America’s Rapid “Mood Ring” Reversal?

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• Sentiment Index (University of MI) Drops Big Based On Inflation Fears
• 80% Surveyed Blame Biden for Inflation
• Kabul Debacle May Trigger a “Wag the Dog” Event

America’s Rapid “Mood Ring” Reversal?
August 18, 2021

“If you consider the dominoes, and the domino effects on supply chains and ultimately on global GDP, that’s all the market needs right now, is something to cast doubt on the all-time highs in the leading equity indices. So you get economic and financial market strength, which is tenuous at this point. We know that reversals and markets are typically sharp, but in this case they would not be unexpected.”
 — David McAlvany

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

Wow. It’s an amazing thing when you see mood shifts. Last week we talked about the summer of 1929, and what a high it was, before the incredible low of the October crash of ’29. And David, it reminds me, you and I both own a little book called The Mathematics of Humor. And it’s almost funny, just even the name, to think that math might apply to humor, but there’s something explained in there, how a joke builds, and how tension builds in the joke, and that can actually be displayed with mathematics or with charts. But when that tension reaches a point of collapse, it’s called Catastrophe Math. Now, granted, that sounds very technical, but that’s when we laugh, we get that belly laugh. When shifts occur, like from the summer of 1929 to the October crash of 1929, that’s not really a belly laugh, is it?

David: No. And there’s some coincidence last week, in discussing the change of mood in the summer of 1929, and the negative news which was emerging in that timeframe but was consistently ignored until October of that year. The consumer sentiment numbers, which were out this last Friday, were just awful.

Kevin: So, does it remind you of that shift that we saw? I mean, the shift in ’29 was awfully hard. This is probably overstating that the shift was this hard at this point, but it does portray something coming down the pike in the future.

David: It certainly suggests that there is a frailty underlying the market, and it doesn’t take much to have people on edge. When sentiment shifted in 1929, it swung hard from positive and bullish, that is in the market, to negative and very bearish in the stock market. And we mentioned the decline in equities taking until 1953 to recover from.

Kevin: But they didn’t really have central banks at the time to print money and just flood the system with money. Aren’t we in a different period of time right now?

David: That’s right. So, we’re not likely to see the severity of declines we saw in the 1930s. This is what makes the current environment more like the 1960s, where a major currency adjustment in compliment to a bear market and recession, it takes a less obvious bite out of the hide of investors and savers alike. It’s still a bite, and when all is said and done, it may in fact be worse than the 1930s, accounting for all the categories of loss. But the nominal numbers are not likely to advertise as poorly as we saw in the 1930s.

Kevin: Well, why don’t we talk then about what you’re looking at for the mood shift, because that actually is a scientific study that people follow, and it’s out of the University of Michigan.

David: Exactly. So, when I talk about confidence or discuss the mood shift from last week, to describe the University of Michigan sentiment numbers from last week as a disappointment is a massive understatement. You also, at the same time, had small business optimism which dropped in July, but the negative swings in sentiment, particularly from that University of Michigan, we’re talking about, on a scale we have only seen a handful of times. 

So, the decline from expectations was 13 and a half percent. The number was 70.2 versus what was expected at 81.2. And the survey’s chief economist had this to say. “Over the past half century, the Sentiment Index has only recorded a larger loss in six other surveys.” So, Kevin, just note that that’s six times out of 600 reports, only six times has it been worse. So, all connected, he says, all connected to sudden negative changes in the economy. 

The only larger declines in the Sentiment Index occurred during the economy’s shutdown, in April of 2020, it was down 19.4%. And at the depths of the great recession, in October 2008, down 18.1%. The losses in early August, he went on to say, were widespread across income, age and education subgroups, and observed across all regions. Moreover, the losses covered all aspects of the economy from personal finances to prospects for the economy, including inflation and unemployment.

Kevin: And it’s worth noting that, yes, there has been a mood shift here in America, in the United States, especially over the last 72 hours because of the debacle in Afghanistan. But this was a survey that just talked about economics, and it was taken before all the geopolitical events that we’ve seen in the last week.

