In Transcripts

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick


“They promise you everything and now you just don’t have the money to do it. And so it’s going to be interesting to see what Trump does, here, how this thing plays out, but I think all the indicators are that you had better start getting some assets that are out of control of the government and the banking system. I’m not telling you to put it all there, I’m not telling you to leverage everything to do it, but from a survival standpoint and an insurance standpoint, you have to start thinking ahead.”

– Bill King

Kevin: Bill King is our guest. I always look forward to Bill King. He just speaks his mind. His mind actually travels at about three times the speed of light so I have a hard time sometimes keeping up. But he is an amazing analyst, Dave, and his thoughts have been formed out of four decades of trading.

David: Right. Don’t be surprised if you, like me, have to listen to the program twice, but that’s because he is bobbing and weaving between strategic insights on a macro level, and tactical decisions which can and need to be made, things that are happening in the market on a minute by minute basis. And he has enough history behind him, as you say, decades and decades, to see how these things coalesce, and the important lessons of the past and how they do apply in the present.

Kevin: I know his report is the one report that I would definitely not miss. Each day we get a lot of research. Bill’s is the one that I always look at.

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David: Bill, we always enjoy having you on the program. Since November the markets have been keenly in tune with politics and with policy shifts. I’m curious how you would characterize the current leadership in the White House. You have Bannon that is gone, Shiller that is gone. The West Wing is predominantly Democrats. Can you give us some perspective?

Bill: That’s the question everybody is wrestling with. What is going on? What does Trump stand for? And who is controlling him? You had another curve thrown when Trump really took a shot at Paul Ryan and McConnell by siding with Schumer and Pelosi over the three-month debt limit hike for hurricane Irma when the Republicans were looking for a year to 18 months. Of course, conservatives were livid. And making it more complicated, when Trump tweeted out DACA, Dreamers, don’t worry, I’ll take care of you, essentially. And then Fox broke the story that Pelosi asked him to tweet that out. So the big concern has been that the Goldman-Sachs guys, the Democrats in the White House, have control of Trump’s domestic agenda. That the concern here, and now it’s kind of getting worse.

There are a couple of things where you have to look. The stock market has gone up and it’s not like it was earlier. The stock market is a different dynamic. Let’s put that aside for a while, but the big dynamic I keep looking at is the dollar. The dollar just keeps going lower and lower, down to multi-year lows. You have to ask yourself, the stock market is going up because they think Trump’s domestic agenda, tax cuts, all this stuff, is going to be good for the economy, straighten out the immigration, get infrastructure, amend Obamacare, not a full repeal but you amend it so it will help businesses, you get rid of rules and regulations. I got that. That should also help the dollar, especially when you have the Fed talking about normalizing, more so than any other central bank. ECB had the chance today – they didn’t do anything and they punted the decision on QE taper until next month. If I was a betting man I would think there were good odds they will punt it in October to December again. And of course what happens is you have the euro going much stronger, the dollar down, gold up a little bit under 1% right now.

But you have to say, what is it with the dollar that is screaming here? The dollar rallied initially very sharply when Trump got elected. A lot of that was short covering, a lot of it was talking about a more conservative agenda, or whatever. But the dollar is really tumbling here, and it should only go down, really, for two reasons. One is geopolitical, and we understand what is going on with that. That’s a problem. But the other is your domestic agenda. And Trump, especially if the Fed is going to try to start normalizing – they are talking about starting to trim their balance sheet.

There is something that is spooking the dollar in a big way here. You can talk about leadership, but in the previous administration there was really nothing that went on. There was really no leadership in that as far as domestic, or even foreign. In fact, most of the problem we have now is because of the previous two or three administrations letting North Korea fester, and they turned a blind eye to Iran. So, yes, there is this problem in North Korea, and maybe that is weighing on the dollar a bit here, but you have to think that the bigger issue that is just persistent has to be something in Trump’s domestic agenda.

I think the fear here is that Trump is a Democrat at heart. He likes that. He wants low rates. He is kind of wishy-washy on everything else. So I think that what the dollar is saying is that people are fearing that he is going to be much more liberal in his domestic agenda than people believed, which is, you are probably going to get some kind of tax reform, and there will be some tax cuts there for the average guys, and probably tighter taxes for the upper crust. Their rates are going to go down, but he is probably going to get rid of loopholes, get rid of the carried interest for hedge funds and Wall Street.

So net-net they are probably going to pay a little more. Even the corporate tax rate, if it goes down to 22-25, which is what Ryan is saying – you say, well, it’s coming down from 35, but how many big corporations actually pay 35%? We see IBM and these guys come up with 9%, 10%, 5% tax rate. GE doesn’t pay any taxes for umpteen quarters. So it depends on what you do. And at the same time he wants infrastructure, he wants this whole debt thing.

So I think there is a feeling here with the dollar that the guys in the White House, with the agenda, you’re going to get bigger deficits going forward. And that is what weighs on the dollar. Throw in geopolitical turmoil and I think that’s why you are seeing gold starting to really act well. The best thing about the way gold is acting – you get a surge, $20, $30, $40, $50 and then it would roll over. Well, you’re starting to get now with gold is that persistent grinding — $4, $5, $6, pops up 1%, retreats a little, and then the guys come in and try to whack it down.

But that is showing you, when you get the big surges – that’s traders, that’s hedge funds, that’s the lemmings. They see a chart, they see a breakup. When you see the persistent buying, that’s the big private money, and that’s what the market is telling me. With the long decline and going in the dollar, and this persistent bid in gold, that’s careful. They’re not running it like the wise guys do with stocks or whatever they are buying. They want immediate performance.

Now, the big private money, it looks to me like they want to establish positions and they are very careful how they are buying it. So I think it is one of those times now – I always think you should have some kind of insurance – gold or silver kind of insurance – but now I think you need more than that. I think there is something else going on here. So personally, I’ve been increasing my holdings of gold – paper, physical, whatever. I think it’s time to really increase your gold exposure because the market is telling you something, and I don’t think a lot of people are paying attention.

David: Right. So the $30, $40, $50 moves, you could say, okay, this is geopolitics. What you’re saying is, this move is more than just measuring the tensions that we have with North Korea, and if that gets resolved, it may continue higher regardless of the headlines relating to some of those geopolitical tensions.

