Warsh Nomination Was the Biggest ‘Hit Job’ on Precious Metals | Mark Thornton
Summary
Two-Track Economy: An Austrian economics lens explains record corporate profits alongside weak consumer sentiment via credit-fueled asset inflation benefiting asset owners.
Precious Metals Thesis: Strongly bullish on gold and silver as long-term savings hedges amid ongoing monetary expansion, policy interventions, and geopolitical risk.
Silver Dynamics: Supply remains inelastic due to byproduct mining; volatility and sharp corrections are normal within a structural bull market.
Policy & Fed: Warsh’s Fed faces constraints from high debt; potential yield curve control and CPI tweaks seen as negative for savers but supportive of the precious metals case.
Energy Shock: War-driven disruptions and data center power demand raise oil, gas, and electricity costs, feeding through commodities, PPI, and CPI for years.
AI & Capex Cycle: Magnificent Seven-led bond issuance funds AI and data centers, spilling into chips, construction, copper, and energy; viewed as late-cycle and vulnerable.
Market Structure Shifts: The Silver Act, BRICS depositories, and state-level sound money moves aim to decentralize and fortify precious metals market infrastructure.
Investment Perspective: Preference for owning physical gold and silver (and related exposure) over overvalued tech; metals positioned as protection against inflation and policy risk.
Transcript
Welcome back. I'm Jeremy Saffron. [music] Uh two things are true right now that are not supposed to be true at the same time, and the gap between them [music] is the most important story in this economy. Here's the first. The American consumer has never been [music] this pessimistic before. The University of Michigan Sentiment Index just hit a record low, 44.8, weaker than anything economists were forecasting. And here's the detail that stops you cold. 57% of the people surveyed brought up high prices on their own without even being asked. Americans now expect inflation to run near 4% a year for the next decade, and gas is averaging 4.55 a gallon, more than 50% higher than it was before the Iran war, over six bucks in California. Now, here's the second thing. At this very same moment, corporate America just put up one of the best quarters in five years. 83% of the S&P companies beat expectations, and the best that we've seen since 2021. Energy profits up 61% on the war. The biggest tech company on Earth growing earnings around 40, excuse me, 84%, and the stock market climbing right along with them. So, one of those numbers is lying, or both are true, and we are living in two separate economies at once, one for the people who own assets, and one for everyone else. And to most analysts, that's a paradox they can't square. To my guess, it's the most predictable thing in the world, and he's been explaining the machinery behind it for 30 years. My guest today is Dr. Mark Thornton. He's a senior fellow at the Ludwig von Mises Institute, one of the most respected voices in the Australian, Austrian School of Economics. He's also the author of The Skyscraper Curse, a documented historical pattern connecting the world's record-breaking towers to the economic crisis that follow them. And here's the part worth remembering. He's one of the few economists who called the housing bubble back in 2004, years ahead of the 2008 crash, using the same framework we're going going here today. Uh welcome back to Kitco News. It's great to have you. Oh, Jeremy, it's great to be back. Um lots to get into. And we got to talk about the Fed, you know, wars. But before we do that, I want to start with the the two economies because, you know, we got record low consumer sentiment on one side, the strongest corporate earnings beats in 5 years on the other. Now, to most analysts, as I said, that's a paradox. To you, I suspect it isn't. Uh walk us through it. Which of these two numbers is telling the truth about where we actually are? Well, this is my wheelhouse because Ludwig von Mises, who's the namesake of the institute, uh discovered the Austrian business cycle theory more than 100 years ago. It was his very first contribution. And he said that inflation is yes, it's a monetary phenomenon, and yes, it does increase prices. But what he showed was that by increasing price uh money through the central bank and the banking system, it reduced interest rates. And those reduced interest rates, of course, help government borrow money, helps businesses and corporations borrow money so they can expand. And it also helps the wealthy because they can leverage up uh their assets. And of course, lower interest rates, everybody knows, increases the price of assets. So, it's definitely going to you know, in terms of the K-shaped economy, it definitely helps the people, the wealthy, the powerful, uh the banking system, corp big corporations, and government borrow money. So, that part of the economy does very well. It doesn't help people without a lot of assets like the working class. People who have, you know, uh very little in the way of physical assets outside of maybe a home or or, you know, a few things like that, but they're not really leveraging up very much. And so what they experience is just the eventual higher prices from increasing all of that money. There's too many too many dollars chasing too few goods. The prices rise and so we see the working class in these surveys of consumer sentiment, you know, not only complaining about the state of affairs, but specifically going out of their way to mention the fact that higher prices are really killing them because higher prices are going up, but their wages are not keeping up with that inflation. So Mises' Austrian business cycle theory explains this to a T, basically, and it goes well beyond the understanding of Fed economists, government economists, most academic economists who no longer even treat increases in the money supply as the primary cause for higher prices in the economy. So they're totally out to lunch. Hey, we've talked about this before, but I mean people people hear record earnings and they assume the economy is healthy. What's the Austrian read on why earnings this strong can actually be a late signal, I guess a late cycle signal, not a green light? Well, they're they're making fresh investments in cutting-edge technologies with you know, borrowed credit at very low interest rates. We see this, you know, in social media, high-tech, AI, computer chips, all of that. They're taking advantage of the low cost of capital and investing in the hottest markets that are available in the economy. So it's really no surprise. And of course, eventually what the Austrian business cycle uh theory tells us is that these investments, particularly uh new investments in advanced technology, that's where we're ultimately going to find out uh where all the mistakes are being made in terms of investment. So, we've eventually we'll see problems developing in financial areas and technology areas. Um now, a lot of people suspect that already, uh not based on the theory that Mises laid out uh 120 years ago, but basically on the basis of their recent experience. So, people with a lot of long-term experience in investing advice in the uh American economy over the last 30 or 40 years, they recognize that things like high-tech and AI and computer chips, um you know, they are great while they're going up, but they also suffer huge huge losses. Um you know, and the market is currently way overvalued in terms of historical norms. Uh the Buffett indicator is two and a half standard deviations above the historical long-term average. And the Case-Shiller um uh measure of valuation of the S&P 500 is at its second highest level above normal valuations in history. So, if you go back 150 years, there's only been one time when the Case uh measure of valuation was any higher in relative terms. So, yes, we are late stage and we are um you know, seeing that final stages of blow off in asset markets. Yeah. Yeah, you know, let me give you the bull case though because it's not nothing. I mean there's there's the respected argument that if the cyclical sectors are now beating two energy materials industrials not just tech, then this looks less like a narrow AI bubble more like a broad-based profit boom kind of a replay of 2021. If the strength is genuinely broadening out, why isn't that simply kind of what a healthy expansion looks like? Well, a healthy expansion is a broad-based expansion but as the the greater availability of credit available at artificially low interest rates, of course, that's going to seep into the economy all over the place. It's not just in new investments but it's in standard financing of capital in corporations across the board and in businesses across the board. But the bigger the corporation, the larger the corporation, the better they are going to be able to exploit those low interest rates. For example, you know, the Magnificent Seven now they're investing in AI and the data centers and all that and they're issuing massive amounts of not government bonds but corporate bonds at rates comparable to the government itself. So, they're getting, you know, huge amounts of money at very, very low interest rates and they're really raising outside capital in the form of bond financing in large amounts for really the first time we've seen any kind of wave like this. And so, yes, it is concentrated and yes, it is broadening out. AI is, you know, starting to have an effect on a multitude of industries uh such as construction, such as um uh a variety of different inputs, including computer chips, of course. Uh and and energy, uh of course. I mean, they're really pressing the envelope in terms of energy. So, not only are the inputs into energy um you know, going up in price because of this expansion, but also, you know, all of the related industries of electrical construction and um data set data center building, copper, uh the raw materials associated with all of these things. So, it is it is branching out. It is uh widening somewhat. And and, you know, we've that means jobs, too. I mean, the one bright spot in the sentiment report is that the job market's still kind of holding up. Uh does a stable labor market buy the system more time or or does it just kind of mask what's building underneath? No, it doesn't buy the the um the market uh any time. It does, of course, help the working class uh find jobs. And right now, the unemployment rate is below what mainstream economists call the natural rate of unemployment. So, in a natural stable economy where the Fed is not intervening, we would expect you know, a significant amount of unemployment as people are changing jobs, for example. Uh and the unemployment rate now is below that level. So, we're that's another sign of bubble activities. Uh Uh, and of course, it's also being influenced by the fact that, uh, President Trump and the immigration restrictions have cut off, um, you know, certain avenues of new labor coming into our economy at the same time where a lot of people are aging out of the workforce. So, a lot of reasons why labor is super tight. Um, and none of them are great. Yeah. Yeah, I want to bring this to the Federal Reserve because there's a lot happening there. I mean, Kevin Warsh has now been sworn in as the 17th chair of the Federal Reserve. President Trump told him publicly, uh, just moments ago, "Do do your own thing." And and said that he wants him to be independent. But, you know, the the market is already testing that independence. I