May 27, 2015; Alan Newman: Don’t Ride the Stock Market Down Again!

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

“You’re talking about something that is an asset that you can hold onto. It’s real. We are in a period where harder assets – real estate, water – are going to be more important, and this paradigm is not going away any time soon. It is probably going to be around for the rest of my lifetime.”

– Alan Newman

Kevin: Alan Newman is our guest today. I love reading his newsletter every month, and I know you do, too, Dave. Alan is one of the guys who has a long-term perspective. He makes incredible charts. They have so much meaning. You don’t miss the point when you look at his charts.

David: A few weeks ago when we were talking about Tobin’s Q and the Shiller PE, we did note that these are not really timing tools, they are perspective tools. They tell you very precisely where you are, and what is likely to occur over the next 3, 5, 7 years. So, for someone who is making plans and investing for the future, they are invaluable. So are charts. They are not necessarily the things that will tell you, precisely, to the minute or the hour, what you should or should not do, but they certainly are helpful, and healthy guideposts.

Alan: In everything in life, Dave, you have to understand, because of your past experience, because of education, an element of meaning. Why does something make a difference? I remember Alan Newman, after 9/11, coming out and saying, “This is the beginning of a super bull market in gold.” Now, this is when gold had been languishing around $300 an ounce, and a little bit below that. And he still feels that we are in a super bull market and it is about to resume. He says we have just been in a rest period.

David: What I enjoy about Crosscurrents on a monthly basis is the clarity of the charts, what they communicate, and of course his very clear explanation of what they imply, and I would strongly encourage listeners to look at that, for perspective, on not only the stock and bond market, but also on gold and just about every asset class. Alan has some great commentary woven in month-to-month.

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Alan, it is great to have you back on the Commentary with us, and we have lots of things we would like to cover. Of course, you are best known for your work in Crosscurrents and the charts and graphs that you put together in them, always stunning, along with the commentary to explain what exactly these pictures are that we are looking at.

There are lots of things that we could start in on, and I guess what I would like to do is say, with a very conservative, cautious, and completely qualified hat on your head, where would you see the markets going over the next 6, 12, 18 months? And again, we will then contrast that with perhaps the radical, reactive, and maybe the ridiculously speculative hat on, where you see the markets maybe going in the next 6, 12, 18 months?

Alan: Well, first of all, thanks for inviting me back on. It is always fun to speak with you. Markets for the next 6, 12, 18 months – I am expecting a bear market. Of course I have been expecting a bear market for U.S. stocks for a long time and we haven’t had one. The Fed has been doing everything in their power to dissuade people from selling stocks. But the truth of the matter is, the public is, by and large, out of stocks, and they have been for a while because they got killed from the 2000 tech mania and the 2007 housing bubble peak, so why would you go back into stocks?

And of course, they can’t get a return elsewhere because the return is not in bonds. So, you have a rather punk economy and I don’t think it can support stock prices where they are now. Certainly, you begin to see it in some charts. You don’t see it in the Dow Industrials, but you do see it in the Dow transports, which are pretty close to breaking down here, and if they do solidly close below pretty much where they are now, and stay there, I think it is going to drag the Dow with them. I am not looking for the end of the world, I am not looking for a move such as we had in 2002 or 2009, but I think we could get down around 14,700. I have a worse case that is a little bit below that, somewhere in the 12,000 area. I don’t like equities – period.

David: So, you are saying divergence between the transports and the industrials, and the suggestion is that if there is a further breakdown in the transports the industrials may follow. What else do you see in your proprietary studies that would reinforce this notion of divergence?

Alan: I have a chart where I take a 50-day moving average of the percentage of New York issues that are advancing. When that is under 50%, that is a bad sign. And here just four days after market peak, recently, we had that under 50%. We have had a series of lower peaks since the first rally off the 2009 lows. It is just a steady series of lower peaks. It is a declining line. It is normal, because it tells you that the internal dynamics of the market are fading, but we are down to a point now when this indicator trades below 50%, it is more than just fading, it is telling you the character of the market has changed dramatically. If you can’t get half the stocks to go up on a 50-day basis, something is terribly wrong. So, that is one proprietary measure that I look at.

