The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
“On today’s program, central bank intervention has now become the new normal, but it’s masking the ability of the markets to recognize and price in risk. What happens when the blinders come off?”
– Kevin Orrick
Kevin: Well, it happened again. Whoever wants to manipulate gold, or push it down, seems to love to dump lots of it onto a very low volume market in the China market on a Sunday night. How often have we seen this, Dave?
David: Sure, [inaudible] Australia, but when it is moving [inaudible] and before we see a European or New York open, sure enough we see a hammering in the gold price. And it was interesting to see the mainstream media talk about 1.8 million ounces sold in one minute. And, was this a flash-crash? Was this is a fat finger? What exactly was it? Well, I can tell you what it was not. It was not normal, because when you have a large position of anything, let’s say you own an entire block of houses. You don’t put them all for sale at once because you won’t sell any at a reasonable price. And that is the nature of flooding the market in an instant. It drives the price lower and you don’t get the best price possible.
Kevin: Unless you’re trying to bear raid the market. Now, let’s say that you were going to buy more gold and you wanted to buy it at a lower price. I remember the Saudi Arabians did this a number of times in 1989-1990 as they prepared for the Persian Gulf war. They would knock the price down only to buy more. Now, it’s hard to figure on something like this, though, Dave, but when you look at a chart it’s just a straight down line. Now, that’s not a rational seller.
David: Well, right. So, the paper markets are truly a wonder to behold. And you’re right, it may be that someone wanted to buy gold at a cheaper level, and you can drive the price lower in the paper market, and buy it back in the physical market pretty easily at lower prices. That is kind of a handy thing to do if you have healthy credit lines. But there are only a few players who can do that. I think when you are thinking of inference to the best explanation, again, 1.8 million ounces sold in a minute – no reasonable person does that when they want to get out of a position. Manipulation is an appropriate explanation in certain instances.
Kevin: I remember your dad, all the years that he was here, talking about the manipulations, or the gyrations, in the gold market back in the late 1970s. In fact, there was a book written about that called The War on Gold. It was about the government’s war on gold, trying to keep it down. I just want to remind the listener – we’ll just take a side note here – that you and your dad are going to be visiting a number of cities here over the next few weeks. I’ll just read those dates again because we would highly recommend any listener who would like to not only hear you talk, but very rare occasion to hear your dad come back in from the Philippines, and also give a longer insight, maybe 30-40-50 years of experience worth of insight.
David: I talked to him last night and he said, “I hope people are ready for a long meeting, because I have a lot to say.” And I said, “Dad, you’ve got about an hour.” And he said, “Oh, I need more time than that.” I said, “What are you – do want three or four hours?” And he said, “If you think they’ll sit through it, absolutely.” I said, “No, I don’t think they will.” So, anyway, he does have a lot on his mind and we’re going to start those conferences in Palo Alto. The first evening is when we are doing the conference, and the next day is when we’re doing consultations.
The conference date in Palo Alto is July 14th. Then we’ll move on to Agoura Hills, a little bit further south, on July 19th. Then we fly up to Bellevue, Washington for July 25th. July 28th we will be in Portland. Then Scottsdale Arizona, which is August 1st. And then we wrap up this part of the tour August 8th in Denver, Colorado. If anyone is interested in doing one-on-one consultations we will be available to do that. We do request that you RSVP for the conference, as well as setting up the consultation and request whom you want to speak with, whether it is my father or myself.
Kevin: Yes, and if you’re listening right now, and you would like to give us a call, 800-525-9556, we can get you put down for the RSVP at one of those conferences free, and it is definitely worth the listen.
David: Kevin, I was in St. Louis this last week and I was walking by the Fed headquarters in Missouri. Of course, I had no appointment, but was certainly organizing my thoughts for a brief and impromptu interview with Fed President Bullard.
Kevin: You sort of had an imaginary conversation with Bullard as you walked by.
David: That’s right. He has gone from thinking that rates needed to be normalized, in other words, we need to raise rates, to now being a little bit more cautious. They would describe him as dovish. So our gaggle of guys from three different countries looked at the building, we scratched our heads, we thought about going in and asking for that impromptu meeting. The questions are still there in my mind. Of course, we did not go in. But why are we not – and this is what came to mind first – why are we not reliably headed to the Fed’s 2% inflation target?
