#1005 - What’s Driving Gold Higher? | with Harry Melandri

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0:54What's driving gold higher? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Harry Malandri, advisor at MI2 Partners. Hi, Harry. Hi, Maggie. How are you? Great. I always love when we get you on the daily briefing because we haven't had a chance to catch up in a while. We were just talking a little bit before we came on air, but we're starting a new month, a new quarter, and we seem to have a different tone in the market. So stocks down today, treasury yields up, gold's up. on what seems to be fading hopes for a Fed rate cut. So this has very much been a theme in the conversations that we've been having with the guests and contributors who've been coming on.

1:37And they were a little bit ahead, I think, of the market on this. And it's something that also Andreas just talked about in a session with our RVIPs that we did last week. And I wanna, before we jump in, as we sort of set the table here, Let's listen to a clip of that, and then I'll get your thoughts on the other side. As far as I can judge, given the live assessments of the US economy, there is no whatsoever need to cut interest rates. Could it be that interest rates will be lower in, say, 24 months time? Sure. But in the foreseeable future, in the tradable future, I don't think there is any need to cut interest rates.

2:22So I have sympathy for that view from Bob Elliott. And my base case, if you put a pistol to my head, would probably be that they don't cut interest rates this year. Because between now and June, they've kind of leaned on June as a likely timing for that interest rate cut, right? I think data will prove to be even stronger than what it is right now. And why move then? I simply don't see it. So that was really, I think that's just been echoed. We had Bob Elliott on talking about it. Ben Miller gave us a big presentation on Friday. And everyone really trying to wrap their heads around whether this is going to be a sort of different regime that we're in, Harry.

3:07How are you thinking about the economy and rates here? So we at MIT have been on the higher for longer camp for a while now. We were there before it was fashionable. and I think there's a fair note you mentioned Bob Elliott, he's been in that camp a bunch of other guys Andy Constance for example a lot of us didn't see where the weakness was going to come from, I think people were inferring that the economy should weaken because rates were high but not but they were jumping the gun it hadn't appeared and right now they're starting to capitulate and you're seeing that, you know, bonds, I think the positioning has switched from the end of the year.

3:52Sometime in Q4, people bought a lot of bonds looking at the Merrill Lynch survey and everyone positioned. Because after all, if it's worked for the last 30 years, buying dips has worked in yields for 30 years, why would you change it now? That's what made you an MD in an investment bank. That's why you're a PM in a hedge fund, buying fixed income market dips always works and it's generally positive carry. So you could see that people are always going to push in that direction. And the question now is why isn't it working? Will it work? Is it really true? And you know, it's a great, so I got lots of theories and no proofs on why it's working out like this.

4:40One of which is you guys have interviewed Mosler, I've interviewed Mosler. Mosler talks about fiscal policy and the impact of rates on fiscal and how we have this positive feedback loop. More interestingly, Bob Elliott disagreed with Warren. Bob Elliott did a really interesting Twitter thread that I'm still digesting and trying to kind of analyze, or at least get the same results, where he suggested that actually only about 25 % of the boosted nominal GDP is down to fiscal. So then you might ask the question, where's the other 75 % coming from? And Bob Elliott's analysis is that if you look at the GDP account, you get it from wages and incomes, which he then suggests will be sort of like the 50s and 60s where you had self-sustaining growth.

5:42I just read a really interesting paper by a guy called Ernie Tedeschi. Eni Tadeshi used to be at ISI and I think he's in and out of administrations all the time when they're Democrat Eni Tadeshi is usually in right now he's at the Council of Economic Advisors and he just wrote up an interesting hypothesis that in fact the issue is immigration that the reason the numbers don't make sense is we have way more immigration than people think legal and illegal. And for me, it's a really fascinating hypothesis. I'm trying to replicate numbers now and go through things and kind of see if there's anything.

6:20The diagnosis of the current situation makes a big difference as to what will happen moving forward after the elections in 2025. So walk us through that. Walk us through why that matters so much, if it's fiscal. And I just will, you know, I'm sure underline what a lot of people listening are thinking, which is that everyone has been talking about fiscal dominance and that it's not monetary. You know, now we're in a regime where it's government spending, the massive amounts of government spending still snaking its way through the economy. I mean, that's what everyone had been pointing at. So if it's something, if there's something else going on, that is really important.

