Fed Under Fire, Gold Explodes — The Bond Market Takes Over | Bill Fleckenstein
Summary
Inflation Psychology: The guest argues inflation psychology is entrenched due to cumulative price increases and persistent deficits, keeping inflation expectations elevated.
Passive Bid Dynamics: Passive flows from retirement accounts via index managers keep equities buoyant, with risks emerging only if employment weakens or retirees shift allocations.
Precious Metals Bull Case: Gold and silver are favored as hedges against monetary debasement, renewed QE-like policies, and potential yield curve control, with central banks preferring gold over crypto.
Silver Supply-Demand: Structural deficits and solar demand tighten the silver market and support prices, with PGMs also benefiting from investor hedging.
Gold Miners Lag: Miners trail bullion as North American retail participation remains low; GDX shares outstanding are down, suggesting room for a catch-up when public interest returns.
Company Mentions: Agnico Eagle (AEM) and Alamos Gold (AGI) are cited as better-positioned producers with long reserve lives; BlackRock (BLK) and Vanguard are noted as drivers of passive flows; GDX is referenced as a sentiment gauge.
Policy and Market Risks: Election-year deficits, defense spending, and mortgage actions are seen as inflationary, while bond market pushback to rate cuts increases the risk of yield curve control.
Transcript
2.7% is the latest CPI print. It was helped by a lower oil and gas price. Of course, uh housing is escalating a little bit. Uh housing prices and more just housing is ex is getting more and more expensive in the US, which is an interesting fact cuz some argue that maybe housing shouldn't be included in in the form it is in the CPI number. So, that's a massive cause for debate. And we will talk inflationary pressures today with our guest Bill Flackenstein of Flackenstein Capital. President Trump is making a lot of concessions, maybe even already uh showcasing or maybe providing the the constituents with some uh what what do you call it? Election gifts here. We're talking about capping credit card interest rates. Uh $200 billion me mortgage backed security buyouts as well. So we we have to talk about it. What does it do to the stock market? What does it do to inflation? But before I switch over to my guest, hit that like and subscribe button. It helps us out tremendously and we much appreciate the support. Thanks so much for doing that. Now, Bill, wonderful. Good morning. Thank you so much for joining us here. >> Well, thanks for having me back. >> Yeah, really looking forward to this, Bill. Uh lot lots to discuss. U maybe we'll start with a general economy right now. 2.7% is the inflation print. Uh unemployment is still ticking higher. Uh what's your read of the economy right now, Bill? Well, I think the sort of the multi-layered economy that we've had for the last year or maybe year and a half is probably still with us uh going to be with us for a while. Although, you know, the stimulus has been uh set up to help juice [clears throat] things uh because this is an election year, at least a midterm election year. Um may help uh some people who are not do who aren't doing as well. I think one of the one of the uh points we have to keep in mind is that young people that with with real degrees are having trouble getting jobs and that's not usually associated with a strong economy even even uh young people in in the tech sector. So um the economy is um kind of mixed but a little better maybe a little better this year than it was last year. We've been kind of in a somewhat of a stagflationary environment in my opinion. Um but the government will will help try to juice things this year because it's an election. So um [clears throat] I don't think there'll be anything dramatic that occurs in the economy. um unless [clears throat] something really wild happens in the financial markets that that that that spills into the economy and it's hard for anything to come out of the blue and really matter given the powerfulness of the passive bid. So, we'll probably kind of just muddle along unless something remarkable happens. >> Okay. Um you you just mentioned the power of the passive bid. I just want to clarify what that means. I think we talked about it during our last interview, but for anybody who hasn't seen that, like what do you mean by that? Well, with um with most jobs in America, there's a a contribution that's made on the part of by the employer for people's retirement accounts and through various efforts and um um both actively on the part of the um index managers normally namely Vanguard and BlackRock. uh they have have now got a huge share of the market's activity on any given day, maybe roughly 50%. And so the money that that gets put into retirement plans gets slammed in the market every day regardless. It's passive. That just means they're not making any decisions. the you know XYZ Corp gives money um to uh it's an employees account and it goes to Vanguard and all an aggregate they go to Vanguard and then they come in and buy their index weighted according to capitalization which is why some of these big stocks h they couldn't possibly grow fast enough to justify their valuations have these enormous valuations anyway it's very powerful and it's one of the reasons why the market seems not to respond to news in a fashion that most people would think that it would, you know. So, um, anyway, it's it's it's it's it's it's one of the reasons why the stock market in America is where it is today. It is the biggest reason for why. >> Do you see any change in that behavior of the passive bid at all? Like anything that would redirect capital somewhere else? >> I mean, what you what you would what you would need is one of two things or both. uh um um even weaker employment growth, so less money going in or a change in preference from for folks that are getting closer to retirement or have retired to start redeeming some of that money. So some some something would have to change to um cause the net inflows to become neutralized or perhaps turn to outflows and that would completely change the game. But um you know we haven't seen you know I mean employment just hasn't gotten weak enough for that to be the case. Now we had a situation last spring um where the news about tariffs uh was powerful enough at the time because of how all the other sort of mechanical forces that work in the stock market. there's a lot of mechanical money that just tries to basically capitalize on on the power of the passive bid. They don't say it that way, but that's what they're doing. Um, so [clears throat] anyway, I it's it's not an easy apple cart to upset. Uh, we saw a little bit of last spring, but they put it back together. I mean, it was able, you know, things got, you know, rectified. Um, but that's what you need. You would need some change in the employment dynamic or on the preference of people that are uh retiring. Um, no, Bill, like I didn't mean to like I don't mean to take the conversation in this direction, but while we're in this rabbit hole, might as well stay there for a second. U Morgan Stanley, for example, came out and said, "Well, maybe we need to change the the portfolio allocations to 60 2020, meaning 60% stock, 20% balance, 20% gold." Um, is that maybe ch part of the investor behavior? Maybe changing that passive bid, maybe redirecting a little bit. Is that something we should be paying attention? >> Well, that would only impact fixed income. >> Yeah. And at some point, yeah, at some point if the balance of their accounts, remember their target date accounts all have a certain ratio of stocks and bonds. More stocks when you're younger, more bonds when you're older. Um, so that could impact the the market in the sense that if the bonds and stocks got out of whack, there would have to be a rebalancing and some money that was supposed to go to stocks would go to bonds. So that could impact it that way. Um [clears throat] obviously the bigger impact would be on the gold market. Um and if we started and that's one thing we really haven't seen is a um big uh participation on the part of Americans in general. Uh obviously