April 26, 2017; Vive la France, Vive la Euro, Vive la Draghi Debt Nannie

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick


“In today’s program, we have all the signs of an epic top therein, yet the Dow soars to new highs above 21,000. All the while, the U.S. nuclear sub U.S.S. Michigan sits ominously in port near North Korea.”

– Kevin Orrick


“I guess what is concerning to me is that that the markets are remaining priced for perfection. And again, certainties and best-case scenarios – they don’t exist! When something is irrational, as I think the stock market is today, it can stay irrational, and will stay irrational for a while. But I think rationality, just like the law of gravity, can be denied for a time, and then – and then – and then – that’s what we’re talking about.”

– David McAlvany

Kevin: Dave, the anti-establishment fervor that we talked about so much back in 2016 seems to have eased. A lot of the people who were pushing the Brexit/Frexit/Trump victory, now that Trump is in the office it seems like there is a relaxation now, and almost an acceptance of the status quo as we move, not just through this French election, but even that lackadaisical attitude of this upcoming budget talk for the government.

David: Every pressure cooker has a release valve, and to some degree the pressure has been taken off. And so, to use another sort of turn of phrase, if someone has an itch, and it has been scratched, it’s just a different experience from that point forward. And to a certain degree, the body politic has sort of done that.

So, over the weekend we had the French elections, and the centerpiece, of course, was what is the future of the euro? And through the lens of this election you have an interesting look into the conflict between people that appreciate their own unique identities, and there is, perhaps, no greater place in the world to put that on display than in Paris, where, actually, if you claim to be a Parisian, that stands out even above your identity as a Frenchman. It is almost like a country within the City.

Kevin: We are different, yes.

David: But that sort of national identity is in contrast with those in a globalist cosmopolitan bent. The drivers of this contrast self-identify, as liberals, as sort of liberal-minded, progressive, forward-thinking.

Kevin: Yes, in fact, the alternative is painted as sort of a troglodyte, sort of looking backward toward our old self, the way World War II or World War I started, that nationalism.

David: Right. So these divisions are being drawn in the U.S., as well as in Europe, and to be a nationalist in America – what does it imply? It implies what you drive, which would be a pickup truck, it implies what you wave, which would not be an American flag but a Confederate flag, and even the way you speak, sort of with a drawl or a twang, which is interpreted, in my opinion, very ungraciously.

Kevin: Very much a stereotype.

David: (laughs) That’s right. It’s a measure of intelligence, right? Well, stereotypes are dangerous. They are dangerous because they attempt to encapsulate all truth, and as such, they are a social device, like hyperbole is a literary device. It is reductionist, and it overstates.

Kevin: It is amazing, as I travel, Dave, as I get older, things are starting to look more and more the same. It used to be you would travel, you would eat ethnic food in various areas, or food that was very, very different. Now you go and people are looking to find the nearest Starbucks or McDonalds.

David: Do you remember eating Ethiopian food in Washington, D.C., why that was so amazing?

Kevin: Oh my, that was so good.

David: But you know, I think, following the World Wars it has been popular to be suspicious of national identity, and kind of hold up the “everyone is special” banner, in the form of multicultural celebration. And doing that, actually, while simultaneously discriminating against certain cultural expressions while you are conveniently elevating others. So what are we encouraged to do? If you are on college campuses, the syllabi cut Shakespeare and replace the bard with the butch, so to say, that is with Lesbian Latin American literature instead.

And on the one hand that is acceptable because we are doing away with the old world in favor of the new, so it shows up alternatively as a big city tendency to inflate the value of cosmopolitan exposure, the arts and culture. The citizen of the world is someone who spends time in Paris, Berlin, Moscow, London, Rome, Hong Kong, Sydney, Shanghai and Dubai. The list goes on. But to my mind, there is a difference between the well-traveled, with an appreciation for each distinct culture, for each language, for each people, and homogenization, which is desired by globalist central planners.

