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50 Years Of Freedom From That Nasty Gold Standard 2021-08-10 2021-08-16 https://mcalvanyweeklycommentary.com/wp-content/uploads/mwc-logo.svg McAlvany Weekly Commentary https://mcalvanyweeklycommentary.com/wp-content/uploads/08-10-2021-featured.jpg 200px 200px


August 15, 1971, Nixon ends dollar convertibility to gold
Since 1971, Dollar moves from 1/35 of an ounce to 1/1700 an ounce of gold
Summer of 2021 is just as hopeful as the summer of 1929!


McAlvany Financial Group (MFG) is a precious metals brokerage and wealth management company that was established in 1972 by Don McAlvany. The company specializes in the sale of bullion, semi-numismatic and numismatic coins, physical gold IRAs, offshore storage for precious metals in Switzerland, Canada, and Delaware, and wealth management services.






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The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
50 Years Of Freedom From That Nasty Gold Standard
August 10, 2021
“You could argue that the 2020s is vastly different than the 1920s because of the evolution of money and credit. With looser monetary standards has come a radical expansion and credit. I think of it as the hollowing out of our system. Asset inflation is part and parcel to the increases in the quantity of money and credit. And yet it’s wealth without substance, standing without importance, shape without form, shade without color, paralyzed force, gesture without motion.”
— David McAlvany
Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
Sometimes you say something, Dave, and it puts a song in my head, and we were talking about the summer of 1929. Of course, Bryan Adam’s song, Summer Of ’69 came to mind. And it talks about, “I knew that it was now or never. Those were the best days of my life, back in the summer of…” He says ’69. But, it applies. He says, “Nothing lasts forever. We should have known that.” Those are the words. So the summer of 1929, that was a really, really good summer. Who’d have thought the fall was going to change everything?
David: It was phenomenal. It was very good. And the summer of ’69, for many people, it was the best experience of their life. I don’t know that Woodstock would have been that for me. But the summer of ’29, the stock market performed exceptionally well. There was some underlying fragility oozing out here and there. Volatility was increasing, but participants couldn’t be dissuaded from participating.
It’s almost the same thing we see in the Chinese equity markets today. We talked about this last week. There’s notable relief in the Chinese equities markets, speculators quickly have come back into the Shanghai exchange and into the more tech heavy exchanges. No such relief appeared in the Chinese credit markets. Again, you’ve got the equity crowd partying like it’s 1969, but the bond crowd not so happy, junk that stayed under pressure, yields in the property development and asset management companies were still pricing in eminent collapse. And you’ve got this really interesting juxtaposition of hyper-positivity with dire negativity. And dire straits, shall we say.
Kevin: Yeah, just another musical reference, Dire Straits. Speaking of dire straits, it’s interesting. We had this talk and this worry about inflation, yet we see moves talking about the China market. I was starting my Traeger Grill with my phone, Dave, okay? On Sunday night. And I purposely don’t look at the markets, but these days you’ve got a grill that actually can be controlled from your phone. But guess what? I can also check the markets after they open in China, and gold was down a hundred bucks.
And it was like, “Okay, I’m going to pretend like I didn’t see this. I want to make sure that I enjoy my steak tonight.” But when you see a straight line down like that, talk about dire straits. A lot of times people think, oh my gosh, gold’s no longer going to be an inflation hedge. But really what it was, was a bunch of traders who—or maybe a single trader, who knows?—that sold a bunch of paper gold that wasn’t backed, into the market. For the technician, they loved it because it came down and hit the levels they had been looking for before the bounce.
David: When you start a Traeger, do you think low and slow, do you think reverse sear? What happened on Sunday was probably more of the full-on, 700 degree, just get this baby fried.
Kevin: How about the super smoke? Okay. I’ve got the super smoke setting where the thing just looks like it’s—
Kevin: It’s a chimney. Yeah. And so I think what was happening was we were being super smoked.