I also look at a lot of sentiment measures, and for me, we are in a situation – it’s not that the bullishness is overwhelming, but it is that there are no bears around. No one wants to bet on the short side, including me, because every time you do, the market will be down 200 points, then it will go back up 200 points. The Fed has an agenda, and the Fed wants to see that agenda fulfilled, so you have tremendous risk on the short side, but you also, obviously, have tremendous risk on the long side.

Valuations are off the charts. Shiller’s PE is, I think, the third highest it has ever been. It was considerably higher in 2000, but that, of course, is a mania that we will never see again. Tobin’s Q, which basically measures the replacement cost of the corporations, is at its second highest in history. So, this is all going to be resolved at some point. I can’t tell you exactly when, but when the market turns I expect it to turn hard, and very rapidly.

David: We have also, within the financial industry, been looking at statistics and breadth figures, and it sounds like one of your proprietary measures is similar to breadth. Maybe you could distill for the non-industry listener – what is breadth and what does that look like today?

Alan: Right. Well, your advance in the indexes is coming from stocks like Apple. I did a study on that recently. I think something like 3% of the entire advance in stock market capitalization over the last couple of years was due to Apple – one stock out of 5,000. It comes from stocks like Netflix, which is trading at ridiculous PE multiples. It comes from stocks like Amazon that recently caught fire. My proprietary indicators, not only for advance decline, but from new highs, show these same declining lines, which show fewer stocks participating as the bull market ages, as it matures. We are at a point now that is consistent, in the past, with big reversals, so it will not give you the day.

David: I’m just curious, you have a significant mutual fund outflow in the period of 2007 to the present, but you have a steady rise in market prices from 2009 to the present. How do you make sense of this where volume continues to decline, but price continues to increase?

Alan: It is hedge funds, mostly, and high-frequency trading. Programmed trading still averages around 30% of New York Stock Exchange volume. That is enormous. Way back when, it was 10%; now it is 30%. High-frequency trading for some funds – it is almost a guarantee that they are going to make money. If they do enough volume, the exchanges will give them a rebate. It is a tiny, tiny rebate on each trade, but what that rebates means is, they could break even and make money on the actual transaction, or perhaps even lose the tiniest bit, but still make money because of the rebates.

It is a fantastic situation, it certainly harms the consumer, and it harms smaller investors, and this is one of the reasons why people are avoiding stocks. They know what is going on. They know that the market is rigged against them, so they don’t want to participate. I should say, I don’t like equities, but I do like gold stocks. I do want to make that point. That is very, very important.

David: Let’s skip to that because I think there is a very interesting strategy that you have, and have had, in Crosscurrents, I would say, for several years. It is a high allocation to gold, gold miners, and even a small slice of energy. And the critics of that kind of strategy might say, “Well, listen, over the last couple of years it certainly hasn’t worked, therefore it won’t work in the future. If you look at all the concerns for inflation, now it is more concerns with disinflation. You have the negative consequences of runaway monetary policy. It has been very deftly handled by the professional econometricians at the Fed.” How would you respond?

Alan: Well, you made a point recently in your commentary about patience. I think you have to be patient. This is all going to happen in due time. We started, as far as I am concerned, a super bull market with the 9/11 terror event, and that paradigm is not going to change for a long time to come.

David: You’re talking about the bull market in gold.

Alan: Correct. We are in kind of a rest period now, or a respite, I should say, and it is going to come to life again. One of the ratios I keep is the Dow-gold ratio – it is currently 15.3-to-1, and I have a 5-to-1 target. That equates to over $3600 an ounce. When I look at this ratio, the critics can say, “Well, yes, it is traded up around here or even higher. Back in 2000 it was up over 40-to-1. It has traded up here for a long time.” But if you take a look, going back to 1975 or so, that ratio has been under 10-to-1 – 10-to-1 would equate to gold at $1800 an ounce – 57.5% of the time. It has traded down below 5-to-1 24.3% of the time, so why can’t that happen?