Bill: Well, even if you solve North Korea, the problem goes right to Iran. The two are joined at the hip. If you want to really get in there and do a little digging, these two have been cooperating with their missile and nuclear technology. If you get one solved, you’re going to have to do something about the other. That’s why I think there is a real good chance they are going to do something really drastic on North Korea just to make Iran wake up a bit. But again, you just don’t know what the guys in the White House, including the generals – these generals are Democrats for the most part.

People forget that when you get a new administration after two terms they wean out a lot of the warriors. They kind of put like-minded people in. You’ve seen it with some of the stories leaking out. There are people being dismissed if they want to be hawks on Iran where the generals don’t. Those are the carry-over people from the Obama administration. You even have people from the Bush administration that might be carry-overs with their view – the Neocons. But again, nobody has a good idea what this guy Trump stands for, or what he is going to do, until he starts getting something taken care of.

David: So the dollar is giving you some clues. What would you say about the stock market? Does a big move in the metals require a sentiment shift in the equity space?

Bill: No, because people forget that in the later stages of bull markets gold and stocks go together. That’s when there is too much liquidity. You saw that in 1980. You see it a lot of times in different markets. The people are like, “Stocks are too expensive. I’m taking my liquidity and going elsewhere.” That is also a factor. I’m sure I mentioned this in previous interviews, but the big money, over time, is made between shifting between real assets and hard assets. The big private money does this because they are slow, and they are methodical. In the 1970s the richest people in the world were all real estate, land, oil and gas, hard asset guys. That’s why Buffet didn’t have much cache back then. And then the last 20 or so years it’s all the paper guys. You have social media companies that could disappear tomorrow and there wouldn’t be much consequence – hundreds of billions of dollars. Apple is, effectively, a consumer electronics company. It’s not a tech, it’s consumer electronics. It’s what Sony was in the 1980s when it came out with the disk man and digital – all this stuff is what Apple is now. Facebook is a bulletin board, a yellow pages, or whatever. That’s one reason why the stock market is going up because virtually everything is over-valued, but at some point the big private money says, “You know, I can’t take these asset prices in paper. It’s just too much. I’ve got to get something real.”

You see yesterday, the head of Deutsche Bank, and also Lloyd Blankfein, the head of Goldman, talking about bubbles, and they are scared about the stocks being too high. So, if stocks get crushed, gold tends to go down on a short-term basis just because you have liquidity concerns, and everything kind of contracts, and the dollar goes up. But over a longer period of time, you have to start looking at what the end game is. What is the end game for China? We have our debt problems here – we’re 20 trillion in debt. We have a Fed with a 4.5 trillion balance sheet but there is no way they can really unwind it without causing dislocations. So what is the game here? There is no way we can pay down this debt.

But then you look at China. China accumulated 24 trillion in debt since the financial crisis, in addition to what they had. They have no way to pay that off. So that is why you hear these central bankers saying, “Inflation is too low. Inflation is too low.” Well, the average guy, or woman, sitting at home, who is getting killed on their health care premiums and housing prices, is looking and saying, “Wait a minute. You’re telling me inflation is good? It’s not good for me, especially when my wages are stagnant.” No, that’s the problem. The central bankers are finally out in the open. The reason that they’re concerned about inflation is the debt. They can’t paper over it. That’s why they exist. That’s what they’ve been doing for ten years now. These massive negative rates, the QE – they’re trying to paper over the unaffordable debt.

So what is going to be the end game? I think the end game here is, whatever happens next they’ll react. If we get very high inflation, they are going to be so far behind the curve it’s going to take them a long time to catch up. And if we get another crisis and we start getting some kind of deflation, what are they going to do? You already have negative rates. Some of these banks – Japan owns most of their own government debt. You can go on and on and on. You just say, what can these people do? So, that’s why I think we’ve really got to start looking more and more to some kind of hedge against central banks and the banking system.

Now, banks are getting clubbed today. They’re getting hammered hard today. All of a sudden the banks have been really falling over. They rallied when people were thinking, “High rates are good for banks,” which is funny, because I used to trade the bank stocks in the 1980s and every time they cut rates banks got very strong. So, raise rates – good for the banks. Cut rates – good for the banks. Right? But something else is going on in the banks. There are a couple of stories out today about how the credit derivatives volume has expanded about 110% over the last week. Somebody is out there trying to hedge defaults on corporate. I don’t know if this is because of the hurricanes, I don’t if this is heavy in insurance companies or banks, or whatever.

But also, you’re having problems in the collateral market, the ten-year note here, the repo rates are exploding. People are failing to deliver. What is significant about that – that shows up from time to time, but the reason we were able to call that 2008 crisis ahead of time is that we saw in December of 2007 that there were fails all over the world in stocks and bonds. In other words, people that were making transactions – people were not delivering the securities because there was not enough collateral. There was too much leverage, too much loose lending, people weren’t paying attention. In retrospect, that’s what Goldman did in February of 2007 – asked AIG to put up more collateral – and that’s what was going on. As this thing was coming apart people were looking for collateral and it wasn’t there, and then it all hit the fan. So there is stuff going on underneath the surface here that is not good.

The stock market is really kind of the magician’s diversion that keeps you from looking at what he is really doing. And I think that’s the problem. What’s going on in stocks is blinding people to what is going on elsewhere. But finally, over the last few weeks, a month, you can see it. All of a sudden, again, gold has that persistent buying, and no one is running it away. To me, that’s how real and serious buyers buy. They don’t want to run it up. Hedge funds and traders do. They want to run it up and sell it before they go home, or sell it in two or three days. The people, to me, that are in the market now – the action appears to be accumulation, as opposed to trading.

David: That a big shift. You’re talking about paper to tangible assets, and this is over long periods of time. Where do you think we are in terms of a time cycle? You had Richard Rainwater directing the Bass brothers to do something like this. Are we talking about something that takes months to play out, or something that takes years to play out? Do I lack the imagination to think that it might even be decades?

Bill: The thing we don’t know is because we are in such unprecedented – they say you should never say it’s different this time. Well, it is different this time because what we have here is the central bank intervention. Not only is it a record amount, but it is for a record length of time. You saw this after World War II where Truman made the Fed monetize debt, but it didn’t last a decade. It lasted for a while. But then you try to normalize – we’re going on a decade of this stuff. You’re doing trickle down from the wealthiest 1/10th of 1%, hoping that they’re keeping the game going. But we don’t know how fast this can unwind because there are so many bubbles so many places. Where is your refuge?