Those are kind of his own words, but why are we not headed there? The rut that we are in economically that keeps us from the magic 2%. “In your opinion, Mr. Fed President, aren’t there causal factors that will remain a drag on growth, and remain a drag on inflation numbers?” Certainly we have sectors in the economy, and regions in the country, where things are growing at a higher pace, but in the Midwest – I think of a man like Bullard, watching his region, seeing, really, no reason to increase rates. What does he see?
Kevin: Well, and we have had accommodative rates, Dave, for nine years. This is incredible that we have been on emergency life support for the economy and it’s not creating growth.
David: And we’re still not out of the woods. That needs to be addressed. You have systemic factors contributing to the slowest economic recovery on record. This is some recovery story, right?
Kevin: This week the talk of the town, in Washington, D.C. anyway, has been about the Affordable Care Act, or what you and I would call the Not So Affordable Care Act. The gyrations that are going on right now as far as discussing a new health care plan, or whether, indeed, they should even vote to have one – they haven’t really repealed or replaced anything, Dave, it’s just sort of a different twist.
David: Right, so keep in mind, when you’re thinking about the slowest economic recovery on record, we have had for most of the last nine years this Not So Affordable Care Act in the backdrop. And I go back to Reagan’s waning days in office and at the time he thought that in spite of his best efforts, still, government was too big, it was still too bloated in size.
Kevin: How much were they spending on health care, though, during the days of Reagan?
David: Roughly 85 billion a year was spent on health care during the waning years of the Reagan administration. That has changed. Not including what is spent at the state level, the federal government is on the hook for about a trillion dollars each year.
Kevin: So 10 or 12 times the amount of health care spending that we had under Reagan.
David: Yes, it is interesting that the consumer still struggles, not only under a mountain of debt, and here we have the government who has sort of ingeniously increased taxes via the health care system.
Kevin: That’s what they called it. They called it a tax.
David: And specifically, the Supreme Court, when they were going through this a number of years ago, said, basically, this is tax. We sit back and wonder at the slow-to-no-growth environment we have in the economy, and again, what are we actually looking at?
Kevin: It’s the Republicans’ turn this time, and it doesn’t seem like the turn is any different than what we have already seen.
David: Could they amend the ACA? To me, the Affordable Care Act – this is where we need to remember as citizens, never trust governmental abuse of language and innuendo. You can call anything what you want to call it. That doesn’t make it so.
Kevin: The Patriot Act. Don’t you love it?
David: And if you don’t like the Patriot Act, then what are you?
Kevin: You’re not a patriot.
David: Well, that’s exactly right. So, this must be affordable because they said it was affordable. And what is the GOP suggesting right now? They’re suggesting that we keep it. And they’re suggesting that, in effect, they’re not trying to get rid of it, their contribution, if you go through all the details and boil it down to the nitty-gritty, they want to use deficit spending rather than tax increases to pay for it. And frankly, the GOP is, in my mind, disturbing, in its ability to ignore the issues which are a drag on the economy. The ACA – yes, it is a drag on the economy. The total stock of debt – yes, it is a drag on the economy. But of course, the GOP is not concerned with limiting the scope of government. What they are really concerned about is who controls the leviathan.
Kevin: Talking about deficit spending, there are rumors – these, of course, are only rumors – that they are talking about just getting rid of the budget cap and not worrying about how much debt the government can take on. So the difference between raising taxes and just printing money – just borrowing, and borrowing, and borrowing – that’s the drag, Dave. That’s what you’re trying to say. This is the drag on the economy.
David: It is interesting who follows whom in this context, because you have Mnuchin talking about extending some of our debt as far as 50-100 years. So, instead of the long bond being 30-year treasuries, imagine 50-year treasuries, or 100-year treasuries. It was Argentina who just in the last few weeks issued their first 100-year bond. Do you know it was eight times over-subscribed? The appetite for Argentinian debt – they’re just getting back into the capital markets, and we have quoted Rudyard Kipling, The Gods of the Copybook Headings, and the line where the burnt, bandaged finger goes wobbling back to the flame. That is the investment community going back to buy Argentinian debt. Are you telling me that in the next 100 years Argentina is not going to have an inflation problem, or a currency crisis?
Kevin: Well, let’s just look at the past. Even a two-year bond would be a dangerous bond in a South American country.
David: Right. So here they’ve done it, it was successful, and if they can finance their debt at 100 years, why can’t we? It’s interesting because usually when you start changing the terms of your loans, it happens most frequently in the context of restructuring. This is not a formal restructuring of U.S. debt any more than it was a formal restructuring in Argentina. That has already happened.
