McAlvany: Market Seeing "Best Set Up for Gold Ever," Silver Offers More Torque

SPEAKER_1 (0:00)

Do you want to broaden it out, though? Take a look at oil and gold just off the top of the show, coming off a bit on both. Wanna welcome in David McAlvany, CEO of McAlvany Financial Companies. Now David, I wanna start more broadly with your market outlook, because you have a slightly different sentiment than some of the guests I've had on recently. You say you're bearish, but you're not short.

But it's important to make that distinction here, because you are staying invested despite seeing the potential for a 30 to 50% decline in the S&P 500 and the NASDAQ. What is keeping you invested for now?

David McAlvany (0:33)

The two things that are holding the market together, liquidity and the strength of the AI narrative, which is alive and well. So I think there are reasons to be long, but should that narrative falter, should financial conditions truly tighten, that's when I think you get to test the levels that we're currently at. If you measure the markets today, S&P 500, according to a variety of metrics, whether it's CAPE or the Q ratio, long-term valuation metrics, we're at three standard deviations above the mean, that accounts for 99.7% of all time. Very little time in the history of the markets have we been this expensive. So if you're looking at long-term returns for the next five to 10 years, this is not a great place to begin the journey.

Your returns are likely to be low to negative for that period of time, five to 10 years. So valuation matters, the price that you pay matters, and these are sky high valuations. Can they go higher? Absolutely. Liquidity drives that, and the AI narrative is something that is just thumping. People love it, and people aren't willing to quit yet. When they do, I think you're going to find that there's such concentration risk in the markets that that 30 to 50 percent may in fact be conservative.

SPEAKER_1 (1:42)

So what would specifically have to happen for either of these pillars to break, David? I mean, what mechanism takes us from a normal market correction to a 30 to 50 percent move to the downside?

David McAlvany (1:53)

Yeah, I think the bond market is critical. I mean, when you look at the bond market disagreeing with Kevin Warsh in terms of tightening of financial conditions, the need to raise rates, he's on his heels a bit. I mean, raising 25 basis points last week.

Arguably, if you're comparing it to the two-year, he's 100 basis points behind and he closed that gap a little bit last week. But the central bank community globally is having to deal with inflation, which is not going away. We've had the ECB recently raise rates, the Bank of Japan, the Fed, and they're dealing with the same structural issues, too much debt in the system. Problem is when they raise rates, they're also increasing the interest expense for their treasuries. You've got a little bit of a challenge between, in our case, Besant and Warsh, different objectives and I think the bond market is certainly the place where tightening of financial conditions would show up first.

SPEAKER_1 (2:45)

David, if that's the potential setup here, then are you taking a defensive position in terms of your portfolio structure right now? What are your percentage weightings? How much are you holding? And I know we always talk about gold and silver. We're going to get there in a second, but how much are you allocating here?

David McAlvany (3:01)

Yeah, I mean, I think if you want to focus on the value of cash, the optionality of cash, short-term T-bills in a target range of 20 to 25% makes sense. That sounds like a lot of cash until you need it, until the opportunity is in front of you to buy assets much less expensive. And then I think that optionality plays very well.

And I think, you know, given the environment we have of central banks abusing the system for a long, long time, there being too much debt in the system, this is treasuries and central banks both, I think we can assume that inflation is a tool, it's a policy choice. They talk about fighting it, but they're actually using it to deal with debt, the only way that you can deal with debt if you're not going to do formal defaults. So I think inflation is something that we will be dealing with for a long time to come.

And in that case, if you're going to have 20, 25% in T-bills, you want to hedge that position with physical metals.

SPEAKER_1 (3:53)

So as we're hedging for physical metals, I know in your note, you described this as the best setup for gold that you've seen in 50 years of trading the metal. You obviously have not been trading it for 50 years, but in the historical 50 years of trading, what makes this current environment fundamentally different from previous gold bull markets?