Well, in fact, I think it will. So, I just want to be patient here. I want to be positioned correctly. Natural resources is always a decent way to go and insofar as gold, I think there are so many question marks about the next few years. Where are we headed? Where is the U.S. headed, vis-à-vis China, vis-à-vis Russia, vis-à-vis all the countries where it looks like they are losing respect for us? I think it is very important to be in gold.

David: I certainly agree, looking at the Dow-gold ratio, that the 15-to-1 tells a very interesting story. I want to talk a little bit more about that, because on the one hand the Dow components are at, or near, all-time highs, and gold is clearly well below its all-time highs. On the other hand, gold has still outperformed stocks since the beginning of the century, the beginning of the millennium, 400-500% for gold, and stocks were up about 50% in the same timeframe. If we reflect on that, what does it mean? What are the trends still in place? Certainly you can look and say, “From 2009 to the present, stocks have done very, very well, but in a broad, long-term timeframe, what are the markets telling us in terms of a bias toward physical metals in contrast to financial assets?

Alan: If you measure from where I am measuring for the super bull market for gold, from the 9/11 event, we are up well over 200%, the Dow is up 40%, and I am adjusting this for inflation, which I think is the proper thing to do. So, gold has outperformed by a wide margin. Another thing with stocks. What is happening nowadays? They are buying back their own shares. How is this helping our economy? How is this helping America? The future? It is not. It is not creating jobs, it is just helping shareholders, it is helping the highly placed executives at companies who have their own stock options. Because the company is buying back their own shares, they can sell their stock options more dearly. This is one of the big problems, I think, moving forward.

David: I think there is a trend, when you look at the super bull market in equities which began in the early ’80s and carried through the year 2000 with, as I think you aptly describe, an unrepeatable level of excess, we have very little of the same dynamic today, except that you do see people betting with great confidence in places like margin debt numbers where, if you don’t have the money you continue to buy what you can’t afford, given the virtual guarantee that the Fed will continue to push prices higher. So, you do have a different feel.

I guess the contrast is, on the one hand, you can make a case for a bull market in stocks, a very powerful one, from 2009 to the present, but when you look at the migration of assets into gold from 2000 to the present, you see a very different story. The Dow priced in gold terms is down over 60%, not up 40% adjusted for inflation, but it has actually suffered a tremendous loss in gold terms, and a good friend of ours, Charles Vollum, likes to say, “All you are looking at with gold is a reliable cash alternative,” and surreally, what you are seeing is your cash buys quite a bit more in terms of Dow shares than it did 15 years ago.

Your suggestion is that we will get to a 5-to-1 ratio, which would imply considerable improvement for someone who owns gold and ultimately wants to own shares, owning quite a bit more for the same “money,” in a relatively short timeframe. Do you see the possibility of the number going below 5, perhaps to a 3-to-1, or even a 1-to-1 ratio, as we saw at least two other times in the last century?

Alan: We’ve been there, certainly it could happen, but there is no point in my currently forecasting something like that. It just doesn’t make sense to me now, I have to take it a step at a time. I have actually had a 5.67 target in place for a while, too, but I changed that back to 5-to-1, and I think it is reasonable to assume that we are going to get there, at least.

So, if we start approaching that number, I have to look the situation over and decide if we can get back down to 1-to-1 where we have been in the past, or 2-to-1. But even if we are only going to get to 5-to-1, that certainly tells you where the smart money is going to go. You and Kevin both made that point recently. This is where the smart money, I think, is going – into gold.

David: And so for the leveraged, or the more aggressive speculator, something like gold stocks may make a tremendous amount of sense, looking at gold and gold stocks.