David: Yeah. And we are talking about a survey, and there is a difference between a survey and measured behavior changes, like retail sales, home purchases, or other inputs, which are hard measures of economic choices. So, as we know with other surveys, we’ve got owners’ equivalent rent. That’s one of the things that factors into the inflation statistic. And it’s tied also to a survey of homeowners, and it goes something like this. You get a phone call, “Hey, if you rented your place out, what do you think you could get for it?” That’s about as sophisticated as that survey gets, and that data point is one of the largest single inputs into our inflation statistic. It’s not an actual measure of real estate or rent increases, but it’s an opinion. It’s a feeling.

Kevin: Dave, you were talking about some friends of yours who had paid their rent all the way through this period of time, when a lot of people didn’t have to. And then when they came to renew, the rent went up, what? Five, $600. They’d been paying $1,500 a month, if I remember right, and their rent went up $600. So, that is an actual increase. What we’re talking about here, though, is a feeling. The change has not necessarily occurred, it’s a feeling. But still, I mean, mood precedes most choices, right?

David: Well, that’s right. I think that is an important point, is that mood precedes most choices. So, if you have a positive mood it precedes ample spending and enthusiastic consumer choice. If you’re talking about in the investment arena, it precedes speculation and aggressive market positioning. On the other hand, if you have negative mood, that precedes household conservatism. You get belt-tightening, increased savings and other more restrictive spending preferences. Or if you’re talking about the investment arena, it shows up as conservative allocations. It shows up, as we talked about last week, as risk-off or safe-haven buying. You see it as a preference for cash and Treasuries and things like that.

Kevin: Okay. So, the people who take this survey, what are the main reasons they think the mood has changed?

David: Yeah. Well, Richard Curtin, the survey’s chief economist, pointed out that negative mood swings were related to inflation, the economy, and personal finances. And these are all areas where the official narrative suggests that there are no issues that exist. So, we know inflation is transitory, and I’m still holding my breath and already a little bit blue in the face on that. The economy is supposed to be robust, which in many respects it is, but,  as we’ve already noted, GDP figures are ebbing. And then of course you’ve got personal finances, and I can’t help but wonder if this isn’t connected to incomes and monthly expenses. So, are the incomes and the outflows more than it is a reflection on personal balance sheets? Because we’ve got asset prices soaring, anybody with assets is happy as a hog in slop, and we can thank Mr. Orwell for the reminder that not all pigs are created equal.

Kevin: Well, that’s true. But one of the signs that we don’t have an Orwellian type of system is a strong middle class. And you brought out in the last couple of weeks that the middle class, the percentage has dropped fairly substantially here in America. That’s what made America great, actually, was, worldwide, I think, we were number one as far as having the largest percentage of middle-class for the most amount of time.

David: Yeah. And you’d likely have to be in the middle-class or better to have asset prices positively impact your mood. So, you’ve got a societal segment, as we noted last week, the Pew research last week, that is actually shrinking, 61% going back 50 years ago, now the middle-class is 51% today. And there was a listener last week who wondered how Pew defined middle-class. Well, Pew has an income calculator on their website, which is really neat, I encourage you to look at it, and it covers 189 countries. You can input your details, and on the basis of purchasing power parity, figure out what tier you fall into in your respective country. So, the demarcation they use is country by country, and the tiers or income base.

Kevin: The United States is still well ahead of virtually all the other countries, are they not?

David: Again, of the global population, if you’re talking middle income or middle class, the total number is just under 20%. Last year’s measure was 17%, that’s of the global population in the middle-class. So, relative to the world, the US still looks pretty good, to your point. But that’s a little like the commentary you hear from Mohamed El-Erian on the US dollar. The US is the cleanest dirty shirt, and in this case, it’s in more ways than one. So, relatively speaking, the US is still fine, even though declines are occurring, they’re just not as bad as elsewhere.

Kevin: It’s important to note, too, you bring up the currency thing. If we really do have high inflation, that affects the way this measurement works as far as if you’re middle-class or not. It really doesn’t matter how much money you make if it’s costing more and more to maintain that lifestyle.

