The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
Kevin: This week I was traveling with David and Don in Palo Alto. And for those listeners whom I saw, it was great seeing you. That briefing tour, the Global Strategic Intelligent Briefing Tour, now continues. On July 19th, they will be in Agoura Hills, California. That is Southern California. Then on July 25th they will be up in Bellevue, Washington, and I’ll be there as well. On July 28th, Portland, Oregon, and Scottsdale, Arizona on August 1st. And then finally, wrapping it up for this segment, in Denver, Colorado on August 8th.
Now, if you want more information on those conferences – the locations, the times – visit us at mcalvanyica.com/briefing. Or if you want to just simply give us a call – 800-525-9556.
It was great being on the road with Don and David again. David has been, of course, doing these conferences for years. Don did them many years before that. It has been about ten years since both Don and David have been on the road together, and there is very important information to share on the cashless society, on gold, on what is going on in India as far as the buying of gold. There are a number of things that, right now, are not showing up in the media, that both Don and David will bring to a point.
Now, for today, we are going to partake in a regular McAlvany Weekly Commentary tradition. Many of you longer-term listeners are used to hearing the Best Of shows where we go back and say, “What have the guest said over the last three or four months that we want to revisit, and just remind ourselves of. We remember the George Santayana quote that said, “Those who cannot remember the past are condemned to repeat it.” Oftentimes David and I will go back and re-listen to interviews from the last six months, sometimes go back years. And when we’re listening to those interviews we say, “Wow, I forgot about that. We need to have our listeners hear that again.
Well, that’s what today’s show is all about. So today we are going to reflect on the comments made by Bert Dohman, Jim Deeds, and also our recent interview with Neil Howe. And if you want to listen to the full shows from which these segments were pulled, go ahead and head to the archives section of mcalvanyweeklycommentary.com. Or for our YouTube listeners the links will be in the description below.
We start with Bert Dohman. He is not always a bull on gold, but in this interview that we did with him just a couple of months ago he is saying that the majority is always wrong. When everyone thinks it’s a good idea, it’s not. And Bert Dohman brings out that there are actually three certainties in life, not two. The two certainties that you hear often are death and taxes, but there is a third – the reduction of the buying power of every paper currency.
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David: What does it mean to you when the bullish consensus on gold hits a 14-year low?
Bert: The bullish consensus, when there are so few bulls out there, is very bullish for a market – any market. And we had that chart in the special report last week where it showed in early 2016 that there were almost no bulls. The big speculators were short, and the big speculators are usually wrong at important turns. So, if there are no bulls, then they are all bearish, and that means that you want to be bullish. You want to be on the other side. You always want to be on the side where the big speculators are not – the unpopular side. We call it the winning minority.
David: (laughs) I started traveling with my dad when I was about three years old and I probably heard this quote a thousand times. If I heard it once, I heard it a thousand, maybe ten thousand, that the majority is always wrong. I tell you, over and over and over again. Maybe my dad wanted to impress that upon me as I was heading into junior high and high school that I didn’t need to follow the crowd. I was probably trying to figure out why he said this all the time. But the bullish consensus, what you just said, the little quote that my dad always raised me with – “The majority is always wrong.” Why do you think that is? Why do think the majority of investors are unwilling to question a trend, or are unwilling to step back from history and say, “Okay, I see that we’re at this point, and we should either see reversal, or the market has had an extreme, or what have you? What do you think about investor psychology being locked in at this point?
Bert: You know, it’s human nature. It’s the herding instinct. We all feel more comfortable when we are part of a group and everybody has the same opinion. We say, “Wow, everybody here thinks the way I do. It must be a good idea.” No. If everyone thinks the same way that you do, it must be a very bad idea. That’s how it usually works. Now, in the investment markets, that is even amplified because money is involved. In the investment markets, if everybody is bullish, it means that all the money has already gone in there. You can’t find anybody who is not in it.
But that means that the next phase is when one little negative thing starts rising and some people start selling, and then that selling gets lower prices, and that gets more people selling. And this is how a bear market starts. And then fewer and fewer people are interested in buying the thing. They are more interested in selling. This is the cycle of human emotions and this is what makes bull markets and bear markets, and it has absolutely nothing to do with corporate earnings and corporate revenues and all of these things that financial TV and Wall Street want you to believe in.