Alan: Also if you look in terms of currencies, in terms of the yen, gold recently got back up there close to where it traded at the yen all-time high. Certainly, in terms of the euro – and the euro is actually the world’s biggest economic block, believe it or not – gold looks pretty decent. It is only in the U.S. dollar where you see this bit of a problem, and this bit of a breakdown. But I think that is going to reverse soon.

David: You mentioned share buy-backs, I want to come back to something relating to that. How long do you think corporate financial engineering can go on before investors realize that, essentially, cleverness has replaced quality of earnings?

Alan: Oh, I think investors realize that already, and that is why you have these outflows from mutual funds over the last few years. It is a matter of trust. I don’t think we trust Wall Street the way we used to years back, with good reason. The average CEO takes home, what, 350 times what the average worker takes home now? It is just not a good situation. When people see companies buying back their own shares, yet your friend Charlie is still out of work, and has been out of work for 27 months, and he is now joining the ranks of the “discouraged workers,” we have a pretty lousy situation. Why isn’t that company spending money on plant and equipment and creating new jobs? You got me, I don’t understand it.

David: You generally invest in plant and equipment and hiring when you expect an expansion of business, when you expect an increase in sales, when you expect to move more of your service or product into the marketplace because the marketplace is buying more of your service or product. And if that is not the case, then you have what we have described, and others have certainly described as, financial engineering. It is interesting to me that that still is accepted by the business news media as a “return of shareholder value.” It is described as a positive when, as you point out, if there is really something positive to talk about here, let’s hire some more people, in response to great economic activity, let’s increase the payrolls.

On to another experiment, if you will. Let’s try the old Rorschach game. I am interested in how you respond to these words. I will say a word, you respond with the first thing that comes to mind. (laughs) Try to have fun with this – the dollar.

Alan: China.

David: U.S. treasuries.

Alan: Zero. (laughs)

David: Zero?

Alan: Yeah.

David: Okay. Farmland.

Alan: Great investment.

David: Derivatives.

Alan: Ahhhh. A sigh – that is about all I can muster is a sigh, because I can’t believe that someone like Buffet now has his company tied up with so much in derivatives. He did call them “financial weapons of mass destruction.” And I have always felt that way.

David: The next one: Emerging market equities.

Alan: I can’t think of one word. I am ambivalent.

David: Apple.

Alan: Way too high. Overvalued.

David: Okay. Gold.

Alan: Great investment.

David: Russia.

Alan: China.

David: OPEC.

Alan: Well, the obvious answer is oil, but it’s the wrong answer. I think, with OPEC, again, you are looking at a situation where the U.S., over time, becomes less respected. Saudi Arabia has their own agenda. It has nothing to do with us. They will use us as long as they can.

David: Because we move on with the rest of the Rorschach test, isn’t it funny that we think we are using them, and they think they are using us?

Alan: Oh, absolutely.

David: (laughs) This probably gets back to that old Wall Street adage, “There is only one genius in the equation.” I guess we will have to see who it is. Okay, back to the Rorschach – mining companies.

Alan: Speculative.

David: Retail sales.

Alan: Bad.

David: Washington.

Alan: Bad. (laughs)

David: (laughs) That concludes our Rorschach test for the day. If we assume that debt levels are high today, and government spending, as indicated by the Congressional Budget Office is not expected to decline, what does that suggest about the usefulness of devaluation, on the one hand, and how does that translate for the individual investor?

Alan: I don’t think it should even be considered. I don’t think we can go there, I really don’t. I mean, what may happen down the road is one thing, but I don’t even think we can consider that at this point. I think it is a telling factor that we have these problems with Washington, with spending, and we can’t figure a way out of it, and the situation is just getting worse and worse. But it is getting worse and worse all around the world – we’re not the only ones. It is worse in China, it is certainly worse in Japan, and it is certainly worse in Russia.

