In PodCasts
  • Wealth disparity and the dropping value of the Dollar
  • Without the “awesome eight” stocks, the broader stock market is flat to down
  • Fed’s Jackson Hole Revelation “Sure we don’t mind higher inflation”


The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Unlimited Debt & The Erasure Of Consequence
September 2, 2020

“When we look at the erasure of consequences and the muting of signals, you just have to broaden your spectrum and look at other things that give you signs and indicators. Money-printing? Monetization? Do they matter? Yes. The U.S. Dollar has dropped from $102 in March to $92 and change here in early September. If it doesn’t bounce soon, we’re going to have some real issues, and the dollar is telling more of the story at this point.”

– David McAlvany

Kevin: David, we’ve come out of four weeks with various guests, and there really was a deliberate action in all of that. As we look at what could be either devastating consequences of a lot of debt or the erasure of consequences and a continuation just by taking out more debt, we’ve had guests that have talked about both. I think it’s interesting so that we can learn how to argue our own point to listen to people who maybe don’t agree with everything we’re thinking.

David: I think it’s fun to have options. If you have ever hit the restart button like when you’re playing a video game, it’s just not going well for you, you realize you’re not going to get a new high score, I think back to when I had one of my kids and it was like the first week, and so I’m not involved, really. I can help do dishes or whatever else, but there’s a lot of things that I can’t do.

And so I’m up late at night playing Angry Birds on my iPad and I know from the first shot whether or not it’s going to be a good game or not, and I just I want a do over. And then I want another do over. No, I want another do over. It was amazing. I got all-time high scores and I just kept on getting all-time high scores, and I looked at the games that I threw away. The opportunity to restart was pretty compelling.

Kevin: The difference between a video game where you don’t feel the restart at all, let’s say you’re playing one of those first-person shooters, you don’t really feel it, so you can press the button. I remember when I went paintballing with my son. The difference between hitting the restart button and actually getting hit with paint, you realize you’re not going to get away without some sort of consequence. Paintball, then, to the next level would be a real gun fight. In a real gun fight, you really don’t have the chance to hit reset, do you?

David: I’ll never forget my brother and his best friend Shane used to hit the paintball on the weekends, and I don’t know what it was, if it was machismo, or they just knew they weren’t going to get hit because they were that good.

Kevin: They took their shirts off. I remember when Shane was bleeding. He was showing it off.

So going to that, in a way, the Federal Reserve has allowed us to pretend that we can hit the reset button without consequence. Richard Duncan talked a little bit about that, and he’s like, “Well, just keep hitting the reset button, baby. Borrow more.”

David: Yes, we just finished the best August for stocks since 1986, and it was the worst August for the U.S. dollar since 2005. And it’s a fascinating contrast. There is a story to be told there. Over the last few weeks on the commentary we’ve journeyed through the ideas of the 4th turning, and it just so happens that we are at a critical time of social and cultural angst. And I think that discussion with Neil Howe brings perspective to the current events which have taken a decidedly violent tone of late. And it removes, actually, some partisan conclusions by stretching back into sociological trends that transcend a single election cycle.

Kevin: And it’s so easy to do that. We have to really teach ourselves when we get 80 or 90 days away from an election to not think only for 80 or 90 days. I mean, we really do need to think beyond election cycles and actually beyond presidential terms.

David: I care about politics and I care who wins, and I have my own personal views on what the impacts will be, but more critically, from a professional standpoint, to be able to better grapple with those issues and the concerns, I think, again, that conversation helps us appreciate the longer term tides and currents influencing the current spirit of the age.

Kevin: But the spirit of the age is influenced by this reset button that we call the credit markets. How much can you borrow without having to pay it back? That was the question for Doug Noland, that was the question for Richard Duncan. It was the question for Lila Murphy. How do you navigate when you don’t know whether the reset button is going to work or not? It has been interesting. And then Neil Howe, of course, talks about how do you navigate the next 100 years?

David: That’s right. You might think that the outcome in November – the outcomes are visible. You think a Trump victory is good for equities, perhaps it is better than a Biden victory from that standpoint, but political uncertainty can still exist, and can still roil the markets, if we go back to this idea of the 4th turning and if violence levels increase. And so I think here again, the 4th turning is as prescient as ever.

But you’re right, it’s not by accident that we are also in recent weeks considering the credit markets, those dynamics, and the financial market excesses as a complement to these late-cycle social trends. You have loose credit conditions, which create an allowance. They encourage reckless investment in capital allocation. And, of course, there’s immediate upside benefits. And Wall Street, I think, probably amused by, maybe even addicted by, those immediate upside benefits, no longer looks to the longer-term consequences and no longer looks at the impact of being over-leveraged.

Kevin: Aren’t we already experiencing consequences? Look at the social unrest and look at the wealth disparity. We may think, because the stock market is hitting all-time highs, that we’re not experiencing consequences, but actually, they’re showing up, aren’t they?