mean, traders are now pricing a Fed rate hike by December after earlier, you know, betting Warsh would kind of bring cuts. And and I don't know if you were reading the headlines, but Fed Governor Christopher Waller said this week, his words, that inflation is not headed in the right direction. He'd support dropping the language that pointed towards rate cuts. So, a hike is, you know, now just as likely as a cut. The Fed funds rate is still sitting at 3 and 1/2 to 3, uh, 3/4%. Now, last time you were on, you made a point I wanted to kind of come back to. You said a Volker style rate shock, the the thing that actually broke inflation in the 1980s, is almost impossible to run today. I I I got to ask you, why? Well, that's just because the national debt has grown so substantially over time. I mean, that by some measures our national debt is over 120% of gross domestic product, which according to historians, uh, once you get over 100, it's unsustainable and unrecoverable. So, it's, uh, you know, the idea of raising rates at this time and raising the cost of financing government significantly, like doubling the rates, would kill the economy and it would make the financing of government bonds really extremely uh painful for government and I'm not against that, obviously. Uh but you know, you got to seriously doubt the ability uh of the Fed, the modern Fed to pull this off in contrast to the Fed of the late 1970s. So, Kevin Warsh, of course, is going to go down in history as the biggest hit job on the market for precious metals. His nomination was revealed just hours prior to the market uh for precious metals crashing. He was perceived as the most hawkish of the four possible nominees by President Trump. And of course, the bullion banks and the big New York City banks would all have been consulted, would all have been informed of President Trump's decision prior to uh the market knowing about it. And uh whatever they did, I don't know, but um you know, the timing of all of that activity and the slam down that occurred uh in terms of triggering all of the, you know, the the stop-loss orders in the market for gold, the market for silver, the market for gold and silver mining shares, uh I don't think is coincidental and I think a lot of people, including those bullion banks, probably saved a lot of money. Other people probably made a lot of money shorting that whole move, uh just that initial move um in the marketplace. So, yeah, I think um now, in terms of what do we expect from uh Mr. Warsh as Fed chairman? Well, he's he uh doesn't have a cooperative board to work with. They're divided. Some of them clearly see inflation as the number one problem, but they also recognize the fact that the economy's been strung along and strung out on easy money for so long that they're in a catch-22 position here. I think they're going to be looking for the emergence of a crisis. They might call it a liquidity crisis or financing crisis or war crisis where they actually have to not increase interest rates and possibly cut interest rates. So, you know, there's no scene ahead for the Fed in terms of what they're going to do, obviously, but I wouldn't be surprised that something comes up where they actually get the opportunity to cut rates or to at least to implement Mr. Warsh's proposals like cutting the calculations for what the inflation rate is. He's got a proposal for that. And he also has a proposal for yield curve control where the Fed tries to control both low short-term interest rates and long-term interest rates by plugging the gaps in the bond market for where wherever it's leaking. So, that's [clears throat] not good for American savers, American workers, and so on. Higher prices, lower returns on savings. You know, that's not going to help the American worker for sure. But, you know, the idea of the Fed is to help finance government largesse. You know, to finance government spending and government deficits. That's really what they're in uh, that's what really what their true role is. It's not balancing inflation and unemployment. That's what they talk about, but really what they're in business to do is to help finance government spending, government wars, and in particular, that's relevant right now. So, a breakout of the war uh, would be one excuse. And the other thing the Fed is in the business of is protecting the banks. Uh, you know, that the original construction of the Fed was based on ownership by the big banks. And, you know, that's where a lot of the employees come from. Uh, and that's where a lot of them plan to go after they retire from the Fed. So, they want to protect the banks. Hey, we got to I mean, when you say the banks knew, I just got to reverse there for a second cuz it was interesting what you said there, Mark. I mean, when you're talking about the bullion banks kind of knowing, what exactly did they know? That wars would come in hawkish, that rate hike pricing would hit metals, or that liquidity was about to be pulled from the trade? No, I think they knew that, um, Kevin Warsh was going to be nominated, and that was a surprise nomination. We don't remember that, but that he was the least likely of all the candidates to get the nomination because he was considered the single most hawkish of all of the four candidates. So, the market was expecting a dove to come in and to cut interest rates. Remember, this is pre-war and pre, uh, CPI going up and inflation expectations going up. And so, you know, the market was kind of still expecting rate cuts. Um, and so, the Warsh nomination said, "No, no, no. This guy's the most hawkish nominee. Therefore, no cuts." And of course, in the short run, you know, rate cuts are, you know, supposed to be good for gold and rate hikes are supposed to be bad for gold. And so, this was just a a great signal for those who wanted to see a crash in precious metals and to be able to take advantage of it either by shorting the market you know, that would certainly help a lot of President Trump's supporters and donors and so forth. And then, of course, the bullion banks who are upside down on a lot of their positions in the bullion market. Hey, I mean, the interest on the national debt is now one of the fastest-growing line items in the entire federal budget, as you know. At what point does the bond market stop coordinating, regardless of what the Fed wants? Well, we're on our way. I mean, I think we mentioned that in the last interview. You know, inflation is basically a monetary phenomenon, but we also keep a look on, you know, how much is the government spending, how much do they have to finance, what are the interest payments, how does that impact the market for government bonds. And what we've seen is that the on the long end, that interest rates are rising to the highest level in the last 5 years. And we're pretty much >> [clears throat] >> poised on a precipice of interest rates on long-term government debt breaking out to the upside. And of course, the Treasury and the Fed have been fighting that. You know, they have this new liquidity program at the Fed trying to help out private credit and private equity, but it's also basically quantitative easing to prevent those long-term rates from breaking loose and breaking higher and really signaling that the dollar is going to go lower, you know, breaking support in terms of the foreign exchange value of the US dollar. That's also looks weak. It looks like it's on a precipice. It's been testing in the high 90s right now. It's broken through down through 100 and that's really a short good short-term indicator of the value of the dollar where it's going relative to other currencies in the world, but you know, that's that's not a good long-term measure because you're measuring the value of the fiat paper dollar against the fiat paper currencies of other countries who are also inflating. The Japanese, you know, you know, they're on a precipice. The UK is in similar situation and a lot of governments around the world are facing very similar problems. Yeah. Yeah, we continue to watch that Japanese yen trade as well. I think I know the answer to this question from you, Mark, because I understand Austrian economics, but maybe some don't and and it is kind of a counter, you know, and that is maybe Warsh's real power isn't the size of the the rate hike, maybe it's credibility. Volcker didn't just raise those rates, he changed the psychology, convinced the world the Fed would do whatever it takes. Could a credible chair re-anchor inflation expectations with words and posture without the kind of brute force hikes that would blow up the budget? Well, new personnel do matter and Warsh is relatively hawkish or has a reputation for being relatively hawkish. He's already been on the Fed. He helped Ben Bernanke uh construct the bailouts um in the financial crisis. Um he's considered, you know, relatively uh hawkish in terms of monetary policy in trying to drive down inflation. Um I don't trust that, of course. Um just the fact that he is going to be promoting a new measure of CPI inflation that is going to reduce the the Fed's measure from what it is now, above 3 and 1/2%, nowhere near the 2% target. This new measure is automatically going to bring the Fed's measure down to between 2 and 1/2 and 3%. So, if that's on his agenda, I don't trust him. Um and uh the board itself is now overweighted towards doves because President Trump did not really appoint any hawks in his first go-round, and and neither did uh President Obama or President Biden. Um and a lot of the older blood >> [clears throat] >> on the board uh of governors is gone, who were hawkish, and and the presidents are also probably better uh because they're selected in the districts, um but they're also less hawkish than they used to be Right. um back in the day, say in the 1980s and '90s, when we really had some really super uh presidents and uh super economists running their research departments in in St. Louis and in Dallas. Um you know, and those days are gone. I got to ask you, and and you know, we can stay with that idea of the kind of Fed protecting the banking system in the paper side of the market and and that's drilling into silver. I was re-watching the tape the last time you were on and one of your sharpest arguments last time and there is a real world test of it now. I mean you you laid out why silver supply is fundamentally inelastic and roughly 70% of it comes from byproduct of copper, lead, zinc mining not from primarily silver mines. So when demand surges the market just can't take I guess make any more of it at this point. Silver was near that $90 when we were here in January. Right now it's pulled back to the mid-70s. Inside your framework is that the normal turbulence of a structural bull market or you know, does does a move like that tell you something else is going on here? Yeah, beyond the politics of all the stuff that I've been discussing with Warsh and Trump and the the Fed, um, precious metal markets are volatile. Yeah. And if we look at actual markets, you know, and you look at them in a long-term perspective on a graph, they seem to just shoot right right up. But in actuality, if you break the the graphics down and you stretch them out, and you look at the the actual movement on a short-term basis, you do see see regular corrections, sometimes sharp corrections. So the regular corrections are up to 20%. The sharper corrections can be over 30%. Um, and this was even true during the hyper German hyperinflation when, you know, even after it became