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  • Perception Management overrides hard science in monetary policy
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  • Rented a VHS video lately? Blockbuster up 53% in a week


The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Absolutely Original, Blockchain Secured, Digital Art—Only $69 Million
March 16, 2021

“It’s impossible to call the top, but when the side effects of dysfunctional policy are all around you, it’s worth pausing. Maybe it’s worth shorting the markets, maybe that’s the answer, but it’s certainly worth recognizing, like the health officials in Europe, if the consequences of continuing on are grave, in some instances literally grave, perhaps we reconsider our next steps and only take actions with prudence and respect.” — David McAlvany

Kevin: Welcome to the McAlvany Weekly Commentary, I’m Kevin Orrick along with David McAlvany. 

Dave, we read a lot of books, and it’s not always about interest rates and bonds and that type of thing. You and I both share a really good book that was written called Magic and Showmanship, and it’s really how does a magician manage perception of the audience? And as we look at what’s going on today, with perception management from the Federal Reserve, or perception management with getting people to either take the vaccine or be fearful of the vaccine, or COVID, what have you, seems that there’s an awful lot of perception management and very little hard science.

David: Well, that’s right. When you look at public policy and you look at Central Bank policy, and you look at the social reactions to the things that are said, there is a lot of managing of perceptions. And that’s an important thing that happens. It’s one of the reasons why we’re interested in a book like that to say, “What’s really going on here?”

Kevin: And the hard sciences guys feel very, very pressured to write their papers with a certain paradigm in mind. If you were writing papers 600 years ago about what body does the solar system circle, you would write a paper on Earth. Otherwise, you’d be burned at the stake. They had to manage perception.

David: And that’s the case today, you have the sort of dominant themes, the dominant players, the dominant narratives, the dominant paradigms. And if you diverge from that at all, there’s very little toleration, which is suggestive of a lack of— I would suggest it’s a lack of integrity within scholarship, because there’s an inability to even have a conversation and consider something that might actually challenge the status quo in the current paradigm.

Kevin: Okay. Like with the dollar. As long as everybody agrees that you can print unlimited amounts of dollars and borrow unlimited amounts of money, then we all can play the game. Or later, I’d like to talk a little bit about this new piece of artwork that sold for a whole lot more money than I’ll probably ever see. But okay, so let’s look at the practical side of perception management. Let’s say everybody panics and the dollar no longer has value. That’s a problem if you’re a central banker.

David: There’s consensus that that’s not going to happen. We’ve sampled the economists, they all come from good schools, the PhDs speak for themselves. And therefore we don’t have to worry because as we, the children in the crowd, the children in the audience, look to the adults, those with the PhDs, they’re not afraid, we shouldn’t be afraid.

Kevin: Vaccines are the same type of thing. Are we accurately going to see how the vaccines affect us? And for perception management alone, you would have to be careful what you say.

David: Side effects from the AstraZeneca COVID vaccine have caused more than a dozen health agencies in as many countries across Europe to temporarily suspend the use of that particular vaccine. So they’re coming up with very limited cases, but of thrombosis and embolisms, blood clots, low platelet levels. Those were all the stated concerns. And whether it’s Slovakia or Ireland or Germany, I mean, you’ve got a number of the Scandinavian countries, well over a dozen. And this is all in the EU. But in the EU and the UK, they’ve had over 17 million doses administered with something like 40 cases showing significant side effects.

Kevin: I mean, so it sounds like a small sampling.

David: Right. Until more data is reviewed, basically, they’ve said the Oxford AstraZeneca jab is under review for its side effects. We’re going to suspend it temporarily for a few weeks, a few months, whatever the case may be. And obviously health officials want to maintain public support for the broad vaccination. They want it to be accepted, and if there’s problems, you can’t simply ignore them. Well, you can, but that might have implications. And I don’t think they can afford to be cavalier about one life, 40 lives, or any number of potential complications. Because we come back to these issues of reputation, legitimacy, and trust, which all actually remain at stake.

Kevin: And at least the COVID vaccine is still a choice, and, see, that’s the thing: perception management, but we don’t really have a choice. When the central banks print a bunch of money and they use a particular economic strategy, we’re all in a way victim to that.

David: We choose how we designate our investments, we choose how we reserve our assets, how we denominate our savings, and we may choose ounces instead of greenbacks.