The problem is, you talk about stock bubbles, but people are missing the point that the biggest bubble, possibly of all time, is going on with the bonds. But you have countries in Europe that really can’t pay their debt. And you can make the case that China and the U.S. and Japan can’t pay their debt. But you have low, and even negative, yields, because of the central bank – you can’t even call it manipulation or rigged – they’ve cornered the market. That’s one of the reasons why you’re having these repo problems in the bond market. There is not enough collateral in there because the central banks have bought it.

They’re doing the same thing with stocks. The Swiss National Bank keeps buying U.S. stocks, like 85 billion. But if you look what they’re buying, they’re buying the mega cap techs. And the reason they’re doing that is Apple, Google, Microsoft are effectively convertible bonds. Because they have so much cash, if you start going to hell, all that cash makes the stock look like a bond. And of course if it goes up you have the upside. So that is one of the things when you see this action in the FANGS, the big cap tech stocks, which have so much cash and so little debt that people call them bond substitutes. Well, that’s not quite correct. This is where your convertible bond substitutes because you still have the upside if the equities go, but with all that cash, if you start falling apart it puts a floor under it much like a bond would. But again, this is the central banks. The dislocations and distortions are so great there is no way you can model this because nobody has ever seen this before, and what happens? Don’t know. Don’t know how quick this can go.

In August of 2007 the financial market ground to a halt. That’s when T bills went to 0.14%. Very few people paid attention. That’s why it was a joke when people said, “We never saw this coming. Nobody saw it coming.” That’s garbage. A lot of people saw it coming. Bear Stearns goes down in March, and then the market ran. It ran all the way until May. In fact, not until May of 2008 when the emerging markets started collapsing – a lot had to do with the debt market first, then people started paying attention. Then finally Lehman went down in September, and then how fast did it go? Right? October, November, December. People thought that was it, we’re in a great depression. But they ignored it forever. And that’s the problem with what the central banks have done. Just like North Korea. You’re talking nuclear war, and what do you get? A 1% decline? Please. I mean, please. Because nobody thinks it’s going to happen. Or they think you buy every dip. So to get back to your questions: When can this happen? How fast can it go? I don’t know. You’re talking about the emperor has no clothes type of market. When people lose faith, there is no telling what’s going to happen and how quick it can go. Because once you make people see the reality, you make them see the garb, you make them see the debt, you make them see the older valuations, you make them see what the central banks have done and the amount of debt – on and on and on, the geopolitical situation, then there is no telling what can happen and how fast. That’s why I think you have to increase your exposure to gold, silver, and some of these hard hedges.

David: You go back to 2000-2001, and you had an ethical erosion which had been taking place for a while, but as Buffet likes to say, you get to see who is swimming naked when the tide goes out. Today, it’s Well Fargo with fake accounts, or Facebook and Google misrepresenting their traffic to boost what they charge for ads, and it doesn’t really show up in the share price, necessarily. But these are the kinds of things that actually play a role in a radical shift in investor sentiment, what you’re talking about, kind of an aha moment where all of a sudden the aggregation of things – maybe it’s a few ethical breaches, maybe it’s looking at the debt. Who knows what the straw is that breaks the camel’s back, but you’ve already got enough there, in terms of straw, to do that.

Bill: Absolutely.

David: So $1050 was the low in gold in 2015. Here we are $300 higher now, $1300 plus. If you’re looking at downside risk versus upside potential you’re saying, “Look, the dollar is telling you what you need to know.” From a trader’s view, what is that? Upside potential versus downside risk?

Bill: I have no idea. You can’t project. The thing is, if you want to say, what is the upside in gold, you can’t pick a number. It’s like picking a number in bitcoin. The reason bitcoin has gone berserk – that’s where the wise guys, that’s where the public is, that’s where the guys who listen to CNBC and follow that goofy stuff that gets said on there. And the other thing is, I remember a propeller head in 2010 trying to convince me to buy bitcoin. Of course, I’m kicking myself that if I had put a few thousand dollars in it would worth hundreds of millions now.

But the thing I missed was, not what it was. He made me understand it. What I missed was that we have a society of people now that will buy crap because Apple put it out, or they’re in love with Facebook, or Google or whatever, because it becomes a cult. They have a cult following, like, “Oh, this has this complicated algorithm that can’t be hacked.” When it all falls apart, who do I go to to get my money? The computer? What’s behind this thing? “Oh, it’s this great algorithm.” But it appealed to the same thing you saw in 1998, 1999 and 2000, this mentality of, “I don’t really understand it, but it’s high tech, and it’s great,” which we had in the 1960s. People forgot that in 1968 that big Onyx boom. Anything with Onyx on it people would buy like crazy because that was it. This was the coming computer age, the space age. And they got their brains beat out.

The thing that is going on that is helping drive Bitcoin and those cyber currencies is that people in Europe and China and Russia, in particular, that want their money outside the banking system. There are a couple of reasons. One, they don’t trust it. They don’t want to go through 2008-2009. The other is political. People before would put their money in Switzerland and not worry about it, but the U.S. twisted the Swiss arms enough that now they got rid of their secrecy. So you say to yourself, “Where do I want assets?”

That’s why a lot of the big, private, smart money – most of the billionaires I talk to all have some kind of gold in physical. They want an asset outside of the control of the banking system, because we all know the banking system and the governments are joined at the hip. They’ll both go down together. Especially since 2008. The governments all bailed out the big banks, so now the big banks, the central banks, and the governments, are all joined at the hip. They go up together, they go down together. And that’s why I think you are seeing some of that fascination. It’s really a lot of far east money going in there, and Russian money. And then of course it creates a mania of its own. But that’s another clue that something is not quite correct here.

David: We look at the markets, and as you mentioned earlier, whether it is Blankfein at Goldman, or the CEO at Deutsche Bank, beginning to get concerned, looking at strange things in relation to corporate yields versus stock yields, what do they get out of those kinds of comments? Is this sort of, “Hey look, don’t hold us accountable, we told you there was something wrong.” Or are they positioning ahead of something? What do their statements actually mean?

