20 Planning Matters Radio - 2020 POLITICS GOLD & THE MARKET W DAVID MCALVANY

If you fail to plan, plan to fail.

How do you want your future to look? We want you to plan for success. Welcome to Planning Matters Radio. And we're pleased to now be joined by David McElvaney, author of the new book, The Intentional Legacy.

He is CEO of McElvaney Financial Group. David, welcome into the program. Hey, great to join you today.

A pleasure. And David, you've had a weekly podcast for many years. You've appeared on television as a commentator and giving your opinion on many different financial topics throughout the years. And you talk a lot about the relationship between politics and finance.

You talk about precious metals. You talk a lot about the direction of the market or where we may be heading due to relative certainty or uncertainty. Moving into an election year, probably a lot of uncertainty on the horizon. Well, that's exactly right, because we have not only what we have here domestically in the U.S., but also what are the consequences of, you know, a second Trump administration or an Elizabeth Warren administration, or there's these unknown variables which get tied to investors, as you said earlier, degree of certainty or degree of uncertainty. There tends to be more risk-taking when you kind of see what the future holds, less risk-taking when uncertainty is present. And so, you know, you look at today's trade machinations and whether we can sort ourselves out with the Chinese and things of that nature, these represent elements of uncertainty and can also translate, therefore, into volatility in the markets. Now, 2019, so far a pretty good year, 2020 around the corner.

What do you sort of expect to see play out, if I can ask your kind of prediction of the future? Yeah, I see a mixed message in 2020, because although the U.S. stock markets are doing quite well, if you look around the world, and that reflects a fairly healthy economy here in the U.S., if you look around the world, we have a slowing global economic trend, and so that's been interesting to watch, because, you know, gold is kind of one of those indicators, call it a barometer, for a change in weather, if you will. And so when storm clouds are sort of gathering, gold tends to do something. So why is it that gold's up 20% in U.S. dollar terms and is at all-time highs in euros, British pounds, Australian, and Canadian dollars? It's had actually quite a good run this year alongside a very good run in U.S. equities.

What is that saying? It says that there's a number of people who don't believe there's going to be follow-through as we head into 2020 and 2021, that actually the slowing global economic trends may come our direction here in the U.S., and of course that remains to be seen, but there is certainly a hedging of bets, and if nothing else, that's what we see in the price of gold, a hedging of bets. So yes, 2019 is great, but that's nearly in the rearview mirror, and so what will it look like as we're heading to 2021, and we've got, quote-unquote, 2020? Hindsight, my guess is that gold's move was telling us something. Really, there's been kind of a gobbling up of gold on institutional levels. A lot of countries are buying and hoarding a large amount of gold, are they not? Yeah, and central banks have kind of changed their direction because from the mid-'80s through about 2010, central banks decided that they wanted to play in the world of paper assets, and they didn't really need gold anymore, and from 2010 to the present, that trend has changed, and each year, you've seen gradual increases in the amount that your world's central banks are acquiring gold as sort of a ballast asset, something to bring stability into their financial system. So major about face, you only have three main categories of buyers for gold, industrial demand, central bank demand, and investor demand. So when one of those things is off significantly, it can impact the price, and you've had all three moving really in the right direction, 2019, with central bank demand increasing, investor demand at least globally increasing, and frankly, that's not the case in the U.S. Investor demand in the U.S. has been pretty tepid, but again, you look at the stock market, it's moving higher, our economy's doing well, and investors generally don't try to anticipate those things. They are very reactive, and so usually a little bit late, so actually a good move if you're wanting to be proactive versus reactive is probably looking at hedging some of your equity bets, taking some money off the table, getting liquid, having a little bit more cash, maybe adding a gold component as an offset to an equity portfolio. If you're proactive, that's what you'd be doing right now, or you can wait and be reactive. Keep in mind, this is the longest stretch of economic growth in U.S. financial history. That should tell you something. We're a little bit long in the tooth in terms of the growth trend, only really here because of central bank promotion of that growth, and it is normal. As you know, at the end of a long day, what do you want to do?

You want to go to sleep, and it's not uncommon for the markets to do that as well, where you've had a good stretch, and now they need to rest. There seems to be a lot of heavy marketing around gold. Would you agree? Oh, for sure.