Kevin: True.

David: But this cavalierness, which we frankly are not seeing with the health officials in Europe, they’re very careful here. We wish the central banks were in fact less cavalier with their own emergency measures. Of course, this is not just in this year, but over the past decade.

Kevin: Well, it’s not just us, it’s the Bank of Japan, People’s Bank of China.

David: Haruhiko Kuroda is considering now the accumulated costs of massive market intervention. So this is the first time the Bank of Japan has basically said, “Well, to be honest, there’s some issues.” And so what they’ve put under review is the rising cost, in their words, the rising costs of prolonged easing.

Kevin: Is that Japanese for inflation?

David: Yeah, that’s a part of it. It’s a lot of things, but there are side effects. And they’re causing the Bank of Japan to reconsider at least some of their measures. Bank of Japan, of course, they’ve been leading the globe in this episode, this particular episode, time slice of experimental policies. They’ve been the ones demonstrating what it looks like to implement yield curve control in the current iteration, doing their bond market purchases. Old school, we’d have called it monetization, direct purchasing of the bonds in the open market. Direct asset purchases in the stock market, that’s also been one of their tools. And it’s time to consider the side effects.

Kevin: Okay. So is the printing of money like an inoculation, except for it does affect everyone, because that’s what we use as money?

David: Yeah. I think to some degree they’re trying to inoculate the entire population with one sweeping policy application. From the low ebbs in a business cycle, from the downturn in asset prices, from recession, you can chalk that all up to, I wouldn’t exactly call it charity, but perhaps good intentions. Rarely is there the same kind of concern, given that, again, these health officials in Europe show for even 40 lives. Part of the issue is that monetary policy is in fact not a science, it’s more art.

Kevin: It’s not a hard science.

David: And as we discussed, this goes back to a conversation with a veteran from the Bank of International Settlements, now in Paris with the Organization for Economic Cooperation Development, the OECD, William—

Kevin: William White.

David: White, thank you. As he said, it’s a lot more art than science. And you might not know that judging from the pretentious mathematical formulas that they attach to things, conveniently attach to things, conferring that sort of scientific legitimacy to a realm that is frankly more philosophy and psychology than hard science. 

What you find is that theories determine policy choices. And it’s a theory that deficits don’t matter. It’s not a fact. The Associated Press has said, Okay, look. The first five months of the fiscal year, so through February, the budget deficit here in the United States is 1.05 trillion. That’s a record, 68% larger than the year previously. And the Congressional Budget Office says, Okay. Well, 1.05 trillion, we won’t finish the year much above 2.3 trillion. But the CBO does not include the $1.9 trillion Biden plan. So I mean, if you added that, and it’s not just simple math, but if you did, 4.2 trillion, that’s prior to any infrastructure spending. I mean, we’re now getting to levels that they actually matter. Well, again, it’s a theory that deficits don’t matter, and as long as we’re operating with that theory, and I can provide a couple of mathematical equations, it looks like it’s fine, but there’re side effects.

Kevin: That’s where the illusion comes in. Okay. So imagine the magician on the stage. We talked about it before, magic and showmanship. There’s a difference between a magician and a scientist. And hard science does not have to have perception management. When you talk about not including the Biden plan, what you’re really doing is, that’s the part of the stage that you don’t see when the magician is standing there pulling the rabbit out of his hat.

David: Yeah. And that’s basically what the monetary policy regimes have been, one rabbit out of the hat after the other.

Kevin: Well, and as the audience is watching the rabbit, wealth inequality is increasing at a more dramatic rate than any time in world history.

David: That’s one of the side effects. That’s one of the side effects. And you ask Powell, you ask Yellen, you ask Bernanke, they’ll deny it, and they will not associate the social tensions which have formed as a result of these massive wealth inequalities. 

Look, they’ve been on display for 20 plus years, but following the interventions, sort of post dot-com bust, post global financial crisis, the disparities are scaling up. And I think it’s really critical to note here because as they do a post-mortem, as I think a lot of these things come unwound, the post-mortem by the establishment will be that this is what you get with capitalism. It’s very cruel, it’s very heartless, and the rich are to blame. 

I think it’s critical to note that these inequalities are attributable to monetary policy. They’re not the problems of capitalism. These are the side effects of central planning and economic command and control expressed through Central Bank policy. This week, I had the perfect example of what capitalism looks like. I have two kids who are on spring break, and they’re coming into the office.

