Gold and Silver: A Correction Within a Bull Market
Gold and silver are currently in a correction phase, and that correction may persist for some time — possibly running until September or October — though this is not certain. My personal conviction remains intact: I am not selling my gold, even though I concede this is only my reading and I may be wrong. The reasoning behind the correction is reduced liquidity growth, which has weakened the recent momentum.
When I study the charts, the market action of gold simply is not impressive at the moment. We had a substantial move in gold and silver last year and into the beginning of this year, lasting essentially until the end of February. Since then we have been in this correction. This should be understood the way we now understand 1987 in retrospect: it was a correction within a larger bull market, not the end of one. Upward cycles are routinely interrupted by short-term cycles that temporarily reduce both the rate of inflation and interest rates, but those interruptions do not invalidate the broader trend.
So while money can certainly flow into hard assets such as gold, silver, and platinum, I would not bet on that happening right now. The broader bull thesis for gold is not over; the timing is simply unfavorable at present. Missing the timing tends to damage portfolios more than picking the wrong asset class altogether.
What Strikes Me Now: Financials and Home Builders
What stands out at the present time is the exceptional strength of financial stocks and the emerging strength of home builders — and notably, that strength in home builders is visible not only in the United States but also across emerging markets.
I read this market action as a signal. The strength in these two interest-rate-sensitive sectors suggests that bond yields are likely to move lower in the near term. Over the next six months, a short-term decline in yields is entirely possible before the longer-term upward trend reasserts itself. This is precisely the kind of temporary bond rally that can emerge even within a long-term inflationary cycle — a distinction many investors fail to grasp.
How the Interest-Rate Cycle Actually Moves
To understand where we are, look at history. In the 1970s, the 10-year Treasury yield began the decade around 6% and climbed all the way to 15.84% by September 1981. That was a sharp secular rise in rates — yet within that climb there were periods when the 10-year yield was cut in half, by 50%, because of intervening bond market rallies. The long-term direction was up, but the path was punctuated by powerful counter-moves.
Equity markets behave the same way. Consider the sequence: the 1987 crash (a correction within a bull market), the 1990–91 correction in America, the 1998 correction, the decline from 2000 down through 2002–2003, then a bull market until 2007–2008 followed by a steep correction, then a bull market until 2020 with another steep correction, and then up again. Markets advance, correct sharply, and advance once more.
Interest rates obey the same rhythm — they rise, then come down, then rise again, moving in long cycles. My view is that the interest-rate cycle peaked in 1981. Rates then declined for nearly four decades, bottoming in August 2020. Since August 2020 we have been in an upward cycle for both inflation and interest rates. These long upward cycles can be interrupted by short-term cycles that lower inflation and rates for a while, but the trend is upward. Many people think I am crazy for saying this, but a genuinely long-term view requires it. Secular trends survive multiple sharp corrections, even as investors repeatedly mistake temporary recoveries for permanent stability.
Why Financial Assets Are Dangerously Overvalued
Over the long term I would be very cautious about financial assets, because they are incredibly overvalued. The S&P 500 has never had such a low dividend yield, and price-to-earnings ratios are in the sky. A telling symptom of how stretched things have become: companies and analysts increasingly no longer even measure the price-to-earnings ratio — they have shifted to measuring price-to-sales. This is Wall Street quietly abandoning traditional measures of value because the old metrics no longer flatter the prices. The result is a widening gap between price and underlying fundamentals, and wealth built on optimistic assumptions can disappear far faster than people expect.
The Real Economy and the Hidden Cost of Living
The economy is much weaker for ordinary people than the government claims. The official rate of cost-of-living increase is reported around 4%, but the true rate is far higher. Ordinary people struggle. They live paycheck to paycheck. They carry large installment credits and large margin debts.
On margin debt specifically: it stands at the largest level ever — roughly 1.3 to 1.4 trillion dollars — and one day it has to be paid. In a bull market, margin debt expands and expands. But when the bear market arrives, the margin calls come, and the leverage that fueled the rise becomes a forced unwinding.
This leverage is not confined to the United States. Trading activity in ETFs — including single-stock ETFs — and in futures is incredibly large, and it comes from all over the world. People in Korea, Taiwan, and China are buying Micron Technology, Nvidia, Tesla, and SpaceX-linked instruments. The volume on the leveraged ETFs attached to SpaceX, for example, is off the charts. The most dangerous leverage is the kind investors stop noticing precisely because it has become so normalized and embedded across these vehicles worldwide. When liquidity reverses, these leveraged positions become forced sellers, not patient long-term investors.
On inflation, the official 4% figure does not match lived reality. People like John Williams of Shadow Stats calculate the May consumer price index inflation rate at 12.5% per annum. I cannot guarantee that exact number, but I can guarantee that viewers do not live with 4% inflation — their real cost-of-living increase, driven by food, housing, insurance, health care, schooling, and debt payments, is somewhere between 6% and 12%, for sure. I expect food prices in particular to continue rising.
Where Capital Could Flee
Question: If the US stock market rolls over the way Japan once did — when money left Japan and flowed into the Nasdaq — does that money go elsewhere globally, or does it take the whole global market down with it?
Up to now, capital has already begun rotating. It has flowed into value stocks, which have outperformed both the S&P 500 and growth stocks. Emerging markets have also finally begun to outperform the US over the last twelve months. So it is possible that money will continue flowing into emerging markets that have become genuinely cheap.