Kevin: That’s what I was talking about, Dave. Your father lives in the Philippines right now. Your brother lives in Bali. You are a well-traveled guy. But I know when I travel with you, the first thing you are looking for is that distinct experience, wherever we are going, not the homogenization that you are talking about.

David: No, I want Hainan Chicken in Singapore. I wouldn’t miss it. But the uniform and the standard, the predictable, the patterned – that’s easier to govern. And I think govern being the word under the microscope – that is a kind way of describing central planning and control.

Kevin: Just moments before we started recording we were talking about the difference between, say, a Russian novel, and a French novel, and a British novel. There are differences, but you have to look backwards.

David: (laughs) It is as different as French food and British food. Distinctions, differences, are amazing. They should be celebrated. I occasionally will have flashes of contrasts in wine. An Australian Shiraz is a completely experience than a French Syrah.

Kevin: Look at your family. They come from the south. You have a Louisiana tie. I don’t think you would want to change that Cajun feel just so that everybody starts eating the exact same thing and talking the same way.

David: No. I was just at a wedding in Louisiana, and I would never want the Cajun flare to be lost. I would never want it to be compelled into sort of a limited version of Cosmopolitan conformity. I have a family that balances the uniqueness of southern identity, including the best shrimp and grits – why are we talking so much about food? I must be hungry (laughs).

Kevin: (laughs) It’ about lunchtime for us, yes.

David: I’m talking about the best shrimp and grits you can imagine, balancing that with a sophisticated take on the world, and unlike the globalist trend toward homogenization, they are unique in their cultural identity and comfortable in their own skin. And they’re not backwards. It’s not bad. But I think, frankly, the South is sometimes too often stereotyped.

Kevin: And we’re not talking about food and how to stay distinct. What we are talking about is something much broader than this. What we are seeing this week in France, and what we are seeing in Europe, is what we are talking about here. You have two groups of people. You have people who want to see this easier-to-govern globalist view, and those who still want to be nationalists. They want to be French, they want to be British.

David: Right. This relates directly to the French elections because the vote comes down to dangerous nationalists, with the spotlight on Le Pen, and the way she is cast in terms of the PR, is as a menacing shadow of Hitler. And then you have Macron, who was the leader in the election over the weekend, a well-educated, younger expression of cosmopolitan liberality and reason. The National Front Party actually came out of the French Resistance. So there is an interesting dynamic there – historical. Perfect? By no means. But I think dinner with either one of them would be fascinating.

Kevin: Strangely though, Dave, the markets have spoken. The markets, at least over the last couple of days, are saying, “Whew! We sure didn’t want change. We didn’t want to see the breakup of the euro, we don’t want to see these nationalist movements. So in the long run, the globalist motion, which is run by debt, is still the motion that is most accepted, at least for now, by the markets.

David: Isn’t it interesting that debt is the common denominator across the globe, whether you are talking about the Chinese system, the U.S. economy, Europe – debt is the common denominator, and somehow it ties all of us together in a shared interest, and that interest is some form of soft bondage. We don’t think of the debt system, the financial system that we have, as perpetuating slavery…

Kevin: But what would you give for security, Dave? That is the question, always, in any society, in any generation.

David: So now we have Macron taking a few more percentage points than Le Pen, and there was pressure relief. Short covering in the CAC and the DAX, the French and German stock exchanges. The euro rallied, up over 2%.

Kevin: A little bit of gold was sold, too.

David: That’s right. So your safe haven trades were reversed, gold being sold in that case. And clearly, Le Pen represents a way back toward a France that is French before it is European. And Macron is seen to be the representative of the new France. Yes, that cosmopolitan homogeneity, European before French, with sort of an openness to all things global, liberal and Goldman-Sachs. Okay, sorry, maybe not Goldman-Sachs (laughs).

Kevin: Well, you were thinking of Mario Draghi.

David: I think Macron is better suited for European leadership, at least in pin stripes.

Kevin: Well, Dave, we have the Dow now above 21,000, or at least, it poked its head above 21,000. People are looking this week at the market animators and they are starting to see that this potential government shutdown is really not that big a deal.