David: I think that’s the abiding connection between currency stability and the size of a country’s middle-class. You can look around the world, and certainly if you’ve traveled around the world, you know that wherever there is higher currency instability, you’re talking about a much greater divide between rich and poor, and a very skinny, very skinny part of the population which is in the middle-class. Pew, I don’t know if they connects those dots, but they probably should between currency stability and the size of the middle-class.

Kevin: And we know the government can manipulate at least the consumer price index. There are some things that you can look at that really can’t be manipulated, but CPI, I think CPI directly relates also to the cost of living increases with Social Security. So, it’s to the government’s benefit to make sure that CPI doesn’t look too high. And it looks like the July numbers came in just a little bit lower than the previous month.

David: Yeah. And as we expected, they are still elevated, not as high as they were the month before. But again, a part of that is accounted for in the shenanigans that they play with weightings and things like owners’ equivalent rent. So, the Consumer Price Index, our measure of inflation, for July came in at 4.3% versus the previous month of 4.5% on the 12 month rate. And mentioning owners’ equivalent rent a moment ago, reflect on how that variable drags the inflation rate lower, or creates the appearance of a much lower number. Rents were recorded as increasing 2.8% for the month, very low. But that component, owner equivalent rent, accounts for 41% of the core CPI figure if you’re looking at its weighting. So, you’re understating CPI dramatically due to the weighting. In reality, if you’re looking at CPI without that fudged number, it’s higher by at least two to three percent, compared to June, if you factor in a more realistic rent increase versus the owner equivalent rent.

Kevin: And that’s scary when you think about that, but I don’t think they have as much wiggle room with the Producer Price Index, do they?

David: That’s exactly right. The PPI doesn’t have the same weighting gimmicks. It doesn’t have the same substitutions, it doesn’t have the same hedonics, where if something is considered to be an improvement, even though you have an increase in price, if it’s an improved product they don’t count the increase because, again, you remember hedonism? If it’s better, that’s where they’re actually drawing that from. So, hedonics is an opportunity for them to again, adjust, lower the CPI number. And so, PPI doesn’t have that. And so, there’s really no surprise when PPI printed last week, and the number came out month-over-month was a blowout. It was 0.6, expected, and a full 1% was the actual number. So, the 12-month number was a surprise higher, at 7.8%. So, again, you’ve got PPI inflation creeping towards 10%. Imagine that. And it should not be a surprise as we look at the various other factors. Home prices, actual home sales, we’re talking about the cost of homes, up 23%. Tyson Foods already at 40% higher on their meat increases and anticipating more.

Kevin: And inflation starts with the printing of money, and then you see in the Producer Price Index, in a way that’s— If you think of an engine in a train in a caboose, the engine comes past first. Okay. And the engine is the PPI, and that then turns into the CPI, which is the caboose, right? I mean, when producers have to raise prices, that’s going to automatically transfer down to CPI, wouldn’t it? We’ve printed the money. I mean, remember Friedman, he said, “It’s a monetary phenomenon, dummy.” Well, he didn’t say dummy, but he did say the printing of money was inflationary, right? What was the quote, Friedman’s quote?

David: Yeah. The quote that we know well is, “Inflation is always and everywhere a monetary phenomenon.” The one that we don’t know as well, and Bill King referenced this recently, I think it’s also a Friedman quote worth knowing. He says, “Inflation is made in one place, and one place only. Washington, DC. The chief source of it is the Federal Reserve Board and a major accomplice sits in the halls of Congress.”

Kevin: So, maybe I should have said that the engine to the train is actually in front of the printing, which would be Washington, DC. So, you’ve got Washington, DC, then the printing, and then you’ve got it followed, PPI and then CPI.