known that the government was going to be entirely dependent upon printing money for its budget and its financing the government debt. I mean, the price of gold as measured in German reichsmarks was highly volatile. So, if you look at the, you know, the relative change on a short-term basis, you see very wide swings. And I think most seasoned and informed investors in the precious metals market realize that it's not a straight line up. It that there is a lot of volatility and that these are structured long-term savings actions on the part of stackers. And you know, and then like what we've just seen in in January and February, you know, when these markets get hot, of course, the momentum traders and the, you know, all of those, the speculators come into the market and really wreak wreak havoc on prices going up and prices going down. And you can trade that, but >> [clears throat] >> a lot of people just are buyers and holders and waiting for either a collapse or a really significant change in the monetary regime. Yeah. Yeah, well said. And I kind of wanted to get your your live reaction to something. I wasn't sure if you saw this story. There's a bipartisan legislation just introduced into Congress. It's called the Silver Act and it comes from a Nevada Democrat and an Idaho Republican. It would require precious metals depository spread across all four US time zones. Cuz right now, storage is concentrated almost entirely around New York. And the stated goal is kind of cutting that systemic risk and improving liquidity. I mean, you've described the fragility in the physical and the futures market. So, does centralizing the vaults actually fix the problem you identified? Or is this government showing up a little bit late to a fire that it helped start? Yeah. I had not seen that story, but I'm not surprised by it either. I'm not surprised by it either. Um, you know, back when silver was approaching $50, I said to everybody that, you know, this market is going to start experiencing growing pains. And we're going to see, you know, a lot of rapid change in the markets themselves, but also a lot of institutional um, regular moral, um, like um, changing margin requirements is an is an example. Uh, and we're also seeing, of course, the BRIC countries doing essentially the same thing, trying to set up a system of international trade that avoids the US dollar and backstops all the trades with gold and silver and having depositories uh, across Asia from uh, Hong Kong and Singapore, uh, to um, Saudi Arabia. Um, and so the trading can take place, um, and it's dispersed, um, you know, and in there's a little bit of independence along with the commingling of activities. So, here in the United States, we also have some good um, you know, things happening at the state level where states are allowing uh, gold and silver to be legal tender. Uh, Texas is study setting up a uh, state depository. Um, other states have reduced sales taxes and capital gains taxes, uh, making gold and silver legal tender. Um, so this is a uh, an encouraging next step uh, in all that process. I don't know about the mechanics and what it will actually accomplish, but I'm not surprised. Nobody should be surprised because everybody's thinking about inflation. I mean, regular people that I interact or the economy. Now we're talking about inflation. Interesting. >> And now we're talking about this stupid war in the Middle East. And so, you know, it's push come to shove. Two-thirds of Americans are upset with our government. President Trump's polling is at an all-time low. Congress is at an all-time low. 90% disapprove. Think it's corrupt and inefficient. Um two-thirds of all Americans oppose uh the American government, Congress uh in general. And when I say two-thirds, that doesn't mean that one-third support what the government's doing. The two categories of support for American government only add up to about 10%. So there's, you know, 23% of Americans that are in a neutral sort of mildly negative category, but two-thirds uh consistently across opinion polls are opposed to what's going on. So a lot of people remember gold and silver. They They maybe have seen the history um or seen your program. And they're they're you know, they're finally getting a little bit desperate themselves, and that desperation is showing up um in these kind of activities and now in terms of legislation. Yeah. Yeah, it's been a fascinating year uh this these past couple for for precious metals. That's certainly the case. Um let's bring back that variable that didn't exist the last time you were on the show. That war that you're talking about that's effectively closed the Strait of Hormuz. I mean, right now WTI, I think Brent crude is near 104 a barrel. Uh WTI around 97, excuse me. Gas is up more than 50% since the war started at the end of February. Now, there's some movement towards a deal Rubio calling slight progress just this morning, but Morgan Stanley says gasoline stockpiles are on track for the lowest seasonal level on record by August. So, from an Austrian view, is a war-driven energy shock the same animal as the money-driven inflation you've tracked for years or does that kind of cause change the curve? Yeah, I mean it's it's soaking up money from from everybody and forcing them to pay higher fuel bills, higher energy bills, higher cost of production for producing just about everything on the planet. People think of oil in terms of gasoline in their car, but it's fertilizer and for farmers, it's all all of the transportation network. So, we're going to all be getting, you know, fuel surcharges if you're a business or if you're a consumer. Um, you know, higher cost of plastics, higher cost of industrial materials like sulfuric acid. It's going to drive up mining cost. You know, the the list of products that are derived from oil is quite impressive. I mean, it's amazing how entrepreneurs have taken that standard product and instead of, you know, purifying it and throwing out everything away and giving us kerosene and gasoline, now they produce, you know, quite a few basic products. And those basic products go into the production of everything from our food to our computer chips. And and so, you know, this is going to permeate out if the war were to stop today, the destruction would hopefully stop. But there's been a lot of destruction of the productive capacity of the Persian Gulf area, and that's not going to recover for years. The commodities market I was talking about before the war was already that whole market area was moving up. You look at the consumer the CRB index of commodity prices, it's zoomed up during this process and is now at you know, a historic high in recent years. And if you compare that to the golden Goldman Sachs commodity index, which is very highly weighted to oil prices, well, that's actually leveled off in recent times as the CRB, which includes all the agricultural products and you know, all sorts of things, some of which I don't even know what they are. That's continued to go higher. Um You know, and those commodity prices eventually get put into producer prices in the PPI, which is already been going up, and then of course eventually it ends up in the CPI, the consumer price index. So, this is a tidal wave that's going to come back and smack the American consumer, but you know, it's really wreaking havoc on a lot of our customers around the world. Yeah. In India, in Asia, and in other places around the world. So, that even with an immediate peace the negative consequences are going to be with us for years to come. Let's bring this all the way down to the kitchen table, you know, because you got that concept that explains the entire two economy split, and it's centuries old. It's called the Cantillon effect. You talked about it a little bit last time you were on the show. Explain it for someone who's never heard the term, and then tell me kind of where you see it most clearly in today's economy. Well, this is very much related to my analysis of the K-shaped economy because, you know, the new money goes in to the economy in general, but it goes into the hands first uh of a certain group of people. And so that those groups are going to be advantaged cuz they're getting fresh money at current prices. So the banks, the corporations, government itself, they all get their hands on the money before prices goes up. And so, you know, that's where we're seeing, you know, the upper part of the K benefiting and as we noted broadening out through the S&P 500, which of course is that's all big business. Those are the 500 largest corporations. Uh that money very rarely gets down into mom and pop. Um and then the money gets spent throughout the economy. Uh it, you know, goes throughout the economy from those original people who get the money. Uh and as it moves through the economy, it's generating higher and higher prices. Sometimes that's, you know, almost imperceptible increases in prices, but it's forcing prices up somewhere in the economy. Assets, land, real estate, products, raw materials, and so forth, labor. Um and then by the time it gets to the kitchen uh to the American household and households around the world because all governments are essentially doing the same thing. Uh, but what what is showing up on the kitchen table is higher prices. And so, you know, the inflation and the destructiveness of the war is going to bring higher fuel prices, uh, higher product prices, higher food prices in particular, which is what I'm really worried about, is the lowest end of the income dist- distribution in our economy lower income classes, which are much larger in third and second world economies, you know, where they're not buying a lot of different things. And food and fuel to cook the food and to get to work is really takes up a huge part of the family budget. So, >> Yeah. you know, to the extent that the family budget is dependent upon fuel and food, um, you know, that's where the uh, and and that's where AI spending, you know, is driving up energy prices. You know, Nevada is, you know, confiscating and giving the electrical system over to the data centers and restricting its access, uh, to the general population, but it's going to cause higher electrical prices, um, all around the country. I just learned that there's a data center being built near me and I had no idea. So, they're popping up everywhere. They all require enormous amounts of electricity. And as part of this inflationary process from the Fed, you know, that is what's going to drive the price of fuel and energy, so forth, uh, onto the typical average American household. Yeah. Yeah, and the data backs you up. I mean, more than a half of Americans are now, according to this sentiment this morning, um, vol, you know, volunteering without being asked that prices are eroding their finances. Fuel demand in California is down 9% since last fall. Big ticket household spending is actually falling. Meanwhile, the people who own assets are kind of doing just fine. So, how long can an economy run on two tracks like that? Well, we've been doing it for quite some time. Lately, it's been very intense uh because of, you know, COVID and the $5 trillion that was unleashed. Uh now, supposedly we had a a stingy Fed in the early 2020s, but uh behind the scenes, uh they were releasing secondary stores of monetary inflation on the economy. So, that caught many of us off guard that um the Fed wasn't operating within traditional um policy mechanisms, uh but they still released a $2.5 trillion uh dollars um