7:03But follow that line of thought why you're paying such close attention to it? So first of all, I'm not sure that it's not fiscal, but it's definitely, yeah, exactly. Some proportionate definitely is fiscal because these are huge numbers, but is it all fiscal? And if it isn't, what else is contributing? And this matters because we have an election. It's an election year. We did an interview with some guys called political alpha on this platform. And they tell us that actually a second Trump administration would not be as fiscally aggressive as the first one. Why do they think that? Because I think everyone thinks every politician everywhere is just going to continue to spend like crazy.

7:52It doesn't matter who they are or where they are. Why do they think it wouldn't be as fiscally stimulative? They've spoken to the transition team and you know how it is like in the business, actually having contact with and meeting people can sometimes give you insights that you don't have if you just assume things a certain ways. I definitely, we knew that Trump was fiscally loose, like a New York Republican, before he got in the first time around. But when the political alpha guys talk to the transition team, They're getting a totally different read. Everyone's a little disgusted, apparently, in the Republican Party with the scale of the fiscal transfers that happened.

8:38There are these questions about the long-term sustainability of the deficit. And I think any reasonable person looking at the trajectory of the deficit would be a little concerned. I'm not a huge deficit hawk myself. I mean, there are lots of ways of making this thing work, not the least of which is cutting interest rates, because that's a trillion dollars of debt service there. so the problems can get look terrible and kind of disappear and inflation itself is a solution to the problem right it's um so i don't worry so much about that but i do worry about the price of bonds in the future i you know i have leveraged positions and i can see how you if the trump team were to get in and it was all about fiscal then the next thing you know is that suddenly they cut discretionary spending and they cut rates and you might have two fiscal contractions happening simultaneously and the market's not priced for it.

9:32So I paid attention for that reason. And that's why I'm so interested in the Tedeschi hypothesis and Bob Elliott's analysis, because when I put the two together, if it's immigration, it ain't going to go away. It'll still be there regardless. You're going to still have that uplift. If anything, it can accelerate between now and the elections, it can get a lot faster. So, yeah, it's a really interesting thing. And I'd like to nail this one down, but I haven't got me yet. I'm sorry. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

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12:04Well, this is part of why we're talking about trying to hook you up with Mosler again, so we can sort of pick through this. So stay tuned. Everyone will let you know if that happens. But it is a really interesting concept. So if that is the case, that would be that sort of, you know, back in the day, it was always, when the Fed was looking at inflation or worried about inflation, it was always the wage inflation that was the most important component because it tends to be not only sticky, but permanent, right? It's hard to roll wages back as opposed to something coming from a supply chain. Is that kind of growth, what does that mean for rates?

12:51So when Bob was on, he was throwing the theory out that maybe neutral for the Fed is a lot higher than anyone expects. We're not going back to two, two and a half period. We are going to have interest rates that stay higher or the floor is higher. Does it feel like that is a possibility that's priced into the market? Or is that the adjustment the market's making now? So it's a fine question because what the market discounts is critical for working out what the line of least resistance is in price action. And I was intrigued. I listened to one of the economists at Aberdeen Asset Management, maybe the chief economist.

13:32You get to a certain age and even economists start to look young to you all the time. It's like policemen, right? That's because we're getting old. It's cruel of you to point that out. But anyway, so yeah, they were making the point that they thought inflation would eventually drop back to 2%, below 2%. And I just shake my head. I mean, I'm not saying it's not possible, but I just don't think it's odds on. And I think what you've got there is the fact that whatever we have seen in the past, the previous 30 years of experience, it's a behavioral economics bias. We're all going to be biased into thinking that the future is going to be like the past.

14:15Actually, when you look at what's happening, we, MIT, we put out something on the macro stuff we do with Real Vision on defense spending recently. Julian wrote up a paper on defense spending. There's no way defense is going to come back down. Defense spending is only heading higher. We have to gear our defense spending to compete with adversaries who can do defense like the second world war where you have this you have to outproduce your opponent um there's all sorts of things we have to adjust to um and that's one of the fact only one of several factors biasing rates higher that doesn't mean they don't come down over 10 years but the idea that you should expect some two percent inflation in the next couple of years i i struggled with that there are really good reasons why that isn't going to happen so and you don't Don't buy the technology is deflationary kind of row point of view.

15:16Technology is deflationary. But you have that factor pressing up against the fact that supposing, for example, let's look at this Tedeschi paper and let's talk briefly about what he said. Well, we know that immigration accounted for three million extra jobs in the U.S. And that kept inflation lower in the U.S. But if you go deeper, the numbers that he's talking about, it looks to me like more like 6 million jobs. So we're underestimating the scale of that immigration. That's kept things under wraps. If that stops, how much inflationary pressure would there be in the United States without 6 million additional workers, not counting their families or their dependents?