David: Yeah. So, what would voters do if they understood the first cause of their inflation frustrations? And actually we just got a recent poll which showed nearly 80% of Americans are blaming Biden for the surge in inflation. And they’re at least right in the zip code. They’re in the right zip code, but not the right branch of government. The public is right to assume that commitments on spending, we’ve got the $1.2 trillion for infrastructure, and the $3.5 trillion that Pelosi wants to see delivered before she retires. Yeah. That’s going to be inflationary, regardless of delusional DC mathematics. And by the way, it’s actually about 23% of that bill, $1.2 trillion. 23% of the bill is infrastructure, the rest is pork, as you might expect. DC seems to believe that you can have $4.7 trillion in spending and there will be no inflation. It’ll help jobs, but there will be no inflation. And again, I think this is delusional DC mathematics.

Kevin: Well, I know Washington’s got a different problem. I’ve mentioned the debacle in Afghanistan, but the debacle in Afghanistan actually started 20 years ago. I mean, it’s questionable why we even went in thinking that Afghanistan wanted to have a government that runs like we do. I’m not trying to take blame away from Biden. I mean, my gosh, it’s been horrible this last week. But we’ve got to make sure that we also look at Bush, the starter of the idea of going over there in the first place.

David: Right. So, we go from delusional DC mathematics to another DC delusion, which is thinking that we can remake another country into our own likeness. And so, you’re right. Afghanistan’s a disaster 20 years in the making. And to be fair to the big guy, you’ve got Bush, you’ve got Obama, you’ve got Trump, they all laid and lit this fuse, and Biden came along and provided the bellows to add a little more oxygen to what was already burning. And yep, that blew up in his face this week.

Kevin: Yeah. Dave, unfortunately the pictures that we’re seeing right now coming across remind me a lot of what I saw in the seventies as we were coming out of Saigon. Granted, Kabul is not Saigon, but the pictures that we saw were just as dramatic.

David: Well, and Antony Blinken would agree with you. He says, “This is not Saigon,” and that is accurate. And we’re glad his geography is truthful and accurate. It’s Kabul. And Saigon, which is now Ho Chi Minh city, is about 2,900 miles away. So, thank you, Antony. But perhaps we can now reference Kabul as Abdul Ghani Baradar city. He’s one of the main leaders of the Taliban, and just like Ho Chi Minh was a politician of the time, Baradar city is probably what Kabul becomes. I say that somewhat tongue in cheek.

Kevin: We’ve had guests on in the past, Dave, that talk about how politics is a lot like psychology. You remember that? And how you really need to understand the psychology of a culture or a country to really understand the geopolitics of that country. It’s almost like walking into a room. You can’t just talk to everybody exactly the same. You need to know their personality. Was it a misunderstanding of the ancient culture in Afghanistan that got us into this trouble in the first place? Just like Vietnam.

David: There probably is not a deep enough appreciation for difference in values. And our goal was to transform an ancient culture into a modern democracy, establishing a new culture in place of the old. And after 20 years, Washington has decided the efforts are futile. George Friedman, who we’ve had on the program a number of times, says that morally the Afghans had their own political order that didn’t value liberal democracy any more than it valued Marxism. The wars against the Soviet Union, then against the Taliban had a common theme. The US was offended by their moral values, and formulated a national strategy based on it. At some point, the national strategy overreached as the moral ambition exceeded strategic possibilities. And he concludes, not wanting to admit failure, the war went on to exhaustion.

Kevin: I remember Ike Eisenhower warned, from a general’s point of view, okay, from a successful general’s point of view, and then a president, he warned of a complex that would turn into something like a business. There’s a whole lot of money that goes into these long extended wars, isn’t there?

David: Yeah. We went to war with a religious ideology and lost. Took us 20 years to figure out that we weren’t going to win anything, so now we’re just tucking tail and leaving. $837 billion was spent fighting a 20-year war, and that’s not including Iraq, that’s just Afghanistan. So, you can add almost a trillion dollars more if you want to look at our whole Middle Eastern commitments. But just looking at Afghanistan, 837 billion, another 145 billion spent trying to rebuild the country, of which 83 billion was spent on police and military training. That number includes military hardware, looks now like a rather large donation in military hardware to hardcore Islamists.

Kevin: It’s interesting, Dave, we both know a man— First of all, we want to make sure that we throw a shout out to the military. These people sacrifice everything for us. It’s just, we have to go back and we have to say, okay, is something worth it? But we know an air force general who lives down here now, who is in charge of Operation Enduring Freedom in the Philippines. And it’s interesting. That was a success far more than a 20-year stay in a place that you know you’re not going to win.

