every time it goes down they say to themselves, “Great. Now we can get two ounces instead of one.” Or whatever. So that idea of having a bucket that you want to fill – how many ounces capacity do you have? And if that lifetime goal, if it’s a lofty goal – look, the cheaper the price the better it is for you when you are adding. So I think, when you bear in mind, these are moves which we have seen, going back to the XAU and the HUI, the gold stock indexes – 100% in four months. I love it. I absolutely love it. As we have talked to clients and as we have talked to potential clients, there is an interesting dynamic here. These are pockets of assets that have suffered, but they do recover quickly. How quickly? Well, lest we forget next week, 100% in four months is making pretty good time, and I really do think we’re just getting started.

Kevin: So trying to time getting in and out, you don’t want to trade these levels. And when I say trading I’m talking about buying, selling back, buying, selling back.

David: I think it’s a bad idea because you’re moving off of a very low base level. So the percentage terms are very impressive, 100% gain, or in the case of the physical metals, 28.5% for silver, 20% for gold. Those are very impressive, but they are also off of a low base. And I agree with Jim Deeds, a recent guest, we are at the outset of a gold rush. There is very, very, very limited exposure to precious metals amongst the general public. The gold ETFs have seen an increase in tonnage, that is, investors who have added it back to their portfolio.

That tonnage increase has been about 20% since the beginning of the year, which is impressive, but again, this is after the sector has been abandoned for nearly five years and left for dead. So all we have seen thus far are the first signs of life. We’re by no means done with a very significant move which will, in our opinion, come to be remembered as the mirror image of a timeframe, as the history books, I think, will record – a timeframe when confidence in central banking and confidence in the dollar as the single reserve currency failed on a global basis.

Kevin: Dave, you and I have been training for a triathlon, a longer triathlon – this is a 70-miler – and I’ve been amazed at what I’ve been learning about my body and what I have to do to make sure that it continues for the long haul, not the short haul. I was reading in one of the triathlon books that you start a triathlon like a book of 24 matches of energy. And everybody has that same book, once you have trained your body to that point.

David: Of 24 matches.

Kevin: Of 24 matches. You have to determine how and when you are going to spend those matches. Now, if this were a short-term sprint you would spend them all right at once, and go as fast as you can. But what we are really doing is, we’re finding out how to actually, like Paul says in the Bible, “run the race with patience.” So just applying that to this market timing, that would eliminate the timing in and out, wouldn’t it?

David: It would, because I think some of the volumes we have seen in the gold space in the first couple of months of the year, speculatively traded gold and silver positions, they have been well timed, but I doubt if many of those recent short-term speculators appreciate the gravity of the global financial backdrop, and I don’t think they are going to stay for the duration. I don’t they can or will endure. The metals will attract, over the next several years, a variety of audiences, so at the front end we may have a particular kind of audience, and then two years from now it will be a different audience. And it will change. Some people will be booking profits only to see the price subsequently double, triple, quadruple, from what they thought were high prices.

Kevin: We’re also talking about something that is different than a paper asset, Dave. Most people think, these days, in either paper or digital types of thought processes. Well, paper or digital can be created in unlimited amounts. What we are actually talking about is the audience that is accumulating this particular product that we are talking about. The product, itself, can run out. Speaking of a book of 24 matches, there may be no matches by the time we actually jump in.

David: That’s right. A normal assumption, on the basis of the COT report, the Commitment of Traders report, is that pressure is building for a correction, and I wouldn’t be alarmed by it. I personally will take advantage of adding to positions, and if it is significant weakness then I’ll aggressively add. This is like a sold-out Broadway show. There may be a ticket or two that comes available and you want to be there, and you want to be ready to purchase them instantly, because there is a line of people behind you that will, if you don’t.

Kevin: I think we should talk about why there is a line forming. We can criticize the central banking community all we want, but actually, let’s take central banking out of it. Let’s just look at what we can look at, which is inflation and interest rates. Those are two factors where people have to make a determination, “Am I making money? Am I losing money? And if I’m losing money, where else do I go?”