Bill: You know what? You don’t know, because you have to know the analyst. When I worked on Wall Street, especially in the groups that I was trading, I always sat down with the analyst regularly, at least once a month, sometimes once a week, to find out what they really know, what they’re really thinking. Because they can’t always tell you what they’re really thinking. There are a lot of pressures within – I remember one time a big name broker in a tech group, and I had a meeting with the guy who was a well-known analyst, a good guy. I’m asking him about IBM and he’s saying, “This thing is a piece of you know what.” This was in the 1980s when the mainframes were falling out of favor for the PCs. And he said, “It’s like turning a super tanker in the east river. It’s not going to be good for a while.” Two days later in the morning meeting they say, “Here’s so and so with his call on IBM.” And I say to myself, “This is going to be good.” He gets on and says, “I love IBM, I make it a one-one,” which means, one-one was a short-term buy and also long-term strong. I’m thinking, “Okay,” and I’m counting to myself to figure how long it’s going to be before he leaves the communication room back to his office, and I’m calling him saying “Jay, what the hell did you just do?” He says, “Hey, I don’t like it, but they made me push it, and plus, the economic committee thinks the GDP is going up, and if they think that then the investment committee thinks you have to buy IBM because they’ll have all this capital spending and it’s going to help them.”

So that’s why you never know. You don’t know what the real deal is. The other thing is, you don’t know, the analysts that have something to say, and others who are just talking because they’re justifying their paychecks. And the other thing is, a lot of times they are out there just trying to create commissions. That started happening in the 1980s. We saw these calls coming out more regularly, with really miniscule changes in them because they wanted to start driving activity. And of course, by the 1990s we had a lot of hedge funds. You get up there and you change your earnings by a penny, you cause a big rally. In fact, what we started getting, which was ludicrous, was that guys would come, “I reiterate my buy rating on Apple.” Oh, stocks up five points for the day because Manny, Moe and Jack reiterated their buy.

Well, I remember years ago when I started in business, if you called somebody up at an institutional account and say we reiterated our buy on GM, they would kill you. “Don’t waste my time with that crap! Tell me when you change something.” Well, we came to a different era where the traders started dominating the market so that’s one of the reasons they go out there because it will be on the table, XYZ was up today because Joe Blow reiterated his buy, or changed the rating, or changed the number. And there’s a lot of garbage out there. That’s why CNBC – people ridicule them a lot because they’re putting these people on – they have to fill up the air time and they put people on, and they say whatever they say to get the air time, or to get their name out there to the people to follow them on Twitter or whatever.

David: I want to come back to gold in a minute, but the two things that seem to be horns on the bull, if you will, would be political dysfunction in the United States and geopolitical craziness. If we think of D.C. as a chessboard, where do you think the greatest pressure is, and who has the advantage at present?

Bill: There is pressure everywhere. The problem is, it wasn’t just Obama, but the other administrations – they just did not do anything. They put a shroud over the chessboard so you didn’t know where the pieces were. And now what is happening is that we’re pulling the shroud off of the chessboard and we’re thinking, “Oh my God, this is a terrible position here.” Like I said, with North Korea, there are no good choices. There are no good choices with Iran also. But the longer you don’t do anything, the worse it’s going to get. So that’s the problem here. And of course, the media ignored it because they didn’t want to bring it up on Obama’s watch that we had this other situation going on.

And of course, what Bush did in the Mid East is not good. They just created all these horrible situations that have been getting worse and worse. You go in and topple Saddam, and what has happened since then? How about Kaddafi? You knock him out. You wanted him gone for 30 years, you finally got it. How’s that working? You keep going through this list. And that’s why you have this horrible immigration situation in Europe because so much of Northern Africa – it started when the Herzegovina and Serbian war blew up in the 1990s.

The order around the world is just going to heck. Part of it was, Bush did too much, Obama did too little, and now you have a problem. And I don’t know how you’re going to clean it up. Don’t know. Because nobody has done anything yet, there’s just a lot of talk. But we don’t know what is going on behind the scenes. We don’t know if money is going into covert ops. We don’t know if money is going into Swiss bank accounts. You don’t know. You’ve gotta wait and see how this stuff starts playing out. You just don’t know.

David: You remember the summer of 1968. We have paid protestors here in the U.S. right now, and I just wonder if this chapter in social and political history can be resolved peacefully. Is there a difference between what was happening in 1968, because this time around seems to be privately funded.

Bill: In 1968 the communists – Russia – the Soviet Union was funding a lot of the protests. You had a number of people. You can Google and see all the different people involved in this stuff. And this is why we thought Trump would win, and also Republicans would take control in 2014 because you had Ferguson and Baltimore. When you have social chaos and violence, Republicans win. A lot of that is because the women that normally vote Democrat become concerned about personal safety. The men have not voted for a Democrat since LBJ for president. Usually the suburban women are just real swing voters.

The thing that helped Trump was blue collar workers swung to Trump more. The big surprise was how well he did with women. If you look at the demographic breakdown, considering the ridiculous stuff he says, and has said, there are more women in the workforce than men now, more women bring home paychecks, and they are more sensitive to economic issues, but it’s the personal safety. I learned from a Senator the number one issue is always pocketbook. The number two issue is personal safety, and that is broken into national security and domestic security.

When you start rioting, and you had the demonstrations – we got one in Chicago at Block and Lakeshore Drive. I don’t know, could be a variety of reasons to protest, probably about DACA. But whatever, people get upset about it, and they don’t want to hear that. They don’t want to see that. And the more you have these protests, the more you see Trump has gone up in the ratings again. Even after Charlottesville people couldn’t believe he went up. It was really ridiculous what he said, but people saw the violence.

They also understood that the Antifa people, what they were doing and have been doing for a couple of years now, all of a sudden people want some kind of order. And I think they’re playing right into Trump’s hand, because if you didn’t know better you would think Trump was funding this stuff because it helps him. People come out and say the stupidest stuff and do this stuff, and you look at the polls, people overwhelmingly want free speech, they don’t want, at the universities, they don’t want the people running around in masks stopping people from speaking, no matter what they have to say. That’s kind of what the Constitution is about, the reason you have that is for speech that you don’t want to hear, or you think is disgusting, or whatever.

But you’re right, it plays into the scenario you had in the late 1960s where Nixon, another guy who was incredibly unlikeable. He looked furtive, that whole routine, but he won in 1968, he won 49 states in 1972, even when he was under the shadow of the burgeoning Watergate thing, because people wanted order. They wanted personal safety. And they wanted a strong leader. I don’t want to say Trump is Nixonian, but the people who voted Nixon in expected him to do order, but also get the economic house in order, which was starting to fall apart in the late 1960s, especially after LBJ’s Great Society.