David: Yeah. No there’s winners and losers here. And we look at our armed forces as— Put them in the casualty category. You count a trillion dollars spent to navigate the past 20 years of preparation for failure, and I don’t blame them. I don’t think it’s their fault. I think you’re looking at political leadership here in DC, which is the real disaster. You do find one clear winner. It’s the military industrial complex, which would not have had it any other way. The last 20 years was a massive success. You can count it in the hundreds of billions of dollars in terms of that success. So, we actually agree with Trump when the announcement to withdraw was made. The art comes in un-embracing the porcupine. Biden’s timetable and logistics were anything but artful. So, you’ll think about our foreign policy. In this case, we’ve now armed the Taliban twice in 40 years, not only with military hardware, but over the last two decades with animus as well.

Kevin: I hate to say it, but they got their update, didn’t they? They got their update in technology, Windows 10 point whatever, or 11 point whatever. But before we throw Biden completely under the bus, because it’s interesting, nobody wants to— You talked about a porcupine. Nobody wants to hold this porcupine in Washington right now. And, yeah. I mean, he is responsible, he is the commander in chief. But there’s a whole lot to this that goes beyond Biden.

David: Yeah. And again, it’s the timetable and logistics which were not done in an artful fashion. And this is not a question of Biden bashing. If you look at the White House press, they’re in a panic. In the last 72 hours they’ve had to deal with some pretty horrendous things. You’ve got the Democratic Party which is coming out of the woodwork to criticize Biden for his handling of things alongside, no surprise, the Republicans and their assessment of the debacle. Surprising though, is the mainstream media, which has brutalized the White House for the past 72 hours, necessitating a Biden presser, which was originally announced as happening in the next few days, and then was brought forward to Monday. So, the damage politically is immense. It has the makings of a political wildfire if they’re not careful.

Kevin: Yeah. The mainstream media usually is very, very protective of the whole liberal or establishment complex. I listened to, Even Chris Wallace was trying to somehow make this sound like it was all Trump’s fault, when he was interviewing Pompeo. But there’s a point where those arguments just break down.

David: Well, I think The Democratic National Committee will now make some tough decisions to buffer consequences and to focus on power maintenance for 2022. I don’t know exactly how this will play out, but Biden may bear the blame and brunt of criticism, which could cost him a second term. On the other hand, Harris has already been cast in such a poor light with the border crisis, it may be an opportunity for them to allow her to bear blame for the catastrophic and idiotic orchestration of the withdrawal. So, if you’re looking behind the scenes, Democratic National Committee will choose who takes the blame, or just orchestrate a wag-the-dog moment to mitigate public perception on Kabul altogether. There is nothing like distraction to shift public focus, but, want to talk about that in a minute.

Kevin: Well, you had brought up a wag-the-dog moment, and that’s something that we’ve grown to expect when something’s starting to make Washington look bad. If you remember with Clinton back in the 1990s, we had the wag-the-dog moment that actually occurred, I don’t know if you know this story. But the press was on the Washington lawn waiting to report on the Clinton/Monica Lewinsky situation. And sure enough, that’s when we sent missiles in to try to get Osama Bin Laden, back in the late 1990s. And they were literally watching in the press tent the movie Wag The Dog while they were wagging-the-dog. So, it’s just interesting irony that they were watching that movie in the press tent while they waited for the Monica Lewinsky information. And sure enough, the attention of the nation shifted to an attack, a failed attack, but it was an attack.

David: Again, we circle back to mood and how important that is for the financial markets. There are aspects of the war on terror that have not played well with the public, and do not reflect healthy social attributes. Actually, they take us back to the sixties and seventies, not because they were the best days of our lives, not the Bryan Adams version. This isn’t Woodstock, but thankfully there are some differences as well. In the last 20 years of conflict in the Middle East and in Afghanistan, thankfully we have not castigated our troops as baby killers. And no one is spitting on our veterans in public displays of disrespect. In this era, we’ve left that for our men and women in blue instead. But I can’t claim to understand the complexities of what has fed dysfunction in the military over the past 20 years, but something has our troops under a tremendous amount of pressure. Maybe PTSD is an adequate answer.