David: Right. These would be your market movers, your market animators. And we expect the tax package imminently. And while we have expected it since early March because it was supposed to be sort of announced this week, announced this week, announced this week – the urgency, I think, is now to announce something prior to a government shutdown later this week. We get to the end of the 100 days, which happens to coincide with running out of money. This was set a couple of years back under the Democratic administration.

But if the Republicans are seen as doing something to help the economy – again, with the tax package – by the end of the week the Democrats are being obstructionist. Whether it is on the wall, or other money-spending initiatives attached to a budget extension, it plays very well for the Republicans in the 2018 election – bad PR for the Democrats. Ryan is the only one who, in the mix, could absolutely screw things up, and Ryan is the recurring poison pill within the Republican ranks.

Kevin: Do you think it is self-serving?

David: I think it will be interesting to see how much he sort of upsets White House policy. And yes, I think, to a certain degree, it is. The Republicans can take some sort of an advantage from this by announcing a tax package this week before the government runs out of money. Ryan favors all political advantage that flows to him. In that respect, I am not sure he even cares about the party.

Kevin: Do you think maybe the wave of excitement for a tax cut will overwhelm anyone’s concerns as we come into the end of this week?

David: Almost certainly. It just depends to what degree that is the case. If it is an overwhelming tax cut, big promises of big cuts – you know what they are going to do? It is going to send the market up big time. And meanwhile, as we mentioned earlier, you have the safe haven trades which would, in that instance, be sold. You have bonds, which are being sold. You see a rise in rates, falling gold prices – that could last several weeks. Okay, there is my negative gold comment for the week.

Kevin: Yes, but how about the overall long-term trend?

David: On the constructive side, you have the 65-week moving average we talked about last week. It looks very positive. Your even longer-term charts, your monthly charts, you are about three dollars away from triggering a multi-year buy signal. And where you have weakness is in the daily charts. So again, short-term – weakness. Medium to long-term, the gold picture looks, not only very intact, but very compelling.

Kevin: Right. Now, when you say multi-year buy signal, what you are talking about is a buy signal where a person who is trading, even intermediate-term – they would be safe on a multi-year rise.

David: Yes, so I think this is good news if you are a buyer, not only because the metals are moving toward you, that is, lower prices in the short run, but the longer-term technical trends are suggestive of a multi-year move higher. Sometimes it is easier to gloss over the weekly and monthly charts, but this takes the price higher all the way out into the early 2020s. And that is, I think, worth paying attention to. I assume not only that gold and silver prices are significantly higher in that timeframe as we move out toward 2020 to 2023, but that equities are significantly lower by that time.

Kevin: Okay, let me play the other side then and say, yes, but what if Trump’s plan causes the Dow to just continue north?

David: Well, that counts for something. I think it counts for the energy which represents putting in a market top. We mentioned a number of weeks ago that the Dow could top 22,000. Well, from a valuation perspective, this is what you have to kind of step back and see. From a valuation perspective, the richer price earnings multiples get, that is, the higher your price earnings multiple gets, the higher the probability of reversion to the mean. That is a different way of looking at things, perhaps. Sometimes people like to think in terms of momentum. “It’s gone high, it will go higher?” Well, yes, it does, until it doesn’t. And then the higher it gets, the closer you are to that reversion to the mean. And that is what I mean – a swing in valuation from the upper end of the valuation range to the lower end of the range.

Kevin: But watch out for the bear.

David: Well, yes, because high metrics and high prices are the breeding ground for bear markets. And it is low valuation metrics and low prices which are the breeding ground for bull markets. So to translate that, the stock market today – they are on borrowed time. And we have noted this many times, they are also at current levels on a borrowed dime. And that is that margin numbers are the highest they have ever been as a percentage of stock market capitalization, as a percentage of GDP, as, in nominal terms, obviously, at 528 billion dollars. So, this has been, believe it or not, the weakest rise in equities on record, given the amount of stimulus that is in the system.