David: This has been an enduring issue prior to the 2016 election. These conditions of easy money and easy credit exaggerate wealth disparity, and they feed resentments and judgments across economic classes. Too often, the present is prioritized at the expense of the future, and it’s going to be the generations to come that will remember this era as either incredibly shortsighted or incredibly selfish, maybe a combination.

But what we’ve done with allowing the Federal Reserve to sort of manage the system, we’ve created the machinery that sucks tomorrow’s economic life and vitality out of the future into the present, and that has a host of cultural consequences, which we started to see prior to 2016. And, of course, they’re readily on display today as well – redistribution, radical politics, these are the flipside of monetary policies that primarily benefit limited segments within society. So to some this will seem a non sequitur and, for others, these are the appropriate dots to connect. But central bank monetary policies are a principal cause in this unfolding social strain.

And that’s why it’s so important to look at views that you don’t necessarily agree with because we’ve all been taught that all debt gets paid. We raise our kids and we say, “Look, don’t go into too much debt. Make sure that you pay your bills.” But what we’re seeing is a system that’s completely built on debt. Both Doug Noland and Richard Duncan agreed on a point, and that is that debt has become the new money.

As you consider those credit markets that you’re talking about, which are causing consequences on the social side of things, but they actually still are fueling what looks like a financial boom or a bubble in the markets. We have to look at both and say, “Do these have a limit? Is there a consequence to come?” And so the Duncan/Noland interviews are worth actually going back and listening to because whether you’re Democrat or Republican, strangely enough, either party right now is using debt to fuel the next wave.

David: Oh yes, there is a commonality between the Republicans and Democrats. Both of them are dependent on the credit markets to enable the next step. And fiscal policy is obviously loose on both sides. It’s not a question of quantities, it’s just a question of flows and who gets the quantity of flows?

We’ve considered the credit markets from a similar vantage point, again, credit access, as you mentioned, these two different analytical frameworks, Noland and Duncan, two very different conclusions in terms of diagnosis and prescription, which has meant that, for our listeners, you get to engage with a range of possible policy outcomes, and of course, a range of effects in the financial markets. Are we setting up for an equity market decline like 1973,1974, 2000, 2002, 2007, 2008?

Kevin: But those had consequences. There was a decline of massive – didn’t they lose about half of their value?

David: Yes, and I think a part of the rigor in the commentary for our listeners, it reminds me of something that happened routinely in my wife’s house when she was growing up, which is her stepdad would debate with her on a topic, and halfway through the conversation he would say, “Switch.” And instantly, they both had to take the other side of the argument and argue effectively and finish the argument.

Kevin: That’s a great technique.

David: So Noland/Duncan, it’s just important that you engage in such a way that you’ve considered the 10th man’s perspective, that you have considered the devil’s advocate’s perspective and see a whole range of outcomes. It’s very possible, very probable, that we have a 50% decline in equities like those past market declines. Today that would bring the Dow just over 14,000. That would return the NASDAQ to its previous decades-long peak of between 5500 and 6000.

Kevin: But Duncan said, “No, let’s just spend another 10 trillion bucks and find some technology that will pull us out of this.”

David: Yes, that’s a possibility. And if you don’t argue for it effectively, you probably don’t understand the argument for it. Do we move here to the infinity zone? Duncan suggested the 10 trillion policy initiative may very well act as an accelerant to an already over-priced market. You have Tesla trading at over 1,000 times earnings. Could that be seen as either the beginning of manic behavior more broadly, or is it the beginning of the end? And I favor the latter interpretation.

David: And that’s why, then, we had Lila on. You’ve said this for years, Dave. Talking to people about theory is great, and there are academics out there that write papers their entire life. And they’re helpful because they study deeper what we can’t study because we don’t have time. Here’s the problem. They’re not the man on the street. They’re not having to make active decisions. It’s like that paintball game. It’s not a video game. You get out, and if you’re exposed, you get hit. And Lila has to make decisions. You do, Robert, Doug. You guys have to get in there and decide, “Do we buy something today? Do we sell or do we stay in cash?

David: I studied philosophy in college and I still like reading philosophy on occasion. Certainly some of my friends are in that profession, so to say, the professional thinkers and writers in the ivory tower. And I certainly love to read academic stuff, but the reason I departed from that and found myself in the world of finance is because so many of these ideas boil down to action. Aristotle said something very simple. “Human flourishing is found in action.” And you can contemplate your navel, which may have its own value, or you can do something like clean the lint out of your navel.

Kevin: Dave, you’ve always taught me that ideas matter. That’s what you’re really saying. There are ideas, and then there is ideas matter, and you pay the price, obviously, every day.