Kevin: It’s never a sign of a health country.
David: It’s really not. It’s what they’re trying to do to make sense of an overstock, an overhang of debt, and what is really a burden on the economy.
Kevin: So the health care costs, in terms of government expenditure, are up over 1000% since the Reagan days. How do you do that without extending maturities on bonds, or going further into debt?
David: Right. So, if is government expenditure on health care is up over 1000% that is money that is coming from my pocket, and yours. When government spends, they don’t have a source of capital except from tax revenue. So if that expenditure is up 10-12 times, that is money that came from you, so that they could re-allocate it in a command and control dynamic to what they think is best for you. If you take that simple bird’s-eye perspective, you can say that the only way a ten-fold increase in debt is possible is either to have a ten-fold increase in the size of the economy or for there to be a massive reduction in debt servicing costs, which I believe, if you look at that debt servicing piece, is really the lynchpin of the economy today.
Kevin: So interest rates cannot rise. They can’t rise much.
David: Well, that is what has accommodated this massive increase in not only line item expenditure but also the total stock of debt. You take away the free lunch and I guess what happens is your breadlines grow significantly. And frankly, a low rate environment is simply a free lunch policy for men in pinstripes.
Kevin: And don’t feel sorry about the people who are actually the insurers. They’re doing very well, thank you very much, with the new Affordable Care Act, and probably with anything that the Republicans throw forth.
David: Right. A final note. So, who is doing well? Health care companies. Premium costs have risen a staggering amount. Reflect on these opposites for a minute, because health insurers – on the one hand their stocks are at all-time highs. But retail stocks are at 52-week lows.
Kevin: So you don’t want to be Wal-Mart, which is retail stock, but you would rather be a health care provider of some sort.
David: This is interesting, because again, taxes are up, which essentially, the ACA is an increase in our taxes, and other categories of spending are down. And there should be no surprise there whatsoever. There is no repeal and replace in motion, coming from the GOP, if you look at their healthcare bills, but what stocks have responded nicely to the Senate Health Plan? You have hospitals, and you’ve got pharma, which is also laughable, but of course, they’ve just gone through the roof. And you tell me, if this scenario is actually good for the middle class.
Kevin: Let’s go back to the topic of debt because this is how we pay for all this if we can’t tax it. Now, if the economy had grown ten-fold, we would be able to pay for it, like in the Reagan years because this would be coming from taxes on revenues in the country. But has the economy grown ten-fold?
David: In nominal terms GDP has grown 3.6 times since the last days of the Gipper. In real terms, it has just only doubled. That is, if you take out the increase attributable to inflation from then to now, you have ten times the debt for about three times the growth. Again, you factor out inflation, and it’s ten times the debt from your doubling of growth. This is a command and control dynamic at its finest. Taxes – if you look at them in nominal terms, they’re up about 400%. So again, taxes are not keeping up, which is why you have this gap between what the government has to spend and what they’re actually spending, which is all deficit. You mark that up year after year, and that’s how we get to 20 trillion dollars in debt. We’re just spending more than we bring in.
But when I’m talking about taxes, that does not include the ancillary things that have been subsumed, not by the treasury, by some other organ of government. Again, health care is a perfect example.
Kevin: Let’s take the bird’s-eye view again. You were talking about that. If we have ten times the debt and we only have 3.6 times the growth in the economy, what we have then, is a gap-filler. We hear about interest rates rising, but they cannot raise rates, Dave, because they’ve created so much debt.
David: But this is precisely my point of criticism with the GOP. They’re very, very comfortable with raising debt levels, and there is an assumption that we can just manage the debt better. So maybe that is Steve Mnuchin’s way of managing debt levels, by saying we’ll just extend the duration out 50-100 years. But again, to me, they’re not dealing with the systemic rot. They’re basically pushing it forward and saying, “Okay, it’s not the next generation, but two generations out that will have to deal with this.”
Kevin: This reminds me of The Fourth Turning. It sounds to me like we’re in a fourth turning, where there is no regard for the next generation or the sustainability of the way things are going.
David: And if you don’t address those core issues, there will be a fourth turning event, a kind of revolutionary event that banishes that kind of politician from the public square for at least a generation.
Kevin: We ought to get Neil Howe on the program, Dave. It would be nice to have him come on now while they’re talking through all these things.