David: Well, erratic swings well beyond the scope of normal trading began in the sovereign bond market. And we’ve seen quite a bit of volatility over the last week to 10 days in both commodities, I’m thinking of oil and gold. So oil and gold, lots of volatility, early trading in gold was notable Sunday. You mentioned just a large paper position hitting the market in thin trading conditions.
Kevin: Yeah. And it’s important to understand for the listener when you see those kinds of moves in the market, it doesn’t involve the real product. Okay. What you’re dealing with is a commodities contract. But let’s look at hedge funds because when they’re all in, man, they’re bold. But when they get out, they’re just as bold, aren’t they?
David: Yeah. Hedge funds under pressure, they bring out the worst, not the best, in any market, as they shift from being leveraged and confident in the positions they’ve taken. Once they start taking some losses, however, they’re very quick to exit any trade that inflicts even the minutest of pain. And so leverage acts as a compressor of time. It juices returns in a condensed period on the upside, but also intensifies losses when bets turn sour. And noteworthy in our portfolio manager meetings, even this week, has been this particular observation: the hedge funds are on the run.
Kevin: Well, okay. So it goes back to the 1929 reference, the summer of ’29. Okay. There were people who were on the run in the summer of ’29. I mean, granted, it wasn’t many, most of the people were in the stock market and all in, because you had great corporate profits, you had everything going on. In fact, the imagination of the new radio and TV coming, you had all that going on summer of 1929, but you did have a few who said, “No, this is over-leveraged, I’m out.”
David: Yeah. No, you had a huge amount of mergers and acquisitions. You had the high flyers, were gobbling everyone up. And a real sense of promise. At the time, you had RCA expanding into movies, which was, again, this phenomenon, not unlike Netflix capturing as much sound space as possible and recording space as possible today. You did have a few concerned investors looking at overvaluation, 1929. And a number had already exited large positions as early as 1928, Jesse Livermore built a sizeable short position and was wrong. The market continued to move against him. There were a few notable voices of concern, particularly when it was excessive borrowing, they were looking at margin numbers. And you had Roger Babson, the permabear of the day. Bernard Baruch, Felix Warburg. They were all familiar voices of caution. And because they were the familiar voices of caution, everyone ignored them.
Kevin: Well, why wouldn’t you? I mean, the companies were making money. Dave, corporate profits were up just like what we’re seeing right now. But remember what you said a couple of weeks ago. Yeah. Granted corporate profits are up, but what you see is the sophisticated investors are actually selling on those announcements.
David: Yeah. Companies are making money. And with that, imaginations are very expansive. Valuations in that 1929 period were high. Again, there was a new world of growth in technology, which helps justify even larger numbers than in previous business cycles. So you had Columbia Gramophone, which traded at a price earnings ratio of 165. You had Radio Corp, which was at a PE of 73. National City Bank, it was interesting. A lot of the financials were trading at very high multiples as well. National City Bank at a PE of 120, Goldman Sachs at a PE of 129. And not a surprise when you look at the technology companies of the day. They traded relative to book value anywhere from 10 to 50 times their book value, and taken on average today, 1929 prices, believe it or not, were a fraction of the kinds of valuations that we have in the present period. So again, things were booming. Everyone was excited. Earnings were stupendous, Lehman brothers… actually, was Lehman Corporation at the time, went public in ’28. Goldman Sachs went public in ’28, there were just a lot of them. And think about that. They went public in ’28 and by ’29 are already trading at 129 times earnings. I mean, they were huge success story.
Kevin: Yes. But it all changed, and what did it take from the crash of 1929 to get back to break even?
David: —‘29, the patient investor sat to get to break even until 1953, Barrie Wigmore in his book The Crash And Its Aftermath — This is a guy who was at Goldman Sachs for years, then retired, and as a retirement fancy wrote about a 700-page book on the history of the crash. It’s actually fantastic, best research done, I think. But he gives a lot of the backdrop for the investment of speculation who was doing what, when, and why. And there are perhaps no easy conclusions.