the Chinese have been very very um involved. A lot of Asians and Indians have. But if you look at you [clears throat] can look at various measures to indicate interests of Americans in general and there really hasn't been much. That's been one element that's missing. If that starts to uh if Americans start to get involved then uh um u we we can see a real sprint in the price of gold, silver, and and the miners. >> Interesting. Yeah, we'll talk about gold later and what maybe caused the rally and run up to over $4,600 as we as we speak here, Bill. Um but I I felt like asking that question because it it seemed like there seemed to be a bit of a mentality shift amongst the bankers as well. So um so I was curious to hear your thoughts. Uh Bill, coming back to the economy inflation data, we just we just got it this morning a mere what is it hour and a half ago roughly. Um the CPI print 2.7%. Um what what is your you know initial takeaway from that number? What do you make of it? >> Uh not much. um you know that the numbers have been kind of in line and around this same area for a while. What I think a lot of people don't appreciate about in inflation and in inflation psychology is that [clears throat] the in the rate of inflation in other words the rate at which prices are going up uh has cooled a lot from say three or four years ago. Um, however, that overall price level hasn't gone back to where it was. And so, the level of inflation, the increase is a little less important than the fact that all the prior price hikes have have tended to stay there. So, so people feel like um inflation is higher than it may actually be simply because of the cumulative effect of it and um once that psychology takes hold that's that's what people felt in the 70s as well um it's very difficult to change and so I would say inflation psychology is strongly embedded and will be difficult to change particularly when you consider the fact that the debt that the United States has are quite large and other you know whether you want to look at Europe or Japan uh the case is is the same there. Um and thus the tendency or the temptation or the requirement or whatever you want to say it to have to print more money to help fund the deficits is going to be uh um uh quite strong. Uh obviously when Trump picks the new Fed chairman, he's going to pick an easy money person. Everyone knows that. And so I think that's uh so I think inflation psychology will remain on the side of we think there's going to be more inflation and we don't and we're not happy about it. Um simply because of the cumulative effect and what it looks like policies are liable to be prospectively. >> Let's dive a little deeper into that inflation psychology and maybe the effects on the market as well here. Um because I want to talk about like the the policies that President Trump is proposing. He hasn't pushed them through yet, but $200 billion mortgage back security buyout, an extra 500 billion in military spending. Aren't those inflationary as well? And like how do you counter that or how do you take that into account looking at the market and where we're at right now? >> Well, I mean spending it isn't inherently inflationary. Deficit spending, which is what we're talking about. um is because you're you're you know you're you're you're you're creating extra demand that's not matched with savings or however you want to think about it. Um um you know the the the the the little finagle of buying a couple hundred billion dollars of mortgage bonds on the part of the GSC's is doesn't move the needle very far. I mean, maybe they're going to change the price of of uh mortgages by 10 or 20 basis points, but not enough to make much of a difference. So, I mean, that just that's more psychological, I think, than anything. It won't really won't really do much. Obviously, the defense spending is real and it impacts the companies that are going to receive the money. But I mean when you're running a deficit in in a in an economy that's not in trouble that's you know a trillion or trillion and a half um you know that that tends to put upward pressure on on prices via demand. So the debt that the the size of the deficit in and of itself tends to be inflationary particularly when the Fed is willing to monetize things as they are back doing once again. Well, $40 billion of Qi. I think that's what you've been hinting at here. It's not Qi. It's non QE, right? Um, what do you make of that? Like, how do you see that trickle down into the maybe the financial markets or into economic data here? >> Well, the printing of money is inherently inflationary. How much remains to be seen based on the environment that you're in. But here we are again running in a massive budget deficit with the economy, you know, kind of stumbling along and the Fed's back doing QE. Now they're calling it reserve management. [laughter] But, you know, this is the same Fed that that went, you know, when the when they'd only done I think the first 800 billion in QE. Bernanki said, you know, doing the opposite IEQT would be like watching paint dry. Well, here we are $7 trillion later or $6 trillion later and you know they can't do QT. I mean they did it for a while now. They're not doing it again. So um you know a lot of these big picture, you know, massive programs or or policy changes or what you want to call it. A lot a lot of times they'll go on for a while. they don't seem like they have much of a negative impact or or positive either. Um but um eventually they it catches up to you and and you know the Fed is a is a complete joke but I've been saying that forever but that's one of the reasons why gold is $4,600 an ounce. Silver's where it is has a lot has also is has something to do with that but also has to do with the fact that the uh you know all the solar uh projects require and and the whole you know sort of ecosystem that goes into it uh uh requires quite a bit of silver and silver market's been in deficit for a while. It finally caught up to it this year and that's part of the reason why silver's the way it is. Plus it's not a big market either. Okay. No, I appreciate that. And then maybe we'll stay on the Fed here for a second. And you know, we we got the Fed meeting in two weeks coming up. A lot of pressure being put on Jerome Powell right now. He's being uh prosecuted for apparently his role in uh building or the new Fed building, whatever that really means. Quite honestly, I'm trying to figure out um what he's being indicted. >> Well, he's not being prosecuted. No, no, no, no, no, no, no, >> no. Under investigation. Under investigation. >> Exactly. and he disclosed the investigation. >> It all started because a congresswoman Pina uh um uh thought that that that he had lied to Congress based on his comments about what was in the buildings. And it it looks like he's a little factually challenged on this topic. Quite frankly, apparently because the Fed or POW in particular were unresponsive to request for information, the DOJ sent over subpoenas. >> That's [clears throat] all that's happened. And the government itself didn't didn't release that information. Powell did claiming that Trump was doing this as retribution. Now, you know, Trump can be like that and he It's possible, but it's also possible possible that, you know, that um that that Powell is using this as a way to make Trump look bad. After all, it started last July by this representative. Now, I guess Trump could have told her to do it back then, and you know, if you you want to believe in all that, it's possible. But, um I I I think it's a very bad look for the administration. But on the other hand, you know, it m it it may not be what it appears to be on the surface. I don't know. But I just everyone leaps to conclusions that it is um purely Trump trying to beat up on Powell. And he'd certainly be willing to do that. Don't get me wrong, but in this case, I'm not so sure that's what it looks like. Anyway, we'll we'll find out. It doesn't help the Fed's credibility and doesn't help Trump's credibility and it focuses people on on the the fact that the the Fed is able to monetize debts and the US has massive debts and so all of it undermines