Yeah, absolutely. My question has always been, and gold has sort of been pitched as, here's where you go if you're worried about the collapse of the economy, the collapse of the currency kind of being the big one. If the folks who have the gold are so certain that the currency might collapse, why would they want my dollars for the gold that they have?

Yeah, I think you're looking at sort of two different themes there. One is the promotion of gold and the reasons why it's promoted. We've been in the metal space since 1972. We were one of the first to offer bullion, and we found a tax loophole to do so. Our company and our family business was involved in getting gold legalized in 1974 and 1975.

So, we do have a long history there. It's not really a question of a company like ours being, we just are facilitating a trade. We're facilitating a trade and there are reasons for that trade. I think as an investor, what you would want to look at, if you're looking at, say, an equity portfolio and how gold complements it, and it really doesn't need to be an end of the world trade. You look at 2008, 2009, you had a major decline in stocks.

It took some time for those stocks to pull themselves back up again and be in a profitable position. If you can avoid those major drawdowns, then you have to play less of the patient's game. That's where gold tends to perform well under periods of duress, and it doesn't do anything when the stock market is performing handily. So, what you would do is create a balance between those two asset classes so that you're never seeing major declines in having to play the patient's game.

We've run the numbers. The optimal, if you're talking about growth in an equity portfolio, the optimal mix would be 75% equities, 25% gold. That means that any major market selloff, 20%, 30%, 40%, 50% in equities, you're more than offsetting those losses with gains in gold. The very important element in those numbers is that you rebalance that portfolio once annually, and then you're kind of constantly moving towards the undervalued asset with the overvalued asset.

Your performance relative to the S&P, if you had that 75-25 mix, is handily above. If you bring gold into a portfolio, your long-term performance benefits considerably because you don't have any of those major downside hits. So, is it more of an investment or an insurance? I think of it as insurance because that's what it's doing in a period of decline. If you have 75% of your portfolio oriented to growth, and there's periods where risk is apparent and downside is in everyone's face, everyone's getting their heads handed to them, someone who owns gold, their insurance policy is paying off.

And that is what is funding the purchase of more shares in the stock market at lower levels with that annual rebalance. So, I do look at it as insurance. I don't look at gold as an investment. You can, but for instance, we just launched a program called Vaulted.

If you go to vaulted.com, very easy to look at and use. It is an alternative to savings. I still don't look at gold as an investment. I look at it as a reliable currency. And why would you want a reliable currency? Because there's periods of time where a currency or a financial system comes under stress. And so, yes, whether you think of it as money, which it's been for thousands of years, or as an insurance policy, where you're offsetting losses elsewhere, I think that's a more appropriate way to look at it than, boy, I bought it at $1,000 an ounce, $5,000 an ounce, look at all the money I made.

That's not the way I use it. It's either the more reliable currency, that's where we have a savings alternative and a program like Vaulted, or with the Royal Canadian Mint, by the way, or just an insurance offset. Maybe a little more secure than the cryptocurrency market. A 5,000-year history. And every time you see both financial collapse and currency machinations, what do you end up with?

People move. It's like Linus and his security blanket. Nobody thinks about it because you've outgrown it, and when you're under a period of stress and strain, you just want something that's comforting. Look at the food trends of the last few years. Back in 2008 and 2009, the popularity of comfort food went off the charts.

Why? Because people just want something that makes them feel better during a period that's kind of rough and humble. Gold is that Linus security blanket.

It is that comfort food. It is that extra security in a period of insecurity. It ends up being a supply and demand game, and it's a very tightly supplied market, so any increase incrementally in demand, that's what they call inelasticity of supply, can't do anything about it. You can't go to the mines and have them produce double the amount just because you want to. It takes a long, long time to increase the total supply of gold. That's why you tend to see price spikes under periods of stress.

Haven't found anybody with that Midas touch quite yet. Before the interview today, off air, David, we were talking about previous shifts in the political party in power in Washington and how when the party in power does shift, there are some direct correlations typically with what occurs in the market. Now, we don't know for certain what the results of that election would be, but this might be a time that we look forward to the 2020 election and possibly could anticipate this.