16:03So I'm sure you're right that technology is a deflationary factor. I just don't know if it offsets the inflationary components we have. And labor compensation is the thing that can keep pushing higher. so i think to keep have a more benign outlook for uh bond markets requires you to believe that the immigration flow into the united states will continue for the foreseeable future i think politically that's a serious problem so i'm just not convinced that will continue um and with regard to the rest of it, yeah, I don't think long-term rates are an equilibrium lower than here at the moment. That can change with other factors, but not right now.

16:55Otherwise, surely we'd have seen these real rates already cause bigger problems elsewhere outside of real estate. Yeah, that's an interesting question. Ben Miller was on Friday, and he has commercial real estate. He runs a commercial real estate fund and also an innovation fund. So he's got like a hand in technology and a hand in commercial real estate. So he had some really interesting charts about the effect of the higher rates. And everyone sort of thought, well, it hasn't had an impact. It's been dwarfed by all of the fiscal and maybe immigration. But he doesn't think they've hit yet because of the rate reset, the rollover in the US.

17:46He thinks it's still coming. and that there will be a pretty severe recession if that happens, unless there's some kind of Fed easing or some kind of something, if the Fed gets that timing exactly right. AJ is asking, if your hypothesis is rates continue to stay high due to a stronger economy, what are some things you're thinking about for how you could be wrong? I mean, you're not sure. I think we said this at the start, that you're mulling this over. I'm not sure who. We've got to disentangle multiple different statements. So first of all, is the economy going to be surprisingly strong? Well, if I agree with Bob and I agree with Ernie Tedeschi, then yeah, it's going to be surprisingly strong.

18:31But that doesn't necessarily mean the Fed leaves rates where they are. The clip you just ran was Andreas asking why the Fed would cut. There are other reasons why the Fed might choose to cut. You can look at this situation and decide that real rates of 2 % or 3 % are too high in a longer or medium-term view ahead of an election. So there are reasons. I agree that they don't have much cover, but how much cover do they need? So that's one observation. This all has to be run through some imaginary Fed reaction function. And I've seen their statements. Their statements seem really determined to cut rates.

19:14Yeah, that's the strange thing, right? I mean, the economy is and has been strong. The only thing they had going was that there had been some decent news on inflation, but it's not where you'd think it would be for them to. And they had the chance to correct that message. Jay Powell did, and he didn't. He chose not to last time, which was interesting. Right, exactly. So I think there's a bias to cut rates if they could possibly get away with it. and I leave it to the informed listener or watcher to decide why there's that bias, I couldn't possibly comment. The other side of this is, okay, does it matter why?

19:57And I think it really does matter why. If this is immigration, then there's a head of steam on this and this thing could speed up rather than slow down. Profits could speed up rather than slow down. Everything could speed up rather. And it would also tell you a lot about why the polls look like the way they look. Why is it that the working classes in the United States have shifted, the opinion polls are shifting in favor of Mr. Trump? What's causing that? And high rates are a distributive issue. If you have a locked-in low rate, you don't experience a negative problem. If you don't have a locked-in low rate, if you're renting, you've got a problem.

20:46So there's a big distributive factor. Now, as for this issue about, you know, you talked about Ben Miller and the real estate markets. So I think you've got to step through your logic real carefully here. I can imagine a world in which real estate is absolutely disastrous, and there are massive collateral losses. I can imagine resets, the demand for resets, reset mortgages on commercial stuff going through the roof and spreads widening and there being substantial losses. It's a space I'm familiar with. I play in it myself. And here's the thing. Nobody cares if I lose money. It won't matter. Will it affect my consumption?

21:30Not really. I have to lose a lot of money before it affects my consumption much because we don't spend up to the amount we could. And elsewhere, why would it make stock markets go down? Because demand drops? It could be a trivial factor. So, you know, you step through this and, yeah, there are losses, but those losses could be primarily distributive rather than macro. And finally, and like the key point, remember, it's like from 2008, 2009, banks and investors do not realize losses when it doesn't benefit them to realize losses. We're going to take another quick break to hear a word from our partners.