But what Nixon did was actually expand LBJ’s programs. That’s when you saw the inflation shock of 1973-1974, and then you saw Nixon close the gold window in August of 1971. Because foreigners figured out what he was doing and said, “Wait a minute.” And that’s what I’m thinking here, and I’m glad you brought it up, because it’s analogous to Trump, where everybody says this guy is going to be – he’s never been a conservative, he’s not a conservative, but people read that into it, that he’s going to balance the budget and do all this stuff, but he’s not. Now you’re starting to look and say, “Hey, wait a minute. Maybe this guy is going to do a Nixon on foreign policy.” And we know what that means. It means the dollar goes to hell in a hand basket and precious metals and hard assets go up. So I think it was good that you brought up that analogy, what was going on in the late 1960s, and what is going on here. You can see it in the political.

Now does this get resolved? It doesn’t get resolved until you get a good economy. That’s really what Reagan did. Once you had the economy booming again – I think Trump knows that. I don’t think he’s going to have the same success because it’s a different environment. You have 95 million people unemployed – or not in the workforce – some of it is because they can’t find jobs, some of it is because they are disabled, but most of it is because they get a check for doing nothing. And it’s going to be hard to disabuse those people of that notion.

Plus, the other thing is, you do have all this automation. Anytime wages start going up, especially on blue collar, people just automate. That’s not just wages, it’s the benefits, and it’s the legality, it’s the regulations, the pension benefits, the healthcare. $15 an hour or whatever it is, yes, that is one factor. But when you start lobbing on all the other things that businesses have to pay, and there are costs and regulations if you’re going to be in manufacturing and reproduction. There are a lot of costs involved in that. So everybody is automating as much as possible.

David: So, kind of sitting the fence between domestic political issues and international complications, you have Trump who is hoping to bring in tariffs. He keeps on saying, “I want tariffs.” What does he hope to accomplish, and what is he likely to accomplish if he gets what he wants with tariffs?

Bill: He’s trying to keep his coalition together. What you have is the blue collar workers, the guys left behind. And it’s also fly-over America. The East Coast elites are so out of touch. How many times have you seen, with Trump, “Oh, he just said something bad about John McCain. He’s finished.” No, it actually helped him. “Oh, he just went after Megan Kelly.” You know, who cares about Megan Kelly? She had good ratings because she followed Bill O’Reilly. Look at how she has done at NBC. It’s a disaster.

But the media doesn’t say any kind of real analysis for the most part. Most of those guys just want affirmation of their biases. So Trump says something mean to Megan Kelly and, “Oh, that’s it. He blew himself up.” No, he went up in the polls. You can just go through the whole list. The same thing with Charlottesville. “Oh, that’s it, he’s done. He’s going to be impeached.” No, he actually went up in the polls on that. And now again he’s moving up again on this.

David: He’s playing to a domestic audience on the tariff issue.

Bill: And of course the Europeans don’t like what he’s doing because he’s trying to make them address their problems. That’s what Trump promised, as opposed to Hillary. This is classic. It’s classic in all the research. If you want to be a successful candidate, go out and articulate what the problems are. Then come up with reasonable proposals. Finally, what is interesting is, even if you don’t enact reasonable proposals and solve the problems, if you try, you get re-elected. It’s clear. It’s exactly clear how to win a campaign. And that’s what Trump did. He said, “Here are your problems,” whether it was immigration, whether it was foreign trade. And now he’s trying to promote solutions.

And we’ll find out a year from now in 2018 when the campaign starts, but right now all those candidates who have been opposing Trump are in trouble in the initial polls, which doesn’t make sense if you read Gallop and all these other polls. They had Trump losing by 12-14 points, and they now say he is so unpopular. And also there is a record amount of money coming into the Republican party, and it’s coming from small contributors, it’s not coming from big corporations. But at some point he has to do something.

In a Machiavellian world, you might think that the Republicans are delaying in putting the first 100 days through that he wanted, because they want to do it closer to the 2018 election. And I can understand that, and that would make political sense. From Trump’s standpoint, he would like to have it start happening in 2019 and into 2020 when it starts happening for his re-election opportunities, if he wants to get re-elected. A number of people I talk to, who know Trump personally, even before he got elected, they thought one term. This guy is not going to want to do this job. It doesn’t fit his temperament, his mentality. Or his age, or whatever, you don’t know. You just don’t know beyond that. So I wonder if the Republicans have been doing this slow play so they could get it done in 2018 and then have really no issues for the Democrats to run on. But we’ll see.

David: Your gut on North Korea. It’s tied at the hip to the Iranian issue. What does it mean for our relationship with China? What is your gut on North Korea?

Bill: Here’s what he’s doing. You don’t need any deep insight that he’s trying to pressure China into reining in North Korea. And he’s saying, “You know what? We’ll do what we have to. We’ll put tariffs on. We have a trade issue with you guys.” He campaigned against that and he’s going to have to try to do something about that. It just depends on the severity, what you can do here.

The other thing here, China has this enormous debt problem, and if you really … the Neocon thinking, where the immediate battles are with radical Islam and North Korea, but the big strategic battle is with China for control of the next century. That’s another reason why this North Korea thing – at some point you can go in there and just obliterate North Korea or Kim or whatever. We’re sending a message to China, Iran, Russia and everybody else here. That’s the reason when we didn’t do anything – Bill Clinton in 1994 cut this deal with North Korea and said, “They’ll be totally out of the nuclear business by 1995. Yeah, how did that work out? Every other year they would rattle their sabers and the U.S. would send them more money just to shut them up. What did they do with the money? They didn’t really improve the living standards for their people. They went out and bought more weapons technology, nuclear technology, and now look where we are. So something is going to have to be done because now that they are in the hydrogen bomb era, and now that they have ICBMs, you’ve got a problem. And it’s only going to get worse if you don’t do something about it. Then, politically, when do you do it? That becomes the other thing. How long can you go?

Now, what we don’t know behind the scenes is what is going on. There might be something going on with China, and they can’t just come out and say what’s really going on, nor can Putin, nor can other people. It’s like Schumer, taking all these shots at Trump, and they’re good buddies. And they saw the picture yesterday, they’re kind of laughing and hugging in the White House when they do this deal. So you have your public consumption, and you have the private – what’s really going on.

