November 23, 2011; A View from the Top of the Bond Market: An Interview with the Aden Sisters

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin:  David, this year, again, you got a chance to sit down in a relaxed way and talk to some old family friends, people who, nationwide, and actually, worldwide, are respected for their technical market analysis.

David:  Kevin, going back many decades, my dad and I visited Pam and Mary Anne Aden down in San Jose, Costa Rica.  They have lived there for decades.  I must have been twelve years old, and I remember sitting on their veranda sharing a cup of coffee as my dad was discussing with them charts and graphs and things that were happening in the market then, things that they anticipated in the future, looking at both fundamental analysis and technical analysis.

It was an interesting conversation, Kevin, because that was decades ago, and it is the same kind of thing that they are producing today through their Aden forecast.  They were trusted enough to have taken on the responsibility of publishing Harry Schultz’s letter, once he retired from writing that every month, and they are good friends with him.

Kevin:  And with Richard Russell, as well.  The people that they know – if you listed them, it would be the Who’s Who of analysts.

David:  We are a small collection of people, Kevin, who have known each other for 30 or 40 years, so it was nice to sit down with them again.  We talked about interest rates and some of the fundamental things in terms of interest rates being down and bond prices being up.  We talked about the gold markets, we talked about equities.  And toward the end of the interview we talked about change, and some of the things that we can anticipate leading our families through and trying to share with our children and grandchildren, leaving not just a legacy of things and stuff and money, but of ideas and of fortitude and of character.  It was a good conversation.  I am glad to have them on the program again this year.

Kevin:  I look forward to every Wednesday when they publish just a simple one-page analysis of what is going on.  They don’t say more than they need to say, but boy, they have been accurate through the years.  I am looking forward to hearing the interview that follows now:

David:  The major interests that we have, if you look at the credit trends that have been in place for the better part of 30 years, and expansion of credit that has fed into an asset boom, both in the equities markets, and in real estate, not only in the U.S., but globally – credit is certainly more constrained today.  There are major impacts in various asset classes.  Equities have gone nowhere for ten years.  Maybe that continues, maybe it doesn’t, but we can look at things from a fundamental standpoint.

We will explore a little bit with both of you this afternoon, the technical side.  What do you see?  Pick where you would like to start – the bond markets, U.S. treasury markets, the gold market, U.S. equities markets.  From a short-term perspective, from a long-term perspective, as you are analyzing charts, where would you suggest that we are in terms of the mega-trends?  Where might be go from here?

Mary Anne Aden:  I think the bond market surprised many people this year.  I think more people were against a bond bull market forecast for this year, and so that was a surprise for many when it started becoming very strong in the early summertime.  We think that, first of all, the trend since 1981, on a technical basis, has been clearly down, and for the 30-year yield, we think that it is going to stay down as long as it stays below 4½%.  That is our key number, actually, on a technical basis, where the trend is.  That is a level we have always been recommending our subscribers, and otherwise, to watch that level, as long as it is below.  Of course now we see yields as low as they were in 2008, and prior to that it was in the 1950s that we saw them that low, so this is a very abnormal spike in the yield now in 2011, and back in 2008.  We see that, at some point, the interest rate trend will change.  It has been kept down, and it looks like it will stay down, meaning a bond bull market, for the foreseeable future.

David:  On that point of rising yields, one of the things that makes gold attractive in this environment is that one doesn’t have any place else to go that is particularly positive, particularly interesting.  Low-to-negative real rates of return allow for someone to opt out and just move to the sidelines, and gold ends up being a good credit bet and a great holding pattern to be in.  Would you suggest that as we see that change in trend, in interest rates, that now you are talking about the clock beginning to tick for the gold bull market?

Pamela Aden:  What is interesting is that prior to 2000, gold and interest rates moved together, and that was the trend.  The mega and the major trends were all being moved together on that basis, and it changed, clearly, and to this day it was still the same.  Now, interest rates and gold prices are moving opposite.  When the mega trend changes again to the upside on interest rates, and it is not there yet, but it looks like it could be coming up likely for next year, then we would have to see how it affects the gold price, because in the past they would move together, but yes, clearly, that will be a competition thing for the gold price.  It has enjoyed a low income environment for a long time now, and it has been able to really rise, but it is also rising for other reasons, too.  So we would have to see if that relationship changes, or how it is affected as the time comes.