credibility a and uh confidence in the government I think which tends to be bullish for metals which is you know one of the reasons that gold went up $100 when that uh you know news story broke. >> Absolutely. Like uncertainty is back. It's it's roaring and uh we were trying to make sense of what the Fed should do next. I'm curious what your take on that is Bill like 90% or so according to Fed watch say well we're not going to see a cut in January. Um I'm curious like what uh if you were chair of the Fed Bill what what would Bill do? >> Resign. No. Um, you know, the problem is that, you know, the is that they don't need to cut rates. You know, I mean, look, the bond market doesn't think so either. The since like September of 24, just before this rate cutting cycle started, you know, they've cut rates what, 150, 175 basis points. I have to look. I can't remember exactly but all interest rates from five years and out have gone up. So we've taken short rates down 150 175 basis points and rates from 5 years and out have gone up. That's the bond market's way of saying we don't trust this or you can read whatever you want into the make whatever statement you want but the bond market is not going along with the rate cuts. And if you go out 10 and 20 years, rates are up. So, um, the bond market is is does not appear to be sanguin with these rate cuts. And I would assume more rate cuts would make them even less sanguin. So, [clears throat] there the the the you know, the the Fed is playing um a dangerous game. I think ultimately the bond market will it'll be more obvious that the bond market lost confidence in in the Fed. And my way of saying that is the bond market will take the printing press away from the Fed. That's my glib statement about that. Um I think ultimately we'll see yield curve control once we get the new Fed chairman if if bond markets don't cooperate. So um um and it's going to get this year is going to get wilder as we get closer to the midterm elections which are obviously going to make a big deal of difference. Sorry. Which could make a a much bigger difference than midterm elections normally do given how insanely politicized everything has become in America in the last few years. >> Absolutely. Coming back to yield curve control here, Bill, just just explain the concept to us real quick to our audience. Um what does it mean and what could the Fed do to maybe keep bond yields and and bail uh like Treasury bill yields under control here? Y y y y y y y y y y y y y y y y y y y y y c curve control is just where the government says or the Fed says we are not going to let rates from 10 years and out go up and we'll buy all the paper all the bonds we need to to hold that price in place you know Japan did that basically um um um up until rec recently you know they monetized half of their outstanding debt and they got away with it the end didn't totally collapse which is But normally a currency will weaken when you do that. Um um so uh because basically you have to print an potentially unlimited amount of money. It's like QE except for instead of saying we're going to do we're going to buy you know 40 billion a month or 100 billion a month, we're going to hold the price where we want it or sorry the yield where we want it and we'll commit an unlimited amount of money to doing that. Right. Well I mean that's going to be inflation. And that's another I mean that that's you know that that can be really inflationary there. It's been try it's been done in the past at certain times um and hasn't been all that big of a disaster but I think in the current environment it would be it certainly would send people um would ratchet up people's inflationary expectations for sure. >> Absolutely. Like I'm I'm trying to look for for certain markers here and like try to identify a potential trend or whether that process has already started here. Bill, I'm just looking at the Dixie. It's actually ticking higher 99.1 as we speak. So I'm trying to look for that currency decay. Um you you touched on the yen not totally imploding, but like it it would assume a certain weakness in the currency and we're not seeing it yet. Like what's the market making out of it? Yeah, but but like but that the the yen was stronger perversely when they were still doing QE in Japan. Yeah. >> It's only been since they've stopped that perversely the rates have gone up mostly because it's pretty clear that the BOJ should be raising rates and they won't do it. >> Therefore the uh the end continues to weaken. The problem I mean so if the dollar sorry if the Fed were to pursue this the dollar should weaken but the problem is when you look at the other governments and the other major currencies they all have huge problems too whether you want to look at Japan we just talked about Europe which is a mess the great Britain I mean so there's the P there's no there's no there are no strong legit currencies anymore I mean even the Swiss have you know lashed themselves to the mass of the euro so their currency won't be strong so Nobody wants a strong currency. And that's another reason why gold and silver are where they are because people don't trust the that the per that the that the colored paper will have its purchasing power down the road. And so they're protecting themselves by owning precious metals and other inflationary oriented assets. I would assume as well. You can they're buying the white metals too, the PGMs. >> Which is a perfect segue actually talk gold and silver here, Bill. Um because as I mentioned, I'm looking for markers and gold and silver are exploding in price, which is a good thing because that's where I make my money personally. But um like as I said, like none of the other other asset classes are really behaving the same way gold and silver are like the dollar, the the S&P 500, the bond market. Um like gold and silver seem to be and and you mentioned the other PGMs uh seem to be on their own island perhaps. Like what what do you make of that? Like what is that telling you? Is it maybe a crack in the monetary system and or are we interpreting too much into it? >> Well, there's definitely a crack in people's confidence regarding the monetary system, what the metals have in common is they're not paper. And um while in modestly inflationary periods or periods of not terribly high inflation, although in hyperinflation as well, sometimes stock markets will do quite well, you know, because um they're they're assets. Um inflation is not generally good for financial assets, but when you have the passive bid, it can can kind of ride through that. Um [clears throat] um but the but but when you when you talk when you say what you what I've just said about the world's currency markets and the tendency of central banks to pursue inflationary policies then people are protecting themselves with precious metals. you know, his in historically there, you know, other um speculative [clears throat] uh assets perceived to be a store of value, you know, fine wine, art and all that, but those are more subject to people's whims about what's sort of fashionable, right? Or what's collectible. Uh whereas the precious metals um have sort of been the default choice for thousands of years now. You and I have had conversations in the past when I was very constructive and I'm assuming you were as well on precious metals and and they weren't behaving as they are today. But now I think it's because the cat's finally out of the bag. Everyone's been able to connect the dots and and you know there's a mad scramble to to to get some sort of protection. There was a time when a lot of the Bitcoin folks felt like Bitcoin would do what gold has done. Let's face it, Bitcoin went from basically nothing to, you know, $100,000 um a coin. But lately, but you know, for the last, I would say, year or so, it hasn't really been able to do much. I don't quite know exactly why that is because I think the psychology amongst those folks is similar to the gold buying community, but um um central banks don't buy gold and and central banks have sorry, central banks don't buy Bitcoin and have been buying gold. So maybe that explains the the difference. I I myself have never been a