David: That’s right. When you’re actively in the market, you have your judgment called into question and measured, marked to market every day. So we last week ended the conversation with Lila, a plan of action emerges out the theoretical conversations and the speculations of what the future holds. We must. Doing nothing actually is still a choice. That’s just stasis, and sometimes that’s appropriate. What do you base your actions on? What are the most predictable, the most probable inputs into the investment equation?

Kevin: Well, you have to answer the question of what the central bankers are going to do, Dave, because they have had probably the greatest effect of anything over the last 10 years on the markets.

David: One of the pillars of our thesis is that central banks will, in essence, take off the gloves and transition to the equivalent of a bare-knuckle fight to maintain the status quo. So all bets are off. And it’s not clean, it’s not by the rules, but what are they trying to accomplish? They are trying to, in essence, end the business cycle. They want the continuation of perpetual growth. They want to guarantee price stability, as if that is within the power of central bankers. And frankly, when you think about price stability, that may turn out to be some version of cold death, unintended, of course.

Kevin: You asked the question, can they continue to control this? Last night, Dave, when we were sitting, you were having your cigar, I was having my Talisker, we were getting to be a little bit philosophical like we do. But we were looking back at this show. And you love talking to people who are in that central banking community, people we may not necessarily agree with the actions on. I’m thinking of Otmar Issing, who was the head of the European Central Bank and sort of the father of the euro. He was head of the European Central Bank for seven years. And we’ve had several others. We’ve had Carmen Reinhart, we’ve had William White, we’ve had Paul Tucker.

David: That covers the Bank of Canada, the Bank of England, the Bank of International Settlements, the ECB.

Kevin: And now the World Band.

David: The ECB. The World Bank…

Kevin: And they all got to a point with you, Dave, during the interview, admitting that they don’t necessarily think this is as much a science as it is an art, and they’re all still wondering if it’s going to work themselves.

David: Yes, I wonder if, out of hyper-control or a drive toward policy control comes hyper-chaos. Regardless of what we think in terms of constructing portfolios that are suitable in the worst of times, we need them to be just that – suitable in the worst of times, constructive in the best of times.

Kevin: But does that bring real things into the equation? When paper collapses you still have real things sitting there, like oil and gold and lumber. And they’re still real.

David: That’s why I like to say, if I can stub my toe on it, walk around it, wrap my arms around it, owning real things, hard assets, whether it’s across the globe, we include multiple iterations which provide healthy income, what we believe to be sustainable income streams. That’s what we do. I wanted to say something about my cigar last night. I might as well tell you here and now. I’m done until after the race in November.

Kevin: Really?

David: Yes.

Kevin: For the listener who doesn’t understand this, this is huge. You’re going to put the cigars away …?

David: No, but I should probably lock the humidor and give the key to somebody who won’t summarily lose it.

Kevin: So tell me why? Because I’m not finished with Talisker by any stretch of the imagination.

David: I know. I am to the most intense part of the training cycle, and it is important that from a blood pressure standpoint, and I just want everything going for me.

Kevin: Well, for those of you who don’t remember, you’re doing a full ironman in November down in Florida.

David: Right. So rest and recovery is pretty critical.

Kevin: 140 miles, something like that.

David: Yes. I actually needed to just say it publicly so that there is a level of accountability here, because I actually burdened my wife with that last night. I said, “All right, you have to help me.”

Kevin: You locked the humidor, actually, until after the election. Let’s just let’s call it a lock of the humidor until after the election.

David: And I said the one exception for alcohol consumption was red wine with steak, if it was socially engaging, that we have guests over, or it’s date night, and then a sip of someone else’s is just fine. So I don’t want to be a complete social prude, but I do want to finish this, and more than that, I want to survive this.

Kevin: Let me try as an active member of this commentary to try to segue way back to what we were talking about.

David: (laughs) I’m sorry.

Kevin: Let me try, because there are times when you have to say, this is not the way we’ve been thinking up to this point, but we now need to think about the next step, and that’s what you did. Last night when we were talking, you never mentioned that you were going to give up cigars right after we hung up with each other. But let’s look at what you and your dad did back in 2005. I’ve worked for you guys for 33 years. And we didn’t pooh-pooh other investments, but we basically said, “Look, gold is your option if paper assets are no longer viable.”

But we always had in the back of our mind, what do we do when gold has reached its peak relative to say, the Dow, or what have you? You had come from the stock brokerage industry. Your dad started there back in the sixties. You guys sat down and you said, “Let’s create something that’s still real, like gold, but will benefit during a period of time when maybe gold is no longer the only necessary option for hedging.

David: Yes, the gloves-off approach from the central banks I don’t think ends very quickly. Their admission of failure doesn’t come quickly. There’s a lot of ego involved in the project that is in play.

Kevin: Can they even extract themselves? That’s the question. 

