The West Faces Economic 'Shutdown', This Asset Has 50% Upside | Steve Hanke

Key Concepts

• Gold Price Forecast: Professor Steve Hanky's prediction of gold reaching $6,000 per ounce.
• Secular Bull Markets: Historical patterns in gold markets.
• Disposable Personal Income Per Capita: A key metric used in gold price analysis.
• Monetary Policy: The role of central banks (like the Fed) in managing money supply and interest rates.
• Equity Market Bubble: The concept of overvalued stock markets.
• Bubble Detector: A framework for identifying market bubbles based on valuation relative to income.
• Silver Price: Discussion of recent highs and potential future movements.
• Portfolio Rebalancing: Adjusting asset allocation in investment portfolios.
• Tariffs: Taxes on imported goods and their economic impact.
• Trade War: Disputes between countries regarding trade policies.
• Critical Materials/Rare Earths: Resources vital for technology and manufacturing, often controlled by specific countries.
• Interventionism/Socialism: Government intervention in the economy.
• Industrial Policy: Government strategies to promote specific industries.
• Inflation: A general increase in prices and decrease in the purchasing value of money.
• Money Supply: The total amount of money in circulation.
• Regional Banks: Smaller banks that serve specific geographic areas.
• Loan Delinquencies: Failure to make payments on loans.
• Hyperinflation Tracker: A tool to monitor countries experiencing extremely rapid inflation.

Gold Price Forecast and Analysis

Professor Steve Hanky revisits his call for gold to reach $6,000 per ounce. He explains that this prediction is based on a historical correlation observed in secular bull markets for gold. Specifically, these bull markets tend to peak when the price of gold is approximately 10% of the disposable personal income per capita in the United States. This calculation is described as a "back of the envelope thinking" and a "mechanical calculation" that is independent of external factors like foreign wars, monetary policy, or the value of the dollar.

Since the previous interview on September 21st, gold has risen significantly, from around $3,600 to $4,300, an increase of $700. While this rapid ascent might concern some, Professor Hanky states it does not trouble him, noting that correlation doesn't imply causation but observing that the price surge followed the podcast's release. He acknowledges that previous rallies have lasted longer on average (1,062 days) compared to the current rally's duration (735 days as of October 13th), but emphasizes that the magnitude of the current move in such a short time is different.

Global Economic Uncertainty and Gold as a Safe Haven

Professor Hanky attributes the current frenzy in the gold market to a "tremendous amount of uncertainty" that is not being priced into equity or other markets. Gold is seen as a hedge against "tail risk," absorbing uncertainty. He highlights several factors contributing to this uncertainty:

• Foreign Wars: Ongoing conflicts are creating instability.
• Weak Leadership in Europe: He criticizes the leadership in the UK (Starmer), France (Macron), and Germany (Scholz), citing political instability and fiscal problems.
• Germany's Energy Crisis: Germany's decision to cut off Russian gas supply has led to significantly higher costs for liquefied natural gas (LNG) from the US, approximately three times the price of Russian gas. This is forcing Germany to de-industrialize, a situation he likens to a post-WWII US objective that was not achieved due to the Marshall Plan. Germany's manufacturing sector, which is about 23% of GDP, is shrinking, while France's is around 12-13%.
• European Economic Outlook: The IMF's World Economic Outlook report forecasts virtually no growth in Europe, with Germany at -3%, France slightly below 1%, and the UK below 1%.
• US Economic Slowdown/Recession: Professor Hanky anticipates a significant slowdown or recession in the US, during which gold typically performs well.

Equity Market Bubble and Valuation Metrics

Professor Hanky asserts that the US equity market is in a "bubble," meaning it is "overhyped, overpriced, overvalued." He believes investors are ignoring the prevailing uncertainty. He describes the bubble as either "popping" or "slowly seeping air out," but cannot predict the timing of the adjustment.

He introduces "Dr. X's bubble detector," a framework he developed based on a Nobel laureate's work. This indicator relates the value of assets to income, essentially measuring how long it takes to buy an asset or yield. A bubble exists when it takes an "excessively amount of time" to buy yield in the stock market relative to the bond market. He criticizes the tendency for people to spin yarns and hypotheticals about bubbles, emphasizing that the core concept is valuation relative to income.