David: This suggests something that is sort of unique in this period of history. We generally have confidence that normal market dynamics are self-healing, even if you throw in a little Schumpeter for good measure and know that there are going to be some ideas that go the way of the dodo bird. But in the context that we have today, of coordinated central bank interventionism on a scale never witnessed in financial history, how does the natural process of recovery occur?

Alan: It simply doesn’t. Actually, the word you want to use is manipulation, right?

David: I think so.

Alan: Yes, absolutely. We have had a number of years of this manipulation and it really hasn’t worked. We come up with numbers, but how accurate are they? Like job creation numbers – it certainly doesn’t look like it. Take a person like John Williams, who runs shadowstats.com. I like his charts better than the government’s charts, and they are showing his measures of unemployment going up rather than down. I don’t even believe the government’s CPI figures. I believe they are much higher than stated. I can see it from my own experience, my wife can see it in her experience. Why am I wrong? I don’t think I am.

David: When we look at the quasi-capitalism that we have today, this is sort of a new era where we have blended the old command and control characteristics of a statist era, or even if you want to go back into the cold war, the Communist era, where prices are being controlled. Certainly, if interest rates are priced, then they are clearly being controlled, and investors are being required to continue to make decisions about their assets in a context where you don’t have a free market. You have 13 trillion dollars sitting in American banks and money funds. They are not getting any interest. What is the trigger out of bank deposits, out of the stock market, where people take on a more defensive posture, and is that why you think the big move in gold is immediately ahead of us, or at least on the horizon?

Alan: I am going to argue just the opposite. I think what the government needs to do is to find a way to get people to spend their money to aid the economy and to create jobs because what you really need is inflation. Right now people do not want to spend their money. They can’t get a return on it, so they don’t want to spend it. If they could get a return on it, if interest rates were 5%, 6%, they could spend some money. So, what would it mean for them to turn defensive?

David: They are defensive in the sense that they are sitting in cash.

Alan: Right.

David: I wonder when they get even more defensive than that, because cash is considered by some to be a neutral position, and it is if you are talking about lower risks than stocks or bonds, perhaps that can be quantified as a low-risk position. But you are leaving your resources to be managed by the Federal Reserve, certainly their long-term track record isn’t very impressive. Maybe their short-term track record is slightly more impressive.

In our conversations in the past, and more recently, you have suggested that the big move in gold is on the horizon. To me, when you see a big move in gold, I translate that as a loss of confidence in the central bank community.

Alan: Oh yes. Sure.

David: So, I look at 13 trillion dollars sitting in banks today, and in money-market funds, earning nothing, opting to rather be there than in the stock market, bond market, real estate market, or anything else that might be less liquid. And I ask the question: How long does the confidence stay with the central bank schemes and with the confidence that there will be purchasing power maintained in those dollar positions? As and when it caves, you do have your big move.

Alan: When stocks start to come down I think you will see a very different scenario. Talk about hunkering down, when people are not spending now, they’re certainly not going to be spending, and the economy would cave. And already, what do we have? Half percent GDP, if we’re lucky?

David: Yes, the Atlanta measure of GDP now, kind of the current rolling average of our expectation of GDP, continues to move down. Most recent retail sales figures knocked off another 10^th of a percent. It is not positive.

Alan: I do think there is a tremendous lack of confidence out there now and it can only continue to grow. We are not going anywhere. We are at best treading water. But I can see in the charts there are some gold stocks, like particularly, Newmont, I can see it in American Barrick, I can see it in certain of the speculative stocks that I own, that we are getting ready for a big move in gold.

David: Circling back around to the Dow, the S&P and the NASDAQ, if we take the numbers that you routinely publish and put into a chart form in Crosscurrents for borrowed money used to go out and buy stocks – margin debt – what does that tell you? 476 billion dollars, highest nominal figures we have seen, very high relative to both GDP and stock market capitalization, I feel like the fuse is lit, but maybe that is just being over-reactionary.