David: Yes, I think the current trend that we have is one that that will last. But you’re right, the idea of rehearsing what is next is really key. So the context for what we do in the asset management space goes back to 2005. That’s when my father and I discussed that need to clearly define what was next. That is, as the metals bull market matured, we were imagining this future point, and having a conversation about what we would do as a family. Where would we diversify our metals holdings? And when that, when the timing was appropriate, where would we reallocate some funds? Not everything, but some funds, reducing total precious metals holdings after having benefited from their price appreciation. So we launched the asset management company in 2008, 13 years ago, not a moment too soon in my opinion because it took the better part of 10 years to refine the team and the process we employ. That process is one that Lila contributes to, that Doug contributes to, you mentioned Robert, myself. We engage with that on a continual basis, and since that refinement of personnel and process, the positive outcomes have become more reliably duplicatable. As we look at the years and decades ahead, I look and say, “Yep, right people, right place, right team.”

Kevin: As you train, talking about the team, you’re training for a type of event, physically, that most people would never dream of doing. 140 miles is a long distance. But when you brought this team together and you started to listen to their past experiences and discipline, the reason you put your cigars away, honestly, all jokes aside, is because you’ve done other races. You now know that this is the correct discipline. You’d rather have the cigar. You’d rather have maybe a Talisker. But the discipline puts it away. And Lila is disciplined, Doug is disciplined. And with those disciplines there is give and take. Sometimes there’s friction, which is wonderful, because in an algorithmic program, there is no friction. But with people…

David: There is friction. There is.

Kevin: But there is discipline. Even if in their gut they’re like, “I think we need to go buy this,” it’s like, “Well, tell me about your gut, plus the discipline.”

David: Yes, I add a little friction. After our cigar and whatever last night, and that’s why I hadn’t made that decision then. But I went on a run between 11 and midnight. And it was at that point that I thought, “I think between rest and recovery and effectively plugging in the exercise where I can,” and sometimes it is odd hours, discipline marks my personal life in those ways. It’s very idiosyncratic. Maybe the kinds of things that I like to read, and when I read, training, time spent with my family, all these things are priorities. And there are all reflecting routines, which I hope drive positive results, whether it’s intellectual maturity or emotional family connection, or accomplishing that particular goal with the Ironman, disciplines are needed. When I look at the asset management business, the team today thrives on them. And it’s the core of our conversations. It’s what drives the backbone of our checklists and our scoring and what we do on a routine basis.

Kevin: Well, sometimes sparks fly. I mean, the old “iron sharpens iron” applies here, too.

David: Maybe that is the beauty of having studied philosophy because conversation, debate, analysis, all of that is right up my alley, and so to bring an orderly process to that for decision-making and action is fantastic. And I have to say, I really appreciate the contribution that both Doug and Lila make to that orderly process, because again, we’re talking about decades of having worked in that field and also quite a bit of time working together. So the banter is cohesive. It has a maturity which goes beyond the 18 months that Lila has been with us because they’ve been working together for the better part of a decade.

Kevin: Well, like I said, it’s not a machine, it’s not an algorithm, people are necessary and they’re involved in this.

David: And so it’s not always easy because people are involved. But people are involved, which in my book holds greater value than turning everything over to a machine.

Kevin: When we’re talking to clients and they’re looking at the stock market, and they’re seeing the massive growth it looks like in the stock market. It’s like Covid is over and we no longer have a recession, but really, the stock market, itself, isn’t doing that well. It’s like eight stocks that are pulling everything else up. So would you give a little bit of definition of the difference between the stock market overall right now and what they call the awesome eight?

David: Yes, the bank credit analyst expanded FAANGs. I guess we’re running out of things to add to that as an acronym, so now they’re just calling them the awesome eight – Amazon, Apple, Facebook, Google, Microsoft, Netflix, Invidia – selling video cards, very helpful if you’re mining Bitcoin or things like that. And then last but certainly not least, Tesla. Those names have dominated the move since the March lows. So when we started selling off, I think the highs were right in around February 19th and the lows about the third week of March. The S&P 500, on an equal-weighted basis, has barely moved for the year.

Now keep in mind, the S&P 500 is a cap-weighted index, so the largest names continue to get the largest flows of capital from the index investor. If you’re looking at things on an equal-weighted basis, actually, you see this huge divergence between those eight names, which are motoring higher, and everything else, which is more or less more about stuck in the mud. And so any broader measure of stocks, the Russell 2000, Value Line, geometric index – they’re negative for the year. And this is what we’ve described as negative breadth, which is different than bad breath, but still not necessarily pleasant.

Kevin: Negative breadth – I’ll start calling it that, actually.

David: Throw the D in there. It means that there are a few names moving higher, but that the broader collection of names is not moving up or is not moving up to the same degree. And I think a negative breath number is a fascinating indicator. I see the same curious behaviors with gold stocks. If you look the big names, they end up catching the capital flows as money comes into the asset category through an index. There’s a disproportionate inflow and outflow with the big names present in those indexes. And if a particular name isn’t on an index, it trades very differently. Frankly, I kind of like it because it trades on its own merits.