And the other thing is, there are some serious domestic terror threats that are going on right now in this country and that they’re trying to be careful with. Coming from south of the border. You saw that a couple of weeks ago. As reported, they found some tunnel, and people popped out of it in some town in Texas and they didn’t know they were there, and they happened to be Chinese. Now, what the hell is that? And the cover story is, “Oh, these were just a lot of dishwashers and cooks.” Really? Where did they get that kind of money to come through that tunnel? And who controls that tunnel, and what’s really going on?

So there are some concerns about that. That’s why a lot of people think Kelly is in the White House as Chief of State. You could say it’s about putting order in there, but he’s throwing out all Trump’s buddies, his people. The stories we’re hearing from people that have been very right in the past about the FBI and Comey and what was really going on with him, is that they’re concerned about what has been coming through that tunnel, and what might be in here. So that’s the other side.

David: Well, we’ve heard a little less in the new cycle recently on Russia, except maybe for Poland. Is the media just aware that they are kind of beating a dead horse on that?

Bill: Yes, they are. And beyond that is that it has bit them on the butt. It has come back and bit them, because now you’re looking at all these things that the Clinton Foundation did. You might have Manafort. You might have him on whatever. They’re leaking out that they might have him on some different money issues and financial transactions, but in the process they uncovered some of Hillary’s people were with him doing these deals. And now you bring in the Podesta brothers. And you say, “Whoa, wait a minute.” That’s why you are absolutely dead correct in your observation. This thing is blowing up on them. Now you have the Comey thing. They thought they had Comey. Now it comes out Comey lied. I think, “Should I say it politely?” No, he lied to Congress, he lied to the American people, and they’ve got him.

I don’t know if I mentioned this to you, but in our conference calls our sources told us that Comey, on July 5th, most of the people wanted Hillary indicted. He got a bunch of, “No, nobody wants this.” And that’s why he made these guys sign nondisclosure agreements because they wanted charges brought, or further investigation. He didn’t do the grand jury. And now it comes out that he had the decision made April or May, by his own Chief of Staff saying that. That was well before the investigation was going on. And they scuttled it. They destroyed evidence. They gave immunity deals. And he’s up there saying, “No, no, no. Nobody wanted to do this.”

And we heard all along, from his right-hand man, McCabe, who took the money from McAuliffe, who besides being Governor of Virginia, was also a long-time money guy for the Clintons. And now you have the Deputy Council, who was the other guy in the decision – they’ve got him for leaking the surveillance thing they were doing with Yahoo to Reuters, and McCabe has three different investigations going about him, one of which is sexual harassment. It was just an absolute mess that was going on at the FBI. If they would have just let this thing alone, nobody would have known this. But now you want to put in prosecutors, you put in investigators. But now you have people inside the FBI that are livid, that really like the FBI, that they have destroyed it and politicized it. You have the Lynch situation now. You have the Obama situation. It all starts coming back to them.

And that’s why you’re not hearing as much on Russia is because the Democrats now wish it would just all go away because there was nothing there. But the real problem – you want obstruction? You’ve got obstruction. It is called Comey, Lynch and Obama, what they did with the Clintons. And now you have that going. So, you’re right. That’s funny, we went from Russia, to Charlottesville, Antifa kept beating up people at Berkley, and now you don’t heart that anymore. Now, it’s definitely Manafort. And Donald Junior is testifying at the Intelligence Committee, I think the Senate, maybe. But you’re right, that has all kind of wound down here, because it has kind of blown up on them.

David: So you have folks that are in senior positions, the Fed, who are expected to take on even greater leadership roles. I think of Stanley Fisher stepping down as Vice Chair. Is that to avoid a reputational hit in anticipation, perhaps, of financial market chaos?

Bill: Trump doesn’t want to be riding in the Fed’s clown car when this all blows up. You have Goldman and Trump doesn’t want to be riding in the Fed’s clown car when this all blows up. You have Goldman and Blankfein. This is a guy that feasts at the trough at the Fed, and saves him. The same with Deutsche Bank, their derivative book and all this other. And they’re saying, “We have a problem. We have a real problem here, Feds. Stop it. Do something.”

Well, you see this, whether it is Draghi or Yellen, or whatever. They keep saying, “Oh, we’re going to do it, we’re going to get the market all set. We’re going to do it. We’re going to normalize.” And then they get one piece of bad economic data, they speak, and then they turn dovish, like Yellen with the double reverse. It was ridiculous. Same thing with Draghi. And they kept expecting them to say something at Jackson Hole. Nope, they won’t say it, because they’re scared to death they’re going to knock stocks down. Why should that matter, unless there is something really bad out there?

David: Yes, because Brainard says, “Caution is warranted on further rate tightening. We have 4.4 on the unemployment number, we have 3% GDP growth. Why is the Fed cautious? What do they see that keeps them cautious?

Bill: Because those numbers are all garbage. They’re scared to death. They can’t pay the debt. That’s the problem. There is too much debt. The reason we had the 2008 crisis was there was too much debt, not enough collateral, not enough income, and the solution was, let’s put more debt on. It’s okay, you’re a business, and all of a sudden you have a liquidity problem, so you take on debt. That’s fine. But if you have a solvency problem, that’s the difference. If you have a liquidity problem where you are just short of cash, that’s what the Fed is for. “Here, guys. Go. Go right ahead. Get going again.”

In business, if you have a problem, you go to your bank and say, “I can buy this new plant and equipment, I’ll be twice as efficient, cut my payroll in half, and we’re going to make a lot money.” “Okay, yeah, here’s the money. Go do it.” But if you say, “You know, I just need the money because we’re just so screwed, it’s not funny. We’re just going to hope a genie appears and we’re going to get 4% GDP for the next five years so I can pay off this loan.” That’s what you’re doing here. It’s the debt. It all comes down to debt. The mathematics, when you look at it, it just doesn’t work.