Yeah. Everyone is trying to judge what the future holds. If you're a corporate CEO or CFO, if you're an individual investor, you may have your personal preferences from a political standpoint, depending on how you line up from a partisan standpoint. I just have to tell you, CEOs and CFOs, as they look at their personal preferences, they have a completely different judgment to make as well, and that's what are the implications of this change. What's good for the bottom line?

Well, that's exactly right. Are we going to increase the expenses to deal with increased regulation? Are we going to have an increased or decreased tax burden? Does that mean that we're going to have to hold back and not invest as much in these kind of capital improvements or R&D programs?

If write-offs go away, what are the implications? We go back to those two words, certainty and uncertainty. If it's very unclear what the future holds or you think there's going to be significant changes and you don't know what the unintended consequences are, then if you're allocating capital, corporate or household, you're going to be cautious, and cautious allocation of capital ultimately means a decline in pricing in the market. If you have certainty, you see clear blue skies ahead, that's where you see risk on and the stock market doing quite well.

I think there are good reasons to look at 2020 as a period of time where there's some uncertainty. What happens? What happens with the full exploration of the Horowitz report? What happens with the full... We don't know if there's going to be a different outcome between the House and the Senate with the impeachment hearings.

What does the election look like on the other side of that? We don't know how the markets... Well, I do know how the market's going to respond if Elizabeth Warren gets nominated to the Democratic Party. You're going to see panic on Wall Street. Here, the US economy is doing quite well. There's no reason for the stock market to crash, and yet a nomination from Elizabeth Warren ends up being very redistributional for Wall Street sky-ons and a major change in terms of our capital markets.

That's called uncertainty, and yes, you'll see risk off in that environment. Throw into the mix the Federal Reserve. How could they maybe direct policy one way or another and therefore the market?

Yeah, absolutely. The Federal Reserve is sort of the elephant in the room. They have lowered rates to nearly zero, and then as you recall, fourth quarter of last year started to raise rates.

What did that do? It caused a nearly 20% decline in the stock market. Fourth quarter of 2018 was horrendous, and that only stopped when Jay Powell got out the first week of January with prepared notes, something that he rarely has, and starts reading and says, okay, we're going to lower rates. We're doing an about-face, a 180, and we're going to accommodate the markets. Lo and behold, we end up with a good year in stocks.

Yes, what the Fed does is hugely consequential, hugely consequential. David McElvaney, he is CEO of McElvaney Financial Group, author of the book The Intentional Legacy. Tell us about the book, David, if you would. What is The Intentional Legacy? Well, 50 years of business.

We've done business with tens of thousands of clients, and over and over again, we see some missteps that people make when they're dealing with their estates. I'll tell you, it doesn't have to do with money. It has to do with relationships. One of the biggest things people miss in the midst of creating what they view as a legacy from a monetary standpoint is they don't invest enough in intangibles. How do you cultivate between siblings?

Loyalty and trust and camaraderie and love. You might think, well, what does it have to do with a legacy? All I can tell you is that of the tens of thousands of people we've worked with, at the reading of a will, we typically see the bearing of teeth and the revealing of claws. It's almost a Darwinian moment where everyone's out for what they can get, and it's not very civil. It's not very kind.

What we see lacking is adequate preparation. Really, what I try to do in The Intentional Legacy is redefine what legacy is. It's not a sum of money that you leave at the end of your life. It's the sum total of all the small decisions you make on a daily basis. It reflects your values. It reflects the things that are most important to you, the things that you say yes to, the things that you say no to, and what you promote in terms of a set of values within your life as an individual, as a single person, or as a family. For us, legacy is much more about management of resources that have nothing to do with money, management of those intangibles. Yes, of course, assets have something to do with it, but we see a lot more attention put on that, and what is most often neglected are the things that bind hearts and lives and relationships together.

Money important, but it is important because it's a tool to support what is actually most important to us, our values, our goals, and our family and lifestyle. He is, again, David McElvaney. He is CEO, founder of the McElvaney Financial Group, author of the book, The Intentional Legacy. We appreciate your time and perspective on the program. Wonderful to be with you. Thank you. Thank you.