Alan: Oh, no, not at all. It is actually over half a trillion. My numbers also include NASD, which puts the total number slightly higher than the New York Stock Exchange number, but it comes in at 2.9% of GDP. And it did tick at 3% not that long ago, but that is the highest since 1929. We are talking about the roaring 0’20s when you could buy stocks for 10 cents on the dollar – now it is 50 cents on the dollar. So, we are dealing with a market that is just incredibly leveraged, and a lot of the leverage is coming from corporations themselves borrowing money to buy their own shares. I have never seen anything so stupid in my lifetime.

David: What you are describing is a CFO of a given corporation saying, “Hey, debt is cheap today, let’s go ahead and buy back shares, it improves our earnings per share, and if we borrow 2, 3, 4, 5 billion dollars to buy back those shares, this quarter we look like heroes, and it is basically free money.” Now, how do you do this long-term?

Alan: It is a nightmare.

David: You have to pay back the debt at some point, or roll it over at a higher interest rate.

Alan: If stocks get to the point where they cannot be supported anymore, and they start to reverse, and as I say, I think they are going to reverse very rapidly, these corporations are going to want to pare down their margin debt, which means they have to sell their shares. So, you are just going to have a decline accelerate down toward whatever target numbers I have and it turns people off again to equities, unfortunately. That is not the way it is supposed to be. We have a capital formation system that had been the pride of the world for so many decades, and I just think we are killing it. But again, this is another reason why I favor gold – and farmland.

David: When you say we are turning people off from the capital markets, isn’t this really the dynamic that you need to put in the actual long-term and perhaps final bottom in a stock market?

Alan: Perhaps. Show me leadership in Washington and I’ll agree with that statement. I am still looking.

David: We look at the general sense of the equities market after we went into a bear market in 1968. By the time we get to 1980, 1981, 1982, everybody and their brother is saying, “I wouldn’t want to touch stocks with a ten-foot pole. It is a perfect recipe for losing money. It is a guaranteed way to lose money, and lose sleep at the same time.” And at the same time, people are saying that about bonds in that era. The bloom came off the rose in 2000. Anyone who thought that they wanted to come back into the stock market got stung again by the decline in 2008 and 2009, and it seems like you are just working off this positive ideal of investing in stocks, like Jeremy Siegel would say, “for the long-run,” and forever, you are working off that positive psychology and moving toward a completely negative, and ultimately dark and desperate psychology, which is what you had in 1931 and 1932, which is what you had by the time you got to the early 1980s, which is what you had by the time you got to 1948 and 1949, at the end of a command and control economy on the other side of World War II where investors were basically saying, “Why would I put my money into the market when it is completely controlled and manipulated?”

Alan: I can tell you exactly how long it could last, that type of feeling, because my dad was broke in 1929, and after the crash he and his father took everything they had left, and threw it into a safe deposit box. That safe deposit box was not opened until 1964 – 1929 to 1964. I knew that he had stuff in there because he kept on getting letters from asset tracers. “Mr. Newman, you have this, you have that, and if you give us 50% of it we will tell you what it is.”

So, I opened the box, I took everything out, and I spent six months at the business library in Brooklyn writing down exactly what he had and what it had become. Just for instance, he had shares of Chase National Bank, and on the back of the certificate it said, “Attach, share for share, is Amerex Corp.” What is Amerex? It was the forerunner of American Express. He actually had over $20,000 in American Express stock and $4,000 in dividends, crude dividends, that he didn’t know about. And I actually gave that vignette to Nelson deMille to use in his book, Gold Coast. So, it can last that long – from 1929 to 1964. It took him 35 years to screw up the courage to have the vault opened.

David: That’s a breaking of psychology.

Alan: Yes, from the mania in 2000, and then the housing mania in 2007, we have killed any desire for them to get involved.