David: Right, because inflation and interest rates – interest rates are the cost of capital, if you are borrowing money, if you are financing an operation, if you are receiving interest income. So interest rates are a very critical component when you are thinking about investing, and inflation is that which diminishes the total return that you have from that interest rate, if you are an investor. Inflation is a big piece in the equation. If you are cash investor, if you are a bond investor, inflation is a big piece of how you do if you’re a stock investor.

I would hope that for regular listeners the names Summers and Barsky automatically call to mind the 1988 co-authored paper on the relationship between real returns in financial assets. That paper specifically addresses stocks, and of course, the price of gold. And of particular relevance is how they adjust the returns of stocks for inflation. The inflation-adjusted returns on bonds and on money deposits, I think, are also relevant.

So you have the real rates, which are, in my opinion, now, if you’re looking at the market and what is happening, back in play. Real rates are back in play, and the price movements within the bond markets are going to get very, very, very interesting over the next 12-24 months as a result of, again, real rates being back in play. Just as a quick review, a real rate is the difference between a nominal rate, and when you subtract inflation from that you get that net number.

Kevin: Let me give an analogy, Dave, that works, at least, for me when we are talking about the difference between real and nominal rates. We have several people in the house that all want to take a shower at the same time. We’re on a well, and our well does not pump beyond a certain amount of gallons per minute. If we use more than those gallons per minute, that pump runs out of water and we have to wait until it refills. If you think about it, inflation is really what it is costing to hold money. If interest is not keeping up with that, if that well is not refilling that in time, you are actually going backward. I think a lot of people have a hard time understanding that when we are in these low rate environments. But remember the 1970s, the early 1980s. People had to understand real rate of return just to survive.

David: Yes, the real rate becomes significant in a rising inflationary period. I think, for obvious reasons, once you have subtracted the inflation rate out, you may have a very negative return. And so real returns would therefore be disappointing. Watched that happen in the 1970s and early 1980s when there was a simultaneous increase in interest rates and inflation, so they were both moving up at the same time. And rates were on the rise, in part, due to market forces, but ultimately due to Paul Volcker, and investors in that timeframe were experiencing rising inflation, which we can call that Peter, in this case. Peter was the robber, not the robbed.

Kevin: Right. That was inflation.

David: And he was taking back what Paul had just given in the form of higher rates. So now we are in a zero to negative-rate environment. This environment is a little bit different than the 1970s and 1980s. For political reasons – well, maybe it’s not political reasons, maybe it is just an administrative bias, because central banks aren’t supposed to be political. But the administrative bias is for full employment, and so you have this predisposition amongst bankers today, at the Fed, and at other central bankers, to be accommodative.

What does it mean to be accommodative, to keep interest rates too low for too long, essentially, and their monetary policy is evident of that right now. So you have Peter, again, Mr. Inflation, who is knocking on the door, but Paul’s not home. And I think this is going to create a very interesting environment as we head into the next administration. Inflation is beginning to creep up, but interest rates are being held low.

Consider what was happening in the 1970s again. Go back and picture, if you will, inflation increasing, and interest rates following, but there is a gap between them. And it was only when Volcker got the interest rate above the rate of inflation that he was able to push it back down again. So he was chasing, chasing, chasing, and the gap between the two ultimately closed, he got interest rates above and brought it back down. Right now we have the same gap, which is intriguing, but we don’t have the will of the central bank community to raise rates – not in earnest.

Kevin: Here is what we do have. We have inflation increasing, we have the Fed not able to raise rates, but perception is that they want to. In other words, Yellen is speaking the speak. Who was it? It was Bernanke, wasn’t it, that said, “Almost all monetary policy right now is verbal?”

David: That’s right.

Kevin: Wasn’t that what he said back in 2012?

David: Yes.

Kevin: So verbally, Yellen is actually trying to talk rates up without actually having to do it.

David: Play this scenario out in your mind. It is a little thought experiment. Rates are at, or near zero – below zero, depending on your geography. That is number one. Number two, you have central banks that are well behind the curve on increasing rates. If you look at the Taylor rule, John Taylor was a guest on the program a few years ago, and he would now, following the Taylor rule, argue that interest rates should be at least 250 basis points higher.