Kevin: They’re here right now.

David: They’re earning a few dollars, and they went home and, looking at themselves in the mirror going, “Wow. I made 50 bucks today.” And the idea that they’re not going to spend it all, they’ll invest a part of it. That’s the basis of capitalism is that we work hard, we save, from our savings we’re able to invest and see growth. That’s very, very different than, we don’t have to work hard, we just push the pedal to the metal, as in the monetary pedal to the metal, create as much credit as we want. And it’s a travesty to them. Right? Again, this is really a key issue, because if you care about capitalism, if you care about the free markets, you have to care about the misattribution, which is going to take place where, particularly with this administration, it’s the rich, they’re the problem. And just because they have stuff doesn’t make them the problem. Again, it’s a misattribution. What’s the first cause?

Kevin: Well, let’s play a mind experiment here. Let’s pretend like you, and I saw you instructing your kids and showing them what needed to be done. Your son was out sweeping the parking lot, I think your daughter was filing back here in back. But what if I said, “You know what, Dave? You don’t have to talk to your kids. I’m going to go ahead and let the government, just sort of personify the government right now, I’m going to let them teach them the way they handle debt and the way they handle capitalism.” What would you do if I said, “I’m going to let them be the nanny”?

David: The problem is, if let’s say a nanny steps in and says, “Look, there’s this thing, you’ve never heard of it before. It’s really cool. It’s called the universal basic income. You get to do what you want.”

Kevin: You don’t have to sweep.

David: If I gave that to my 12-year-old, he’d play video games for the rest of his life. Knowing that he’s got a guaranteed income, why would you do anything else other than that which brings pleasure, and gets you around any version of pain? Now there’s a character development process, which obviously is devoid in that scenario. And that’s what I’m concerned about; capitalism is not easy. It’s not easy. You have to say yes and no to particular things.

Kevin: And there’s pain and reward. There’s pain and reward. I look that they’re working hard. You remember Higgs? When you interviewed Higgs, he had written the book Crisis and Leviathan. What he talked about is if you always continue to solve the last crisis with government intervention, it grows like a big green blob until it’s like a Leviathan. It’s just, it overwhelms.

David: Well, and again, when you think about the side effects of central planning, when you think about it, there’s some things that you go, “Well, that’s not so bad.” And if you go back to the Credit Bubble Bulletin from this last weekend, you’ll be totally overwhelmed with the amount of data that’s in it. And we do this on a quarterly basis, looking at the Z1 report. And equities are now 308% of GDP. 308% of GDP

If you’re an equity owner, you say, “Well, that’s not so bad. I’m not complaining.” That’s versus the cycle peak back in 2007 of 187%. Household net worth is at a new record, 130.15 trillion. That’s 622% of GDP. Again, compared to the previous cycle peak, 622% of GDP versus 485% back in 2007. 

And what you see is the benefits accrue to the asset owners, the costs are there for the bill payers with no real assets in the equation. And thus, this sense of being left behind. You have the 2016 political dynamics which were set up by this very thing, and they’re only going to get worse. If you thought 2016 was a weird political dynamic, and 2020 even weirder still, we’re not done. We’re not done because of the misattribution, because we’ve got side effects.

Kevin: This is the bubble, and it creates side effects.

David: Exactly. So the bubble is there, the prices tell you the bubble is right in front of us, and it is always followed by an increase of government involvement in the economy when that bubble bursts.

Kevin: That’s what Higgs was— that’s what he wrote about.

David: It’s insane to think that the organizations directly responsible for our problems are asked to solve them. The reality is, that’s not new. Einstein, in fact, had to call that out. And when he said, we can’t solve our problems with the same thinking used when we created them. Think about that. We can’t solve our problems with the same thinking we used when we created them. 

That’s a man who’s making a social observation. This is in fact what we do. And a part of it is, we have those with PhDs and those who don’t, “You must trust the leaders. You must trust those who have a greater education. I mean, are you a doctor? Do you have the authority to speak to this issue?” It could be PhD, it could be MD, it could be a JD, Doctor of Jurisprudence. So you’ve got the academic biases, which dictate. That is precisely what we have done and continue to do. We’re ignoring, we’re misattributing the side effects in the process.