David:  Your thoughts on the gold market, particularly?  We have been in a bull market for ten years.  I’ve spent some time on Bloomberg and CNBC and they are surprised that we are still bullish, thinking that it has already been through a bull phase, and in their mind it is in a bubble.  I gather that is not your opinion, but what does a bubble look like in any asset class, and what would be the telltales, in your opinion, that yes, now we are in a bubble?

Mary Anne:  We’re clearly not in a bubble and there are dozens of reasons why.  I could rattle off some of the most important ones, but that would be very much talking about the fundamentals.  To give you the numbers, which is very important and tells the story anyway, in bubbles, and we are talking about the gold bubble of the 1970s, the NASDAQ tech bubble of the 1990s, the Japanese stock market bubble – in those cases, those markets rose 2000 to 3000+ percent from bottom to top.  This time, gold has been rising for eleven years, which gives people a lot of cause to say, “Oh, it has risen too far, too fast, too long – it’s a bubble.”  But gold in that time has only risen 600%.  I say only, but that has been a very good return, it has been year after year a good return on investment, but it is certainly not bubble standard, so we think this bull market has a lot further to run.

Just touching a bit on the fundamentals, the debt, the trillion-dollar deficits year after year, the spending, on and on, all the things we all know, the dollar losing its reserve status – all of these factors are coming in to play.  Globalization is a huge one.  The recession – the recovery from the 2008 recession hasn’t been like normal recoveries in the sense of unemployment remaining high and housing still down.  There are a lot of factors that are what we call this debt lag hanging over the market.

In the meantime, there is a huge demand for gold in the emerging countries.  It is coming primarily from China and India, but also from all over the world.  These are all the reasons why we believe this bull market has a lot further to run.  If you are looking at the mega trend, it will stay up as long as gold stays about $1470.  That’s the number we are watching, and it is far above that level right now.  We have always taken a long-term view, to just stay with it as long as the bull market stays intact.

David:  Consistently, for the last ten years, gold has gotten near the 65-week moving average.

Mary Anne:  Yes.

David:  And maybe in 2008 it slipped below.  Let’s say that we did have another de-leveraging event, a couple of major financial firms implode, and the governments scrambling, our government and some other government around the world, trying to put their thumbs in the dike and make sure that this doesn’t get catastrophic.  We did see that in 2008.

Mary Anne:  Yes.

David:  Gold broke through that critical level.  What would cause you, as a technical analyst, to say, “It may have, but the trend is not finished?”  Is that where you combine technical analysis and fundamentals?

Mary Anne:  Yes, very much so.  Nothing is black and white, and it did break, it was a temporary break, but it was a panic-mode situation, where everything went down – stocks, gold – and it was just very much a reaction, so then you have to let the dust settle a bit, if you will, and then see what happens.  That was what happened in 2008, it was a panic.  And as you know very well, the world was brought to the brink, so it was a very abnormal situation.  But as you said, that could certainly happen again.  It almost happened last week with the euro problems.  There is always something there that hangs overhead, so you have to be on the alert.

Pamela:  I would like to add something on a technical basis for gold.  When it broke the 65-week moving average, 2008 was the low, and when it came back above it in September of 2009, gold broke into a stronger phase with a bull market.  It was a new phase when it clearly broke above $1000 in September almost a year later.  Since then, we have not had any kind of decline that is substantial.  This decline in September was only 16%, so we have been thinking that it should go lower, just to have a normal bull market correction, and it hasn’t.  Now it is popping back up, and we are still wondering if we are going to get it, but if we don’t get it, this is saying that we are in an explosive situation.  If we see that $1900 peak clearly broken and it stays there, we could clearly be in an explosive situation, because it would be an extremely bullish bull market.

David:  It seems like that is characteristic of a latter stage, where normal patterns within a bull market are two steps forward, one step back.  It is constructive, but it is also harrowing, because with some of those corrections you are asking the question, “Has the trend changed, has something significant changed, because the price is dropping?”  And that has been happening for the last ten years, moving into what we have described as a third phase for the metals.  We are really talking about two steps forward, and two steps forward, and two steps forward.