It is so comical when you hear these earnings reports from corporations on the financial TV. They don’t tell you how that earnings report compared with one year ago. They don’t even let you know if it was better than a year ago or worse than a year ago. No. They tell you if it beat estimates. But who makes the estimates? It’s Wall Street, the greatest manipulators of all. If they want most companies to beat the estimate, they just put their estimates lower than they think they are going to be, and then everybody beats the estimates, and then what do you see on financial TV? “Wow, 70% of the companies reporting so far beat estimate.” Well, estimates are totally irrelevant.
David: (laughs) That’s right. Well, when you describe gold as a hedge against a loss of confidence in a currency, we have this already, to some degree, overseas. Maybe King Dollar stays King Dollar a lot longer, I don’t know, but demand for gold overseas seems to reflect a diminishment in enthusiasm for other currencies. How do you conceptualize a decline in currency values, having a position in gold as an offset, and also balancing out what you might see in terms of behavior in the stock market? Is it necessarily negative for stocks? Is it positive on the front end, negative as time goes on? Help us wrap our minds around that.
Bert: Gold is not a crisis hedge, it’s not a fear hedge, or any of these other things that you always hear. In my opinion, gold is only a hedge against declining purchasing power of the currency. That’s what it is. I was just at a shopping center, and a little cup of ice cream was $7.00. I can’t believe this. I remember when it was a nickel. And this really tells you what has happened to the purchasing power of the dollar.
Other countries have had an even greater reduction in the purchasing power of their currency. This is what it all comes down to. You always hear about the two certainties in life – death and taxes. There is actually a third certainty in life, and that is that the value of your currency, no matter what currency you hold, will continue to decline. That is a certainty. If you know that certainty exists, why not put some of your depreciating currency into an asset that is going to hold its value over thousands of years? And that is gold. Gold has done that.
That doesn’t mean you have to have 50% or 100% of your assets in gold. No. But it’s smart to diversify. It is really smart to diversify. You want some real assets in this next go-around. This is going to be the big one. You said it initially in this interview. When the reserves that are currently stuck at the Federal Reserve – the bank reserves – when they are being used for loans, first you get the kick in the economy, it’s going to really do well. Then you get the inflation. And then finally, eventually, you get to the point where the central banks are saying, “It’s too much inflation, we have to tighten money.” And that’s when everything starts tumbling down. And that includes the precious metals at that time.
But in 2008, during that crisis, we predicted that crisis. I even wrote a book in 2007 called The Prelude to Meltdown. I said, “2008 is going to see a global financial crisis.” Nobody wanted to believe it. So the book, obviously, was not a bestseller. But we saw the precious metals get hit just as hard as the stock market and oil and everything came tumbling down. And look at the recovery that gold and silver had after that. So the first reaction is, everybody sells everything just to get cash, because nobody has any. Everybody just has a lot of loans outstanding and they need the cash. And everything is sold.
The second phase is when the big smart money goes and picks up the bargains, and in this case they were picking up gold. This is what will happen the next time around, too, in my opinion, because the next financial disaster is going to cause the central banks of the world to just create so much confetti, otherwise known as currency, that people say, “This can’t be good. We have to diversify. We have to buy some gold. We have to buy some silver.” And I think that is where you are really going to be making the money.
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Kevin: In this next segment we visit with Jim Deeds, one of my favorite guests. Hopefully, we will have him on often in the future. But Jim calls me on a regular basis and says, “Kevin, have you been looking at silver? Have you been buying silver? Are your clients buying silver?” Jim is not just saying that because silver is inexpensive relative to gold right now. What I mean by that is that you can get between 75 and 80 ounces of silver for an ounce of gold right now. Oftentimes that is different. Oftentimes over the last 200 years, actually, the average is about 31 ounces of silver for an ounce of gold. So, silver is relatively cheap right now.