Kevin: That’s 2.5% higher.

David: Than the current Fed funds level here in the United States. And though the Fed, as you say, occasionally talks like a hawk, what they are really doing is Yellenizing like doves. And yes, to Yellenize is synonymous with acting like a dove, for those who are wondering. (laughs) Isn’t it fun creating new words?

Kevin: Yes, and a dove doesn’t want to raise interest rates, it wants to loosen policy.

David: That’s right. So that’s number two. Number three, any increase in inflation, which is already beginning to occur, matched with an unwillingness to raise rates, is going to drive a larger gap between the nominal and the real rate. And that brings us to number four. The more negative the real rate is, the less likely investors are to be inspired by the status quo.

Kevin: Which means they hit the exit from the status quo.

David: That’s exactly right. So how does money migrate in a low-to-negative real rate environment? Summers-Barsky thesis deals with a low-to-negative real rate of environment in stocks, but I think there is something that we can borrow here. This brings us back to Gibson’s Paradox in the Summers-Barsky thesis. It deals with a shift in investor preference, when equities are giving you low-to-negative real returns.

I just wonder, are bonds and cash deposits any different? In some ways they are different because you have the perception of risk being much lower, with bonds and cash. Whereas in the case of equities, you have higher market risk, which you just can’t justify if returns are low, or if returns are negative. And if in real terms they are negative, the choice – “Look, move to golden pastures.” Instead of “greener” pastures, move to golden pastures. In the case of cash deposits and bonds, I think the same dynamic exists.

Kevin: I don’t know what the magic point is where a little bit of negative seems to be fine. We’re seeing that in Europe, we’re seeing, “Okay, so I’m losing a quarter of a point on my money.” But they all know, I have to imagine, that the central bankers understand that it becomes so negative at a point that there is an exodus out of any of the paper investments that are costing them money.

David: That’s right. You have already seen the migration out of cash bank deposits, and into physical cash. But what if the inflation figure becomes an equal bite to the negative interest rate, and just sitting in cash is now putting assets at jeopardy too? So the negative number moves negative and you begin to see a shift in investor behavior and a migration out of stocks, bonds, and cash, into less traditional assets.

Kevin: It actually forces what the central banks have been hoping for, which is spending money, but they are spending money on something they can save in.

David: And that’s the question. Will it be consumer spending, or will it be investing of a different nature into things like gold, silver, art, diamonds, collector cars, and anything that has, number one, a tangible element to it, and number two, other reasons which you may like in this environment, whether it be privacy, portability, or in the case of an automobile (laughs), enjoyability.

So back to that thought experiment. When rates are this low and can’t move that much because of the solvency-related concerns, we have a lot of debt in the system, inflation expectations can move much more. Again, so rates cannot move much, but inflation expectations and inflation, itself, can move quite a bit, which becomes very critical for bonds and for currency holders, because if inflation expectations move significantly, you have the self-fulfilling cycle of real inflation rising.

That occurs, and now your bond and cash-holder that had a better, or theoretically, safer, risk profile than the stock-owner, is now in real trouble. And so, yes, I assume that if the average cash and bond-holder is making a migration on the basis of negative real returns, you are going to see a significant surge in gold and silver.

Kevin: Which brings us back to the 1970s. This is what Jim Deeds was talking about a couple of weeks ago. That is exactly what happened. Inflation started increasing. Interest did not keep up with it. There was a move to gold and silver and, of course, it was the most substantial move that we had had in American history on a move up in gold, and we seem to be having that same kind of thing forming at this point.

David: Yes, that’s a good recap – a combination of rising rates, rising inflation. It wasn’t until the early 1980s that rates got ahead of inflation, tipped the scales of inflation expectations back to lower numbers. In other words, Volcker finally broke the back of inflation with radically higher rates. Now we have low rates and inflation that is creeping higher, creating the same issue of negative real returns, and as that is exaggerated by higher rates of inflation, even small increases in the inflation rate are going to have a big impact in the marketplace.