Kevin: Yeah. I really wonder about the increase in suicides in the military. That’s concerning.

David: Well, the New York Times reports just over 7,000 US service men and women have lost their lives fighting in the Middle East, post 9/11. They also report over 30,000 military suicides among servicemen and veterans during that timeframe. And I’ve actually seen numbers as high as 60,000. Morale was, and clearly is, an issue for us. And to match up the positive with the negative. You mentioned the Air Force general passing on his personal cell phone to 19,000 troops, letting them know that if they ever contemplated taking their lives, he was immediately available to any one of them, night or day. And that to me, is functional leadership in the context of a broader dysfunction. It’s heartening. Nevertheless, we look at morale as this very critical pillar, and we’ve got a broader context today of morale being under attack, not by foreign forces or the Taliban, but even domestically in the ranks, higher ranks of leadership. You’ve got critical race theory and a progressive agenda being adopted by the top brass today, which I think is going to have considerable consequences for military morale over the next several decades, should it continue to be pushed. And I don’t think there’s any accident there that it is being pushed. But undermining morale is unfathomably coming from the top, not just oozing in from a variety of cultural influences.

Kevin: There’s a point where being woke isn’t nearly as important as doing the right thing, as far as a pullout. Let’s go back to morale, though. Okay. Morale of the Afghani army. Obviously there wasn’t high morale. I mean, you can definitely see that they just got run right over when we came out.

David: Clearly, as we announced the timetable, it fell to pieces quickly. Just last week, you had a Reuters article covering a US Defense official, citing US intelligence saying that Kabul could be isolated within 30 days, and possibly taken within 90 days. And here we are, less than a week later, and the city has already changed hands. And it was only 40 days ago that Biden had this to say, and this is one of the most catastrophic news sessions, I think, of the Biden administration. Just 40 days ago he said, “You have 300,000 well-equipped Afghan troops and an air force against something like 75,000 Taliban. The Taliban is not the North Vietnamese army. They are not. They are not remotely comparable in terms of capability. There’s going to be no circumstances for you to see people being lifted off the roof of an embassy of the United States from Afghanistan.” That’s the end of the quote. I think all you can say is, oops. I mean, he stepped in that one. This is no surprise that Biden administration is scrambling. You’ve got NPR, you’ve got CNN, you’ve got virtually every left-leaning network which is in the process of eviscerating the White House, and he’s scrambling.

Kevin: And this goes to wag-the-dog. What is going to change this? I mean, you’ve got masters, you’ve got Hollywood storytellers, masters of re-spinning a story. What do you think is coming down the pike, Dave, to revive the reputation of the White House?

David: Good question. I mean, operation hometown distraction. How will a foreign policy blunder be turned from PR crisis to political opportunity? Is this just spin game, which comes into effect now? Is there a political sacrifice of an advisor or policy operator needed to appease the gods of power and control within the DNC?

Kevin: What if you just give them a free gift, that’s what I’m wondering. I mean, look at the Romans back when things were falling apart in Rome. You just gave them some bread, you put on some circuses. These days I think you probably send people checks or food stamps, what have you.

David: When you fall out of line with your party, it’s amazing what can happen. The protections that were provided for you go away. The DNC thinks Biden is headed for trouble, and compromises the party in 2022. He could end up with Cuomo sexual problems that differentiate the man and his weaknesses from The Democratic Party.

Kevin: Well, whatever’s happening, there is more to come, whatever the announcement is, whether it is food stamps— Did you think the timing on the announcement of the increase in spending for food stamps was just a coincidence or was it planned?