Kevin: When a person learns how to handle an emergency, let’s say you’re out in the woods and you have a severe cut, well, you might have to use a tourniquet, but that’s never an ideal long-term solution. It leads to amputation of the limb. And I think about quantitative easing. Quantitative easing used to be the tourniquet of the market. In other words, it’s like, “Okay. We’re only going to use this for just a moment, because otherwise it’s going to destroy the system.”

David: Well, and I think it’s fascinating. We mentioned the Bank of Japan earlier beginning to look at the accumulated costs of prolonged easing. Now you’ve got the Bank of England also looking at that perspective. This morning, I read from Bloomberg that one of the perspectives coming from the Bank of England is that QE is not ideal in the longer term.

Kevin: Like a tourniquet. It’s not ideal.

David: Yeah. But I mean, leave it to the British to say, “Well, it’s not ideal.”

Kevin: It’s not ideal.

David: Are we a lot closer? Are we getting a lot closer to a general recognition of monetary policy expediency delivering a very helpful and painless, blissful present in exchange for a very challenging future? Does that make sense? As these policymakers at the Bank of England and Bank of Japan are ruminating, it appears that the future is here, and they know it.

Kevin: You are so yesterday, though, Dave. Just come on. You know your kids are here, they’re working. I don’t know why they even have to work because, like you said, it’s they’re going to get income anyway with universal income. But this is what I’m wondering, are we actually just naysayers? Have they actually recreated the wheel? I mean, what we talked about earlier in the program, this digital piece of art that sold for a whole lot of money, could it be that somebody sees something that you don’t, Dave?

David: You probably don’t need evidence of a bubble. I mean, honestly, if you talk about 622% of GDP household net worth, or 308% of GDP coming from equities, the massive expansion in real estate, bonds, stocks, you name it, 2020 was one for the record books. So you probably don’t need any evidence of a bubble. But I thought the Christie’s Auction, and this is unique because it’s digital art, and this happened last week. I think it’s a fascinating exhibit of how we perceive value, and what we deem a worthy use of cash when cash is less and less valuable. I guess you could say that’s a continuation of the monetary policy thing we’ve been talking about today. But I think it also reveals what decisions look like when speculative money is made fast and has no real perspective on wealth.

Kevin: Yes, but this is tied to blockchain technology. Come on. Catch up, Dave, catch up.

David: All right. So the artwork. It’s a digital collage of 5,000 images put together by Mike Winkelmann, also known as Beeple. Sure. Why not? Beeple. It’s attached to a digital token.

Kevin: That’s what I mean.

David: There’s the novelty. And again, for the naysayer out there, we are finding uses for blockchain after all. You can judge for yourself if this is revolutionary. But it’s attached to a digital token that serves as a guarantee of authenticity. So of course, I mean, it runs on the blockchain.

Kevin: Yeah. No longer can you actually have the fingerprint of the artist in the paint, now you have to catch it with a blockchain.

David: Well, this is what’s unique. You don’t get anything physical. When you buy this artwork, you don’t get anything physical. This is digital art. Nothing to hang on a wall. This is art of a very different kind. And in my view, this is purely postmodern. Think about it. It’s a digital copy of something that never had a physical form, it can be replicated infinitely, and because of the medium, it requires the mostly immutable record, perfect record, immutable record of the blockchain to have authenticity. The basis of authenticity. It’s amazing. Now, Kevin, I have a screenshot of the project and it was free to me.

Kevin: Okay. So you get the picture anyway.

David: I got it. I got it. But the non-fungible token, the NFT, the non-fungible token is the owners only privilege and proof of ownership. I guess, bragging rights or some sort of privilege as well. I would think of it in some terms like a future shaming right as opposed to— That’s just my opinion.

Kevin: Yeah, but this was Christie’s. This is an actual auction house that participated in this.

David: Noah Davis was one of the auction organizers for this particular sale for Christie’s, and said in a Bloomberg interview, “It was one of the most magical events in my auction career. I’ve never seen anything like it.” And to you and I, Kevin, it’s no kidding, and magical is one way of describing it. Insane is another. So here are the details. Bidding usually starts at a minimum, a reasonable amount in light of the value of the art in question, sometimes with the floor, below which the owner would prefer to keep the object. So, for instance, you’re hopeful that a piece of art might sell for $10 million, but you’re going to take nothing less than two and a half million. So bidding starts at that reserve. Two and a half million goes up incrementally, hopefully in the direction of your auction estimate. Everydays is the name of the space, Everydays is the collage of 5,000 digitally generated graphics.