David: I imagine conversations that I would have with Senators and Congressmen. Sometimes I have questions, other times just sort of high levels of frustration. I want to see if I can pivot from public policy, discouragement, if you will, and sort of the dull topic of politics and public policy to the markets, which are clearly never dull and we never get discouraged there, except when prices are controlled and price discovery is not even possible.
Kevin, you mentioned Neil Howe. He is one of the co-authors of the book, The Fourth Turning, a book we read as an office many years ago. It was a very helpful rubric for understanding social, political and economic change, and it involves a lot of demographic studies, looking at generations, and how there are things that shift from one generation to the next, in a cycles of 100-120 years. They looked at about 600 years of British and American history. Neil will be joining us on the Commentary next week.
Kevin: It’s a very reliable template. You can look at things through different eyes, and sometimes it is nice to look at things through a particular template where you can say, “Hey, are we in a first turning, or a second turning, or a third or fourth? And I would not miss that program. That will be during the week of the July 4th holiday.
David: He looks at a pretty good source of data to come to the conclusions that he does.
Kevin: Dave, you’ve talked about the stock market being over-priced. One of the ways we know it is overpriced is because the return on equity is very low right now.
David: Yes, if you look at the book value of a company, if you look at a company, how it is priced relative to the sales that it is bringing in, if you look at what the return on investment is, or the return on equity is, you have a picture for where you’re at in time. Bill King references a fascinating chart dating back to 1951 – this is from a Bloomberg data set, and it is a very intriguing point. Return in equity for non-financial corporations. You go through various interest rate cycles, and now we have gone through one of the greatest buy-back binges in history where corporations have bought back their own stocks, which inherently should give you a higher return on equity, and yet, we see this number in terminal decline. It is at the lowest level presently, going back to the 1950s.
And when I think of return on equity, I think of it like the cap rate in real estate. Your cap rate tells you something about the environment you are in, both in terms of the demand, and in terms of the value that you are getting for what you are paying. Again, the smaller the cap rate on a piece of real estate, the more prices have already been priced to perfection, the more they have been bid higher. If return on equity is at the lowest level in more than five decades, again, far lower than it was after it fell, literally, off a cliff in the late 1990s.
As the bubble in tech took hold … so again, you have stock prices soaring in the 1990s and your return on equity falling through the floor. And now we have return on equity even lower today than it was then. This is with the buy-backs, this is with an increase in debt by corporations so that they could buy back more shares. It tells you something. To me, what it implies is that there is a lot more in the price than people are seeing. Specifically, there is a tremendous amount of balance sheet vulnerability – a tremendous amount of balance sheet vulnerability. Because debt is certainly a part of this equation, where corporations have added to the amount of debt they have taken on, and it has not helped them in terms of a return on equity. Reducing share count has not helped them in terms of an improvement on return on equity.
Kevin: They’re just games. They’re just games that they play to try to make it look like it’s not falling further.
David: Right. So when you see the Dow, or the S&P, or the NASDAQ priced for perfection, understand how much balance sheet fragility is right in front of you.
Kevin: Well, we have transitioned so much over the last nine years. You have talked about the change as far the amount of health care costs, and the debt increase, but we have also moved into a period of time where there is just the assumption that the central banks will be able to manage all, just continually, but I think there are some central bankers – the central bank of all central banks is the Bank of International Settlements – and there is a warning that has been thrown out saying, this may be a pretty bad financial crisis if it happens.
David: If you remember, one of our guests from maybe a year-and-a-half ago was William White who worked for the Bank of International Settlements, and then he would travel on weekends down to Paris to do some other work with the OECD, fairly well-connected, originally started a central bank career in Canada, working for the central bank in Canada, and he liked to explain that central bank work is really not that scientific, and although they use a lot of math, there is no formula.
Kevin: It’s not a science.
David: It’s far more art than science, and nine times out of ten they get it wrong. So the market perception, as you say, that the central banks can kind of hold the sun, moon and stars in place, it’s a misperception. On this side of the pond, we are blinded by the light of Fed intervention and by the indirect market manipulations through the high-frequency trader. The chief economist at the Bank of International Settlements, which is really the bank to central banks – he sees things a little bit clearer. Claudio Borio is his name, and he warns that the next global crisis will hit with a vengeance, and this is to quote him directly: “The end may come to resemble more closely a financial boom gone wrong, just as the latest recession showed, with a vengeance.” That comes from the BIS’s 87th annual report.