He dismisses the theory that people are buying stocks due to uncertainty in the same way they are buying gold, stating that stocks represent risk.

Silver Market Analysis

The discussion shifts to silver, which has reached $54 per ounce. Professor Hanky notes that silver has only breached $50 three times in history, and this is the first time it has sustained above $50. He recalls the Hunt Brothers' corner of the silver market in 1980 as the previous instance of such high prices. He recounts a conversation with a friend who owns a significant amount of silver bullion and is contemplating selling it after its recent surge. Professor Hanky advises patience and suggests rebalancing portfolios, especially for older individuals whose stock holdings may have become disproportionately large due to the market's run. He suggests that if a portfolio is no longer balanced (e.g., 85% stocks and 15% bonds instead of a traditional 60/40), rebalancing by lightening up on stocks and increasing holdings in other assets like bonds or gold might be prudent.

Tariffs, Trade Wars, and China's Economic Power

The conversation turns to President Trump's announced 100% tariff on China, set to take effect on November 1st. Professor Hanky strongly refutes the narrative that China started the trade war, stating that the US initiated it. He argues that China is merely counterattacking by restricting exports of critical materials and technology.

He warns that China could "shut down the Western world in about six to nine months" by cutting off these critical materials. He poses a rhetorical question: if facing an adversary who can "pull a trigger and blow your head off," would one stay in the fight? He believes the US should find alternative ways to secure critical minerals, a process that would take approximately 20 years.

He criticizes Secretary of the Treasury Besson's statements about China starting a trade war and the idea of the entire world decoupling from China, calling them "absurd" and "factually incorrect." He argues that the US is actually copying China's economic model, not the other way around.

The US proposal to set "price floors" in forward buying for certain industries is labeled as "disaster," "price controls," and "interventionism," essentially a form of socialism. Professor Hanky contends that politicians are increasingly meddling in economic affairs, dictating business decisions and personnel. He contrasts the US system, where politicians are primarily lawyers, with China's system, where the top hierarchy consists of highly trained engineers. He believes this difference contributes to China's advancement in areas like AI, mining, metal energy, and material science, where they are far ahead of the US due to an emphasis on merit.

Inflation and Money Supply

Professor Hanky reiterates his core belief that "inflation is always and everywhere a monetary phenomenon." He explains that aggregate price indices like the CPI lag changes in the money supply. He has never observed significant inflation anywhere in the world without a prior significant increase in the money supply.

He is "relaxed" about current inflation trends because the money supply has been contracting since April 2022, only recently bottoming out and showing a slight increase. The current growth rate of the money supply (M2) is slightly below his "golden growth rate" of approximately 6%, which he believes is consistent with a 2% inflation target.

Regarding tariffs, he states they act as a sales tax on Americans, increasing the price of imported goods. However, he argues that this will not necessarily lead to widespread inflation if the money supply is not increasing. If Americans spend more on imports due to tariffs, they have less income for other goods and services. He uses the example of eggs and groceries to illustrate how people perceive inflation based on the rising prices of everyday consumables, while other prices, like those for computers or iPhones, might be falling. He notes that import prices are rising about twice as fast as other goods and services, and Americans bear the cost of tariffs.

Federal Reserve Policy and Regional Bank Concerns

Professor Hanky agrees with the market's pricing of Federal Reserve rate cuts, as indicated by Chicago Mercantile Exchange data. He emphasizes that market prices are objective and reflect the collective wisdom of those with "skin in the game."

He is not surprised by signs of cracking in regional banks, such as Zion's Bank Corporation and Western Alliance Bank, citing rising delinquencies on mortgages and loans. He notes that while aggregate delinquency rates might still be below historical averages, specific cases become accentuated when banks are forced to report them in their financial statements. He believes this is a natural consequence of market valuations adjusting to underlying financial realities.

Conclusion and Future Outlook

Professor Hanky concludes by emphasizing the importance of following him on X (@Eve_Hanky) for real-time updates. He is ranked as the third most influential economist globally on Twitter by Focus Economics. He expresses a desire to discuss his "hyperinflation tracker" in a future interview, highlighting Venezuela and North Korea as countries of concern. He advocates for free-market principles and voluntary behavior.