That’s why they don’t want to talk about it because it’s immutable. The debt number is immutable. You can talk about that the CBO can project that Obamacare does this, and infrastructure, and the CBO has never been right about anything. It’s ridiculous to say, “Oh, the CBO says…” Who cares? They’re horribly wrong on everything they’ve touched. It’s just a political mechanism. But that’s the problem. The math tells you, the debt tells you, when you start seeing it, and we have to figure out the GDP growth, you look at the demographics, you look at the technology, where the jobs can come from. And you also have to look at the baby boomers, all these countries aging, and you’re at the point now where the boomers are going to start retiring en masse every year in the U.S., and it’s just going to start really jamming up the health care and the social security class. But they know that. They’re not that stupid.

But the problem is, they got caught. The whole reason you had the Fed was to be the lender of last resort. But over the years they took on more and more importance because they were helping the government. And then these egos got out of control. When I started in this business, even in the 1980s, you might know Volcker, but who knew who the Vice Chairman was? Who knew who the Presidents were? Now these guys are on the tape almost every day, talking, and they think they’re rock stars. Go away. We don’t need to hear you guys. Do your policy. If you want to tell us something, do it. But you have all these guys out running their mouths now. The media has them on all the time, and it’s ridiculous. It doesn’t serve any purpose, except it’s more harmful. It gives the algos and traders something to trade a few ticks every day with when they’re talking. But it’s not helpful in the big picture.

David: So, if the big picture – if the real issue is debt – not enough collateral, in the right circumstance not enough income. We have the Fed balance sheet, the ECB balance sheet, the BOJ, and they would argue, “Look, we can step in. We can buy our way to success.” I had a conversation with a guy from the Bank of England. I said, “Well, what happens if the Fed boosts their balance sheet to ten trillion?” He said, “No problems, we just sterilize. Not a big deal. No inflationary impact. It’s not like the old school monetization.” I sat there and scratched my head and I thought, “Is he shining me? Does he really think that you can buy the sun, moon and stars with paper, or credit that has come from nothing, and there is no inflationary effect?

Bill: The problem is, that was the buzz word in the late 1980s when they started intervening. “We’re sterilizing on intervention.” But you know, it was a disinflationary time. That’s the problem. We’re in a period of enormous disinflation. The first shock – Reagan created the disinflation in oil in the 1980s to take down the evil empire, and it worked. The next inflationary cycle was the stock market collapse in 1987. Then we had Japan bursting their bubble in 1990. And then there was a series – Mexico in 1994. And then you got into – Japan panicked in April of 1995 and went to zero rates because the deflation was running away. Then you had Long-Term Capital go down, you had Russia go down in 1998. Then we had the great stock bubble here because they were pumping money like crazy.

And of course, in the 1990s, the Soviet Union collapsed, China was in collapse. The communist world was in collapse. That’s enormously deflationary. So in the 1990s, Japan was bursting their bubble, and the communist world was deflating. And you had in his nation the technology industry that was developing in the 1980s was burgeoning in the 1990s. The technologies were coming to the market, were being implemented. So again, less need for workers. Of course, then you had the bubble burst here, and these guys knew this. Greenspan – that’s when they went and got Bernanke. He was the depression specialist. They brought him in in 2002 because they thought after 911 and the tech bubble burst, they thought, “Here we go.”

And then they ran the property bubble – the housing bubble – to try to keep the depression away. And of course then all that led to is the 2008-2009 crisis. And that is what you’re going through. And what they do – they don’t understand, when you make money this cheap you give businesses incentive to fire people, and to buy machines. I notice my neighbors who are small businessmen. All they keep doing is buying more machines. And it is amazing over the last 10-15 years, I know a guy who has a blister board packaging. It’s a great indicator for the economy because he has everything from auto parts to locks, to magic markers. And over a 15-year period he has cut his payroll more than half. He is probably down 60-70%, and his output is up three-fold, because the technology is so much better in printing. And I’m talking these massive print machines they buy from Germany. Just astounding how much more output he has and what he has done with his payroll. Just amazing.

And that is going on all over. That’s the dilemma you have. You have nowhere to really get – or the growth in industry. Since the crisis of 2008 it was in restaurants and hospitality, health care – these low-paying gigs. You have college students – and I know them. A lot of my children’s friends and classmates are tending bar, they’re waiting tables, and they actually make more money than working in some of the media industries. It’s amazing. Absolutely amazing. And how long can you do that? Now you’re seeing the restaurants have rolled over in the last year. You’re seeing these – I don’t know what they call them, but it’s the restaurants that are just above McDonalds, but not the high-scale, are starting to have trouble. Because people are either going to McDonalds or going more to Carrabba’s or Pappadeaux’s, or one of those types of places. But the guys in between, just a step above the fast food, are starting to struggle.

You say, how do we solve our problem? Give me the end game. What industry is going to pop up here and start really creating jobs for everybody? The only one I always think of was biotech, but again the technology is, you don’t need that many workers. You need researchers. You need the ideas more than you need able bodies. And of course, the other thing you’re doing is, once you have unleashed all the refugees from Northern Africa and even from the Arab world, how many of these people are skilled workers? Look at their economies. What is in their economies? So you know they don’t have the experience. What are they doing here?

And you’re bringing these people in and you think, “Well, they’re here because they’ll do jobs.” What jobs? What are they qualified for? What is their training? So that’s why if you sit there and you try to think the end game – how are we going to get out from under all this debt? Are we going to produce our way out? Are we going to get a jobs boom? You’re seeing the economy do better because Trump got rid of rules and regulations. You’re seeing a little more. But you don’t see the kind of boom you had post World War II. At the end of World War II everybody thought we were going into a depression.

My parents told me all the time that you were in this 1930s depression, and sure, you had the war technology, the war problem came out, you got some new technology, automation, all these GIs were coming home, the women are going to go back to the households. How are we going to employ all these guys? It took a couple or three years, but then you had this enormous boom. But what people missed was, during World War II most everybody worked, and then you couldn’t buy anything. Everything was rationed. So people had savings. You had incredible pent-up savings. You had incredible pent-up demand. And you didn’t have much debt. Except the government. Now, there is no pent-up savings. There is no pent-up demand. You don’t have that kind of kick.

And then, the same thing, you had the Reagan revolution. He cut taxes, but also you took interest rates – for crying out loud, it went down from 16 down to a single number. T-bills went from 22 down to 6. Imagine the incredible boost. That’s an enormous boost to the economy when you get rates cut that big. Plus, again, you had a nascent tech industry appearing. All that tech innovation was going on. Where is it coming from? Where is our next boom going to come from? I don’t know.