Hindsight is different than insight in advance. And so he had the value of hindsight writing in the 1980s, but the vast majority of investors who were coming into that period of time didn’t see any reason for concern. There was no reason for concern. In the months leading up to the collapse, you had corporate earnings which were impressive. In fact, they were setting new records. You had the economy, which was extending the 1920s theme of growth compounded. And this was almost like a post— We think of a post pandemic boom right now, you were past a major world war, and the resolution and the pent-up consumer demand, the roaring ’20s. It was like, “We’re back. The world is not going to end. And we are back.” The atmosphere was one that promoted investor participation, not caution. Quite the opposite. Even when you got into early October, you had a very positive tone in the press. You’d have a guy here or there say, “Oh gosh, things are really expensive.” The mood was bright. Nobody cared.
Kevin: Yeah. You talked about the brightness after World War I. When I first came to work for your dad, I was put on a mission. This is before the internet. This is back in the ’80s. And the mission was, “Kev, why don’t you go do research on the Peace Silver Dollar” that was first minted in 1921. And so I went down to Colorado University’s library. I studied, I wrote a piece on it. Anthony de Francisci was the artist. But the thing that I learned at the time was this amazing hope that this peace dollar would signify peace for all time. The war to end all wars was World War I. And it was the war that would end all wars. It would be a little like Fukuyama, The End of History . In other words, we were done.
And I’m wondering right now, we’re joking about the summer of ’29 being like Bryan Adams song “The Summer of ’69,” but do we believe, actually, that history still exists? Do we believe that there are consequences to massive bond market expansions, credit markets, prices on stocks being extraordinarily high, the creation of trillions of dollars without inflation? Do we believe, maybe, the end of history has occurred and we’re now wanting to mint the peace dollar, again?
David: It’s the way the financial markets are behaving, although, I don’t think that’s an economic reality. We are post-COVID 2021, and there is a euphoria within the financial markets which would suggest that risk is no longer something that we have to really take that much time to consider. And then things change.
David: In 1929, psychology shifts and the mood of the market with it. In one moment, you’ve got the thundering herds of bulls, and then all of a sudden something’s different, like a vapor. Volumes vanish, investors seem to just simply flip a switch. In our day and age, we actually refer to it as risk on and risk off, as if it were simply the flipping of a switch.
The underlying structure of the market is key. And I think then, as now, you’re talking about a tremendous amount of leverage in the system—far more now than then, but the greater the force of the unwind— If you have a tremendous amount of leverage within the financial system, if that defines the structure of the market, you’ve got investor leverage, which is one thing, you’ve got structured products, which increase leverage within the financial markets as well. You’ve got corporate balance sheets adding to operational leverage, which is one more form of heightened leverage. We’re very leveraged here in 2021.
Kevin: Let me play devil’s advocate, though. Okay? Let me just play the other side of this because there’s got to be the listener going, “Yes.” But it’s different this time, because before, we were on a gold standard, you couldn’t just print money out of thin air. But at this point we’re not, can we avoid this? What we’ve been calling moral hazard, is it really a moral hazard? Have things changed since 1929?
David: There is a sense in which the markets operate on a different basis today than they did in 1929. Moral hazard has been perfected in the opening years of the 21st century, and investor behaviors still shift to risk off, but you have this ingrained and trained behavior, which is to step back in and to do so quickly, knowing that central bank largesse is going to backstop value at some level. And again, this is a partial prisoner’s dilemma. They have to do something because leverage in the system is so great if they don’t. You’re talking about going back to the stone age, essentially.