Kevin: So it seems the equities, the stock market in general, and especially these eight stocks that are doing extremely well, it has something to do, obviously, with the printing of money. Now, Jackson Hole is something that is sort of a punctuation point in the year for the central bankers. In August, they meet in Jackson Hole. Of course, we’ve had some guests on that are usually at Jackson Hole, like Carmen Reinhart. This year, they’re basically talking about allowing higher inflation, as if it’s a gift. The gift that we’re going to go ahead and give you is no longer 2% inflation, but we think now 2½ makes sense.

David: Just one more thing on that view of the awesome eight. It starts with the market. If the market index looks good then the assumption is that the economy must be improving – and there are some measures of economic improvement. I’m not saying there are not. But this is where I’m going. The flow of thought for the average market participant is this. Look at the index. Index is up. Okay, check that box. Economy must be good. Okay, check that box. The third box to check is, I feel okay. So market okay, economy okay, mood okay. Market not okay, economy not okay, mood not okay.

Kevin: So Jackson Hole actually affects the mood of the country as well, whether they know it or not.

David: Yes, and to your point on this being a critical once a year soiree, it’s a great place to ski, this is where the Fed does their annual meetings. This year was a little bit wonky because of Zoom and whatever. So what did they shift, of real significance? The inflation policy, I think, was noteworthy for two reasons. One was the belief that you can turn the dial from a 2% inflation target to something that is going to average more than 2%. So they’ve said 2½%.

Then again, that the problem here is it’s not as if you’re dealing with a sensitively tuned apparatus where you just turn the dial and get what you want. It ignores the fact that, for the better part of five years, the Fed has tried to fine tune a 2% number, and it’s been an exercise in futility. I think now that inflation is on the rise, they’re claiming that a higher number is acceptable, which seems to me like a credibility cover.

Kevin: Oh, yeah, “We’re purposely doing this.”

David: Yes, exactly, and implying that they like 2½%, but not more than 3% annual inflation, again, as if they are turning a simple dial to get exactly what they want. This is not a precision instrument. This is not something they actually have control over.

The second part is, we’ve harped on the dual extractive nature of financial repression and inflation, and those trends continue. With a higher degree of extraction. Inflation will go up, but rates are not going to go up at a commensurate pace. Rates will remain low. Some central bankers are actually going back to reaffirm the usefulness of negative rates as a tool in their policy toolbox. The Bank of England last week was only too happy to affirm the use of negative rate structures as a part of their overall strategy when and where necessary.

Kevin: Yes, but there’s a little bit of hypocrisy here because Jerome Powell was like, “You know, I don’t think we really need negative interest rates at this point.” But, Dave, if you have 2½ or 3% or 4% inflation, and you have rates that are below that, are we not already negative?

David: Right. And again, I think Powell has said we don’t need negative rates at this point because he’s comfortable with the tools that are in practice today. Forward guidance, which is basically setting market expectations, guiding the mind of the market, so to say. And then asset purchases, which is setting prices. So setting expectations and setting prices, they feel like they’ve got enough power. But I tell you, if the swelling of the balance sheet past $10 trillion is not sufficient, they will revisit the negative rates.

Kevin: They’ll do whatever they have to. So, inflation. What in the world are they doing calling it 2%? If you were to look at Dr. Copper, which we’ve talked about through the years, Dr. Copper’s up 29%. Lumber – how much is lumber up?

David: 127% year to date. Part of this is artificial in the fact that it’s driven by housing stats and home building, because if you think about the migration from cities, you’re seeing a response to Covid, you’re seeing response to unrest, and people are moving, moving to the suburbs or beyond the suburbs. And so there is some positive home-building, and the multiplier off of homebuilding is a pretty powerful thing. So lumber year-to-date is up 127%, copper is up 29%.

But where you begin to say, actually, maybe it’s a combination of that migration and a larger inflationary thematic. When you look at silver, you look at most of your industrial metals, really not tied to a move in housing. Most of them are up double digits. So it suggests that hard assets are coming back into the mainstream, though slowly. And I think there are a lot of reallocations still to occur into commodities and gold.

Kevin: Why don’t you address that right now? Because sometimes we’ll hear that gold is near $2000 an ounce, so it must be fully invested, it must be overbought. But if you actually look at the average portfolio, it hardly has anything in it.

David: Right. UBS published research on the strategic asset allocation of global family offices. These are your ultra-high net worth families, let’s say 50 million to 5 billion. And on average their cash was sitting around 7.6%. Gold and precious metals was 8/10 of 1%. And commodities, which is a combination of agriculture, lumber, etc. combined, and that would be your oil exposures, too, energy 2.4%. So a minuscule exposure to real things other than real estate, with a much higher 17% allocation.