Kevin: Where did they start bidding?

David: Well, in light of the value of this piece of art, it started at a reserve of $100 and sold with the buyer’s premium for $69 million.

Kevin: $69 million. It’s a digital picture that’s got blockchain technology securing that it’s the only original digital picture. Right?

David: It’s the only original digital picture except for the one that I have on my desktop.

Kevin: And on my phone.

David: Yeah. I mean, this is art done in a new way. Will this be considered one of those masterpieces of art 100 years from now, or will this be one of the master jokes that we talk about in terms of symptoms? Does this make sense?

Kevin: Dave, I’ve got a tulip bulb that I’d like to sell you right now. What would you pay? A tulip bulb.

David: Well, in this case, you’re talking about a cryptocurrency investor in Singapore with probably more money than sense. And all I can say is that bubbles have their signature attributes. So if the art market is giving you one indication of a bubble in money and credit, where people have no real sense of value, and this is not me being sort of snobbish for a different artistic period. We have pretty eclectic taste in our house.

Kevin: You do. You’ve got beautiful art in your house, but it actually exists. But let’s go even one step further, Dave, because this digital artwork actually existed when it was bid for. Now you’ve got investments where now, “Well go ahead and pay us first—”

David: “And then we’ll tell you what we’re going to invest in later.”

Kevin: “—then we’ll tell you what it’ll be later.”

David: Talk about magic and showmanship. I mean, this is, you get the reputation as a Houdini, and so you step onto the stage, and you’re like, “No. Before I start my act, I want a million dollars up front. And then I’ll tell you if I’m going to do the act. Maybe you get your money back, maybe you don’t.” SPACs, which of course is the acronym for special purpose acquisition company, are clearly one of those sort of signs. Can bubbles have signature attributes? This would be one of the attributes of a bubble period. Over the last 15 months, you have 474 special purpose acquisition companies, SPACs. They’ve raised $156 billion.

Kevin: Not chump change.

David: These are IPOs without the company included. So they’re going public, they’re raising capital in the public markets, creating a trust where the money goes, and then they’ll go figure out what they want to be when they grow up, or what kind of company they are going to buy. And so just think about that for a minute. Raise the money, issue shares, then figure out how to spend it, I mean, invest it. 

Think it through. An IPO craze is usually at the outer limits when companies that make no money, have zero revenues, convince investors on the basis of pro forma guesswork to fund them with millions or tens of millions, I mean, even billions of dollars. In this iteration, and this is hilarious, you have blank check companies, or SPACs, they’re different. The money is raised prior to any pro forma creativity, prior to any promotional hustling. That is a whole new level of speculation. So you’ve got promoters for these companies. Paul Ryan, politician, Alex Rodriguez and Shaquille O’Neal. I mean, these are guys— these are not the scions of Wall Street. They play with their balls better than they do money, along with 471 other big names, big enough for investors to say, “Yeah. I’m in. That’s great. I’ll exchange my money for the hope of great gain.”

Kevin: Okay. So we were talking about, at least with the inoculations, the vaccines, it’s still a choice. So a person can weigh the evidence and make the choice. Seems to me like if you’re stupid enough to go out and spend $69 million for a digital painting that is blockchain secured, so it’s the only one, except for it can be reproduced in unlimited amounts. Or if you basically go out and just give somebody money for a company that doesn’t even necessary exist or have any revenues, that still seems to be a choice, a choice of redistributing your wealth to somebody else. Doesn’t it?

David: Yeah. I mean, whatever investing used to be, it has become a voluntary wealth redistribution scheme. Money is moving from those who have it to those who want even more.

Kevin: So if you’re Paul Ryan, Shaquille O’Neal—

David: The name is enough.

Kevin: There’s Hilton, Paris Hilton.

David: Yeah, the name is enough. Association with a name, you’re privileged to be included in this offering. Speculation with no bona fides provided up front. That’s sufficient. And it kind of reminds me of Paris Hilton. You’ve got the ICO, remember we went from the IPO craze. That was so 2000.

Kevin: That was so yesterday. Cryptos, we need cryptos.