Bitcoin owner. Um um but anyway, we don't need to go off get off on that topic. Now I'll just get you flamed now from the people that hate anyone who doesn't 100% positive on Bitcoin. >> Yeah. Get get them riled up and triggered. Why? Why not? Why not? >> No, I don't really want to. I don't want to pick a fight with them. I mean, they can I mean, look, they you've been involved for in Bitcoin for a long time. Doesn't matter what anyone says. You made a lot of money. Yeah, absolutely. You were right for the last what is it 14 years now. So, uh or within the last 14 years. You had a long time to be right. Um talking about being right. Uh let's talk about the miners a little bit as well, Bill. We're jumping through topics here or running through topics, but the miners seem to be, you know, they're still playing catch-up to to the precious metal prices, and I'm curious what your take is. How are you investing right now? We don't have to share names or anything, Bill, but uh like what does your portfolio cons or construction look like right now? Well, um the um the miners have been kind of dragged kicking and screaming to the precious metals party. They have they have periodic bursts of strong performance and then you know kind of flounder it would seem. Um and and that's I think largely because North Americans uh Canadians and Americans are not really involved in the gold trade. And if you look at the GDX and the shares outstanding of the GDX, it's down by about a third or a quarter. I haven't looked at it uh in the last couple weeks. Uh from where it was in 22. So, [clears throat] while gold has, you know, obviously hit all new alltime new highs or new all-time highs, um the miners uh really haven't had much participation because if people were really getting excited, you would see the um ETF create new outstanding shares as demand came in. I expect we will see the public get involved. When the public gets involved, they'll not just buy gold and silver, they'll buy miners as well. But that's one of the reasons why I think the minor's performance has been somewhat episodic. Um the other problem is um you know it it's a business that you don't you can't as a minor you can't you it's hard to control your own destiny because the price of your main product is you know determined by the marketplace. It's not like you're you're you know you're you're the the price of your product is more or less known and you can work on your businesses aspects of your business to drive demand. Um so um in any case so so um but I don't the miners don't come close to reflecting the current price in terms of what you know what what they can earn at these levels. Now, it matters with miners if you're going to look at the what they can earn and try to evaluate them on a on a price to earnings ratio, something like that, really matters what the reserve life is. You know, if it's a long reserve life, it's going to be 15 or 20 years, then you can kind of use a a methodology like that. If it's only a five or six year reserve life, um you know, then you can't really use that because it's they're going to be out of metal in a certain amount of time. um it's not quite so straightforward because you know under with underground mines the you can only develop your reserves in the or body you're in um as you go down through it and so you're you're only you're only going to get a look ahead for so many for so many years unless you step out of where the or body is and explore something nearby right so you have to know something about the underlying nature of the business uh what the great what what um you know what the what the what the what the [clears throat] real reserve life looks like. Um so there there there are complicating factors and and a lot of the the um um analytical community is quite lazy and they use this concept called net asset value where they basically treat all minds exactly the same like whatever they have in reserve that's all they're going to have and whatever some small part of their inferred resources etc. Um it's kind of lazy analysis because you an open pit mine is totally different than a than an underground mine and all these sorts of things. So then the analysts adjust for that factor by saying well this one should trade at 1.3 times nav and this one should trade at 1.6 times nav and they make up all this subjective crap because they're too lazy to do the work to differentiate one mind from another and they resort to this NAV stuff. Now, I've gone off on a tangent on one of my hobby horses, but um anyway, the the mining sector I think um if you look at some of the better performing and better position and that have been better position for a long time, whether at Nico or Alamos Gold, you know, they're maybe trading it I it depends. They haven't been around so much, you know, whatever you want to you use for the last price on the board of gold. They're trading at maybe 15, 16, 17 times earnings, which is high by by where they traded a few years ago, but not in terms of overall market um you know uh uh ratios and and those both those guys have long live reserves. And in case of Alamos, they're actually going to be growing pretty substantially in the next couple years. their production. I mean, so um um I have a I have had a um um um um a decent amount of exposure to both gold and precious metals for quite some time. Um it's a little less than it was going into the beginning of 24 because I I lightened up because I had been way way way way out over my skis in terms of exposure. Um but now it's it's still, you know, re really quite quite substantial. Nice. Now, it's one thing I'd like to add like the analysts as well, they're so lazy. They use old price forecasts like 2900, 3200. So, uh so you can't really like give a give a hoot on the the PNAF calculations because the assumptions don't make sense. >> That's generally set by the the firm's economist, right? The economist says where the price of gold should trade, right? And it makes a big difference if you want to do a net present value on what you think the future price of gold will be, right? makes a huge difference if you think the future price of gold would be 2500 or 4500. So for up until like the last year the forward prices always were lower because you know nobody believed the rally. You know one of these days they'll have them all higher right but um the certainly higher but like a little bit >> quality of the quality of research in the mining sector is quite low in aggregate. Not to say that all analysts are not good, but I mean that's true in the stock market in general, but really true in the mining sector because they were so unloved for so long. >> Yeah. Like you couldn't make any money with your research, right? So why why focus on it? So absolutely, Bill, what what a wonderful conversation. We we covered a lot of ground here. Um where do we send our audience to follow more of your work? Uh well um if they just want to see my glib comments about this that and the other thing I'm on uh x at um fleckcap is my handle and my I have I have a website fleenstein capital.com where I write a daily column and answer questions. I've been doing this since 1996 although I've only had my site since 2004 and uh it's $130 a year because I feel like people should pay something but they shouldn't pay too much. I mostly do it to help people and whatever money I glean and then more ends up going to a charity that I support um and readers contribute to and I match those anyway. So that's where I'm at. >> Fantastic. Awesome. Bill, really appreciate your time. Thank you so much for joining us here on Sora Financially. We'll have to do this again soon and uh really appreciate it. Thank you so much, Bill and everybody else. Thank you so much for tuning in to Sor Financially. If you enjoyed this conversation with Bill Flackenstein, go check out his ex page. Quite quite a lot of content on there as well. Go check out his website and don't forget to hit that like and subscribe button here on our channel. Our goal is to reach 100,000 subscribers by the end of this quarter and with your help we can achieve that goal. Thank you so much for doing that and take care out there.