Again, we are dealing with the expectations of higher inflation, we’re dealing with the concerns of investors that have emphasized cash and bonds as a safe asset class. I don’t know if anybody even remembers this, but U.S. bonds, many moons ago, used to be called “certificates of confiscation,” for this reason, because you’re stuck in an asset that you can’t get rid of, but inflation is eating your lunch while you’re sitting there, so your real rate of return is so deeply negative and ugly that they used to call U.S. bonds certificates of confiscation. So when we get to that negative rate environment where cash and bonds are suffering, and those cash-holders and bond-holders are re-evaluating why they own what they own, are we going to see a massive shift in investor preference? I think so.

Kevin: And there is wishful thinking, of course, coming out of Wall Street, where obviously they tell the people something different than they believe themselves. Goldman-Sachs right now is saying, “Oh yes, we’re on track for two, maybe three, interest rate increases by the end of the year.”

David: You changed your accent, almost like you have a plum in your mouth.

Kevin: Oh yes, yes.

David: How proper.

Kevin: (laughs)

David: They think three interest rates in the remainder of this year, and that is not exactly realistic. Their assumption of a return to economic normalcy, they are basing it on massaged numbers. These are the kinds of numbers that Goldman has a history of creating for other countries. Do you remember when they helped get some of the peripheral European countries into the European Union by coming in and prettying up the pig, so to say? They literally did this, where they took official numbers and massaged them such that the EU was like, “Okay, yeah, now you fit our profile.”

Kevin: They made Cyprus look like Germany. That was a lot of make-up.

David: That’s a lot of lipstick.

Kevin: (laughs)

David: That is a lot of lipstick. That’s called red-lighting it. Anyway, the confidence there, I think, with Goldman, rests on this sociological reality. Yes, government statisticians can tell a lie, yes they can tell it often enough, yes, the people come to believe it. You run enough headlines and they all look the same. You know what you end up thinking? Exactly what the headlines have taught you (laughs). And there was a teaching process. It wasn’t an accident. I think that is important to recognize.

Kevin: Let’s contrast this and say, okay, why couldn’t they actually raise those interest rates? I’m going to go back to Volcker’s day. Back when Reagan first took office there was a trillion dollars of debt here in America. From George Washington all the way to Jimmy Carter, we built one trillion in debt. That’s a lot. That’s a million million. That’s a lot of debt. But Volcker could still raise interest rates and the outstanding debt didn’t sink America because it was only, and I can’t believe I’m saying this, but it was only a trillion. Our debt now is almost 20 times what it was when Paul Volcker had the latitude of raising interest rates.

David: Well, that’s the issue, and that’s what makes the Goldman-Sachs projection unrealistic. It’s what made the Fed projection of raising rates four times in the span of 2016 also unrealistic. You have 20 times the amount of debt, and that is just governmental debt. If you are talking about private, corporate, and governmental, it is over 62½ trillion dollars just in the United States, and as we have talked about in recent shows globally since the crisis in 2007 we have added 57 trillion dollars to the total stock of debt, bringing the grand total globally to over 200 trillion.

Now, bring it back to just the U.S. because that is what is particularly relevant as it pertains to an increase in rates here. 62½ trillion dollars in debt is impacted by every 1, 2, 5, 10, 25 basis-point increase in interest rates. So, we’re dealing with a couple of things here. We have the ability to roll over debt, rolling it over meaning refinancing it in the future, which is a basic assumption in the debt markets. Rolling it over at higher interest rate numbers simply increases the pressure for the debtor, whether that is the government, the corporation or the individual, in terms of what it is going to take, dollars out, to service the debt. You’re diminishing cash flow which could be used for more productive purposes, and instead it is being siphoned off for increased debt service payments.

The total amount of debt in the system seems to be the elephant in the room being utterly ignored. So not only is there a higher cost to the debt with an increase in rates, that’s obvious, there is also greater pressure on equities as the cost of capital rises. Can the stock market bear up under the higher cost of capital? We have said, “No, the bond market cannot bear up under a higher cost of capital. Refinancing becomes an issue and it begins to put a real stress on the debtor. But the stock market cannot bear up under the higher cost of capital either, and the market signaled in January and early February that this was absolutely the case. The answer from the market was, “No.” Emphatically. We had the interest rate increase in December and we had very quickly thereafter, basically, a 15 percentage point drop in Dow, S&P.