David: Right. So the ICO is the initial coin offering craze. That was 2017 to 2018. Of course, this was just prior to the 90% collapse in cryptocurrencies. But you had sports athletes, you had divas, you had Wall Street tycoons, it was sort of a be-there-or-be-crypto-square type of a thing. ICOs then, SPACs now. And the level of speculation is astounding. For the person stepping out, the risk of loss is minimized in their minds, and it’s offset by this massive desire for outsized gains, predominates everything.

Kevin: Well, wait till it goes down, then they’re the victim. That’s almost always the case. You look at people and it’s like, “You’re kidding me. You’re investing in this.” And then when it goes down, they’re screaming for regulation.

David: Right. And that’s what we know from the past is that the losers in any sort of grand speculative scheme turn out to be the whiners and the self-portrayed victims. No personal responsibility expressed for manic irrational expectation. None whatsoever. Very rarely in history do the masses line up and eagerly invest in a visionless proposition. There’s plenty of vision casting, right? You get the hucksterism, but very little insight. What I’m saying is, in this case, what’s lacking is understanding, and that’s to the benefit of the hucksters. Collective blindness on a voluntary basis is symptomatic of great bubbles.

Kevin: Do you remember the book we all read here in the office, written in the 1850s, Extraordinary Popular Delusions and the Madness of Crowds?

David: Yeah.

Kevin: Yeah. You had tulip bulb mania in there, you had the Louisiana Scheme, the Mississippi Bubble. These were things that we can recognize right now, Dave. It’s like Solomon said, There’s really nothing new under the sun.

David: Go back to the archives if you’re interested in the interview that we did with the biographer of Richard Cantillon. Fascinating, fascinating, fascinating. For anyone who knows the history of John Law, you may not know the history of Richard Cantillon.

Kevin: You’re talking 300 years ago, and he rode the wave in the beginning, but he knew when to get out.

David: Absolutely. And the Mississippi Bubble is a case in point. In terms of, again, what is symptomatic of great bubbles, it leverages the unfamiliar and it leverages the removed. Literally, in the case of the Mississippi Bubble, geographically removed. In 1718, 1721, there was not a lot of Europeans sailing to the new world. And that distance served to inflate the possibilities in the minds and the imagination of British and French investors. There was nothing that could limit that speculation because imagination was unhinged. 

The more you know of something, the more you understand its flaws. We find this in a dating relationship, don’t we? Before you get married, if you don’t know someone, you tend to fill in the gaps with whatever you want it to be. And the longer you know someone, you realize you’re dealing with an imperfect person and you have to make choices. Is this a relationship that you’re willing to commit to? What are the conditions, if any, for that relationship? And when you say your vows, it’s a very big deal. But for those who meet in Vegas and marry in Vegas within 24 hours—

Kevin: Or meet online and never meet until the marriage.

David: Again, the more you know of something, the more you understand its flaws. The less you know, the more you can fill in the gaps with the content you prefer.

Kevin: Well, and that’s magic and showmanship, Dave. That’s the whole deal. The whole art of magic is making sure that people are filling in the blanks the way you want them to fill in the blanks. You don’t want them to know the trick, and that’s why the old rule is, “Never show them the trick twice.”

David: Right. Well, the basis for a good bubble is high spirits. Nothing moves the animal spirits of the market like access to the infinite money tree. And we have that today. It’s both in the form of monetary and fiscal policy. But you add to that, you add to that a veil of mystery where people don’t exactly understand, and I think actually cryptocurrencies do fit this bill. For all their merits, which they do have, the average investor can’t even tell you what they are, yet they’re eager to put money to work because they want some of that money.

Kevin: Right now, they’re being rewarded because the price is going up, so it’s like, “I don’t need to know what it is. The price is going up.”

David: Add the veil of mystery. If you add that veil of mystery, and now the pricing possibilities are infinite.

Kevin: But you’ve got to add one more thing. Add one more thing, which is— it used to be called, 2000 years ago, bread and circuses. I think maybe now it’s called bread— It’s not even bread. Bread actually has some nutritional value. It’s candy and circuses. I mean, these folks are getting $1400 checks, and where are they going with them, Dave?