But Jim, actually, is calling and suggesting something even more dire. He says, “Look, if the cashless society doesn’t work out, you’re going to need something that is small, that is easy to barter with.” So before we dive in on this segment of the interview that we did with Jim a few weeks ago, realize that gold is still the primary focus of what Jim is talking about, but silver plays a key and critical role as a portion of that portfolio.
David: We look at gold demand in India, for instance, just as an indication of global interest in the metals. Jewelry demand was up 16% last year. Chinese bar and coin demand rose 30% here in the first quarter of this year according to the World Gold Council. These are cultures that save in ounces. They look at gold and silver as a reliable store of value. In the United States nobody cares. U.S. mint numbers are down pretty catastrophically since the beginning of the year. But that is just an indication of where the mindset of the American investor is. They would be the guys who were buying Brunswick, not when no one is paying attention, but when it has already hit the most active list. And that’s what they’re doing in the stock market today.
Jim: I watch CNBC, obviously, because I’m really still very much involved in enjoying the stock market, and I participate. I haven’t heard silver mentioned (laughs) in memory for a long, long time. And just to back up what you just said, I do read quite a bit, and I saw the mint came out with their report on both gold and silver American Eagle coins and in the first four months sales were down more than 50% in those coins. So, obviously, individual investors in America aren’t very excited about silver.
Then, of course, on the commodity exchange the report came out a couple of weeks ago that the commodity market, which is where they trade paper gold and silver – which is worth a discussion in itself – but that is just a price-setting mechanism which doesn’t relate directly to physical at all, it’s just people speculating on the price of gold or silver. But the short position in silver was at a 23-year record high. The largest number of people had sold silver short, meaning they think it’s going to go down, in 23 years. The position was that big.
And that got my attention as to what we’re talking about today, because I thought, “Golly (laughs), if you can buy something that world history tells you always come back, and comes back, and comes back again, gold and silver money always seem to return when everything else fails – and if you can buy silver today when nobody in the world seems to want it, it might be a pretty good time to look.
David: So, when you think about saving money for the future, does silver fit the category of interest?
Jim: You’re asking a good question, which just came to me this morning I’m sorry to say, but the answer is that we have, you and I, and everyone in this country has been interested in making money – the whole economy, the whole culture, is designed around how much money can you make? How much do you earn? Where can you get a better job? So, we’ve been involved all of our lives in making money. And I think, maybe at this point in time we should be looking at what will we need, rather than how much more money do we want?
And if you think of need, then a silver coin or a gold coin, obviously, come into focus very quickly because in really impossible times where everything is changing daily – this morning they were accusing Trump of giving secrets to the Russians. Two days ago they were accusing him of treason because he had fired the FBI director. I have never seen America up in the air, nor the world, with more change, more rapidly, and without answers that you and I can answer. And you say, “Wait a minute. I just might need something simple, and if I can buy it when nobody else wants it, a silver coin is real money, it’s physical, I control it, and on top of that, other people accept it and know what it is. And as you just mentioned, it is used all over the world. So it is kind of an interesting time.
David: Let’s talk about scenarios. We have the Trump administration, kind of an X factor in play. We don’t know what policies will either be announced or what will actually, plausibly be pushed through. Maybe signing statements and executive orders will accelerate the trend if he gets very much pushback from the legislature. So, let’s say we hit Trump’s target – 3% annual growth. And it’s a success story. Does silver fit in that scenario?
Jim: It surely does. See, that’s the most exciting part of the whole silver story at the moment, and you and I are on the same page. You can look at two things that may happen ahead, and I surely don’t know which it will be. Maybe President Trump will be successful and get growth in our economy back up to 3-4%, which means that industry will be humming, and people will be moving, and everything will be working the way it should. And the amazing part, if I’m answering your question correctly, is that silver is a one-of-a-kind metal, it is a franchise, in Warren Buffet’s terms, it is used in the technology area more and more every year, all over the world, in technology products.
And on top of that, as you and I both know and we can talk later about it, it is in short supply. The short supply comes about from the fact that silver is found on the surface of the earth, while they can go a mile deep and find gold. So, most of the silver is open to man’s exploration, and a lot of it has already been found. The Silver Institute comes out and says, “We have probably 17 years left of mining silver and the grade and the amount of ounces per ton go down every year because it is harder and harder to find, and there is less and less silver available. So, in a boom time, as you expressed, which I think President Trump wants, silver would be an industrial metal in high demand, and at the moment nobody is talking about it, so it would seem like it would fit.