Fed Under Fire, Gold Explodes — The Bond Market Takes Over | Bill Fleckenstein
Summary
Transcript
2.7% is the latest CPI print. It was helped by a lower oil and gas price. Of course, uh housing is escalating a little bit. Uh housing prices and more just housing is ex is getting more and more expensive in the US, which is an interesting fact cuz some argue that maybe housing shouldn't be included in in the form it is in the CPI number. So, that's a massive cause for debate. And we will talk inflationary pressures today with our guest Bill Flackenstein of Flackenstein Capital. President Trump is making a lot of concessions, maybe even already uh showcasing or maybe providing the the constituents with some uh what what do you call it? Election gifts here. We're talking about capping credit card interest rates. Uh $200 billion me mortgage backed security buyouts as well. So we we have to talk about it. What does it do to the stock market? What does it do to inflation? But before I switch over to my guest, hit that like and subscribe button. It helps us out tremendously and we much appreciate the support. Thanks so much for doing that. Now, Bill, wonderful. Good morning. Thank you so much for joining us here. >> Well, thanks for having me back. >> Yeah, really looking forward to this, Bill. Uh lot lots to discuss. U maybe we'll start with a general economy right now. 2.7% is the inflation print. Uh unemployment is still ticking higher. Uh what's your read of the economy right now, Bill? Well, I think the sort of the multi-layered economy that we've had for the last year or maybe year and a half is probably still with us uh going to be with us for a while. Although, you know, the stimulus has been uh set up to help juice [clears throat] things uh because this is an election year, at least a midterm election year. Um may help uh some people who are not do who aren't doing as well. I think one of the one of the uh points we have to keep in mind is that young people that with with real degrees are having trouble getting jobs and that's not usually associated with a strong economy even even uh young people in in the tech sector. So um the economy is um kind of mixed but a little better maybe a little better this year than it was last year. We've been kind of in a somewhat of a stagflationary environment in my opinion. Um but the government will will help try to juice things this year because it's an election. So um [clears throat] I don't think there'll be anything dramatic that occurs in the economy. um unless [clears throat] something really wild happens in the financial markets that that that that spills into the economy and it's hard for anything to come out of the blue and really matter given the powerfulness of the passive bid. So, we'll probably kind of just muddle along unless something remarkable happens. >> Okay. Um you you just mentioned the power of the passive bid. I just want to clarify what that means. I think we talked about it during our last interview, but for anybody who hasn't seen that, like what do you mean by that? Well, with um with most jobs in America, there's a a contribution that's made on the part of by the employer for people's retirement accounts and through various efforts and um um both actively on the part of the um index managers normally namely Vanguard and BlackRock. uh they have have now got a huge share of the market's activity on any given day, maybe roughly 50%. And so the money that that gets put into retirement plans gets slammed in the market every day regardless. It's passive. That just means they're not making any decisions. the you know XYZ Corp gives money um to uh it's an employees account and it goes to Vanguard and all an aggregate they go to Vanguard and then they come in and buy their index weighted according to capitalization which is why some of these big stocks h they couldn't possibly grow fast enough to justify their valuations have these enormous valuations anyway it's very powerful and it's one of the reasons why the market seems not to respond to news in a fashion that most people would think that it would, you know. So, um, anyway, it's it's it's it's it's it's one of the reasons why the stock market in America is where it is today. It is the biggest reason for why. >> Do you see any change in that behavior of the passive bid at all? Like anything that would redirect capital somewhere else? >> I mean, what you what you would what you would need is one of two things or both. uh um um even weaker employment growth, so less money going in or a change in preference from for folks that are getting closer to retirement or have retired to start redeeming some of that money. So some some something would have to change to um cause the net inflows to become neutralized or perhaps turn to outflows and that would completely change the game. But um you know we haven't seen you know I mean employment just hasn't gotten weak enough for that to be the case. Now we had a situation last spring um where the news about tariffs uh was powerful enough at the time because of how all the other sort of mechanical forces that work in the stock market. there's a lot of mechanical money that just tries to basically capitalize on on the power of the passive bid. They don't say it that way, but that's what they're doing. Um, so [clears throat] anyway, I it's it's not an easy apple cart to upset. Uh, we saw a little bit of last spring, but they put it back together. I mean, it was able, you know, things got, you know, rectified. Um, but that's what you need. You would need some change in the employment dynamic or on the preference of people that are uh retiring. Um, no, Bill, like I didn't mean to like I don't mean to take the conversation in this direction, but while we're in this rabbit hole, might as well stay there for a second. U Morgan Stanley, for example, came out and said, "Well, maybe we need to change the the portfolio allocations to 60 2020, meaning 60% stock, 20% balance, 20% gold." Um, is that maybe ch part of the investor behavior? Maybe changing that passive bid, maybe redirecting a little bit. Is that something we should be paying attention? >> Well, that would only impact fixed income. >> Yeah. And at some point, yeah, at some point if the balance of their accounts, remember their target date accounts all have a certain ratio of stocks and bonds. More stocks when you're younger, more bonds when you're older. Um, so that could impact the the market in the sense that if the bonds and stocks got out of whack, there would have to be a rebalancing and some money that was supposed to go to stocks would go to bonds. So that could impact it that way. Um [clears throat] obviously the bigger impact would be on the gold market. Um and if we started and that's one thing we really haven't seen is a um big uh participation on the part of Americans in general. Uh obviously the Chinese have been very very um involved. A lot of Asians and Indians have. But if you look at you [clears throat] can look at various measures to indicate interests of Americans in general and there really hasn't been much. That's been one element that's missing. If that starts to uh if Americans start to get involved then uh um u we we can see a real sprint in the price of gold, silver, and and the miners. >> Interesting. Yeah, we'll talk about gold later and what maybe caused the rally and run up to over $4,600 as we as we speak here, Bill. Um but I I felt like asking that question because it it seemed like there seemed to be a bit of a mentality shift amongst the bankers as well. So um so I was curious to hear your thoughts. Uh Bill, coming back to the economy inflation data, we just we just got it this morning a mere what is it hour and a half ago roughly. Um the CPI print 2.7%. Um what what is your you know initial takeaway from that number? What do you make of it? >> Uh