David: Candy and soda pop. Yeah. Give my kids $1400 and universal basic income, and they would forever choose video games, Skittles, and Barq’s Root Beer. Or, I don’t know, whatever their favorite. But yeah, anecdotally, I hear a lot about these $1400 Biden checks going into Robinhood accounts. The intention, and I mean, how many people have I talked to about this? Six people? 10 people? It’s not an infinite number. But enough for me to go, “This is really kind of interesting.” The intention is to cash in on what they consider to be the investing game. They don’t even see it as like a serious pursuit.

Kevin: Well, let’s go buy companies that are completely out of business. I mean, Blockbuster. Can you believe Blockbuster is even still around?

David: Last week GameStop was up 92%, Koss was up 89%, Blockbuster—

Kevin: Blockbuster.

David: Up 53% last week.

Kevin: I haven’t rented a video from Blockbuster in 20 years.

David: I don’t think anyone else has, either, but their stock was up 53% last week.

Kevin: Wow.

David: And again, this is the investing game. AMC was up 39%, Kodak 29%, Blackberry 25%.

Kevin: Blackberry is still around?

David: Investing is not a slow and steady game of patience preceded by understanding a company’s assets and liabilities and their future prospects, it is now an instant gratification roll of the dice. So by the way, you have Grayscale, Bitcoin, and Ethereum also used in those same anecdotal senses of, “Yeah. I think I’m going to play a little bit with GameStop. It just seems like a lot of fun and maybe buy a little Bitcoin.” Could this be described as a systemic side effect of the COVID stimulus?

Kevin: Candy and circuses. Of course.

David: We’re not talking about money going to people who need it, and they’re going to buy milk and cream of wheat. We’re not talking about bill paying. The COVID fiscal spend of 2021 was largely a political opportunity to solidify the base with handouts, and to deliver on all of your previous political promises. And it will be really interesting to see, when the infrastructure plan comes, who is selected to be the economic winners in that one. So again, you’ve got Twitter today, which can determine if something is true or not, based on its color, red or blue. And I would guess that your political elites might be able to funnel cash towards their own color preferences too, in the case of this economic spend and infrastructure plan.

Kevin: So here’s my question. You’re a man who manages money, and there are a lot of hedge funds out there, where they’re having to look at this and they’re saying, “How in the world do you predict this? And literally, how do you throw billions of dollars at something that doesn’t make any economic historic sense?” In fact, historics would tell you, it makes no sense at all.

David: Yeah. Over at Bridgewater, the world’s largest hedge fund—I think it was 165 billion at its peak, maybe 150 today, things haven’t been easy. Last year was not an easy year. Risk parity strategies, they benefit from Treasury market stability, and a normal relationship between stocks and bonds. Again, sort of predictable non-correlation to stocks, and they need Treasuries to behave as a hedge. That went out the window. 

So the volatility in stocks and bonds has put the firm under more pressure than they’re used to. And so the stated concerns from Bridgewater, from the leadership, are that the rise in rates in the Treasury market—that’s been our primary topic here on the Commentary for the last couple of weeks—but the rise in rates within the Treasury market threatens the high flyers in the market today, from the SPACs to the cryptocurrencies. Their point, not mine. 

The highest-flying stocks remain most at risk. And if this Treasury market sell-off continues, that’s where you’ll see the high drama. This is what Doug Noland terms a tightening of financial conditions. And it’s no surprise that it’s felt most dramatically by those entities which are in a rough financial condition to start with. And I think it’s notable this week, if you’re just following the numbers, that we had an outflow from the junk bond sector of 5.33 billion, a very sizable outflow from junk bonds. One week does not make a trend, but it’s definitely worth watching.

Kevin: One of the things that has amazed us over this last decade has been the lack of inflation with the incredible amount of money printing. Now that’s changing, and so you look at guys over at Bridgewater and even you, Dave, you have to factor in inflation at this point.

David: Yeah. There was another Bridgewater executive who was in the Financial Times this week saying, and I quote, “The pricing in of inflation in markets is actually the beginning of a major secular change, not an overreaction to what’s going on.” The gentleman’s name is Jensen. Last name Jensen. He went on to say economic conditions and inflation will adjust faster than either markets or the Fed are expecting.

Kevin: So you wonder, okay, is the Fed making decisions based on old models or are they possibly reacting at this point?