In support of the idea that interest rates matter, Borio says in the report, “While much attention has focused on the impact of bond yields, of changes in central banks’ large scale government bond purchases, the effect on a government’s financing costs has gone largely unremarked. And yet, if those changes are large enough (again, he is talking about the change in financing costs), the impact can be sizeable, and this could have significant macro-economic implications, especially in economies with high government debt-to-GDP ratios.”
He goes on to say, “The main reason is simple. From a consolidated public sector balance sheet perspective, large scale purchases amount to a withdrawal of duration from the market. It is as if the government replaces long-term debt, the amount purchased by the central bank, with very short-term debt, the liabilities the central bank issues to finance the purchases. Since these liabilities typically take the form of excess reserves held by banks [and I would note, Kevin, that that is about 4½ trillion dollars here in the U.S.], they are the equivalent to overnight indexed debt,” Borio says. “This makes the government’s net borrowing costs more sensitive to higher rates.”
Kevin: Well, if we were to put that in terms – like with the United States, we have a certain amount on our line item. The amount of money that we come in, with taxes – there is a certain amount that goes toward the interest on our debt. Now, what you are talking about is some of these interest rates sensitivities with these huge, huge government long bonds, the interest rate sensitivity has been shifted almost to the impact that an adjustable rate mortgage might have with a person who owns way too much house. He can afford it right now, but if interest rates go up even a percent or two he will lose the house.
David: And that is what he is saying, that with governments that have a high debt-to-GDP ratio there is a risk if you raise interest rates. I think he hints at something that is important, if it is not obvious. This dynamic – there is a rapid rise in current liabilities – again, this is the current interest rate component – and it goes hand-in-hand with rising rates, which seems pretty obvious, but our debt-to-GDP ratio is not at the worst level on the planet.
Kevin: I would guess Venezuela is probably a little worse right now.
David: Or Japan.
David: But is well past the Reinhart and Rogoff threshold of 90%, where they have written that pressures on the economic system, historically, have begun to cluster
Kevin: Yet you say that the GOP really doesn’t have any sensitivity to the growth in debt right now. They are certainly not communicating that.
David: They don’t have any sensitivity to the growth in debt, you don’t see from the Treasury Department, any sensitivity to rising rates having an impact on the structure of our debt, or what that may mean to, let’s say, for instance, the Fed balance sheet, which again, as Borio points out, you look at the average duration of a central bank balance sheet, and maybe on paper it says it is five years, or ten years, or all the debt comes due 12 years from now. But because of the way they have loaned money out through their different facilities, it actually is more like overnight lending, which makes them far more interest rate sensitive than it would appear on paper, which is he arguing, basically, whatever debt-to-GDP figures you see today, they can blow out very quickly with the rise in rates.
Kevin: But the GOP is basically saying, “Don’t worry about the debt. Growth will take care of it all.”
David: That’s just it. They think that when they deficit spend, when the GOP deficit spends, what that turns into is multiples of economic growth, and therefore it doesn’t matter. So, if the Democrats were doing it they would be highly critical. But they can do it – and this is a little bit like claiming your flatulence smells like rose petals. I understand these guys are perpetual wind bags, and they may have developed olfactory fatigue, but the reality is, this doesn’t make sense economically and mathematically. It’s a pipe dream for them to think that they can deficit spend us into some form of financial success. The backdrop during the Reagan era was radically different than it is today, and you can’t assume that some borrowed supply side economic principle is somehow going to carry the day.
Kevin: We’ve talked about how we have become reliant over the last eight or nine years on central bank intervention. This Bank of International Settlements report is a long report. We’re talking 132 pages. But are they hinting at some sort of withdrawal of the central banks, or does it look like it’s going to be the new paradigm, Dave, where they are just always here managing things.
David: Borio does a good job, and I think other contributors to the paper do a good job looking at positive points of growth in the global economy. But one thing that I didn’t like was the observation in, I think it was the fourth section, that post financial crisis pricing anomalies may now be a permanent feature of the markets. Again, central banks have left a huge footprint in financial markets. They have become the artificial buyers. And what he is saying is they may be here to stay.
Your normal buyers, who would buy mortgage-backed securities, asset-backed securities, are being crowded out, and they have been replaced by central banks. That, again, has created anomalies in pricing which he is saying may be here for a while. There are several others, but I think the mortgage-backed securities market is the obvious standout in terms of Fed purchases.
Kevin: Earlier this year we talked to Russell Napier, one of our favorite guests. He has just made the point, even recently, that it is going to be impossible to really raise rates significantly.