not much. um you know that the numbers have been kind of in line and around this same area for a while. What I think a lot of people don't appreciate about in inflation and in inflation psychology is that [clears throat] the in the rate of inflation in other words the rate at which prices are going up uh has cooled a lot from say three or four years ago. Um, however, that overall price level hasn't gone back to where it was. And so, the level of inflation, the increase is a little less important than the fact that all the prior price hikes have have tended to stay there. So, so people feel like um inflation is higher than it may actually be simply because of the cumulative effect of it and um once that psychology takes hold that's that's what people felt in the 70s as well um it's very difficult to change and so I would say inflation psychology is strongly embedded and will be difficult to change particularly when you consider the fact that the debt that the United States has are quite large and other you know whether you want to look at Europe or Japan uh the case is is the same there. Um and thus the tendency or the temptation or the requirement or whatever you want to say it to have to print more money to help fund the deficits is going to be uh um uh quite strong. Uh obviously when Trump picks the new Fed chairman, he's going to pick an easy money person. Everyone knows that. And so I think that's uh so I think inflation psychology will remain on the side of we think there's going to be more inflation and we don't and we're not happy about it. Um simply because of the cumulative effect and what it looks like policies are liable to be prospectively. >> Let's dive a little deeper into that inflation psychology and maybe the effects on the market as well here. Um because I want to talk about like the the policies that President Trump is proposing. He hasn't pushed them through yet, but $200 billion mortgage back security buyout, an extra 500 billion in military spending. Aren't those inflationary as well? And like how do you counter that or how do you take that into account looking at the market and where we're at right now? >> Well, I mean spending it isn't inherently inflationary. Deficit spending, which is what we're talking about. um is because you're you're you know you're you're you're you're creating extra demand that's not matched with savings or however you want to think about it. Um um you know the the the the the little finagle of buying a couple hundred billion dollars of mortgage bonds on the part of the GSC's is doesn't move the needle very far. I mean, maybe they're going to change the price of of uh mortgages by 10 or 20 basis points, but not enough to make much of a difference. So, I mean, that just that's more psychological, I think, than anything. It won't really won't really do much. Obviously, the defense spending is real and it impacts the companies that are going to receive the money. But I mean when you're running a deficit in in a in an economy that's not in trouble that's you know a trillion or trillion and a half um you know that that tends to put upward pressure on on prices via demand. So the debt that the the size of the deficit in and of itself tends to be inflationary particularly when the Fed is willing to monetize things as they are back doing once again. Well, $40 billion of Qi. I think that's what you've been hinting at here. It's not Qi. It's non QE, right? Um, what do you make of that? Like, how do you see that trickle down into the maybe the financial markets or into economic data here? >> Well, the printing of money is inherently inflationary. How much remains to be seen based on the environment that you're in. But here we are again running in a massive budget deficit with the economy, you know, kind of stumbling along and the Fed's back doing QE. Now they're calling it reserve management. [laughter] But, you know, this is the same Fed that that went, you know, when the when they'd only done I think the first 800 billion in QE. Bernanki said, you know, doing the opposite IEQT would be like watching paint dry. Well, here we are $7 trillion later or $6 trillion later and you know they can't do QT. I mean they did it for a while now. They're not doing it again. So um you know a lot of these big picture, you know, massive programs or or policy changes or what you want to call it. A lot a lot of times they'll go on for a while. they don't seem like they have much of a negative impact or or positive either. Um but um eventually they it catches up to you and and you know the Fed is a is a complete joke but I've been saying that forever but that's one of the reasons why gold is $4,600 an ounce. Silver's where it is has a lot has also is has something to do with that but also has to do with the fact that the uh you know all the solar uh projects require and and the whole you know sort of ecosystem that goes into it uh uh requires quite a bit of silver and silver market's been in deficit for a while. It finally caught up to it this year and that's part of the reason why silver's the way it is. Plus it's not a big market either. Okay. No, I appreciate that. And then maybe we'll stay on the Fed here for a second. And you know, we we got the Fed meeting in two weeks coming up. A lot of pressure being put on Jerome Powell right now. He's being uh prosecuted for apparently his role in uh building or the new Fed building, whatever that really means. Quite honestly, I'm trying to figure out um what he's being indicted. >> Well, he's not being prosecuted. No, no, no, no, no, no, no, >> no. Under investigation. Under investigation. >> Exactly. and he disclosed the investigation. >> It all started because a congresswoman Pina uh um uh thought that that that he had lied to Congress based on his comments about what was in the buildings. And it it looks like he's a little factually challenged on this topic. Quite frankly, apparently because the Fed or POW in particular were unresponsive to request for information, the DOJ sent over subpoenas. >> That's [clears throat] all that's happened. And the government itself didn't didn't release that information. Powell did claiming that Trump was doing this as retribution. Now, you know, Trump can be like that and he It's possible, but it's also possible possible that, you know, that um that that Powell is using this as a way to make Trump look bad. After all, it started last July by this representative. Now, I guess Trump could have told her to do it back then, and you know, if you you want to believe in all that, it's possible. But, um I I I think it's a very bad look for the administration. But on the other hand, you know, it m it it may not be what it appears to be on the surface. I don't know. But I just everyone leaps to conclusions that it is um purely Trump trying to beat up on Powell. And he'd certainly be willing to do that. Don't get me wrong, but in this case, I'm not so sure that's what it looks like. Anyway, we'll we'll find out. It doesn't help the Fed's credibility and doesn't help Trump's credibility and it focuses people on on the the fact that the the Fed is able to monetize debts and the US has massive debts and so all of it undermines credibility a and uh confidence in the government I think which tends to be bullish for metals which is you know one of the reasons that gold went up $100 when that uh you know news story broke. >> Absolutely. Like uncertainty is back. It's it's roaring and uh we were trying to make sense of what the Fed should do next. I'm curious what your take on that is Bill like 90% or so according to Fed watch say well we're not going to see a cut in January. Um I'm curious like what uh if you were chair of the Fed Bill what what would Bill do? >> Resign. No. Um, you know, the problem is that, you know, the is that they don't need to cut rates. You know, I mean, look, the