Kevin: The reaction was amazing. And it was quick.

David: So three interest rate increases, if this is what Goldman-Sachs is serving up on a silver platter, I think next to their three interest rate increases, served on a silver platter, are the heads of equity and bond trade desks from around the world. And I don’t know if that is what Goldman wants, or not.

Kevin: Again, it’s all perception manipulation. Consumer confidence has risen since 2009, but this is what is being reported by the government. What is consumer confidence? And it has risen? The idea would be from Goldman-Sachs, “Hey, you know, we’re actually in a recovery right now. But when you ask the small businessman, when you actually take an independent survey, consumer confidence is dropping.

David: It is a fascinating divergence. It seems like each week we can feature something that is not quite right and consumer confidence, you are right, has been on rise since 2009 for more most of 2015 and 2016.

Kevin: Doesn’t Obama fill that number in each day? I thought he, “Consumer confidence – Oh, it’s an election year, I think it’s a little bit more than it was last year.”

David: (laughs) And it has actually kind of moved sideways. It hasn’t improved, it hasn’t deteriorated, so between 2015 and the present, it has just hovered at the level it has been at for a little while. But if you compare consumer confidence with the NFIB, the National Federation of Independent Businesses, their optimism index, there is a disturbing divergence. The NFIB started moving lower in 2015 and is now moving lower in earnest. The last time this divergence occurred this is where consumers were still happy, but small businesses and owners of small businesses had growing concerns about the economy. The last time this occurred was 2007.

Kevin: It’s a good indicator that something is wrong. 2007 was right before the crash.

David: Small businesses could tell something was not right, even as consumers went along with the hype of the real estate bubble and ignored the warning signs. And we’re there again. In all likelihood we will see consumer confidence plunge in the next months, catching up to where, again, the NFIB, the National Federation of Independent Businesses, those number, they have already gotten there, so it is just a question of consumer confidence cratering and catching up as they both head lower.

Kevin: Last week we mentioned the FANG stocks. They can sometimes send, just like with the tech stock bubble, we can get an unnatural signal sometimes when people are buying in frenzy, on momentum, based not on earnings, but actually just based on the fact that somebody else owns Apple stock, or Facebook, whatever. So the FANG stocks, those have been the hot stocks, but we’re really seeing a change right now. Take Apple, for an example.

David: I hope we are not reading too much in and perhaps extrapolating from the Apple numbers to the broader markets, but the market took a 50 billion-dollar bite out of Apple last week, and that was because the quarterly revenues went negative. They went deeply negative. They went more negative – well, they went negative for the first time since 2003, but compared to 2003 when they had a quarter where they were negative, this was a multiple in terms of on the downside. It was terrible! Those quarters’ numbers were ugly. And the relevance is that it is one of the most over-owned stocks on the planet. The fact that it has lost 25% of its market cap since its May 2015 peak is very relevant because it is owned by almost every mutual fund and every hedge fund, and it was the no-brainer stock.

Kevin: Right, everybody had to own it – an Apple a day.

David: That’s right. Even Carl Icahn, when you looked at his tweets and his different messages that he would send out daily, half the time he was trying to pump the stock out because it was one of his largest holdings. And he has finally thrown in the towel. Why? There are company-specific issues, but there are consumer-related issues, too. It is interesting to look at that which was the most popular stock on the planet, now beginning to fade. Is it an indicator? Are we reading too much into Apple’s numbers? Are we reading too much into the fact that it is 25% off the peak that it put in in May of 2015, and that there are a variety of stocks that are not all that strong?

Breadth, actually, has improved in the first three months of the year, and it will be interesting to see, as we head into the next quarter earnings. Everyone is lowering expectations, revenues have been on the decline, sales have been on the decline. Expectations, in many instances, have been met, only because they were lowered either days or weeks before the earnings were announced. It is just very interesting, everyone is reaching the bar because the bar continues to lower and lower and lower. No one is looking at the earnings trajectory and saying, “Yes, but earnings are down year-on-year. Yes, but revenues are down year-on-year. Yes, but sales are down year-on-year.”