Valuations? Again, we’re talking about measuring them by the price of stocks and the earnings of those companies. They have managed to get to fairly high levels. We are talking about levels that are now two standard deviations from the norm, and two standard deviations from the norm is your typical turning point in the stock market, for it to move either higher or lower. If you are two standard deviations above the norm, you’re moving lower, which is what I’m talking about. If you were, in fact, two standard deviations below the norm, then you have kind of put in the low. Actually, you’ve only gotten to three standard deviations once in history – that is, ever. So, kind of a low probability.

Kevin: So Dave, let’s go ahead and look at a little perspective. Let’s go back to the turn of the millennium, the year 2000. People are looking at the Dow right now and they are saying, “Wow, it just hit 21,000. I wonder how much higher it can go?” But the S&P 500 – only up 54% nominally since the year 2000. And, you adjust that for inflation, it’s half that. So, if we were to look at the Dow and the NASDAQ, today, as we record this program, the NASDAQ went to 6,000 for the first time in history. The Dow hit 21,000 for the first time in history. But the NASDAQ is still down in inflation-adjusted terms since the year 2000. That is 17 lost years.

David: Right. It is interesting, because you look at secular trends and on those longer-term bases, you have a very different perspective. Wall Street kind of looks at what has happened the last 24 hours, in part because they have product to sell every 24 hours, and they need your interest in the nano or microsecond. That longer-term perspective might, in fact, be discouraging. If you are talking about the NASDAQ from the year 2000 and the peaks that we were putting in there, yes, factoring in inflation, we’re negative 17%. If you are looking at nominal terms, you are now between 17% and 20% above water.

And you are right, the Dow is the out-performer, 76% up since the year 2000, and factor in inflation and you are up 23%. But keep in mind, 23% over a 16, almost 17-year period – these are not impressive returns. These are sort of 2% to 2½% returns. Nobody would want to talk about gold and silver in that context because you are talking about double-digit annual returns by comparison in that same timeframe. I think what we are looking at is time and distance, and would make the case that we are still, as crazy as this will sound to some, in terms of secular trends, we are still in a secular bear market in stocks. And we do think that resolution will occur over the next two, three, or four years.

And the resolution, in terms of a bull market in gold, a secular bull market, will also be finished – kaput – done – over – over the next three to four years. There are opportunities in bear and bull markets on both sides. That is what we have tried to argue in the equity markets. Just because you spend 60% of your time with the stock market going up doesn’t mean that you should neglect the other 40% of the time when you can actually make money on the downside.

Kevin: And you’re putting your money where your mouth is. You and Doug Noland are starting the short fund so that you can take advantage at this time of a bearish market.

David: And we’re not bearish because we launched a short product. We launched a short product because the markets are at epic levels of distorted value. The apathy within the marketplace is indicative of a market top. So today, shorting is becoming a compelling market position. Tomorrow, and frankly, on a longer-term, what are we interested in? We’re interested in buying a market, not selling it short, and being long when the risk metrics are favorable, and there is a double or triple in price as a real possibility, not based on what it is today, which would be the greater fool theory, or some speculation about demographic shifts impacting spending, but based on something quite basic, starting at the right time.

Kevin: Looking at fundamentals, it’s things that are basic. Doug Noland, probably more than anyone else that you know, Dave, watches credit flows because he is very, very interested in liquidity because he is very, very interested in market direction in the long-term.

David: Liquidity is a massive factor, whether it shows up as corporate liquidity, or private liquidity, or governmental liquidity, in some form, ultimately, liquidity drives economic activity. So, let’s think about that from the macro level to the micro level. It’s driving sales. Liquidity is going to drive sales. If there is liquidity from a consumer, then you have a company which is going to be selling widgets and services. So, liquidity drives sales, which in turn drives earnings. And earnings drive price.

Kevin: Right. But that all boils back down to how much credit is flowing.