So I think when I look at the commodity space, when I look at the gold space, and when I look at some of your larger pockets of capital around the world, you’re not talking about a crowding effect, not by a long shot. There are concerns that the metals are in a bubble. To me, if you want to know what a bubble looks like, see a two-year chart of Tesla, see a two-month chart of Tesla, see a two-week chart of Tesla. When you get a 76% move in 14 trading sessions, and then somebody thinks gold is in a bubble because it’s gotten above $2,000.

Listen, the inflation-adjusted price is somewhere between $2600 and $2800. Historically, you’ve got to go twice the inflation-adjusted price before you begin to run out of buyers. And so you’re talking about a $5000 gold price, double the inflation-adjusted price, which is clearly not an economically sustainable number. It won’t stay at those levels, but you run out of buyers at about twice the inflation-adjusted price. Whether that’s natural gas, oil, or pick your commodity, they can move higher, they can move to unsustainable levels, but this is not it.

Kevin: Do you think there’s a general ignorance right now with the type of person who is actively participating in the market? We’re in a different generation where people don’t just typically own gold in a portfolio. In the old days, starting with central banks, central banks worldwide keep about a third of their liquid assets in gold. But portfolios going back 50 or 100 years, what would they have? Maybe 10% or 20% in gold, just as an allocation. These days nobody even thinks that way.

David: As recently as the 1970s, just to go back to the cycles, gold was a standard 10% allocation for wealthy families. That was common in the 1970s, but also note it was common in a period of time, common here in the United States and globally, as metals were putting in the cycle highs. So it gains popularity, people start to put it into their portfolios, but unfortunately they are typically coming late to the cycle and are not anticipatory. Frankly, in many parts of Europe, that 10% allocation has never changed. It’s still acceptable.

But I think you have the new rich, the nouveau riche, which have yet to understand the allocation role of gold and silver. And frankly, few of them know why a healthy insurance policy is even necessary. They haven’t known hardship – not like past generations have. So there will be some very valuable lessons learned and education gained, tuition paid for, in the context of a solid, protracted equity bear market, where most of your world’s wealth is still sitting in equities and bonds.

Again, 10% in gold, from that to 8/10 of a percent in gold, I would say it is under-owned. Energy, from 20% of the S&P 500 to less than 4% now – under-owned. With patience and discipline, you can capture the re-valuation of asset classes and build significant wealth off of low cost basis.

Kevin: Let’s look at patience just for a minute, because what you’re talking about from an analogy point of view of putting the cigars away until the race, there’s a level of patience there. It doesn’t necessarily make sense to your flesh right now. Your flesh would like to continue to have a drink every once in a while, or a cigar. Really, patience in the investment field is buying something that nobody else is buying. And so you have to almost get rid of your self-insecurity, needing someone else’s approval. You really don’t have approval if you have patience in the investment world, you’re almost always looked at as the wrong guy on the wrong day at the wrong time.

David: Right. And it’s so funny to me that as I talk to folks and they say, “Tell me about your performance this year, that year, and it’s always compared to, “Well, I could have owned Amazon and done that much better. I could have owned Facebook and done that much better. I could have done much better owning Microsoft or Tesla.

Kevin: Rear-view, rear-view mirror on the wall. Who’s the fairest one of all. The rear view mirror is easy for all of us.

David: Yes, and I think the great successes in investing are anticipatory. It’s when time and the tide of events has played out that you get to look back and say, “I positioned accordingly because this is what I saw coming. And I bore the fruit from that.” Yet another quote from Aristotle (I suppose Marc Faber mentioned this in a recent missive): “Patience is bitter, but the fruit is sweet.”

Some idiosyncratic reading, I was stuck in the early chapters of Leviticus, an Old Testament book of the Bible, which I frankly don’t recommend (laughs). I was reading that earlier this week. According to Jewish law, the fruit of a tree is not to be harvested for at least three years. Then they’ve got their seventh year let the fields lay fallow and recover. There are these ideas of rest. And of course, the 50 years, the jubilee.

Kevin: It goes against the perpetual growth religion.

David: It does. And I think I think one of the reasons I was reading Leviticus was because I went back to Tomas Sedlacek’s book, The Economics of Good and Evil. He looks at the ways that wealth has been viewed through various worldviews, one of them being, if you’re going back to early time, is from this fertile crescent and that part of the world, that you can’t harvest for three years. I thought that was fascinating.

Alan Newman recorded this week in his most recent missive – it’s always the last one because he’s basically retired, but he has to write, but I love a guy who has to say something – Alan Newman recorded that the average holding time for equities, whether you’re talking about individual shares, mutual funds, ETFs, has come down over time. If you’re looking at sort of 1926 to 1998, the average was three years, nine months as a holding period. So you really weren’t harvesting for over three years, either. 1926 to present, so now you’re tacking on the last 20-odd years, the averages have changed. It’s no longer three years, nine months. It’s three months, 25 days.