in the, you know, in from 2022 to 2024. Uh uh and now, you know, they they ran out of that those funds and they stopped the quantitative uh tightening process and then they announced in December this new program of buying $40 billion a month of government bonds. So, they're unrelenting in, you know, dosing the American population with this inflationary gas. Um and eventually it's going to all light on fire and burn the economy down in some respect. You know, we can't accurately predict the future, but there's all sorts of problems of leverage um and there's all sorts of problems in uh especially in the American family household budgets, credit card debt, um you know, is is out of control, and interest rates are rising. Uh so, the American household is really under enormous pressure, and I really feel for people. Uh it's it's just awful. And uh you know, people are doing without and uh right now, and they've already made significant cutbacks. They've already been in the process of cutting their budgets, cutting their expenditures, cutting their subscriptions, reworking their plans for TV and internet access and all of that. So, it's going to get even more painful as we move from cutting fat to cutting muscle in the in the American household. And you know, I I know where the problem is coming from. I just can't do anything about it. >> Right. And you know, here's a here's a detail I can't get past. The Federal Reserve spending billions renovating its own headquarters while this plays out. Is that the Cantillon effect made literal? The money closest to the people who printed it. Yeah, and the the chutzpah of of people in Washington, you know, with their billion-dollar ballrooms and their two two and a half billion-dollar renovations uh of their headquarters. And that's not a big building, by the way. Uh that's just where that just houses the the main part of the Fed and the seven Board of Governor members. Uh there's, you know, all of the district banks, which are also huge, you know, Greek pyramid-like structures all all across the country. They're all elite and uh in in terms of the money that they spend on these people and their facilities. So, Washington is clearly um you know, gone away, but of course, they've taken away the ability of the American voter to actually control politics. They've created a monopoly in Washington, D.C. They get their funding from a few special interest groups and foreign money. They're really not dependent and of course, they lock out third parties and independent candidates. Um and they target uh the best people in Congress. Um uh and they try to drive them out. People who are arguing for spending controls and arguing for the Constitution and arguing for limited uh government and limitations on spending and weariness uh of the national debt expansion. Uh these special interest groups and this foreign money come in and target those specific people while, you know, giving money to people in Congress and the U.S. Senate who just get along and vote for everything and don't make any waves. And so, Americans have really lost effective control over their government. Mhm. Mark, our time always goes too fast. I always look at the clock and go, where the heck did that go? But I mean, bring it back for a working family watching this right now. One that doesn't own a stock portfolio. What does your framework actually tell them to do? Well, they know what to do. Um you know, they um it's a it's a matter of you know, trying to make the family budget work. Yeah. Uh that's very difficult and people are going to have to make uh some structural uh changes in their lifestyle uh moving forward. I don't see this really getting um there's no path of this getting better uh for the American household other than those in the top 1% other than those in the top 10% um in America, people who are especially people who are living off the government and government contracts. Uh you know, there's this whole I mean, the whole data center business is uh you know, that's largely going to be you know, a big part of their revenue is going to be devoted to the software technology people who um are keeping track of the American public, who are surveilling the American public and make sure they're paying their taxes and make sure they're not, you know, doing things out of whack and who knows what they're going to do with that. But the fact that these companies are rushing in to provide the data centers means that you know, the government wants data about everything about everybody so that they can control uh the American people. Um so it's a very very difficult situation. You know, it becoming independent uh as much as you can, where you can, however you can uh however you can be more dependent on your community, your friends, your relatives and less on the government, uh the better you can you better keep you can be. Uh you know, if we all became more attuned to local government and less attuned and did something about stopping the federal government cuz that's really where the problem originates. Even the expansion of state and local spending is largely dependent upon uh federal programs and federal revenue sharing and those kind of things. So, think local, think from the bottom up. Um and don't think that you're going to get bailed out because I don't see any real uh concern on the part of well, from the president certainly. Uh the Congress um you know, anybody up there uh they don't even talk about cutting the budget or cutting programs. Uh so, I don't think we can be the in the least hopeful that this current group is going to do anything to make things easier for the government. I'm working on a um essay right now and a podcast right now where, you know, the mainstream economists try to make taxation and spending kind of a balancing act and fair for everyone and that kind of thing. But in reality, it's not. In the reality, taxation and spending is destructive, causes distortions, makes it harder for the little guy to get ahead, to work from the bottom up. And the real things that stimulate the economy are tax cuts and government spending cuts. Hey, I owe my audience the other side, right? I mean, let me play out the scenario where the metals trade kind of ends, you know, a peace deal gets done, Hormuz reopens, crude falls back towards 70, maybe gas drops, inflation expectations re-anchor. Maybe worse holds steady because the shock resolved in Washington under pressure from a furious electorate, you know, actually cut spending. In that world, what would happen to gold and silver? And and how seriously should investors take that scenario? Well, that's what we're all looking for. We're looking for not necessarily true monetary reform of going back to a gold standard with silver coinage. That's something that Mises always fought for his entire life. But any kind of retrenchment like we saw under Volcker would mean you know, trouble for precious metal prices. I you know, it would be very disruptive initially, but the long-term benefits of that kind of thing would be great. I'm hoping, you know, that gold goes back to $20 an ounce and silver goes back to $1 an ounce and that we can have honest money again based that looks just like the old system. But I'm not counting on that. But even a retrenchment of monetary policy that prevented the government from borrowing money and that prevented the Fed from increasing the supply of money or prevented the Fed from intervening in interest rates. That's really what we have to do. Or a simple matter of allowing Americans to own gold and silver in bank accounts which they could which they could easily move back and forth to cash currency and not charge them any taxes or capital gains taxes on their holdings in those accounts. Those accounts exist today. It's just that they they tax you on capital gains in those accounts. But if if they were to do that one simple thing I think that would have a dramatic positive effect uh, the American population. I know like China encourages its citizens to put its savings, individual savings, into gold accounts. Um, and so the the um, Chinese population is somewhat insulated from inflation. Obviously, the Indian population, which have been historic uh, hoarders of gold and silver, are somewhat insulated from inflation. So, that's 3 billion people out of 8 billion people. If we could spread that around the world, we could make inflation of the money supplies of currency, paper currency, uh, far less attractive to government and uh, and and the and the working classes. See, that's the key is that the solution has to involve giving access to the working classes uh, of their own personal gold standard and the incentive to save. So, you know, they've got to take the taxation of savings out of the picture uh, and make inflation and make those savings insulated from inflation. That would help uh, rebuild the economy from the bottom up. Everything good in this world comes from the bottom up. Nothing good comes from things that are coming from the top down. Everything from the top down is almost always bad for us. And I think that's the simple lesson I would leave everybody uh, from no matter what the question, no matter what the issue, no matter what the policy, does it help us build from the bottom up? Great. Is it a top-down solution? Terrible. I mean, don't just save in currency, save in metals. I mean, very different message than Western central banks have sent for decades. Hey Mark, before I let you go, I understand you have an event coming up in New Mexico this August you wanted to tell people about. Tell us what's happening there and and where our viewers can find out more. Well, I mean, we have events all the time. We just had Rothbard University here. It was great. Um but we're having a conference in Albuquerque, New Mexico, August 15th on gold and silver in the future of freedom. And I will be uh speaking at the conference. Uh Ryan McMaken, who's in charge of mises.org and the general editor of the Mises Institute, a brilliant uh scholar. Uh we have um JP Cortez for the um Oh gosh, I can't remember his organization, but uh Sound Money League. Yeah, Sound Money League. Um yeah, he's great. He was actually a student here at Auburn University. I'm so very proud of him and all he's been able to accomplish. Mhm. Um so we're going to have a great uh group of speakers. Our main speaker is an a real true and blue expert at uh financial uh analysis and uh contrary investing. And he's very favorable, of course, to gold and um and he really works uh the numbers on companies the way they used to in the past. So, it's a great blend of uh financial analysis, contrary investing with a uh good flavor of uh gold and silver investing. So, we're bringing together, you know, speakers from four different perspectives. Mhm. Uh the financial, the political, the historical, and I'm the theoretical guy. Um it's not very expensive. It's in Albuquerque. Uh we always have a lot of fun at these things, too. Um making fun of the state and the Fed while learning a few things >> [laughter] >> and enjoying ourselves. So, you can look that up on mises.org under our events page. Beautiful. Dr. Mark Thornton. Yeah. Always worth the time. I appreciate this. I'm kind of jealous. I know JP, jealous I'm not going to be there in in August, but right in the middle of my son's first summer. So, I'm going to do that first. First things first, Jeremy. You bet you. All right, Mark. Thanks again. Always a perspective you won't get on mainstream financial TV. We thank you for being here. Thank you very much. And for everyone watching, here's the takeaway. The gap between Wall Street and the kitchen table isn't an accident. It seems like a mechanism and now you understand how it works. Whether you agree with Mark or not, that framework will help you read every headline that comes next. If this was worth your time, subscribe. It's how we keep bringing you the conversations the mainstream won't have. And and tell us in the comments, are you on Mark's side of this, hard assets, >> [music] >> or do you think the market's got it right? We read everyone. I'm Jeremy Saffron. We'll see you next time on Kitco News. >> [music] [music] [music] >> I