bond market doesn't think so either. The since like September of 24, just before this rate cutting cycle started, you know, they've cut rates what, 150, 175 basis points. I have to look. I can't remember exactly but all interest rates from five years and out have gone up. So we've taken short rates down 150 175 basis points and rates from 5 years and out have gone up. That's the bond market's way of saying we don't trust this or you can read whatever you want into the make whatever statement you want but the bond market is not going along with the rate cuts. And if you go out 10 and 20 years, rates are up. So, um, the bond market is is does not appear to be sanguin with these rate cuts. And I would assume more rate cuts would make them even less sanguin. So, [clears throat] there the the the you know, the the Fed is playing um a dangerous game. I think ultimately the bond market will it'll be more obvious that the bond market lost confidence in in the Fed. And my way of saying that is the bond market will take the printing press away from the Fed. That's my glib statement about that. Um I think ultimately we'll see yield curve control once we get the new Fed chairman if if bond markets don't cooperate. So um um and it's going to get this year is going to get wilder as we get closer to the midterm elections which are obviously going to make a big deal of difference. Sorry. Which could make a a much bigger difference than midterm elections normally do given how insanely politicized everything has become in America in the last few years. >> Absolutely. Coming back to yield curve control here, Bill, just just explain the concept to us real quick to our audience. Um what does it mean and what could the Fed do to maybe keep bond yields and and bail uh like Treasury bill yields under control here? Y y y y y y y y y y y y y y y y y y y y y c curve control is just where the government says or the Fed says we are not going to let rates from 10 years and out go up and we'll buy all the paper all the bonds we need to to hold that price in place you know Japan did that basically um um um up until rec recently you know they monetized half of their outstanding debt and they got away with it the end didn't totally collapse which is But normally a currency will weaken when you do that. Um um so uh because basically you have to print an potentially unlimited amount of money. It's like QE except for instead of saying we're going to do we're going to buy you know 40 billion a month or 100 billion a month, we're going to hold the price where we want it or sorry the yield where we want it and we'll commit an unlimited amount of money to doing that. Right. Well I mean that's going to be inflation. And that's another I mean that that's you know that that can be really inflationary there. It's been try it's been done in the past at certain times um and hasn't been all that big of a disaster but I think in the current environment it would be it certainly would send people um would ratchet up people's inflationary expectations for sure. >> Absolutely. Like I'm I'm trying to look for for certain markers here and like try to identify a potential trend or whether that process has already started here. Bill, I'm just looking at the Dixie. It's actually ticking higher 99.1 as we speak. So I'm trying to look for that currency decay. Um you you touched on the yen not totally imploding, but like it it would assume a certain weakness in the currency and we're not seeing it yet. Like what's the market making out of it? Yeah, but but like but that the the yen was stronger perversely when they were still doing QE in Japan. Yeah. >> It's only been since they've stopped that perversely the rates have gone up mostly because it's pretty clear that the BOJ should be raising rates and they won't do it. >> Therefore the uh the end continues to weaken. The problem I mean so if the dollar sorry if the Fed were to pursue this the dollar should weaken but the problem is when you look at the other governments and the other major currencies they all have huge problems too whether you want to look at Japan we just talked about Europe which is a mess the great Britain I mean so there's the P there's no there's no there are no strong legit currencies anymore I mean even the Swiss have you know lashed themselves to the mass of the euro so their currency won't be strong so Nobody wants a strong currency. And that's another reason why gold and silver are where they are because people don't trust the that the per that the that the colored paper will have its purchasing power down the road. And so they're protecting themselves by owning precious metals and other inflationary oriented assets. I would assume as well. You can they're buying the white metals too, the PGMs. >> Which is a perfect segue actually talk gold and silver here, Bill. Um because as I mentioned, I'm looking for markers and gold and silver are exploding in price, which is a good thing because that's where I make my money personally. But um like as I said, like none of the other other asset classes are really behaving the same way gold and silver are like the dollar, the the S&P 500, the bond market. Um like gold and silver seem to be and and you mentioned the other PGMs uh seem to be on their own island perhaps. Like what what do you make of that? Like what is that telling you? Is it maybe a crack in the monetary system and or are we interpreting too much into it? >> Well, there's definitely a crack in people's confidence regarding the monetary system, what the metals have in common is they're not paper. And um while in modestly inflationary periods or periods of not terribly high inflation, although in hyperinflation as well, sometimes stock markets will do quite well, you know, because um they're they're assets. Um inflation is not generally good for financial assets, but when you have the passive bid, it can can kind of ride through that. Um [clears throat] um but the but but when you when you talk when you say what you what I've just said about the world's currency markets and the tendency of central banks to pursue inflationary policies then people are protecting themselves with precious metals. you know, his in historically there, you know, other um speculative [clears throat] uh assets perceived to be a store of value, you know, fine wine, art and all that, but those are more subject to people's whims about what's sort of fashionable, right? Or what's collectible. Uh whereas the precious metals um have sort of been the default choice for thousands of years now. You and I have had conversations in the past when I was very constructive and I'm assuming you were as well on precious metals and and they weren't behaving as they are today. But now I think it's because the cat's finally out of the bag. Everyone's been able to connect the dots and and you know there's a mad scramble to to to get some sort of protection. There was a time when a lot of the Bitcoin folks felt like Bitcoin would do what gold has done. Let's face it, Bitcoin went from basically nothing to, you know, $100,000 um a coin. But lately, but you know, for the last, I would say, year or so, it hasn't really been able to do much. I don't quite know exactly why that is because I think the psychology amongst those folks is similar to the gold buying community, but um um central banks don't buy gold and and central banks have sorry, central banks don't buy Bitcoin and have been buying gold. So maybe that explains the the difference. I I myself have never been a Bitcoin owner. Um um but anyway, we don't need to go off get off on that topic. Now I'll just get you flamed now from the people that hate anyone who doesn't 100% positive on Bitcoin. >> Yeah. Get get them riled up and triggered. Why? Why not? Why not? >> No, I don't really want to. I don't want to pick a fight with them. I