Bear in mind that brings in all of the old data and the new. Today’s holding periods to bring that average down so considerably, the time until we pluck the fruit, so to say, it’s now days, it’s now microseconds and nanoseconds. And it’s, I think, a different way of thinking about, it’s a different way of engaging the capital markets.

Kevin: Going back to the 1980s, Dave, when we started looking at actually working in managed funds. One of the things we would do, like with mutual funds, is we’d look at their cash position. So let’s say they had, $100 in there, total, but they had $98 of it invested. Well, that didn’t leave but $2 for liquidations without them having to go and liquidate more. One of the things I love about Alan Newman’s writing is he is always looking at the cash levels to see where they’re at because it gives a good indication of two things. One is overall bullishness. How much do we want to be invested? But the second thing is, how vulnerable are they? How low is the cash in case there are liquidations?

David: Yes, I think that’s a really interesting dynamic in terms of forced liquidations if you don’t have enough cash to meet redemptions in sales. I have a friend in Kansas City who manages a mutual fund for a fund company out there, about a $2 billion mutual fund. He has been with him 20-plus years. A new CEO came into the business recently, and he pulled all the fund managers in, and he said, you will not maintain cash balances. That is not your mandate. You have your mandate. If someone wants cash, they can raise it and sit on it themselves.

What he’s really saying is, “Guys, we’re facing an existential threat. We cannot have our returns equal that of the indexes if we’re not fully invested.” People will look at a relative performance and say, if you’re not performing as well as the S&P, why don’t I just invest in an index fund? So the whole mutual fund industry is also dealing with a structural constraint where they have to put everything in. They want to put everything in, lest they go the way of the dodo bird.

Kevin: And that creates a self-fulfilling prophecy when the stock market starts going down because they have to sell to raise cash.

David: That’s right. It magnifies. They call it a force multiplier, not having enough in reserves. So Newman loves to talk about cash levels. It is an indicator of how fully invested the speculative community is. No surprise that last month levels hit an all-time record low at 2.2%. Part of that is pushing money into the market on a speculative basis. A part of it is the pressure of the mandate to be fully invested. And that’s a new structural change for mutual funds to have to deal with on the competitive nature of things.

So the thing to remember is that sentiment is exaggerated, and sentiment swings to extremes at the end of a move. So cash balances are just an indicator. He also loves talking about how much money is borrowed on margin. It’s only $600 billion or so of borrowed money from the house, used to buy stocks that you didn’t have the money for. And, yes, the clock is ticking. Yes, you’re paying interest on that. And yes, it ultimately has to be paid back, hopefully at a profit, not a loss. Also from Newman, he views the March lows and the recovery since then – I thought this was fascinating – he views it as the biggest bear trap in history.

Kevin: Let’s just put a little context on Newman for a moment because he watched his dad not look at his stocks from the 1929 crash until the 1960s when Newman got in there and looked at it. His dad became so incredibly depressed after the losses in the stock market he wouldn’t even open the safe and look at the stocks.

David: Yes, I’m going to quote him from something he said in his most recent note. “Despite the speed in the depth of the one-month collapse in March, there was no capitulation.” He’s a guy to talk about capitulation because he understands the psychology of capitulation. His dad was a broker in the 1920s, quit, and all of his stock certificates he put in a bank box and didn’t open until the 1960s. Actually, he asked his son to research what was in there. “I don’t care what they are, I don’t care what they’re worth. Tell me if there’s anything left.”

Kevin: This is deep in the family DNA. Let’s put it that way. Bear traps.

David: Right. So what does capitulation to look like? What is a bear trap? What we did get was an intervention response from the Fed. This is also a kind of classic bear market action, a big push to the downside, policy response, which gave us the bounce that we have now, and now we wait to see how the bear unfolds. I just don’t buy that we’re in a new bull market.

Kevin: Well, we have the erasure of consequences. We started the program talking about pushing the reset button. How often can you push the reset button and there not be a consequence? We still are dealing with the real world, even if debt can maybe erase that for a while.

David: Well, I guess if I took the devil’s advocate position on what I just said, I don’t buy that we’re in a new bull market, the question would be the same one that Lila asked last week, which is, “If you take interest rates to zero, do you recalibrate risk across the board?” Are you allowing for a richer valuation structure across the board? And so maybe Tesla is, in fact, ridiculously priced. But if you look at the others in that mix that I mentioned, that are trading more in the $30s to $50s in terms of price earnings multiples, perhaps that’s the new normal.

Normal? You can hang a question mark after what is normal and what we come to accept as normal. And again, this comes back to, on the one hand, but on the other. On the one hand, I think that this is not a new bull market. On the other hand, if we’re recalibrating things around zero or negative rates, maybe it has farther to go. But on the other hand, still, that does presume control by the central banks, and I believe they have control until they lose control.