Warsh Nomination Was the Biggest ‘Hit Job’ on Precious Metals | Mark Thornton
Summary
Transcript
Welcome back. I'm Jeremy Saffron. [music] Uh two things are true right now that are not supposed to be true at the same time, and the gap between them [music] is the most important story in this economy. Here's the first. The American consumer has never been [music] this pessimistic before. The University of Michigan Sentiment Index just hit a record low, 44.8, weaker than anything economists were forecasting. And here's the detail that stops you cold. 57% of the people surveyed brought up high prices on their own without even being asked. Americans now expect inflation to run near 4% a year for the next decade, and gas is averaging 4.55 a gallon, more than 50% higher than it was before the Iran war, over six bucks in California. Now, here's the second thing. At this very same moment, corporate America just put up one of the best quarters in five years. 83% of the S&P companies beat expectations, and the best that we've seen since 2021. Energy profits up 61% on the war. The biggest tech company on Earth growing earnings around 40, excuse me, 84%, and the stock market climbing right along with them. So, one of those numbers is lying, or both are true, and we are living in two separate economies at once, one for the people who own assets, and one for everyone else. And to most analysts, that's a paradox they can't square. To my guess, it's the most predictable thing in the world, and he's been explaining the machinery behind it for 30 years. My guest today is Dr. Mark Thornton. He's a senior fellow at the Ludwig von Mises Institute, one of the most respected voices in the Australian, Austrian School of Economics. He's also the author of The Skyscraper Curse, a documented historical pattern connecting the world's record-breaking towers to the economic crisis that follow them. And here's the part worth remembering. He's one of the few economists who called the housing bubble back in 2004, years ahead of the 2008 crash, using the same framework we're going going here today. Uh welcome back to Kitco News. It's great to have you. Oh, Jeremy, it's great to be back. Um lots to get into. And we got to talk about the Fed, you know, wars. But before we do that, I want to start with the the two economies because, you know, we got record low consumer sentiment on one side, the strongest corporate earnings beats in 5 years on the other. Now, to most analysts, as I said, that's a paradox. To you, I suspect it isn't. Uh walk us through it. Which of these two numbers is telling the truth about where we actually are? Well, this is my wheelhouse because Ludwig von Mises, who's the namesake of the institute, uh discovered the Austrian business cycle theory more than 100 years ago. It was his very first contribution. And he said that inflation is yes, it's a monetary phenomenon, and yes, it does increase prices. But what he showed was that by increasing price uh money through the central bank and the banking system, it reduced interest rates. And those reduced interest rates, of course, help government borrow money, helps businesses and corporations borrow money so they can expand. And it also helps the wealthy because they can leverage up uh their assets. And of course, lower interest rates, everybody knows, increases the price of assets. So, it's definitely going to you know, in terms of the K-shaped economy, it definitely helps the people, the wealthy, the powerful, uh the banking system, corp big corporations, and government borrow money. So, that part of the economy does very well. It doesn't help people without a lot of assets like the working class. People who have, you know, uh very little in the way of physical assets outside of maybe a home or or, you know, a few things like that, but they're not really leveraging up very much. And so what they experience is just the eventual higher prices from increasing all of that money. There's too many too many dollars chasing too few goods. The prices rise and so we see the working class in these surveys of consumer sentiment, you know, not only complaining about the state of affairs, but specifically going out of their way to mention the fact that higher prices are really killing them because higher prices are going up, but their wages are not keeping up with that inflation. So Mises' Austrian business cycle theory explains this to a T, basically, and it goes well beyond the understanding of Fed economists, government economists, most academic economists who no longer even treat increases in the money supply as the primary cause for higher prices in the economy. So they're totally out to lunch. Hey, we've talked about this before, but I mean people people hear record earnings and they assume the economy is healthy. What's the Austrian read on why earnings this strong can actually be a late signal, I guess a late cycle signal, not a green light? Well, they're they're making fresh investments in cutting-edge technologies with you know, borrowed credit at very low interest rates. We see this, you know, in social media, high-tech, AI, computer chips, all of that. They're taking advantage of the low cost of capital and investing in the hottest markets that are available in the economy. So it's really no surprise. And of course, eventually what the Austrian business cycle uh theory tells us is that these investments, particularly uh new investments in advanced technology, that's where we're ultimately going to find out uh where all the mistakes are being made in terms of investment. So, we've eventually we'll see problems developing in financial areas and technology areas. Um now, a lot of people suspect that already, uh not based on the theory that Mises laid out uh 120 years ago, but basically on the basis of their recent experience. So, people with a lot of long-term experience in investing advice in the uh American economy over the last 30 or 40 years, they recognize that things like high-tech and AI and computer chips, um you know, they are great while they're going up, but they also suffer huge huge losses. Um you know, and the market is currently way overvalued in terms of historical norms. Uh the Buffett indicator is two and a half standard deviations above the historical long-term average. And the Case-Shiller um uh measure of valuation of the S&P 500 is at its second highest level above normal valuations in history. So, if you go back 150 years, there's only been one time when the Case uh measure of valuation was any higher in relative terms. So, yes, we are late stage and we are um you know, seeing that final stages of blow off in asset markets. Yeah. Yeah, you know, let me give you the bull case though because it's not nothing. I mean there's there's the respected argument that if the cyclical sectors are now beating two energy materials industrials not just tech, then this looks less like a narrow AI bubble more like a broad-based profit boom kind of a replay of 2021. If the strength is genuinely broadening out, why isn't that simply kind of what a healthy expansion looks like? Well, a healthy expansion is a broad-based expansion but as the the greater availability of credit available at artificially low interest rates, of course, that's going to seep into the economy all over the place. It's not just in new investments but it's in standard financing of capital in corporations across the board and in businesses across the board. But the bigger the corporation, the larger the corporation, the better they are going to be able to exploit those low interest rates. For example, you know, the Magnificent Seven now they're investing in AI and the data centers and all that and they're issuing massive amounts of not government bonds but corporate bonds at rates comparable to the government itself. So, they're getting, you know, huge amounts of money at very, very low interest rates and they're really raising outside capital in the form of bond financing in large amounts for really the first time we've seen any kind of wave like this. And so, yes, it is concentrated and yes, it is broadening out. AI is, you know, starting to have an effect on a multitude of industries uh such as construction, such as um uh a variety of different inputs, including computer chips, of course. Uh and and energy, uh of course. I mean, they're really pressing the envelope in terms of energy. So, not only are the inputs into energy um you know, going up in price because of this expansion, but also, you know, all of the related industries of electrical construction and um data set data center building, copper, uh the raw materials associated with all of these things. So, it is it is branching out. It is uh widening somewhat. And and, you know, we've that means jobs, too. I mean, the one bright spot in the sentiment report is that the job market's still kind of holding up. Uh does a stable labor market buy the system more time or or does it just kind of mask what's building underneath? No, it doesn't buy the the um the market uh any time. It does, of course, help the working class uh find jobs. And right now, the unemployment rate is below what mainstream economists call the natural rate of unemployment. So, in a natural stable economy where the Fed is not intervening, we would expect you know, a significant amount of unemployment as people are changing jobs, for example. Uh and the unemployment rate now is below that level. So, we're that's another sign of bubble activities. Uh Uh, and of course, it's also being influenced by the fact that, uh, President Trump and the immigration restrictions have cut off, um, you know, certain avenues of new labor coming into our economy at the same time where a lot of people are aging out of the workforce. So, a lot of reasons why labor is super tight. Um, and none of them are great. Yeah. Yeah, I want to bring this to the Federal Reserve because there's a lot happening there. I mean, Kevin Warsh has now been sworn in as the 17th chair of the Federal Reserve. President Trump told him publicly, uh, just moments ago, "Do do your own thing." And and said that he wants him to be independent. But, you know, the the market is already testing that independence. I mean, traders are now pricing a Fed rate hike by December after earlier, you know, betting Warsh would kind of bring cuts. And and I don't know if you were reading the headlines, but Fed Governor Christopher Waller said this week, his words, that inflation is not headed in the right direction. He'd support dropping the language that pointed towards rate cuts. So, a hike is, you know, now just as likely as a cut. The Fed funds rate is still sitting at 3 and 1/2 to 3, uh, 3/4%. Now, last time you were on, you made a point I wanted to kind of come back to. You said a Volker style rate shock, the the thing that actually broke inflation in the 1980s, is almost