David: Right. So, we’re watching credit flows. That’s critical. Watching sales as sort of a downstream indicator, in turn, is critical because without liquidity the markets don’t have very far to run. Ultimately, when the fundamentals are measured, and you look at earnings, standard form, or the CAPE, the Cyclically-Adjusted Price Earnings multiple, if you want to take out the noise of short-term volatility, you are talking about long-term trends of business growth or decline.

These are trends in the marketplace that are not as sensitive to Tweets, not as sensitive to headlines, as investors are currently led to believe. These are nonpolitical. These are disinterested tides of investor sentiment which roll in, and they roll out. I grant you that market psychology can certainly be impacted, can certainly be exaggerated, by circumstance, can be exaggerated by policy choice. But generally speaking, it is reinforcing the existing trend.

So tax policy – that was the topic, right? Tax policy shifts will extend the current trend of asset price inflation through Q2, into Q3 of 2017, and in all likelihood, complete one of the greatest market peaks in all of stock market history.

Kevin: Let’s go back and review that, because we have seen some amazing stock market peaks, but this is a unique period of time to be alive. This may be the peak of all peaks because it is fueled by – we never really recovered, Dave, from the 2008 crash. We just papered over it. It was all based on credit flow.

David: There is a number of things that I could put on the back of a napkin that would be sufficient as sort of pearls of wisdom for the next generation. One of them would be the perspective triangle – a balanced approach to having assets between stocks and bonds, and cash and gold, and seeing how they work and complement each other, not only in terms of taking advantage of risk, but also reward.

Another would be this idea of – again, just axiomatic, things that you would have on the back of a napkin, next generation needs to know this – If PEs are between 20 and 25, that defines the territory where every bear market begins.

Kevin: Every bear market. Every time you are above 20 a bear market is beginning, whether you see the price drop or not.

David: That doesn’t tell you if it is going to be 2015 or 2017, it just tells you that you are in a rich range where a bear will be born. Then at the other end of the spectrum, PEs between five and ten, so a price earnings multiple between 5 and 10 – that defines the territory where secular bull markets begin.

Kevin: That’s when you buy stocks, not sell them.

David: So we know where we’re at. We know where we are going. We do not – repeat, do not – have a precise timeframe for launching into a bear phase.

Kevin: Yes, but isn’t it amazing, Dave, you can see these things, this back of the napkin talk that you are talking about, always seems to be so obvious when you’re giving it on the back of the napkin, but then when there is a crash everyone says, “Oh, we didn’t see it coming. That must have been a black swan.”

David: Right. So when the bear phase reveals itself, it is going to be talked about not as the black bear, but as the black swan, as you say. An event that was unpredictable, it was unforeseeable, and frankly, it was excusable. It was excusable for John Bogle, it was excusable for the popularizers of autopilot investing through the indexes and what-not. Obviously, I’ve been frustrated for a long time, sort of that void of engagement, that lack of critical thinking in the financial space, where you no longer even distinguish between the qualities and merits of a particular company. You don’t do that hard work either, you just pick an index and run with it. It is shallow, and it is mindless, and it is ultimately going to be very, very painful for the investor who is on that bandwagon. Larry Fink over at Black Rock, who oversees about as much money as Vanguard does – they are both in about the four trillion dollar range. Imagine that – four trillion dollars. He was saying here recently, “Warning signs are getting darker for the U.S. economy.” And the two things that he was looking at – a pull-back in car sales, and a decline in merger and acquisition activity. He is just looking, and he is saying, “The economy is not as strong as everyone thinks.”

Kevin: Last week you brought out that triggers are very hard to define ahead of time, in fact, impossible to define ahead of time. You had brought out that there had almost been a war at one point between North and South Korea based on a tree needing to be cut down.

David: That’s right. So, they’re odd, sometimes they’re non-intuitive, and that could be a trigger for actual geopolitical conflict, or financial market decline. The second round of the global financial crisis – what triggers it? And everybody wants to know. In the final analysis, people will look for the explanation, try to look and say, “Oh, that was the cause.” And I will argue, in that moment, that it was coincidence that something occurred when we had the beginning of the decline, because we want solution, we want resolution, we want certitude, we want facts to make sense to us in a world that is absolutely upside-down and crazy at points.

