1987 Black Monday Repeat: How Close Are We? | Adrian Day

Adrian Day (0:00)

Would you lend money to the US government for 30 years, or five and a half? I know I wouldn't. Gold has held up remarkably well. It has been remarkably resilient in the face of, you know, higher oil prices, strong dollar, and particularly rising yields. That scenario should be very, very negative for gold.

David Lin (0:21)

Pleased to welcome back to the show Adrian Day, President of Adrian Day Asset Management and the Portfolio Manager of the Euro Pacific Gold Fund. On the agenda, gold, gold stocks, interest rates, the dollar, Federal Reserve Monetary Policy, inflation outlook, and the fears that we're heading into another 1987 style correction in the stock market.

That's surfacing again. Adrian, welcome back to the show. Good to see you.

Adrian Day (0:46)

Well, thank you very much for having me, David. I think we're going to be here all night if we discuss all that.

David Lin (0:52)

You have a particular talent for condensing your thoughts into concise snippets. So this is why we appreciate you and I'm very much looking forward to this interview covering a broad range of topics. Let's start with the 1987 fear. So this is a theory and you know, I want to stress that we're in October now. We're entering the middle of October and this will be 39 years since Black Monday, 87

Right? Yes, 39 years.

What happened then was a series of things leading to the trigger that became known as Black Monday, the Dow fell 22% on that day. Now, they didn't have circuit breakers at the time. Now we do. But some of the conditions that happened then, which led to the correction on Black Monday are kind of similar to what's happening now, which is what is leading people to make parallels. Now we have higher interest rates, concerns about the dollar, concerns about the deficit situation, and a really overvalued stock market, according to a lot of pundits out there. I'm talking about particularly the AI sector. That's the biggest concentration risk right now. My first question to you is, are interest rates high enough to start attracting investors away from stocks into the bond market, which would then potentially lead to a cascade and a sell-off in the equities markets?

Adrian Day (2:28)

Yeah, good question. I mean, it's part of the broader topic you touched on. But to answer the specific question, obviously, it's on a continuum. I might decide to sell stocks and buy the 10-year-old 5, and someone else needs 5.5, and someone else needs 5.75. But to answer your question, I don't think interest rates are high enough at the moment for a large transfer from the stock market to a bond market, particularly at the long end.

You know, I asked a question, would you lend money to the US government for 30 years of 5.5? I know I wouldn't.

David Lin (3:11)

Why not? I actually have no reference point as to how to answer that question. I mean, is that high, low?

I mean, compared to history, it's low, but should it be higher? I don't know.

Adrian Day (3:22)

Well, I'm just asking you, if you're a lender, what do you want to lend money to the US government for 30 years? What do you want? With inflation where it is, with the fiscal situation where it is? Yeah, I see what you mean. I want more than that. I don't care what has been in the past, and I don't care what other people think.

I'll lend you $100 for no interest rate because I think you'll pay me back. But my next door neighbor, well, I shouldn't say that because let's say someone else in this building, I may not want to lend money to even a 20 percent, because I don't think I'll ever get it back. So I'm just asking that question theoretically. Clearly, we haven't had a failed auction yet, and the 10-year bond auction today was well-bid. No question.

But remember, these are smaller auctions than we're used to for the longer-dated treasuries, because so much of the treasury instruments in the last several years, last six or seven years, has been at the short end. And the short end is obviously just a place for parking money. But the 10 and 20 and 30 are more investments. So anyway, no, I don't think we're there yet. And then the second question, or that raises the question, obviously, is the Fed going to raise rates to the point where it does become strong competition?

And I don't know if you want to get that into that now. I mean, clearly, I mean, I think it's fairly, fairly clear, we're most likely going to have another interest rate height this year, another quarter of a percent.