David: I think they are reacting. And I wholeheartedly agree with the Bridgewater comments. And I think the confusion over economic reopening and rise in interest rates, it’s putting the Fed back on their heels. There will be a slowness in their reaction, because I think they’re underestimating the power of inflation, and a shift in public sentiment towards it.

Kevin: Yes. But remember, perception management. If you are the head of a central bank, the best thing that you can do right now, especially if you’re on your heels, is just convince people that there is absolutely no problem.

David: But I think this is one of the things where you recognize the reputational consequences, and this is where the health organizations in Europe are actually taking this seriously. They recognize what’s at stake.

Kevin: Yeah. Those 40 cases.

David: Yeah. So Dalio was also vocalizing that amidst “stupid bond economics”—very, very clearly stated.

Kevin: That’s an economic genius there.

David: Amidst stupid bond economics, he says, “It’s time to buy stuff.”

Kevin: Okay. But stuff, and you buy stuff, not just gold but toll roads, infrastructure.

David: Yeah. Stuff is what we like most.

Kevin: Specialty real estate.

David: That’s what we like in our asset management, infrastructure, natural resources, precious metals, real estate, stuff, real, tangible. And Bridgewater, actually has begun to transition away from Treasuries as their hedge to gold and inflation-linked notes. So we share a common concern for the implications of ever-expanding debt obligations at low rates. Rates don’t stay low forever. And we share a concern— I mean, very eloquent, stupid bond economics.

Kevin: I sort of like it.

David: Yeah. It’s referring to the secular shift from deflation to some variant of inflation, and you can’t treat your bond portfolio the way that you used to.

Kevin: Okay. So let’s pretend. Let’s pretend just for a moment that rates and inflation are actually rising.

David: Yeah. So if rates are of great consequence to the stock market and other high risk assets, and inflation is intentionally understated, I think it’s important to see what people are already thinking. As inflation expectations have always been—and again, these are the measures of expectations more than the statistic, I think—what people think is more important than the government manufactured figures.

Kevin: This is why you got to manage perception. They can’t think. The people can’t think right now. They have to think what the Fed wants them to.

David: Right. So if you’re focusing on CPI/PCE, you should have no concerns with inflation. And yet, there’s an interesting Kansas City Fed services survey. 64% of the contacts in that survey said that their businesses had been negatively affected by rising materials prices.

Kevin: Now, that’s not inflation, it’s just rising materials prices.

David: Unless it’s inflation.

Kevin: Right.

David: Unless it is inflation. I see the rise in materials prices, lack of availability, and slower delivery times. We’re talking about input costs. These input costs get passed along to consumers for as long as consumers will take the pain. So in that period of rising consumer price inflation, your old-school stocks do well as profit margins are not squeezed. Again, you’ve got some pricing power, you can bump your prices, a consumer is willing to pay it. Then comes the pain for the corporate sector a little later on in the inflation cycle. Where costs can no longer be passed along, profit margins are gravely impacted.

Kevin: Okay. But stocks in the beginning. In the beginning stages, stocks are actually— they benefit.

David: Winner on the front edge, loser later on. And so stocks like the ones we’re interested in, a little bit of a different— call it different kettle of fish. Again, because you’re not dealing with consumer prices. It’s looking at unique aspects within the world of real assets. Last week, Hard Assets Insights put that out on Friday or Saturday, made mention of the five year breakeven rate, confirmation in our thinking of a shift in the market’s perception of inflation.

Kevin: What does that mean? What’s a five year breakeven rate? What does that mean?

David: It’s an anticipation of where inflation will be and what your breakeven number is going to be over the next five years.

Kevin: Breakeven with what? The stock market?

David: Breakeven with the Treasury.

Kevin: With the Treasury. Okay.

David: Yeah, so exactly. What the five year breakeven rate is telling you is that the market does think there’s going to be more inflation than what you see reflected in the CPI and PCE, the official statistics. So think about the stock market again, reflect on that market in particular. It’s impossible to call the top. It’s impossible to call the top. But when the side effects, when the side effects of dysfunctional policy are all around you, it’s worth pausing. Maybe it’s worth shorting the markets, maybe that’s the answer. But it’s certainly worth recognizing, like the health officials in Europe, if the consequences of continuing on are grave, in some instances literally grave, perhaps we reconsider our next steps and only take actions with prudence and respect.

Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany. You can find us at And you can call us at 800-525-9556.

This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary._

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