Mary Anne:  Exactly, exactly.

David:  Essentially, technology stocks in 1996, they had already been described as extraordinarily exuberant, and that didn’t keep them from doubling, and doubling again.  So we have considered an annual rate of change in the neighborhood of 150-200% is one of those telltales, for now you are seeing real momentum to the upside, and perhaps something that is ultimately not sustainable.  But where we have one or two years, successively, with 150-200% rate of change, everyone’s in that’s going to be in, in terms of a gold-owner.

From our standpoint, just to echo what you said a moment ago, the buying is primarily in Asia, primarily in Europe, primarily in the Middle East.  We have been in the metals business for 40 years, and are doing very brisk business with old clients, which is to say, there is not a massive amount of new people with interest in gold.  It is people who sometime in the last 30 or 40 years have taken an interest, and have purchased maybe 2 or 3 ounces before, and are now making a more significant commitment because they realize what is happening.  But that is not really a new audience.  It is a very limited audience.  I don’t know if it is 3% or 5% of the general population, but it is very small.

Regarding the equities markets, we have seen what can happen with equities when you pour fuel on the flames, so to say, liquidity coming out of Europe, which has been the same kind of liquidity provisions provided through TARP and TALF and all of the different things that we have done here in the states.  Do you buy that?  Or is that something where you say, “No, actually the trend has been sideways, to down, for ten years – follow the primary bull markets and someone else play with the cyclicals if they choose to?”  But as a technical analyst, maybe that is just as much of interest to you – the short-term trends.

Pamela:  If you look at the stock market from 2000, the S&P 500, from 2000 to today, we have had flat tops and lower bottoms, but those rises are very worthwhile, which is another reason we think the global market has longer to go, because it has been camouflaged by the stock market’s rises.  For instance, from 2009 until just this year, we have had a decent rise in the stock market, and as an investor buying then, and selling now, you would have done okay.  And it would be good to diversify.  We actually went with the trend on that one, but now, if it is going to come back up, and let’s say the S&P goes back to test its 2007 highs, still a major top formation on a big-picture basis, from now to there, it could be worthwhile as an investor.  But it is higher risk, definitely, at this point – very high risk.  We see the emerging markets changing.  We see that maybe the Dow will outperform the emerging markets in this one.  Why?  We don’t know why, actually, but that’s what, technically, it looks like.

David:  That is an interesting observation.  Well, with a lot of years of looking at the markets, and analyzing not only the technicals, but the fundamentals, as well, as the two of you sit at the beach and ponder, when you are not at the office working hard, but just kind of collecting your thoughts, and reflecting between yourselves, what are the things that have surprised you?  What are the things that you have said, “I didn’t think it would go this far.”  Or, “I’d love to have been a fly on the wall.”  What have some of your reflections been in the last couple of years?  These have been very, very curious.

Mary Anne:  One surprising thing is no decent downward correction in gold since the financial meltdown of 2008.  That is something that was a surprise to us, actually.  We have been waiting for those weaker moments to buy more, and we had to buy at a higher level.  That was it.

Pamela:  Another thing that has been surprising is that despite what we were just talking about, all the debt, and all the deficits, the spending, things still somehow plug along, not ideally, but things always seem to take longer than you would expect.  There are a lot of people who for years have been talking about the gloom and doom and that everything is going to fall apart and we are going to have a great depression, or a great debt blow-up, and all of these things, and they don’t happen.  That is not to say they are not going to eventually happen, but things just simply do take longer and you do need patience.

David:  In the last few years I have made a study of Latin American debt defaults, and it is interesting, looking at the charts on interest rates, whether it is Honduras, whether it is Columbia, whether it is Peru, whether it is Argentina, over several hundred years, what is obvious is that the rates get lower, and lower, and lower, and things become more desperate as time goes on, but if you were just looking at the chart, you would assume that things have never been better.  Rates should reflect some degree of credit risk, and yet, at the moment where there appears to be no credit risk, historically, that is when the most credit risk exists, and what you see is, you go from very low rates to very high rates, very rapidly – at least in Latin America, where it is a snap moment, and it does take longer, longer, longer than you ever expected, but when it happens…

Pamela:  To get there… it’s quick.