Kevin: And this is why critical thinking is so important. Lila said last week that this is the most difficult time to navigate of any time in our lifetimes. Look at Covid. If you want to find something that completely discounts Covid, just get online. There’s plenty of evidence that you can discount it. Then on the other side, you can see that there’s a real threat. And so I think at this point we’re making critical decisions. This is not to tell people whether we’re going to have a new bull market or another crash. It’s just, how do you critically think? Now on Covid, it’s the same type of thing. You have to gather your evidence because sometimes underneath the surface of the mainstream media, you can actually make some pretty good decisions.

David: Yes, and the word of the week this week is co-morbidity. The CDC released statistics showing that in 94% of U.S. Covid cases there was at least one other underlying disease. On average, it was 2.6 underlying diseases. And only 6% of the deaths from the Corona virus, Covid-19, here in the United States were from Covid-19 alone. If you start looking at the numbers of 180,000, that’s a big deal. What is attributable directly and solely to Covid-19 is 10,800 If I did my math right.

Kevin: And are there politics involved? How does Covid affect either a Trump reelection or a Biden election?

David: Bloomberg covered some commentary in their columns this week showing an interesting correlation between Biden’s chances of getting elected and Covid cases increasing. And then the flipside, of course, that his chances of being elected declining when Covid cases are falling. You can chart it out and see this correlation. I’m not wanting to wade into the Coronavirus debate on masks or shutdowns, but I did think that the CDC stat, coupled with the Bloomberg correlation, was worth noting.

What are the other factors? Of course obesity, high blood pressure, other causes of systemic inflammation, all seem to increase the odds of mortality. I’m not taking this lightly at all, and I don’t want to be dismissive, shrinking from 180,000 to 10,800, because I can tell you in that 180,000 I’ve got eight people in my family who had Covid, and two friends here in Durango who have had Covid, and I can tell you it was not pleasant. But there were no mortalities either. I don’t want to downplay it, but I think about little things. I think about my diet. I think about whatever I eat that might promote inflammation. Maybe I should cut back on sugars. Maybe that’s not a bad idea in general.

My point is, back to Biden, it seems that there is a negative correlation between street violence and Biden’s odds of winning in November, a positive correlation tied to Coronavirus. Can we escape the politics of this? I don’t think so. But if violence continues, you’re going to continue to see the voter base migrate. And if violence continues I think the Democrats could actually lose the House, too. Then you’re looking at a very fascinating 2020/2021 transition. Could be the first Christmas of Terror, something akin to the Weathermen, the Weather Underground.

Going back to Dylan’s, “The weatherman we don’t need, we know when the winds are blowing.” Whatever. The Weatherman from 1969 to 1970, these are guys throwing Molotov cocktails in the East Village, packing bombs. Could we see that in the lead-up to an inauguration of Trump? I think it’s possible. And frankly, if Covid doesn’t get considerably worse between now and then, it appears that Biden’s odds are considerably worse of winning.

Kevin: Dave, going back to the theme that we started with, the erasure of consequences or the reset button, we talk about how the consequences may be showing up in areas that we don’t expect. The buying power of the dollar or the buying power of any currency in any country, oftentimes is the one that is sacrificed. That’s the sacrifice of the consequence. John Maynard Keynes basically said that’s the inflation that only one in a million understands, when you can suck the buying power out of a currency, you can actually fuel many bubbles and anesthetize a lot of pain.

David: I mentioned that sort of three-step move. I’m going backwards here from mood to the economy to the market, or played in the other direction, the market gives you a litmus test for how you think the economy is doing, which affects your mood, and what people often neglect. And from that standpoint, if you can manipulate the market, you can manipulate the mood. So the indexes are really a key thing. If you want to buoy sentiment or keep it at a high level, manipulate the crud out of the market and you’ve got mood captured.

On the other hand, you see impacts within the currency realm which are not as easy a litmus as just the stock market.

Kevin: And the dollar has been falling.

David: You can look at other countries, too. Shinzo Abe, father of Abenomics. He’s leaving office early due to recurrent health issues, and this question is there. Do public policies and monetary intervention impact the value of a currency? The answer is, of course. The yen is already rallying just on his announcement of leaving office prematurely. He stepped down because of these same health reasons back in 2007, and the yen rallied 12% against the dollar. Yes, policies matter.

So I guess when we look at the erasure of consequences and the muting of signals you just have to broaden your spectrum and look at other things that give you signs and indicators. Money-printing? Monetization? Do they matter? Yes. And I think it’s your currency which will tell you when you’re stepping over the line. The U.S. dollar has dropped from $102 in March to $92 and change here in early September. If it doesn’t bounce soon we’re going to have some real issues, and the dollar is telling more of the story at this point.

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