David: So, again, back to the idea of the big game where someone who is not managing money for the next quarter, or day trading, but is managing money on an inter-generational basis, and is concerned about the years, but more concerned about the decades. The shift toward tangible assets. You think that is under way?

Bill: Yes, because the game – and I’ve mentioned this with you, and we’ve been talking about this for 20 years – the key was when the communist world went bankrupt. These countries are bankrupt. Socialism – big government in all its forms – fascism, socialism, communism – is bankrupt. They can’t afford it anymore. That’s what the whole crisis of 2008 was about, and that’s where the governments came in and had to bail out all the big banks because they were the ones who were financing it. Now, what they did with that is, they made the situation worse. Now the big banks can’t go down because they’ll take the central banks down and they’ll take down the governments. And it’s because you can’t afford the socialism anymore – the freebies, whatever the form. Communism, fascism, whatever you want to call it, the debt is so large you can’t afford it anymore. And that’s what is coming down. And what is interesting, if you look at it, that’s why the politics are so divisive right now, because people, whether they inherently understand it, or it’s just a feeling, you see government has never been bigger, it has never provided more freebies, but the people that are getting them have never been more upset than they are now. They want more. That’s human nature. Whatever you have, it’s not enough, because these hedge fund guys are living in hundred million dollar houses. So what if I can get free cable, free Air Jordan’s, or whatever? Look at these guys. And then the people that are getting taxed, and of course the people getting squeezed are also the middle class. That’s why Trump is sitting in the White House. Because the top class is getting taken care of by the stock bubbles, the bond bubbles, or whatever. The underclass is looking at that and they’re mad, and the media is beating on them to be mad – you should be mad. And the government can’t deliver. The last thing was the Obamacare. That’s the last freebie. Here, have some [unclear], do this one, and all you did is, my insurance rate has gone up 300%. It’s ridiculous. Now, I’ll be going on Medicare soon, and so fine. But that’s what is happening more and more. The government is in there, and driving the cost up, and you’ve socialized it. And that’s why you’re getting these arguments now on social issues. If you look and see where the left is coming from, it’s all social issues now, because they can’t talk the economics because they’ve been a bust, and it’s blowing up. So now you have to get the people upset about civil war statues or transgender issues, instead of in the past when we were talking about how do you take care of your family, how do you get your kids educated? That’s why the coasts are out of touch with fly-over America because people still want to take care of their kids, take care of their families, and they want some personal safety. They want a future. But that’s why this is getting so vicious, because either you know it because you’re doing the work and you’re looking at it, or you feel it, is that we’re in an end game with big government. And that’s why you can’t have Charles Murray speak, because what he is going to say is divisive. Well, what is divisive? He’s giving you the conservative view, but that’s divisive now. So you don’t let him speak. That also tells you he lost the argument. But it goes back to big government blowing up. They promise you everything and now they just don’t have the money to do it. And so it’s going to be interesting to see, again, what Trump does here, how this thing plays out, but I think all the indicators are there that you had better start getting some assets that are out of control of the government and the banking system. I’m not telling you to put it all there, I’m not telling you to leverage everything to do it, but from a survival standpoint, and an insurance standpoint, you have to start thinking ahead. That’s what the big, private money learned in 2008. People think they just learned, “Oh, you’re over-leveraged, and everything went down, and you had market risk, and it got too risky.” What the really wealthy people, and the smart people figured out was, what was going on with the collateral and everybody collapsing – people didn’t know their assets were safe. So you had custodian risk. “Oh, I’m a multi-billionaire because of my stock holdings.” “Well, where are they?” “They’re sitting on Goldman-Sachs.” Or, they’re sitting at J.P. Morgan, or sitting at State Street Bank, or whatever. Yeah, go get them. See if they’re still there. See what’s there. What’s the deal here?” And that’s why that thing got so vicious, and why it was really lights out, because you had this custodial risk. People didn’t know where the collateral was, how much they had, who had control of it, who was grabbing for it. That’s why I think you are seeing this persistent buying into gold from the big money. It’s the same thing you see in diamonds, you see in all these. You still had the outflow all those years, too, all the big hedge fund guys. Why? Because it’s outside the control of the financial system and the government.

David: Right. So you’re out of counter-party risk.

Bill: All you need is good security. You need a good security system.

David: That’s right.

Bill: It got really big, doing the gold in vaults overseas, the Swiss banks and that. And I’m sure that’s still going on. And if you had an enormous amount of money you have a different problem. What do you do with all of it? But I think for the average person, you want to have possession of something that can keep you going for a couple, or three years, if something really bad happens, to keep you and your family going, keep you from dire straights.

David: So in generic terms, if you’re allocating assets and you’re looking at a two to four-year time horizon, you think moving beyond an insurance position in the metals as a worst case, actually beefing up that position, makes sense.

Bill: Yes, I think, thinking in terms of 5% as an insurance position of your assets or your investable assets, whatever you want to use, that’s fine. But now I think you should be ten, looking to go higher depending on how things start playing out. But I wouldn’t go over 20 yet. I think you should be 10-20 right now, depending, again, on how much money you have. If you have hundreds of billions you want to have a little more in there than the average guy who just wants some insurance. But now I think it’s time you need to increase your insurance because I think the hurricane is approaching. But I also think we’re at the point now we could start getting speculative buying where you are also doing this to profit. Before I thought it was just mainly insurance.

Again, if you know a hurricane is coming you want to up your insurance. I think we’re at that stage now where you up your insurance, and you start taking on some small speculative risks. Again, the thing that can really upset this is if the Fed, or some central bank, really says, “That’s it, we’re normalizing, and here we go.” Again, we don’t know how long that lasts. But if you see signs of the central banks caving in and normalizing, then gold is going to go ridiculous. I couldn’t put a number on it, but if you want to see what it can look like, look at bitcoin. That’s what I would say. That would be the analogy. Once it gets going it’s going to be real hard to stop.

David: Well, we appreciate you bringing in some market perspective and in the trenches experience. There are lots of ways to look at the world. You can look at it, use your library card and read lots and maybe take an academic approach, and there are elements that are helpful there. But there is something that battle-hardening does to you, and in this case, it’s market-related battle-hardening. Bill, I’ve always appreciated your perspectives and your insights. I look forward to our next conversation and wish you well.

Bill: Thank you. You, too.

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