And that is where not just Apple but a much broader swath of stocks are suffering in the same way, but it is a silent suffering because the market is tending to focus on the earnings beat. In other words, I tell you I’m going to make a penny, and I make a penny. And it’s a success story. Except that last year I made a dollar. That’s just for dramatic effect, but that is happening, where the market seems to be happy being told something is a success, when in reality, we are seeing deterioration in the profitability of corporate America, and no one seems to care.

Kevin: David, I think you know the kind of person who typically listens to the program. I really don’t think that most of our listeners are fooled by what Goldman-Sachs is saying, by what the markets are saying. I get a chance to read, and so do you, some of the comments that come in, and some of them are just amazingly intelligent comments, some great economic insight. These guys see through the mirror and they see that there is something on the other side. So for that person – I want to go back to the very beginning of the program—for the person who sees this larger picture, and that we are in a paradigm shift, and we are seeing this dollar reserve Bretton Woods system changing to a new system. What do they do for now?

David: I think it’s real easy. Again, for me, if you want to be strategic, grab a piece of graph paper or the back of a napkin will do just fine. You have buckets to fill up, and what do you want in your buckets? To be honest with you, my cash bucket is almost empty, because I don’t like anything Yellenized, and particularly, my cash deposits. So gold and silver probably has a higher emphasis for me than the cash bucket.

Kevin: But your bucket goal – let’s call it a bucket list, and I didn’t mean to be punny on this, but let’s face it – you said how many ounces do I want to own by the time I’m 85, let’s call it the bucket. Your bucket list actually incorporates a specific amount of ounces of gold, a specific amount of ounces of silver, and you are teaching your kids the same thing.

David: Right, and when it comes to real estate and stocks and bonds it figures slightly differently, but what do I want the dividend income to be off of a stock portfolio, what do I want the coupon income to be off of a bond portfolio? What do I want the income from real estate to be when I’m 85 years old? And I can do the math on having X number of dollars in income from real estate and knowing that I have to have X number of dollars invested in real estate to generate it.

So, what are your needs, what are your expectations? Is it $10,000, is it $100,000, is it three million dollars? What are your income priorities as you get to be 85, and then you’re going to figure out how you want to organize your buckets. The reality is, I have more of an emphasis on gold and silver today because the majority of assets are over-priced. We have talked about that in terms of the cyclically-adjusted price earnings ratio of the stock market, currently over 26. I think 26.4 was the recent high. That is too expensive to be putting very much money into stocks, generally speaking.

Why? Because statistically that would imply that over the next ten years you are going to have a less than 1% rate of return per year. You have to ask yourself, “Okay, so is the risk/reward in balance?” And it’s not. That doesn’t mean it can’t get in balance. It can get in balance, but it gets in balance when you have a price correction.

Kevin: Sure, if the PE was 8, 7, 6, 5, you would probably be buying some stocks right now.

David: I would probably be coming out of the gold and silver and shifting it toward stocks. If I could earn a decent rate of return on real estate, I would be doing that, but I can’t. You look at real estate in the Durango area and rental income might be in the 5-6% range. Honestly, that doesn’t give you much of an allowance for vacancies and the regular expenses, including taxes, that you have to pay on real estate. So it’s not fat enough to justify itself yet. And yet, I have the bucket, it’s just earmarked, and largely empty. So when the time comes to make some shifts, yes, I have very specific goals, and those goals relate to when I’m 85 years old and I’m clipping a bond coupon, getting dividend income from a stock and waiting for mailbox money from a real estate property.

So how does this play out? It plays out by putting something on the back of a napkin. It’s not that complicated. These are long-term goals that you can make incremental steps forward toward, and I think the smartest thing to be doing right now is emphasizing gold, silver, cash (laughs) – I told you I don’t trust Yellen with my cash deposit, so perhaps I’m a bit biased there. But truly, if you were to strike a balance between cash and gold and silver, the rest of those buckets are going to be more easily filled after a 2020 timeframe when prices and value are coming to you, and you’re not chasing those markets.

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