impossible to run today. I I I got to ask you, why? Well, that's just because the national debt has grown so substantially over time. I mean, that by some measures our national debt is over 120% of gross domestic product, which according to historians, uh, once you get over 100, it's unsustainable and unrecoverable. So, it's, uh, you know, the idea of raising rates at this time and raising the cost of financing government significantly, like doubling the rates, would kill the economy and it would make the financing of government bonds really extremely uh painful for government and I'm not against that, obviously. Uh but you know, you got to seriously doubt the ability uh of the Fed, the modern Fed to pull this off in contrast to the Fed of the late 1970s. So, Kevin Warsh, of course, is going to go down in history as the biggest hit job on the market for precious metals. His nomination was revealed just hours prior to the market uh for precious metals crashing. He was perceived as the most hawkish of the four possible nominees by President Trump. And of course, the bullion banks and the big New York City banks would all have been consulted, would all have been informed of President Trump's decision prior to uh the market knowing about it. And uh whatever they did, I don't know, but um you know, the timing of all of that activity and the slam down that occurred uh in terms of triggering all of the, you know, the the stop-loss orders in the market for gold, the market for silver, the market for gold and silver mining shares, uh I don't think is coincidental and I think a lot of people, including those bullion banks, probably saved a lot of money. Other people probably made a lot of money shorting that whole move, uh just that initial move um in the marketplace. So, yeah, I think um now, in terms of what do we expect from uh Mr. Warsh as Fed chairman? Well, he's he uh doesn't have a cooperative board to work with. They're divided. Some of them clearly see inflation as the number one problem, but they also recognize the fact that the economy's been strung along and strung out on easy money for so long that they're in a catch-22 position here. I think they're going to be looking for the emergence of a crisis. They might call it a liquidity crisis or financing crisis or war crisis where they actually have to not increase interest rates and possibly cut interest rates. So, you know, there's no scene ahead for the Fed in terms of what they're going to do, obviously, but I wouldn't be surprised that something comes up where they actually get the opportunity to cut rates or to at least to implement Mr. Warsh's proposals like cutting the calculations for what the inflation rate is. He's got a proposal for that. And he also has a proposal for yield curve control where the Fed tries to control both low short-term interest rates and long-term interest rates by plugging the gaps in the bond market for where wherever it's leaking. So, that's [clears throat] not good for American savers, American workers, and so on. Higher prices, lower returns on savings. You know, that's not going to help the American worker for sure. But, you know, the idea of the Fed is to help finance government largesse. You know, to finance government spending and government deficits. That's really what they're in uh, that's what really what their true role is. It's not balancing inflation and unemployment. That's what they talk about, but really what they're in business to do is to help finance government spending, government wars, and in particular, that's relevant right now. So, a breakout of the war uh, would be one excuse. And the other thing the Fed is in the business of is protecting the banks. Uh, you know, that the original construction of the Fed was based on ownership by the big banks. And, you know, that's where a lot of the employees come from. Uh, and that's where a lot of them plan to go after they retire from the Fed. So, they want to protect the banks. Hey, we got to I mean, when you say the banks knew, I just got to reverse there for a second cuz it was interesting what you said there, Mark. I mean, when you're talking about the bullion banks kind of knowing, what exactly did they know? That wars would come in hawkish, that rate hike pricing would hit metals, or that liquidity was about to be pulled from the trade? No, I think they knew that, um, Kevin Warsh was going to be nominated, and that was a surprise nomination. We don't remember that, but that he was the least likely of all the candidates to get the nomination because he was considered the single most hawkish of all of the four candidates. So, the market was expecting a dove to come in and to cut interest rates. Remember, this is pre-war and pre, uh, CPI going up and inflation expectations going up. And so, you know, the market was kind of still expecting rate cuts. Um, and so, the Warsh nomination said, "No, no, no. This guy's the most hawkish nominee. Therefore, no cuts." And of course, in the short run, you know, rate cuts are, you know, supposed to be good for gold and rate hikes are supposed to be bad for gold. And so, this was just a a great signal for those who wanted to see a crash in precious metals and to be able to take advantage of it either by shorting the market you know, that would certainly help a lot of President Trump's supporters and donors and so forth. And then, of course, the bullion banks who are upside down on a lot of their positions in the bullion market. Hey, I mean, the interest on the national debt is now one of the fastest-growing line items in the entire federal budget, as you know. At what point does the bond market stop coordinating, regardless of what the Fed wants? Well, we're on our way. I mean, I think we mentioned that in the last interview. You know, inflation is basically a monetary phenomenon, but we also keep a look on, you know, how much is the government spending, how much do they have to finance, what are the interest payments, how does that impact the market for government bonds. And what we've seen is that the on the long end, that interest rates are rising to the highest level in the last 5 years. And we're pretty much >> [clears throat] >> poised on a precipice of interest rates on long-term government debt breaking out to the upside. And of course, the Treasury and the Fed have been fighting that. You know, they have this new liquidity program at the Fed trying to help out private credit and private equity, but it's also basically quantitative easing to prevent those long-term rates from breaking loose and breaking higher and really signaling that the dollar is going to go lower, you know, breaking support in terms of the foreign exchange value of the US dollar. That's also looks weak. It looks like it's on a precipice. It's been testing in the high 90s right now. It's broken through down through 100 and that's really a short good short-term indicator of the value of the dollar where it's going relative to other currencies in the world, but you know, that's that's not a good long-term measure because you're measuring the value of the fiat paper dollar against the fiat paper currencies of other countries who are also inflating. The Japanese, you know, you know, they're on a precipice. The UK is in similar situation and a lot of governments around the world are facing very similar problems. Yeah. Yeah, we continue to watch that Japanese yen trade as well. I think I know the answer to this question from you, Mark, because I understand Austrian economics, but maybe some don't and and it is kind of a counter, you know, and that is maybe Warsh's real power isn't the size of the the rate hike, maybe it's credibility. Volcker didn't just raise those rates, he changed the psychology, convinced the world the Fed would do whatever it takes. Could a credible chair re-anchor inflation expectations with words and posture without the kind of brute force hikes that would blow up the budget? Well, new personnel do matter and Warsh is relatively hawkish or has a reputation for being relatively hawkish. He's already been on the Fed. He helped Ben Bernanke uh construct the bailouts um in the financial crisis. Um he's considered, you know, relatively uh hawkish in terms of monetary policy in trying to drive down inflation. Um I don't trust that, of course. Um just the fact that he is going to be promoting a new measure of CPI inflation that is going to reduce the the Fed's measure from what it is now, above 3 and 1/2%, nowhere near the 2% target. This new measure is automatically going to bring the Fed's measure down to between 2 and 1/2 and 3%. So, if that's on his agenda, I don't trust him. Um and uh the board itself is now overweighted towards doves because President Trump did not really appoint any hawks in his first go-round, and and neither did uh President Obama or President Biden. Um and a lot of the older blood >> [clears throat] >> on the board uh of governors is gone, who were hawkish, and and the presidents are also probably better uh because they're selected in the districts, um but they're also less hawkish than they used to be Right. um back in the day, say in the 1980s and '90s, when we really had some really super uh presidents and uh super economists running their research departments in in St. Louis and in Dallas. Um you know, and those days are gone. I got to ask you, and and you know, we can stay with that idea of the kind of Fed protecting the banking system in the paper side of the market and and that's drilling into silver. I was re-watching the tape the last time you were on and one of your sharpest arguments last time and there is a real world test of it now. I mean you you laid out why silver supply is fundamentally inelastic and roughly 70% of it comes from byproduct of copper, lead, zinc mining not from primarily silver mines. So when demand surges the market just can't take I guess make any more of it at this point. Silver was near that $90 when we were here in January. Right now it's pulled back to the mid-70s. Inside your framework is that the normal turbulence of a structural bull market or you know, does does a move like that tell you something else is going on here? Yeah, beyond the politics of all the stuff that I've been discussing with Warsh and Trump and the the Fed, um, precious metal markets are volatile. Yeah. And if we look at actual markets, you know, and you look at them in a long-term perspective on a graph, they seem to just shoot right right up. But in actuality, if you break the the graphics down and you stretch them out, and you look at the the actual movement on a short-term basis, you do see see regular corrections, sometimes sharp corrections. So the regular corrections are up to 20%. The sharper corrections can be over 30%. Um, and this was even true during the hyper German hyperinflation when, you know, even after it became known that the government was going to be entirely dependent upon printing money for its budget and its financing the government debt. I mean, the price of gold as measured in German reichsmarks was highly volatile. So, if you look at the, you know, the relative change on a short-term basis, you see very wide swings. And I think most seasoned and informed investors in the precious metals market realize that it's not a straight line up. It that there is a lot of volatility and that these are structured long-term savings actions on the part of stackers. And you know, and then like what we've just seen in in January and February, you know, when these markets get