David: I ran into a couple not long ago, and I would like for you to theoretically respond to them, because there is probably more than one couple out there like them. They had a decent precious metals portfolio. They actually owned a few gold shares and things like that. They had planned on retiring about 10-15 years from now. And you know, health concerns, grandkids getting older, they decided to fast forward and say, “No, we’re going to do it now, because we can.” And so they did. They sold their gold, they sold everything that related to something of a hedged position, and went to a local broker and said, “Hey, we need to focus on income. Get us income at any cost. We want income because now we’re retired.”

Can you speculate? Can you imagine into the next ten years, those in the graying generation, 11,000 baby boomers a day, retiring and giving the same mandate to their local broker, “Now we need income to supplement our Social Security, and by the way, inflation must be going up because health care costs are going up and the things that I pay for every day are going up, and I need more income.” And so they give that very clear mandate to the broker. What is the outcome for them over the next ten years? Move away from gold, move into fixed income. How would that end?

Alan: Well, if it was me, I would have to take some risks. I could go into natural gas partnerships to make a little more income, pipeline stocks to make a little more income, energy companies – I have always loved Chevron, close to a 4% yield. I have always loved AT&T, about a 5.6% yield, something like that. So, you can get some income, but you are taking risks to do it. If you can hold onto the assets forever, let’s say you are 60 years old and you have another 20-25 years of life, it really doesn’t matter, as long as you get that income you are fine. Can it work out poorly? Sure. So, it is a question of needing to take some risks. If you want more income, you always have to assume more risk.

David: But notably absent in your response is fixed income.

Alan: Oh yes, I can even see going with a REIT like Simon Property Group, which has always been a favorite of mine, but by and large, fixed income, like corporate bonds – given the situation we have with corporations spending so much money on buying back their own shares, which doesn’t do anything for their future, and buying back their own shares with borrowed money – no, not in the traditional sense, I don’t want to buy corporate bonds. If I have money that needs to remain safe and I can put it out there for zero percent, I can put it into treasuries.

David: It seems to me that if you look at your Dow-gold projection, and I don’t know what kind of a time frame that you think that is possible or reasonable…

Alan: Five years.

David: It seems, within a five-year timeframe, if you wanted to own those same things, assuming that you didn’t need income for the next five years, or could do with less income for the next five years, energy and natural gas, AT&T, Simon Properties, REITs, a variety of income-producing vehicles may be far more attractive than an arbitrage between gold and those shares on a delayed basis – a 5-to-1 Dow-gold ratio – that is the Dow, that is only 30. I suppose you could do the same ratio for the S&P 500 and you are going to include a few more companies in the mix, of course.

Alan: Yes.

David: But doesn’t that arbitrage make sense to you?

Alan: Sure it does. Every time you make an investment decision, you are arbitraging, you are considering the odds and making a decision based on those odds. For the most part you are probably taking partial positions. That is also an arbitrage. You are never going 100% into something, going full steam into something, you are going a step at a time. That is an arbitrage. I hope that is the answer you are looking for.

David: Well, it is an answer. I have looked at Crosscurrents for the better part of a decade, and I have really enjoyed it. I have noticed that in the timeframe that I have been reading it, and that really is in the context of your original comment and call, that there was a significant sea change at 9/11. And arguably, there has been no diversion from that original change. So, the Crosscurrent’s basic strategy hasn’t changed tremendously. The primary themes are still there.

Alan: Well, frankly, the super bull market went further in a shorter period of time than I had expected. When we got above $1900 an ounce by August 2011, I was more a fan of a slower and steadier climb, and that is probably why we have had this big pullback since, but I don’t think anything has changed. You still have new paradigms out there. It is not only terror, it is what we have done in terms of stocks. We have made the stock market into somewhat of a joke. We have made the income market into somewhat of a joke. We have made our government into somewhat of a joke.

There is a new paradigm out there. We are losing respect all around the world. I think everything we are looking at – you mentioned farmland – you are talking about something that is an asset that you can hold onto. It is real. We are in a period where harder assets like real estate and water are going to be more important, and this paradigm is not going away anytime soon. It is probably going to be around for the rest of my lifetime. I will be 75 next month. I still have 15 years to go.