22:09We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

22:17Oh, yeah. I mean, I think Bob is so funny. It's like if banks do, they're not good at lending, but boy, they're good at sort of restructuring hot messes. A lot of experience like that. But it's not just commercial real estate, right? If rates stay longer than anybody who has to buy anything, a car, a home, all of that hits the economy. Sure, if you have to borrow money. Yeah. Look, this is the thing. I had this argument with my colleagues this morning, and lots of people keep showing me charts showing people who are not particularly well off and not particularly well off. So forgive me, I don't mean to be quite so dismissive of it, but if you're indexing how the economy overall is performing from the bottom 80 % of consumers, you are not going to get a very instructive picture of the overall economy.

23:0920 % of consumers are going to be doing well. Julian talks about this concept of hyper-financialization. Really, you should think of this as wealth effects for CEOs. if the stock market's going up, CEOs are not being rewarded for running their companies tight, they're being rewarded for increasing cash flows through their companies, they're going to start spending more. And they have been in defensive posture for a while. And yet profits are enormous. Profits are only getting bigger. Part of that fiscal policy, because it's a transfer from the public sector to the private sector. Part of it might be immigration, which is noted.

23:49But there's that hyper-financialization and then there's wealth effects. Even I'm noticing that the gains from the stock market increases and gold and everything is starting to affect my net wealth position. I'm starting to think that I could maybe get through retirement without ever having to resort to eating cat food at some point. It's not like every time I've thought that in the past, by the way, that preceded a big market correction. So it makes me wonder, like we've got, These are huge rallies, huge rallies. And I can't see anything unwinding it on a three-month view. So we did have a question about gold.

24:30We started the show asking about gold. Sure. People have been so disappointed in the past when it looked like it was getting ready to go. Does it feel different this time? Yeah, it does to me. So I'm a big fan of Peter Brown. And Peter Brandt, who shows up on the show, he talks about this very big, massy cup and handle structure in the gold market. We broke that a while back. Now, MI2 has been bullish gold forever. Some very big gold bulls on our team. I wasn't one of them. When we broke the cup and handle, I hopped on board real quick because it's like watching your colleagues win a lottery ticket.

25:14You know, you don't want to be the guy who didn't participate in the lottery pool when they win. So I hopped on board. Why is gold going up? Well, our analysis has been a weak hands, a strong hand transition has been going on forever. People don't want it to rally. Who are the strong hands? Global central banks seem to be big accumulators. And then there's retail in China. It's a really interesting thing that retail in China is accumulating gold. And that kind of makes sense to me because there is a lot of stress in Chinese real estate and in the Chinese financial system. Various wealth management products are not money good because they're linked to the real estate market.

26:00So Chinese retail investors are finding out that their investments weren't great. that's doing nothing other than to increase the demand for gold now. Because if you lost money on your supposed no-can't-lose wealth management product, what would you move into? And then there's geopolitical factors. All of this together seems to me, unless we start to tighten financial conditions substantially across the West, I don't see why gold doesn't continue. And the stuff that the technicians talk about is they're targeting 2 ,900, for example, on gold. I know what most of the viewers of this are thinking.

26:45They're thinking gold is Bitcoin for old people. You're right. Gold is Bitcoin for old people. Old people have a lot of money. That's a great way to look at it. So AJ asked me a follow-up. Would the Fed be more comfortable with slightly higher inflation, or do we think they'll induce a recession to get to that 2 % target? It's another way of asking, are they going to ease, even if inflation is running hotter than they like, or are they going to stick to their guns? AJ, the Fed has already answered this question for you, because they were talking about easing. It's true that inflation was still heading down there, and they could go early and anticipate it.

27:32But they weren't waiting for inflation to get below the 2 % target. They started to talk about it well before we got near the 2%. And if you look into the data now, it just doesn't look like we're going to coast down in the near term. I know. You shared an ISM chart, right? Did you send over a chart? I did send over a chart. Brian, maybe you can put that up. Because this is, what is this telling you? This is telling you what, the economy is rocking and rolling? You know, yields and ISM are not well correlated, but generally speaking, yields follow ISM to some degree. And of course they would, because ISM is a cyclical indicator, tells you where you are in the cycle.

28:12So look, the stat that Julian wanted me to say, I didn't want to share the chart with you guys, is that when ISM goes below 50 and then rises back above it, the Fed doesn't cut rates. It's been well over 30 years since the last time that ISM dropped below and then popped above and they cut rates. They might raise rates for sure, but it's very unusual for the Fed to say, look, ISM's recovering, let's cut rates anyway. That doesn't happen. Now, I would suggest that if you built a model of the Fed, a subjective model that reflected all of my prejudices, I would have found the Fed to be weirdly dovish all the way along through this cycle.