hot, of course, the momentum traders and the, you know, all of those, the speculators come into the market and really wreak wreak havoc on prices going up and prices going down. And you can trade that, but >> [clears throat] >> a lot of people just are buyers and holders and waiting for either a collapse or a really significant change in the monetary regime. Yeah. Yeah, well said. And I kind of wanted to get your your live reaction to something. I wasn't sure if you saw this story. There's a bipartisan legislation just introduced into Congress. It's called the Silver Act and it comes from a Nevada Democrat and an Idaho Republican. It would require precious metals depository spread across all four US time zones. Cuz right now, storage is concentrated almost entirely around New York. And the stated goal is kind of cutting that systemic risk and improving liquidity. I mean, you've described the fragility in the physical and the futures market. So, does centralizing the vaults actually fix the problem you identified? Or is this government showing up a little bit late to a fire that it helped start? Yeah. I had not seen that story, but I'm not surprised by it either. I'm not surprised by it either. Um, you know, back when silver was approaching $50, I said to everybody that, you know, this market is going to start experiencing growing pains. And we're going to see, you know, a lot of rapid change in the markets themselves, but also a lot of institutional um, regular moral, um, like um, changing margin requirements is an is an example. Uh, and we're also seeing, of course, the BRIC countries doing essentially the same thing, trying to set up a system of international trade that avoids the US dollar and backstops all the trades with gold and silver and having depositories uh, across Asia from uh, Hong Kong and Singapore, uh, to um, Saudi Arabia. Um, and so the trading can take place, um, and it's dispersed, um, you know, and in there's a little bit of independence along with the commingling of activities. So, here in the United States, we also have some good um, you know, things happening at the state level where states are allowing uh, gold and silver to be legal tender. Uh, Texas is study setting up a uh, state depository. Um, other states have reduced sales taxes and capital gains taxes, uh, making gold and silver legal tender. Um, so this is a uh, an encouraging next step uh, in all that process. I don't know about the mechanics and what it will actually accomplish, but I'm not surprised. Nobody should be surprised because everybody's thinking about inflation. I mean, regular people that I interact or the economy. Now we're talking about inflation. Interesting. >> And now we're talking about this stupid war in the Middle East. And so, you know, it's push come to shove. Two-thirds of Americans are upset with our government. President Trump's polling is at an all-time low. Congress is at an all-time low. 90% disapprove. Think it's corrupt and inefficient. Um two-thirds of all Americans oppose uh the American government, Congress uh in general. And when I say two-thirds, that doesn't mean that one-third support what the government's doing. The two categories of support for American government only add up to about 10%. So there's, you know, 23% of Americans that are in a neutral sort of mildly negative category, but two-thirds uh consistently across opinion polls are opposed to what's going on. So a lot of people remember gold and silver. They They maybe have seen the history um or seen your program. And they're they're you know, they're finally getting a little bit desperate themselves, and that desperation is showing up um in these kind of activities and now in terms of legislation. Yeah. Yeah, it's been a fascinating year uh this these past couple for for precious metals. That's certainly the case. Um let's bring back that variable that didn't exist the last time you were on the show. That war that you're talking about that's effectively closed the Strait of Hormuz. I mean, right now WTI, I think Brent crude is near 104 a barrel. Uh WTI around 97, excuse me. Gas is up more than 50% since the war started at the end of February. Now, there's some movement towards a deal Rubio calling slight progress just this morning, but Morgan Stanley says gasoline stockpiles are on track for the lowest seasonal level on record by August. So, from an Austrian view, is a war-driven energy shock the same animal as the money-driven inflation you've tracked for years or does that kind of cause change the curve? Yeah, I mean it's it's soaking up money from from everybody and forcing them to pay higher fuel bills, higher energy bills, higher cost of production for producing just about everything on the planet. People think of oil in terms of gasoline in their car, but it's fertilizer and for farmers, it's all all of the transportation network. So, we're going to all be getting, you know, fuel surcharges if you're a business or if you're a consumer. Um, you know, higher cost of plastics, higher cost of industrial materials like sulfuric acid. It's going to drive up mining cost. You know, the the list of products that are derived from oil is quite impressive. I mean, it's amazing how entrepreneurs have taken that standard product and instead of, you know, purifying it and throwing out everything away and giving us kerosene and gasoline, now they produce, you know, quite a few basic products. And those basic products go into the production of everything from our food to our computer chips. And and so, you know, this is going to permeate out if the war were to stop today, the destruction would hopefully stop. But there's been a lot of destruction of the productive capacity of the Persian Gulf area, and that's not going to recover for years. The commodities market I was talking about before the war was already that whole market area was moving up. You look at the consumer the CRB index of commodity prices, it's zoomed up during this process and is now at you know, a historic high in recent years. And if you compare that to the golden Goldman Sachs commodity index, which is very highly weighted to oil prices, well, that's actually leveled off in recent times as the CRB, which includes all the agricultural products and you know, all sorts of things, some of which I don't even know what they are. That's continued to go higher. Um You know, and those commodity prices eventually get put into producer prices in the PPI, which is already been going up, and then of course eventually it ends up in the CPI, the consumer price index. So, this is a tidal wave that's going to come back and smack the American consumer, but you know, it's really wreaking havoc on a lot of our customers around the world. Yeah. In India, in Asia, and in other places around the world. So, that even with an immediate peace the negative consequences are going to be with us for years to come. Let's bring this all the way down to the kitchen table, you know, because you got that concept that explains the entire two economy split, and it's centuries old. It's called the Cantillon effect. You talked about it a little bit last time you were on the show. Explain it for someone who's never heard the term, and then tell me kind of where you see it most clearly in today's economy. Well, this is very much related to my analysis of the K-shaped economy because, you know, the new money goes in to the economy in general, but it goes into the hands first uh of a certain group of people. And so that those groups are going to be advantaged cuz they're getting fresh money at current prices. So the banks, the corporations, government itself, they all get their hands on the money before prices goes up. And so, you know, that's where we're seeing, you know, the upper part of the K benefiting and as we noted broadening out through the S&P 500, which of course is that's all big business. Those are the 500 largest corporations. Uh that money very rarely gets down into mom and pop. Um and then the money gets spent throughout the economy. Uh it, you know, goes throughout the economy from those original people who get the money. Uh and as it moves through the economy, it's generating higher and higher prices. Sometimes that's, you know, almost imperceptible increases in prices, but it's forcing prices up somewhere in the economy. Assets, land, real estate, products, raw materials, and so forth, labor. Um and then by the time it gets to the kitchen uh to the American household and households around the world because all governments are essentially doing the same thing. Uh, but what what is showing up on the kitchen table is higher prices. And so, you know, the inflation and the destructiveness of the war is going to bring higher fuel prices, uh, higher product prices, higher food prices in particular, which is what I'm really worried about, is the lowest end of the income dist- distribution in our economy lower income classes, which are much larger in third and second world economies, you know, where they're not buying a lot of different things. And food and fuel to cook the food and to get to work is really takes up a huge part of the family budget. So, >> Yeah. you know, to the extent that the family budget is dependent upon fuel and food, um, you know, that's where the uh, and and that's where AI spending, you know, is driving up energy prices. You know, Nevada is, you know, confiscating and giving the electrical system over to the data centers and restricting its access, uh, to the general population, but it's going to cause higher electrical prices, um, all around the country. I just learned that there's a data center being built near me and I had no idea. So, they're popping up everywhere. They all require enormous amounts of electricity. And as part of this inflationary process from the Fed, you know, that is what's going to drive the price of fuel and energy, so forth, uh, onto the typical average American household. Yeah. Yeah, and the data backs you up. I mean, more than a half of Americans are now, according to this sentiment this morning, um, vol, you know, volunteering without being asked that prices are eroding their finances. Fuel demand in California is down 9% since last fall. Big ticket household spending is actually falling. Meanwhile, the people who own assets are kind of doing just fine. So, how long can an economy run on two tracks like that? Well, we've been doing it for quite some time. Lately, it's been very intense uh because of, you know, COVID and the $5 trillion that was unleashed. Uh now, supposedly we had a a stingy Fed in the early 2020s, but uh behind the scenes, uh they were releasing secondary stores of monetary inflation on the economy. So, that caught many of us off guard that um the Fed wasn't operating within traditional um policy mechanisms, uh but they still released a $2.5 trillion uh dollars um in the, you know, in from 2022 to 2024. Uh uh and now, you know, they they ran out of that those funds and they stopped the quantitative uh tightening process and then they announced in December this new program of buying $40 billion a month of government bonds. So, they're unrelenting in, you know, dosing the American population with this inflationary gas. Um and eventually it's going to all light on fire and burn the economy down in some respect. You know, we can't accurately predict the future, but there's all sorts of problems of leverage um and there's all sorts of problems in uh especially in the American family household budgets, credit card debt, um you