David: I particularly appreciate your anecdote about your father and the nature of a bear market, and how long it can leave scars on the mind of someone who has experienced it. You know there are times when you don’t want to look at a statement, and that may go on for one or two months, maybe even a year, 35 years. It’s a significant period of time.

Alan: In that 35 years, the only thing he ever did was to buy the Ford IPO. That’s it, in 35 years, and that was a stretch.

David: And that is after being a professional on Wall Street, as a career.

Alan: Yes.

David: We appreciate the perspective you bring, not only today in our conversation, but also on a monthly basis in Crosscurrents, a little bit more than monthly, and I would encourage listeners to find you and be benefitting from your insights, and cross-currents.net is the best place to find you, I think. I thank you for continuing the newsletter.

Alan: David, thank you for inviting me back on. It is always fun to speak with you.

David: I look forward to the next 15 years of reading Crosscurrents.

Alan: Okay.

David: And hopefully we can stretch that a little bit further. You know, I want to emphasize how important charts are. My oldest son is nine years old. I sat down with him for the first time and looked at charts when he was sitting in my lap and he was about nine months old. I don’t think it meant much to him then, but the pictures tell a story, and to be able to sit and describe what that story is, even at nine he now gets the story. He knows the basic difference.

Alan: Yes, I’ll bet he does. Sure, absolutely.

David: What is a bull market and what is a bear market?

Alan: Right.

David: And I will ask him routinely, “Does this look like something that you should buy?” “Oh, no, look at it. It is way over-priced.” Well relative to what?

Alan: I actually did that with my kid when he was the same age. Is that amazing or what?

David: (laughs) So, I love the clarity in your charts, and I love the story-telling that you bring along to bring greater clarification and understanding to what is happening in the market. So again, Alan, thanks for your time today.

Alan: Thank you, David.

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Kevin: As always, Dave, Alan is continually the skeptic on the things you need to be skeptical about. I think that must come from his background. To watch your father, who had been burned professionally and personally during the crash of 1929, so much so that he couldn’t actually even look at the value of anything that he owned for – what was it – 35 years?

David: 35 years. Well, that kind of reflection, to me, that was not only the anchor of the program, but more than worth the price of admission. I think of the conversation that we had with Otmar Issing and his reflection, at his first lunch meeting, as he was beginning his tenure at the European Central Bank, sitting across from a Frenchman, and reflecting on these two fathers, and their fathers, these two men who had fathers who were in conflict during the war.

Kevin: One was French, one was German.

David: In fact, one in the prisoner of war camp that his father oversaw, and the personal connection to the past and the imperative of making decisions that are informed by what we have learned from the past. I love that.

Kevin: Alan is a breath of fresh air for those who are getting tired of this rest period in gold. I know I am one of those people, Dave. (laughs) I am sick of the – he called it what it is – it is manipulation. Interest rates are being manipulated, gold is being manipulated, and frankly, the stock market, like he said, is being intervened in. He said the Fed has an agenda, and so they are playing that agenda out and it is costing everybody.

David: If Alan is right, and we do see $3600 gold, or even higher, over the next five years, I would ask the question, “What does the summer of 2015 mean? What are the actions that you would take if you knew exactly where we were going over the next three to five years, and will you look back at $1200 gold with a different opinion, sitting at $2400, $3600, or $4800 gold?”

I know very clearly what I want to do, I know very clearly what I continue to do, and I clearly know what I have already done. The allocations to the metals are, as we discussed with Alan today, I think an amazing opportunity to arbitrage value, and take what is a solid gold cash standard and basically be in a position to, over the next three to five years, be looking at bargains, whether it is in the energy space, whether it is in the telecommunications space, whether it is in the real estate space, a variety of sectors are going to look very cheap relative to gold five years from now.

So, what decisions do you need to make now? That is what I would ask you.