David: Yeah. I think the announcement of an increase in spending for food stamps this week comes at a curious moment, and there may be more to come from that. But you’ve got, first of all, the post University of Michigan Sentiment nosedive. Secondly, you’ve got the post CPI, PPI indications of higher rates of inflation for a longer period of time. And then, third, and maybe not even final, is the post Kabul/Baradar City embarrassment. And lo and behold, the Supplemental Nutrition Assistance Program increases its per person allowances by 25%. By 25%. Effective October. So, USDA estimates the cost to feed a family of four is— You can play the drum roll please. Going to go up.

Kevin: Oh, you think transitory. I guess not transitory.

David: This increase in food assistance doesn’t need legislative approval because back in 2018 in Trump’s farm bill, he provided the USDA with authority to review the subsidy and amend it. And so, here we’ve got $20 billion, that’s the estimated increase in spending on that particular program. And I don’t know if it’s chump change or just spare change for chumps, but the USDA is obviously adding up their numbers different than the BLS.

Kevin: Yeah. And I just wonder why they don’t talk to each other. So, The Bureau of Labor Statistics, they come in with low numbers. The USDA comes in with probably a more accurate number.

David: Yeah. I mean, when counting the increased cost of food for the CPI calculation, it’s not exactly a 25% number. And it’s funny that there’s a difference, but it’s not funny. The announcement conveniently came from the USDA the same day as Biden is being forced to take the stage and discuss Afghanistan. Is that a coincidence? I think not.

Kevin: Yeah. And so, enter the gifts. We talked about, before, bread and circuses, you’ve got to keep the public happy when the mood starts to fall.

David: That’s right. I mean, public gifts, bread and circuses, let’s hope that desperate power players only abuse the public purse, and don’t abuse the public as a means of distracting from the Kabul debacle. When the left loses the support of the mainstream media, when the right loses the support of the mainstream media, when politicians and power players lose the support of the mainstream media, crazy things are the most likely things to happen next. So, to get the mainstream media back to their role as administers of the ministry of truth, as interpreters of fact for the greater good, it might take some recalibration.

Kevin: Last week we talked about we’re coming into the 50th anniversary of the dollar coming off of the gold standard. August 15th, 1971, was when Nixon closed the gold window. We covered that last week. I thought it was interesting that Kabul fell on that same day, on the 50th anniversary of the dollar being removed from the gold standard. But we have to back up a little bit, because Nixon, you can blame Nixon for it, but actually you’ve got to go back. I’ve got to go back a little bit to Johnson, guns and butter policies of the 1960s, Vietnam, we were fighting a long extended war, and we were also giving gifts to the people and socializing an economy that had not been socialist up to that point.

David: Yeah. It’s funny. Johnson fits in this conversation in a couple of different ways because he was known as saying, when he first came into office, “If anything ever is done that shines a good light on the White House, I want full credit for it. And if anything ever shines a bad light on the White House, I want you to find the right person to blame.” And so, he was a brutal tactician in terms of playing politics. But we do have a replay of the 1960s here with guns and butter policies. And yes, this includes Bush and Obama and Trump and Biden setting the stage for our economic condition. And our economic condition to some degree reflecting what our reputation as a global leader is. You might look at our status as of this week as being downgraded. I mean, I looked at July budget deficit, we had $302 billion, and it keeps us on track for the second-largest full-year deficit in US history. So, whether it’s economic conditions or international reputation or credit ratings, we’ve got some vulnerability here.

Kevin: I don’t know if it’s just me, Dave, and I’m not trying to be controversial here, but there’s no way not to be controversial these days. But COVID, I’ve got more friends in the hospital with COVID right now, as we speak. I mean, is it just me, or is this thing this time around different?

David: Well, again, we come back to the things which can shift the mood and the markets, and obviously there’s been an enthusiasm getting back to normal, and hoping that COVID is behind us. But this week we’d be remiss in discussing the factors that can shift the market mood and not mention COVID. You’ve got Delta, which continues to be a concern as cases increase. You’ve got Pfizer shot, which has been— Well, it’s had its effectiveness dropped to 42% with Delta cases. And then you’ve got Lambda, which is another variant, in Japanese studies it’s showing to be vaccine resistant.