know, is is out of control, and interest rates are rising. Uh so, the American household is really under enormous pressure, and I really feel for people. Uh it's it's just awful. And uh you know, people are doing without and uh right now, and they've already made significant cutbacks. They've already been in the process of cutting their budgets, cutting their expenditures, cutting their subscriptions, reworking their plans for TV and internet access and all of that. So, it's going to get even more painful as we move from cutting fat to cutting muscle in the in the American household. And you know, I I know where the problem is coming from. I just can't do anything about it. >> Right. And you know, here's a here's a detail I can't get past. The Federal Reserve spending billions renovating its own headquarters while this plays out. Is that the Cantillon effect made literal? The money closest to the people who printed it. Yeah, and the the chutzpah of of people in Washington, you know, with their billion-dollar ballrooms and their two two and a half billion-dollar renovations uh of their headquarters. And that's not a big building, by the way. Uh that's just where that just houses the the main part of the Fed and the seven Board of Governor members. Uh there's, you know, all of the district banks, which are also huge, you know, Greek pyramid-like structures all all across the country. They're all elite and uh in in terms of the money that they spend on these people and their facilities. So, Washington is clearly um you know, gone away, but of course, they've taken away the ability of the American voter to actually control politics. They've created a monopoly in Washington, D.C. They get their funding from a few special interest groups and foreign money. They're really not dependent and of course, they lock out third parties and independent candidates. Um and they target uh the best people in Congress. Um uh and they try to drive them out. People who are arguing for spending controls and arguing for the Constitution and arguing for limited uh government and limitations on spending and weariness uh of the national debt expansion. Uh these special interest groups and this foreign money come in and target those specific people while, you know, giving money to people in Congress and the U.S. Senate who just get along and vote for everything and don't make any waves. And so, Americans have really lost effective control over their government. Mhm. Mark, our time always goes too fast. I always look at the clock and go, where the heck did that go? But I mean, bring it back for a working family watching this right now. One that doesn't own a stock portfolio. What does your framework actually tell them to do? Well, they know what to do. Um you know, they um it's a it's a matter of you know, trying to make the family budget work. Yeah. Uh that's very difficult and people are going to have to make uh some structural uh changes in their lifestyle uh moving forward. I don't see this really getting um there's no path of this getting better uh for the American household other than those in the top 1% other than those in the top 10% um in America, people who are especially people who are living off the government and government contracts. Uh you know, there's this whole I mean, the whole data center business is uh you know, that's largely going to be you know, a big part of their revenue is going to be devoted to the software technology people who um are keeping track of the American public, who are surveilling the American public and make sure they're paying their taxes and make sure they're not, you know, doing things out of whack and who knows what they're going to do with that. But the fact that these companies are rushing in to provide the data centers means that you know, the government wants data about everything about everybody so that they can control uh the American people. Um so it's a very very difficult situation. You know, it becoming independent uh as much as you can, where you can, however you can uh however you can be more dependent on your community, your friends, your relatives and less on the government, uh the better you can you better keep you can be. Uh you know, if we all became more attuned to local government and less attuned and did something about stopping the federal government cuz that's really where the problem originates. Even the expansion of state and local spending is largely dependent upon uh federal programs and federal revenue sharing and those kind of things. So, think local, think from the bottom up. Um and don't think that you're going to get bailed out because I don't see any real uh concern on the part of well, from the president certainly. Uh the Congress um you know, anybody up there uh they don't even talk about cutting the budget or cutting programs. Uh so, I don't think we can be the in the least hopeful that this current group is going to do anything to make things easier for the government. I'm working on a um essay right now and a podcast right now where, you know, the mainstream economists try to make taxation and spending kind of a balancing act and fair for everyone and that kind of thing. But in reality, it's not. In the reality, taxation and spending is destructive, causes distortions, makes it harder for the little guy to get ahead, to work from the bottom up. And the real things that stimulate the economy are tax cuts and government spending cuts. Hey, I owe my audience the other side, right? I mean, let me play out the scenario where the metals trade kind of ends, you know, a peace deal gets done, Hormuz reopens, crude falls back towards 70, maybe gas drops, inflation expectations re-anchor. Maybe worse holds steady because the shock resolved in Washington under pressure from a furious electorate, you know, actually cut spending. In that world, what would happen to gold and silver? And and how seriously should investors take that scenario? Well, that's what we're all looking for. We're looking for not necessarily true monetary reform of going back to a gold standard with silver coinage. That's something that Mises always fought for his entire life. But any kind of retrenchment like we saw under Volcker would mean you know, trouble for precious metal prices. I you know, it would be very disruptive initially, but the long-term benefits of that kind of thing would be great. I'm hoping, you know, that gold goes back to $20 an ounce and silver goes back to $1 an ounce and that we can have honest money again based that looks just like the old system. But I'm not counting on that. But even a retrenchment of monetary policy that prevented the government from borrowing money and that prevented the Fed from increasing the supply of money or prevented the Fed from intervening in interest rates. That's really what we have to do. Or a simple matter of allowing Americans to own gold and silver in bank accounts which they could which they could easily move back and forth to cash currency and not charge them any taxes or capital gains taxes on their holdings in those accounts. Those accounts exist today. It's just that they they tax you on capital gains in those accounts. But if if they were to do that one simple thing I think that would have a dramatic positive effect uh, the American population. I know like China encourages its citizens to put its savings, individual savings, into gold accounts. Um, and so the the um, Chinese population is somewhat insulated from inflation. Obviously, the Indian population, which have been historic uh, hoarders of gold and silver, are somewhat insulated from inflation. So, that's 3 billion people out of 8 billion people. If we could spread that around the world, we could make inflation of the money supplies of currency, paper currency, uh, far less attractive to government and uh, and and the and the working classes. See, that's the key is that the solution has to involve giving access to the working classes uh, of their own personal gold standard and the incentive to save. So, you know, they've got to take the taxation of savings out of the picture uh, and make inflation and make those savings insulated from inflation. That would help uh, rebuild the economy from the bottom up. Everything good in this world comes from the bottom up. Nothing good comes from things that are coming from the top down. Everything from the top down is almost always bad for us. And I think that's the simple lesson I would leave everybody uh, from no matter what the question, no matter what the issue, no matter what the policy, does it help us build from the bottom up? Great. Is it a top-down solution? Terrible. I mean, don't just save in currency, save in metals. I mean, very different message than Western central banks have sent for decades. Hey Mark, before I let you go, I understand you have an event coming up in New Mexico this August you wanted to tell people about. Tell us what's happening there and and where our viewers can find out more. Well, I mean, we have events all the time. We just had Rothbard University here. It was great. Um but we're having a conference in Albuquerque, New Mexico, August 15th on gold and silver in the future of freedom. And I will be uh speaking at the conference. Uh Ryan McMaken, who's in charge of mises.org and the general editor of the Mises Institute, a brilliant uh scholar. Uh we have um JP Cortez for the um Oh gosh, I can't remember his organization, but uh Sound Money League. Yeah, Sound Money League. Um yeah, he's great. He was actually a student here at Auburn University. I'm so very proud of him and all he's been able to accomplish. Mhm. Um so we're going to have a great uh group of speakers. Our main speaker is an a real true and blue expert at uh financial uh analysis and uh contrary investing. And he's very favorable, of course, to gold and um and he really works uh the numbers on companies the way they used to in the past. So, it's a great blend of uh financial analysis, contrary investing with a uh good flavor of uh gold and silver investing. So, we're bringing together, you know, speakers from four different perspectives. Mhm. Uh the financial, the political, the historical, and I'm the theoretical guy. Um it's not very expensive. It's in Albuquerque. Uh we always have a lot of fun at these things, too. Um making fun of the state and the Fed while learning a few things >> [laughter] >> and enjoying ourselves. So, you can look that up on mises.org under our events page. Beautiful. Dr. Mark Thornton. Yeah. Always worth the time. I appreciate this. I'm kind of jealous. I know JP, jealous I'm not going to be there in in August, but right in the middle of my son's first summer. So, I'm going to do that first. First things first, Jeremy. You bet you. All right, Mark. Thanks again. Always a perspective you won't get on mainstream financial TV. We thank you for being here. Thank you very much. And for everyone watching, here's the takeaway. The gap between Wall Street and the kitchen table isn't an accident. It seems like a mechanism and now you understand how it works. Whether you agree with Mark or not, that framework will help you read every headline that comes next. If this was worth your time, subscribe. It's how we keep bringing you the conversations the mainstream won't have. And and tell us in the comments, are you on Mark's side of this, hard assets, >> [music] >> or do you think the market's got it right? We read everyone. I'm Jeremy Saffron. We'll see you next time on Kitco News. >> [music] [music] [music] >> I