David: Exactly. He takes a different tack. Everyone is assuming that rates are rising because the global economy is in recovery, and he would say that it remains virtually impossible for rates to rise significantly. They are in a real pickle here because, arguably, they should have raised rates a long time ago to normalize the system, but that would have come at a cost. Now there is a cost to doing it, and it may be catastrophic, but there is also a cost to keeping rates low, as well – damned if you do, damned if you don’t. He looks at companies like insurance companies, or organizations that have pension plans, and he says, basically, that low rates are going to force those corporations to direct more and more of their cash flow toward those liabilities.
Kevin: Right. Because the liabilities, like pensions, promise a certain amount of pay out to the person who worked their entire life to have that income.
David: And they have made certain assumptions about the income that they are going to receive on those pension investments. If rates stay too low for too long, not only do you lower the total return that you might have in an equity exposure, but you also obviously have lowered the return that you have from the interest component on a fixed income portfolio.
What is the lesson here? I think the lesson we walk away with from this is, Knut Wicksell – you remember the Swedish economist – he basically said, “Don’t mess with the market-discovered natural rate of interest. Don’t do that. If you hold rates too low for too long, ultimately, they will correct and go far higher than is desirable.”
Kevin: Do you remember the commercial for a margarine, Dave? It said, “It’s not nice to fool mother nature.” In other words, don’t fool with the free market.
David: That’s exactly right. And if you do, your creative genius which creates that low interest rate environment – and arguably we have had creative genius from the central bank community – may birth something akin to a Frankenstein monster.
Kevin: But the thing is, none of the markets are able to price in risk right now because the central banks are intervening anywhere there is risk. We have talked about junk bonds. Some of the junk bonds, really, because they were so popular, were paying just a little bit more than a normal treasury might.
David: I know last week it sort of sounded like I was excited about something bad happening. Well, junk bonds, the fact that we actually saw them move down a little bit – why does that make me happy? Because it says that someone cares about the risk involved in that market. Last week we finally started to see some downward movement in the high-yield bond market. And you know what? They are still 10% higher, and near all-time highs compared to where they were, say, election day. We have mentioned this in the past that European junk is priced, really, at levels that make their yields on par with U.S. treasuries.
Kevin: That’s amazing.
David: Is that realistic? I don’t want to sound like a broken record, but here I am sounding like a broken record. At current levels, these prices don’t reflect actual risk.
Kevin: The European Central Bank is just coming in and being the only customer.
David: Yes, so you don’t have adequate compensation for the inherent risk in these investments. Nothing today – nothing reflects actual risk anymore. This is because the central bank community has gone about their business crowding out capital from certain asset classes which has created further crowding into other areas. As investors have had to hunt for income, hunt for yield, this is what you end up with – price inflation. It is a broad-based phenomenon, and we’re not talking about price inflation at the consumer level where a bag of potato chips costs more. We’re talking about asset price inflation.
David: Stocks, bonds – the kinds of things where, again, the footprint of the central bank comes into the market, crowds out people from that marketplace, and they are forced to go someplace else. And that drives up prices in other asset classes. This is the challenge we have today with price discovery when you are at the end of a credit cycle. Pricing dynamics go haywire. And the messages that the market is sending become irrelevant unless you read them as a contrarian.
That brings me full circle to why I am comfortable in gold in this environment. I know that games are being played, and I know that we are at the edge of desperation in terms of what central banks can do, what policy measures are effective, what has been proven ineffective with the low-to-negative interest rate policies throughout Europe, and we have flirted with that in real terms here in the United States. And I say to myself, “They don’t know what is coming next. They have already used their ammunition, in the event that we have a real awareness of risk in the marketplace, and that is priced back into junk bonds, priced back into corporate debt, priced back into equities.
What do they do? Well, if they can’t do very much at all, then I think we see a very interesting set of tracks go from the stock market, from the bond market, from the currency markets, into what has classically been a safe haven move. Why do I think gold is going to see a lot of play over the next two to three years? We have massive political dysfunction. We have geopolitical dysfunction at a level we haven’t seen, and it is being ignored. We haven’t had this kind of geopolitical dysfunction since the 1980s.
Kevin: That’s what you’ve talked about – the financial moves to the economic, which moves to the political, which moves to the geopolitical.
David: And yet the markets are not pricing it in. When the markets begin to price in these levels of dysfunction, both political and geopolitical, do you know what happens to the price of gold? That’s why you want to own it, frankly, when no one cares, and I would say that is right about now.