David:  It’s quick.

Pamela:  And that’s Greece’s story, talking about the latest example.  This has been a long time coming – I mean, decades, really. I’m certainly not putting down Greece, because I think it’s a beautiful country, but they have had a long history of kicking back and enjoying the good life, becoming a member of the Eurozone, but everybody still having their cultural ways, if you will.  It is just interesting that they were the first to go broke, and then everyone is trying to keep them from going broke, and trying to help them in this, and the Greek people, themselves, are furious about the austerity measures, and what have you.  All this process has taken quite a long time, but then, like you just said, when it finally “blew,” their interest rates went shooting up to almost 200%, I think, or 150% in any case, and now everyone is, just like you said, running around like mad trying to plug the dike.

But then, who is coming up next?  Again, Spain and Italy – we know they have bad raps, if you will.  But that has been a long time coming, too.  It is just very interesting to see, as these things unfold. And if you want to, you can throw the U.S. in the pot, too.  Everything does just take time.

David:  Yes, relative to Europe, our debt-to-GDP figures are either over or under theirs, by 100%.  It just depends on whether or not you want to throw in Fannie Mae, Freddie Mac, and some of our other NGOs, which are actually obligations, but aren’t officially counted, so we are either 350, or 550, so that variance of 100% over or 100% under, and Spain and Italy are closer to 450, right in between.  But interest rates would imply that there is no risk in the U.S. market.

Mary Anne:  Exactly.

David:  We have wondered if it is not a misjudgment, the concern being primarily for liquidity.  In the final analysis, it will be a judgment on the basis of sovereign stability and solvency.

As we wrap up, there are a lot of things that I would be interested in knowing what you would reflect on, and what sort of advice you would give.  I know your son has come into the business.  If you were having one of those sage-like conversations, and sitting down with children and grandchildren, and saying, “Here’s something that you need to know, this is something that we learned from this period in time.  Don’t ever forget it,” what can we learn from this period in time?  What do you think will be etched in history?  What should we walk away with, as investors, or just as families, with a recognition, or a cognizance of?

Pamela:  Excess comes to mind, when you ask that kind of question, starting with everybody getting drunk on excess, meaning with the credit defaults, and the mortgages – not just sub-prime, but all-prime.  There was just too much – too much leverage, too much excess.  That would be financially, and personally – people who got into too much debt.  Everybody just went spend, spend, spend.  So I would say excess.  When we see those things in the future another 30 years from now, be aware that that is not normal times, and it is not good to be so excessive.  When you ask that kind of question, I would say that comes to mind.

Mary Anne:  Things are always changing, so whenever you think you are real comfy, and you are set in your ways, that is not the way to be.  You have to be able to adapt to change.  If it is the excess that Pam was just talking about, the pendulum swings, and you have to go with it.  I think that is probably a good lesson.  The only thing that is inevitable is change, and of course, death.  But things are always changing.  They will change in your personal life, they will change in your business life, they will change economically, but some people are very resistant to change and they fight it, and they argue, and they cannot believe that, for example, the world is changing the way it is, and they don’t want it to, and it’s kind of too bad, because it is happening, and it is going to keep happening.

Pamela:  I think another important thing is that people get used to getting benefits from the government, and that is the problem with all the civil unrest, basically, because they are getting things taken away from them.  It is better not to let yourself get too spoiled, because when things are taken away from you, it is very upsetting.  That is exactly why we see Occupy Wall Street, we see all the civil unrest growing around the world, because the developed world is in trouble, while the East is starting to gain, led by China.  This is a shift that is happening and it is causing all this volatility, personally, and in the markets, therefore.  That is the change we are seeing and feeling right now, and Greece is the best example, but we are going to probably keep seeing other examples.  I don’t think Occupy Wall Street is going away.  Something has to give, or head up, before it goes away, whatever it may be.  That, I would say, is something we would tell our kids and grandkids.

David:  I appreciate you sharing your thoughts.  This is the second year in a row we have been able to sit and visit, and as always, it is a real pleasure to see you.

Pamela:  Well, same here.

Mary Anne:  It is a great pleasure.

Pamela:  And thank you very much.