Kevin: Well, you knew that was coming. I mean, Dave, I’ll have to tell you a quick story. One of our listeners actually, and he’s a client, great guy. He teaches security nationwide to healthcare facilities. And he says, my wife and I, on a normal year we may fly 200 days. During the COVID year, this last year, they flew over 100 days. They didn’t get COVID at all until May of this year, they got COVID from a room full of people who were fully vaccinated. Okay. These were healthcare workers, a room full of people who were fully vaccinated, and that’s the one time. I mean, otherwise they had flown and everything was fine. So, I think it’s important that when people talk about the vaccine, they’re not fooling themselves into thinking that somehow when you’re fully vaccinated, you’re not contagious.

David: Or a potential carrier, because these are not transmission blockers, and I think that’s quickly forgotten. You’ve got lawmakers who are present discussing interstate vaccine passports, and not all lawmakers are keen on that happening, which, in response, drew out a bill proposal from Kevin Kramer in North Dakota. Basically says, if you’re going to require proof of vaccination for interstate travel, why don’t we require voter IDs for federal elections? And he said, “Look. If you’re comfortable with making people show their private medical records to simply go to a restaurant, they should be fine having people prove they are who they say they are before they vote. Our legislation,” he says, “shines a light on their hypocrisy.”

Kevin: Yeah. So, you think some of those districts that actually had more votes than people who lived in them, you think that would maybe play into that?

David: I think it definitely raises the question about what are the appropriate papers to show in our society? And when should we be required to provide our papers to the authorities? There’s also, according to AP News, considerations of changing how government reimburses treatment for unvaccinated people who become ill with COVID. And apparently that’s been tabled for the time, being concerned that it would be too polarizing. Yeah. I think that could very well be polarizing. There’s this issue that’s been raised in a couple of different editorials I’ve read recently, where segregation according to vaccine status is going to be a 2022 election theme. You’ve got the lowest vaccination rates in the country among black and brown communities, and travel, dining, and other restrictions are thus felt more by those communities. And it’s ironic that we’ve got modern day segregation as a potential issue moving a needle in 2022. I think this is where, be careful what you wish for. Playing hardball may have consequences.

Kevin: Yeah. You talked about modern day hypocrisy, there are places where masks nor vaccines are actually really necessary as long as you have the money to put on a really, really nice party. Now, I’m thinking of the Hamptons, or Martha’s Vineyard. Forget the fact that you had a huge spike in COVID cases right after those big parties. Am I bringing something up that I shouldn’t, Dave?

David: You mean the Obama birthday party? Well, I mean, what you’re bringing up is the strain that I’m most concerned by, and it’s the Sigma strain. You’ve got Lambda, which is vaccine resistant. Sigma apparently is only contagious on the East and West Coast, and appears to be means tested and partisan. It’s amazing. The socialites sophisticated strain. The socialites sophisticated strain, otherwise known as Sigma. It’s non-symptomatic if you have a high enough net worth and the right political connections. And if you’re already vaccinated and have a home in the Hamptons or on Martha’s Vineyard, there’s simply no chance of transmission to friends because that’s what the science shows.

Kevin: Let’s talk about real science, because lest we sound like we’re just down on everything, there was actually good news about COVID coming out of Israel this last week.

David: Well, that’s right. In all seriousness, they’ve got a drug in phase two trials that 29 out of 30 patients were discharged within five days coming in with moderate to very serious symptoms. And this again circles back around to how frail is mood, and how frail are the markets because of that? Without these improvements like the one that we saw in Israel, the world is moving back towards lockdowns, shutdowns and restrictions, which are to say at the least mood dampeners. This week we have China, which has already partially shut one of its largest container ports due to COVID cases. This is the third largest container port in the world. And we’ve got New Zealand and Australia both going back to lockdown. So, if you consider the dominoes and the domino effects on supply chains and ultimately on global GDP, that’s all the market needs right now, is something to cast doubt on the all-time highs in the leading equity indices. So, you get economic and financial market strength, which is tenuous at this point. And we know that reversals and markets are typically sharp, but in this case they would not be unexpected.

Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. You can find us at McAlvany.com. That’s M-C-A-L-V-A-N-Y.com. 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.