mean, they can I mean, look, they you've been involved for in Bitcoin for a long time. Doesn't matter what anyone says. You made a lot of money. Yeah, absolutely. You were right for the last what is it 14 years now. So, uh or within the last 14 years. You had a long time to be right. Um talking about being right. Uh let's talk about the miners a little bit as well, Bill. We're jumping through topics here or running through topics, but the miners seem to be, you know, they're still playing catch-up to to the precious metal prices, and I'm curious what your take is. How are you investing right now? We don't have to share names or anything, Bill, but uh like what does your portfolio cons or construction look like right now? Well, um the um the miners have been kind of dragged kicking and screaming to the precious metals party. They have they have periodic bursts of strong performance and then you know kind of flounder it would seem. Um and and that's I think largely because North Americans uh Canadians and Americans are not really involved in the gold trade. And if you look at the GDX and the shares outstanding of the GDX, it's down by about a third or a quarter. I haven't looked at it uh in the last couple weeks. Uh from where it was in 22. So, [clears throat] while gold has, you know, obviously hit all new alltime new highs or new all-time highs, um the miners uh really haven't had much participation because if people were really getting excited, you would see the um ETF create new outstanding shares as demand came in. I expect we will see the public get involved. When the public gets involved, they'll not just buy gold and silver, they'll buy miners as well. But that's one of the reasons why I think the minor's performance has been somewhat episodic. Um the other problem is um you know it it's a business that you don't you can't as a minor you can't you it's hard to control your own destiny because the price of your main product is you know determined by the marketplace. It's not like you're you're you know you're you're the the price of your product is more or less known and you can work on your businesses aspects of your business to drive demand. Um so um in any case so so um but I don't the miners don't come close to reflecting the current price in terms of what you know what what they can earn at these levels. Now, it matters with miners if you're going to look at the what they can earn and try to evaluate them on a on a price to earnings ratio, something like that, really matters what the reserve life is. You know, if it's a long reserve life, it's going to be 15 or 20 years, then you can kind of use a a methodology like that. If it's only a five or six year reserve life, um you know, then you can't really use that because it's they're going to be out of metal in a certain amount of time. um it's not quite so straightforward because you know under with underground mines the you can only develop your reserves in the or body you're in um as you go down through it and so you're you're only you're only going to get a look ahead for so many for so many years unless you step out of where the or body is and explore something nearby right so you have to know something about the underlying nature of the business uh what the great what what um you know what the what the what the what the [clears throat] real reserve life looks like. Um so there there there are complicating factors and and a lot of the the um um analytical community is quite lazy and they use this concept called net asset value where they basically treat all minds exactly the same like whatever they have in reserve that's all they're going to have and whatever some small part of their inferred resources etc. Um it's kind of lazy analysis because you an open pit mine is totally different than a than an underground mine and all these sorts of things. So then the analysts adjust for that factor by saying well this one should trade at 1.3 times nav and this one should trade at 1.6 times nav and they make up all this subjective crap because they're too lazy to do the work to differentiate one mind from another and they resort to this NAV stuff. Now, I've gone off on a tangent on one of my hobby horses, but um anyway, the the mining sector I think um if you look at some of the better performing and better position and that have been better position for a long time, whether at Nico or Alamos Gold, you know, they're maybe trading it I it depends. They haven't been around so much, you know, whatever you want to you use for the last price on the board of gold. They're trading at maybe 15, 16, 17 times earnings, which is high by by where they traded a few years ago, but not in terms of overall market um you know uh uh ratios and and those both those guys have long live reserves. And in case of Alamos, they're actually going to be growing pretty substantially in the next couple years. their production. I mean, so um um I have a I have had a um um um um a decent amount of exposure to both gold and precious metals for quite some time. Um it's a little less than it was going into the beginning of 24 because I I lightened up because I had been way way way way out over my skis in terms of exposure. Um but now it's it's still, you know, re really quite quite substantial. Nice. Now, it's one thing I'd like to add like the analysts as well, they're so lazy. They use old price forecasts like 2900, 3200. So, uh so you can't really like give a give a hoot on the the PNAF calculations because the assumptions don't make sense. >> That's generally set by the the firm's economist, right? The economist says where the price of gold should trade, right? And it makes a big difference if you want to do a net present value on what you think the future price of gold will be, right? makes a huge difference if you think the future price of gold would be 2500 or 4500. So for up until like the last year the forward prices always were lower because you know nobody believed the rally. You know one of these days they'll have them all higher right but um the certainly higher but like a little bit >> quality of the quality of research in the mining sector is quite low in aggregate. Not to say that all analysts are not good, but I mean that's true in the stock market in general, but really true in the mining sector because they were so unloved for so long. >> Yeah. Like you couldn't make any money with your research, right? So why why focus on it? So absolutely, Bill, what what a wonderful conversation. We we covered a lot of ground here. Um where do we send our audience to follow more of your work? Uh well um if they just want to see my glib comments about this that and the other thing I'm on uh x at um fleckcap is my handle and my I have I have a website fleenstein capital.com where I write a daily column and answer questions. I've been doing this since 1996 although I've only had my site since 2004 and uh it's $130 a year because I feel like people should pay something but they shouldn't pay too much. I mostly do it to help people and whatever money I glean and then more ends up going to a charity that I support um and readers contribute to and I match those anyway. So that's where I'm at. >> Fantastic. Awesome. Bill, really appreciate your time. Thank you so much for joining us here on Sora Financially. We'll have to do this again soon and uh really appreciate it. Thank you so much, Bill and everybody else. Thank you so much for tuning in to Sor Financially. If you enjoyed this conversation with Bill Flackenstein, go check out his ex page. Quite quite a lot of content on there as well. Go check out his website and don't forget to hit that like and subscribe button here on our channel. Our goal is to reach 100,000 subscribers by the end of this quarter and with your help we can achieve that goal. Thank you so much for doing that and take care out there.