Indonesia is one example — its stocks are now rather inexpensive, though of course not the whole world can invest there. Thailand is another; the stocks there are also inexpensive, and while there is nothing particularly exceptional about Thailand, certain aspects argue for holding some investments there at present. Money can also flow into hard assets — gold, silver, platinum — though, as noted, I would not bet on that immediately.
The deeper point is that the rotation is already underway before most investors notice it. The more important signal, however, is that policymakers have limited tolerance for prolonged tight money when debt levels and asset prices are this elevated.
Why a Volcker-Style Tightening Is No Longer Possible
I am a believer that the United States does not have much option other than to print money. The pain that genuinely tight money would inflict today — on the ordinary American and on the capital markets — would be far larger than the pain Paul Volcker inflicted when he raised rates to crush inflation.
The reason is scale. At the time Volcker acted, the financial market was tiny in comparison to today, so while his policy did cause a real economic impact — there was a recession in 1980, 1981, and 1982 — it was not as devastating as it would be now. Today, replicating Volcker's tight monetary policy would be a complete disaster.
Question: Would that be worse than a depression? And what is the risk or opportunity most underappreciated by investors right now?
It would indeed likely be worse than a depression, which is precisely why we have not seen authorities pursue the policies some commentators would like. The most underappreciated risk is that financial assets — and other assets — are grossly inflated. The real danger for savers is assuming the system can endure Volcker-style restraint a second time. It cannot.
Asset Inflation and Consumer Inflation: Two Sides of One Coin
The concept of inflation is difficult for ordinary people to grasp. When the stock market rises, people call it a bull market — but fundamentally it is an inflation of asset values, of financial asset values. Corporate profits also benefit from monetary inflation, from the increase in the quantity of money: more money boosts profits, boosts household net worth, and all of these have a positive impact on the economy. This is the kind of inflation investors celebrate.
But the consequences arrive later and in a different form: price increases at the supermarket, higher costs for children's schooling, rising health care prices at hospitals, and so on. That is what we call consumer price inflation — and it, too, is caused by monetary inflation. It is simply a different sector of the same inflationary environment. Asset inflation and consumer inflation are two sides of the same monetary cycle. People love the first kind and hate the second, but they spring from the same source. Ignoring that link leaves portfolios exposed to both valuation risk and the erosion of purchasing power.
The Democratic Deficit Trap
People like everything that produces inflation, especially when they receive government benefits — subsidies, child benefits, Social Security. All of these are inflationary factors. A government deficit is inflationary, period. The economy has been financialized; there is no question about that.
Markets will eventually assert themselves, and in my view the United States is heading toward a fiscal crisis. The core problem is that deficits are extraordinarily hard to reduce in a democracy. A politician who goes to voters and says, "We made mistakes in the past, so you now have to tighten your belts, work more, pay higher taxes, and receive fewer benefits," is unlikely to be elected in a million years. By contrast, the politician who promises this benefit and that benefit, who promises to subsidize your children and give you free health care, will be elected. That is the structural incentive.
Question: This is not just a US situation, is it — given the rise of populism globally?
Correct, this is not unique to the United States. In some European countries it is even worse. The exception is found in most emerging economies, where this dynamic largely does not apply — because they do not have the entitlement programs that drive the developed world's deficits. The contradiction is plain: policymakers encourage spending while central banks claim to be fighting inflation. The danger for investors is assuming political incentives will suddenly turn fiscally disciplined.
Why the Fed Cannot Cut Much, and Why Politics Complicates It
The debt situation in the US is very high, and the interest the government pays on its debt is unlikely to fall, because the large annual deficits keep adding to that debt every year. Interest rates themselves are unlikely to drop because the inflationary pressures are real — with or without oil rising or staying elevated. I expect food prices to keep climbing. Therefore the Fed cannot meaningfully lower interest rates at the present time, even though the market wants cuts. The debt market may simply refuse to cooperate.
Question: As Kevin Warsh prepares for his first meeting, many expect him to declare inflation "transitory," point to falling oil prices, and find a way to justify a rate cut. Is that fantasy?
There are, in a sense, two Kevin Warshes. One is the economist, for whom I have high regard — at heart he is potentially an outstanding Fed chair. But he is also working for the Trump administration, and that creates tension.
One of the administration's objectives is good results in the fall midterm elections. That is why there is pressure to end the war with Iran — the most unpopular war in the US, with people rightly asking why America is involved at all — and also pressure to do something visible against inflation, because people feel it directly. The tariffs increased the price level consumers pay at department stores, supermarkets, and drug stores meaningfully, and they pushed interest rates higher precisely when people had expected them to fall. That is why homes and cars are relatively unaffordable: the mortgage rate is still above 6%, which is no bargain.
The deeper conflict is this: as an economist, Warsh would actually like to raise rates; but as a member of the administration in an election year, raising rates will be politically difficult. He can still do it, and in my view he should do it — because if he does not, the price level in America is more likely to rise further than to fall.
The Throughline
The consistent thread is that the clearest signal is not what politicians say about inflation, but what they need before an election. Election incentives routinely outweigh economic orthodoxy. Investors should therefore watch actions, not speeches. Tariffs raise consumer prices; mortgage rates above 6% keep homes and cars out of reach; persistent deficits and rising government interest costs keep inflationary pressure alive even if oil prices temporarily retreat. This is a policy trap in which political pressure favors easier conditions even when inflation remains stubborn — and that trap is what makes the long-term inflationary trend so durable.