David: From the Silver Institute, one of the categories of growth from last year to this year was in the area of photovoltaic demand, and it was a pretty big increase. As a percentage it was monstrous. But in terms of millions of ounces used per year, that is an area where, as people continue to want clean energy, as people continue to improve the quality of cells that collect energy from the sun, it is interesting – silver is smack dab in the middle of that.
Jim: I think that really makes sense. And I’ve sat and looked at this. Silver might be one of the few things we could look at, at what seems to be a bargain basement price. The price is quite low. We can discuss whether we think that is right or not, but certainly from an investor’s standpoint, the price is very, very low. If the economy picks up, which I think is an awfully big if, but a possibility certainly, with Trump, silver demand will go up from the industrial side. That is the beauty of silver versus gold. Silver is an industrial metal. Gold isn’t anywhere near that much of an industrial metal, at least at this point.
However, if things don’t turn out quite right, and I could name 20 different crises out there, all different, that might affect the economy, America, the world, in the next year or two or three, if it doesn’t work out quite right, silver and gold turn out to be the two base metals that have been around – you can look back at Rome in the year Christ was born, and the Romans had a silver coin, and 300 years later they had diluted and diluted and diluted the silver coin down to the point where they had no silver left in the coin.
So, you can look back in history, and again, silver and gold have been the last man standing when it comes to a monetary value that people could hold and possess in their own hands. And silver, if everything went wrong, and if we went to a cashless society, which we may well do, would be a representative of something physical that people could use and barter if all of a sudden a cashless society wasn’t working too smoothly.
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Kevin: In our next segment, Neil Howe talks about what this first turning will look like. First turnings, of course, are the rebuilding after the crisis. Neil brings out something very interesting. He says that no crisis would be the worst crisis of all, because you don’t have a first turning without a fourth turning crisis. Right now, with the manipulation that we have in the markets, created with debt, with central banking, they are giving the impression that we’re not going to have a crisis. “That,” Neil says, “will not be successful in the long run.”
Neil is also interested in millennials and how they are investing. There has been a psychology change in that they would almost rather be wrong together than right as individuals. Of course, he brings out, also, what David has been bringing out over the last couple of months, that we have a new bubble. It is called the passive investment bubble. And that bubble is created when everyone’s money is going into two or three funds like Vanguard and State Street and BlackRock. Those three funds make up the majority of the investment community. Neil says that that is a danger and that there will be no one to buy when those funds need to sell.
David: We talked about the Civil War just a few minutes ago, and several weeks ago on our Commentary we discussed the collapsing of certain state budgets. Culturally, we are not the same country we were in the 1930s. We are not in this together, which raises the question of a fourth turning, and the question of internal conflict. What kind of a rebirth would you anticipate in a first turning if it follows a period of internal conflict more like the Civil War versus the last fourth turning which we saw which was defined by international, or external, conflict?
Neil: That’s a great question. We sometimes exaggerate looking back, how united we all were in the 1930s. We had enormous immigrant communities who still felt that they did not have much. Here in our local regions in America, has anyone gone back and looked at local color short story writing in the 1930s? We were a nation of significantly different bits and pieces back in the 1930s. Spoken speech could hardly be understood if you went from New England down to Texas, for example. We were not, in many ways, as united as we are today, in some respects.
I will agree that in terms of ideological division – the whole red zone, blue zone thing – and how politically different we are by region, that is disturbing today, and that probably has no precedent. If that were the issue in a regional struggle, I think you would have to expect that the outcome of the crisis would involve some degree of just subjugation. It would be like after the Glorious Revolution, the Whigs just basically suppressed the Tories, and Tory regions of Britain were simply suppressed. Anyone who wanted to bring back the Stuarts – there were uprisings which were periodically suppressed. If you think of something that is regional, you would have regional winners and losers, and that would condition our memory of that crisis. And that would go on for generations later.