So a greater depression, this is the new era, a greater depression is not possible in an era of central bank muscularity. So it’s believed. So it’s believed. And so what we’ve seen is each time in the last 20 years, as the markets have begun to come unwound, the central bank steps in. And each time they’ve done that, it’s been with greater and greater muscularity. Bigger and more expansive balance sheet increases, right? We’ve been to the edge of the precipice, we’ve peered inside, but the greater commitment to survival and market perpetuation, what that does is it’s just calmed the nerves and emboldened the speculator of our day. We see that the central bank will act, they will act. And therefore we increase our bets, knowing that we’re going to get bailed out.
Kevin: And so we’re going to go back to the summer of ’29, though, because that was a roaring summer. I mean, the roaring ’20s were still going, but it’s interesting how politics have changed. For the person who thinks that Trump was a conservative, I think they need to understand that modern monetary theory was actually operable, whether they called it that or not during the Trump administration. Of course it’s continued under Biden. But Hoover, back in 1929, Hoover was uncomfortable, wasn’t he?
David: He was very uncomfortable. And when he would talk to the Treasury Department, he would let them know that didn’t like the circumstances that they had, and promoted sort of a liquidation as mindset. Summer ‘29 was exciting, nothing humdrum about corporate profits soaring, nothing humdrum about investors making a ton of money. You did see margin rates begin to creep up. You did begin to see volatility emerge, but again, no one really cared. Hoover was concerned about speculative excess, but he was in the minority, and he was the new guy. There really were no complaints, and hardly any caution was taken because money was being made. And everyone has a hard time toning that down.
Vegetius said that if you want peace, then prepare for war. And I think you could apply something quite similar in preparation for prosperity. You have to pay attention to risk analysis and moderation.
Kevin: It’s so interesting when you said that. Because I thought about minting the peace dollar saying that we’re never going to have war. Maybe that was a mistake. Now they’re beautiful coins. We sell peace dollars. I own some, you own some, but maybe we shouldn’t have been minting a peace dollar celebrating peace for all time, but we should have actually been creating the tank for the next war. I know you and I like to read history, but I’ve read a lot of Patton’s writings and Rommel’s writings. These guys knew, they were participants in the First World War, but they knew for a fact that the next war was going to be fought with tanks and in the air. And they began planning for the next war about the same time that we were minting the peace dollar.
David: My kids love taking advantage of exceptions and exclusions. And we have these little carve outs where they can use bad language. And one of them relates to, “Rommel, you magnificent bastard, I read your book.”
David: And so it’s fun to hear a seven-year-old quoting Patton on that.
Kevin: But in the early ’20s, imaginations were running wild because World War I, and actually the plague that followed, were really devastating. But as you progressed, they had figured out also, we can talk about this a little bit later, but the gold standard really wasn’t the gold standard anymore. You could start printing money a little bit more than the gold that you had. So imaginations were running wild.
David: It’s funny. It slipped my mind. The Spanish flu was a part of those teen years coming out of World War I. We also had one of the greatest global pandemics. And so that sense of relief and going back to normal, the 1920s really was sort of a psychological shake off the blues. And speculation was a part of an expression of positivity and the world was going to be better. We were free, not only from the fear of warfare but from the specter of death. And I had forgotten about the Spanish flu, you’re right.
There wasn’t a lot of preparation for prosperity in terms of risk analysis and moderation. And you don’t find that in the summer of 2021 either. Profits are setting records, earnings are exceeding expectations by a country mile, you’ve got earnings up 86%. You’ve got revenues up 21%. And with those revenue and earnings beats comes the recalibration for the fall. Higher expectations still for the second half. And as they look at 2022, higher expectations still. As we mentioned a few weeks ago, these are expectations on the increase. Even as GDP ebbs, you’ve got the imagination of investors which is moving the opposite direction. While gravity may still be in effect, investors are pegging their imaginations to the interplanetary. Everybody’s got diamond hands. Everybody wants a ticket for the next Bezos or Musk mission to Mars.
Kevin: Well, I’ve got to admit, I wouldn’t mind going myself. Going into orbit doesn’t sound that great, but go to Mars, yeah. Unless you just have to be gone so long.
But all right
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