And I think, probably, if that were the case in the subsequent awakening, you would find the revenge of the suppressed would come to the surface. Which part of America was vanquished and what truths, or what insights, did it have which were suppressed? Those would emerge again. So yes, that would play out for a long time in American history if we had that kind of a fourth turning.
David: One of our guests, Bill King, explored – and this is kind of specific to market dynamics – he explored how the 1987 market crash was exacerbated by the bottleneck of brokers and phone lines as investors were attempting to sell while the automated selling was already in motion triggered by what was called portfolio insurance, what today we would call derivatives. Today, we have the Fed. We have ample liquidity from the Fed. We have high-frequency trading firms which are willing to serve the interests of the Fed, effectively delivering liquidity via normal market mechanisms, but very effectively, very quickly, to wherever the liquidity needs to go. So, theoretically, we’re past the age of market crashes, if you assume that a crash is merely an isolated liquidity issue.
Neil: Yes, but you see, I don’t believe that crashes are an isolated liquidity issue. I think that’s true, for a crash that one recovers from in three weeks or four weeks, where in a relatively short period of time as was true in 1987.
David: So Minsky and the social mood are still more important to you? Because your primary concern, what you find is most disturbing, is where there is no real crisis. That, to me, is also real disturbing, because I look at what the Fed is attempting to do in smoothing the business cycle, and I come back around to that idea of super-computing and technology, and to the cycles of the future.
Neil: The good news is, I don’t think they’re going to succeed. Many valuation measures today are off the charts, and despite the fact that the Fed has begun to raise rates again, it is talking about shedding its balance sheets later on this year. And I think that part of what is going on, if you want to talk about a bubble today, and we may, post crash, talk about it as the passive index fund bubble. That’s what is going on. Everyone is pushing into passive indexing, and if I find one thing that scares me about the market today, it’s that, particularly among millennials, who are so social, millennials above all are a generation that would rather go down with their buddies than be left alone behind. What that means is, they love passive indexing because it means they’re all in it together whatever happens. So, even if they are lemmings all going off the cliff together, they’ll never be left behind, which is why the only way to get millennials to invest in stocks is to camouflage it as a target date fund (laughs) or some sort of thing that puts it into a big basket. Real estate and individual stocks, millennials think are toxic, hugely dangerous. But put them all in together with everyone else and they’re happy. And the older generation, too, are going to Vanguard and State Street and BlackRock, and the result is that even the so-called active funds don’t want get in front of the locomotive. So, the active funds, the hedge funds, which lately have not been doing very well except for the quant funds, but the quant funds basically don’t take directional positions. They are just doing arbitrage. So, a lot of your active funds are behaving like passive funds, and right now I regard this as a big danger because of the potential for herding. Everything today is momentum. Anyone who talks about value is disparaged today.
One other aspect, as long as we’re talking about index funds, one of the things that I’ve been concerned with recently is their economic impact, totally aside from their financial impact, is that everyone today – this is what I call the paradox of risk diversification, which I would tell you is this. If everyone is completely diversified across the market, it means that everyone is owning a little bit of every firm and every industry, in which case, who is the investor competing against anymore?
If you have an active investor, they’re investing in, say, American Airlines against United, so they’re investing in American and hoping it really competes and beats the pants off United. But today, everyone is investing in every airline, everyone is investing in every social media company, so I would ask the question, and the commoners are beginning to ask the question, if the biggest single share-holder of something like 85% of the S&P 500 by market value, is Vanguard, BlackRock and State Street combined, in their passive funds, that is, in aggregate, if you combined all those, they are the single largest equity holder of 85% of the S&P 500.
And they are the ones that participate in all of the proxy votes. Management has to listen to them. Who are they competing against? I would suggest that they own a cross-section of every industry, across all firms, I would say they are only competing against two players – new entrants, which dovetails with declining business dynamism today, and fewer startups. And they are competing against the consumer, which argues in favor of increased market power, raising prices in a way.
The less competition in prices may be good for the shareholder, but isn’t good for the consumer. All of this is detrimental to productivity improvement, business dynamism, and competitiveness in general. And I think the financials’ herding impact and the economic impact of the current dominance of passive index funds worries me.