Kevin: Okay, but I brought up interest rates. On your back of the napkin – I’ve heard you say this over and over – three steps, and then a stumble. That seems to be the case when the Federal Reserve just starts raising interest rates near the top of a market.

David: Right. So, is it going to be a coincidence? Will there be a direct cause? The major decline that we think is likely to occur in the 2017 to 2018 timeframe – maybe it does follow the three steps and then a stumble model of rising rates reaching a point of critical mass. Maybe it is China, which is constantly flirting with having too much credit in the financial system. If you have seen the amount of money and credit they have created in just the first quarter of this year, it is absolutely mind-bending, at a pace which has never been recorded in human history.

So, what do we have today? We have an intentional tapping of the brakes there in the Chinese economy. Does that lead to an outright out-of-control financial disaster? It could.

Kevin: Right. I think one of the questions is, how far can debt go? Because you have borrowed money that, actually, is paying back borrowed money.

David: Sure. Just to mention Dave Burgess’s comments in his Weekly Wrap-Up on our Wealth Management website. New U.S. leveraged loans, sort of debt-on-debt, if you want. Think of it as a layering in and extra layer of not only higher risk, but higher-cost debt. It hits 432 billion in the first quarter? That is pushed out in the marketplace by the five big banks? Now, obviously, that is going to improve the profitability of those banks in subsequent quarters, but is anyone thinking about the risk profile? Those five big banks – yes, they have put out 432 billion more in loans. What we’re asking is – triggers? What would they be?

Kevin: You would think that lower revenues for these corporations would be a trigger. Look at IBM.

David: No, one thing that will never be a trigger – I mean never be a trigger – is a disappointment in IBM revenues, because you’ve had – look at this – 20 consecutive revenue declines with IBM, and it’s like people don’t care. In fact, what does Warren Buffet do? He steps in and buys a boatload of shares saying they are a huge value. Meanwhile, looking at year-over-year numbers, their decline in free cash flow fell from 2.3 billion to 1.1 billion. And guess what saved the day in terms of their earnings report? A negative tax rate of 23.1%.

Kevin: Right. So, they’re getting a refund this year.

David: That’s right. They’re getting a refund. The number was slightly less on a non-GAAP basis, so GAAP numbers were 23 plus, non-GAAP were nine and change. Still, a negative tax rate, right? Otherwise, they’re hemorrhaging. But never mind, never mind, Netflix is losing money, too. But they have a compelling story. You should buy the story. Go long, Netflix. Go long, Tesla. Go long, Amazon. It’s a brave new world. You don’t need to make money to be in business anymore.

Kevin: No. And in the meantime, let’s pretend like we know nothing about what we just now talked about, and we were an alien who maybe had been taught world history. We all of a sudden show and say, “Okay, give me the stats on what is going on.” Well, we’ve got Russian tanks on the North Korean border. The United States has a submarine that is docked, that can launch nuclear missiles, in South Korea right now. North Korea is a nuclear power. It has already threatened the United States, Australia, I think Canada, but nobody really paid much attention to that.

David: Trudat. I mean, Trudeau.

Kevin: (laughs) So, you have the Dow hitting 21,000 at a period of time that we have the potential for – I didn’t even mention China.

David: Right. China sits in that awkward position of negotiator for a madman. They are on the border with North Korea, as well. They are responsible for 80% of North Korean imports and exports. China wants neither war with North Korea nor peace, because a reunified Korean Peninsula doesn’t serve their interests, either. So, it is in their interest to stir the pot, just not feverishly.

China is in an awkward position, you’re right. The Russians have gathered their tanks and rockets on the North Korean border because of conflict brewing there. Meanwhile, you have Chinese bombers which are on high alert according to CNN. It is an age where investors are choosing to suspend disbelief and see a perfect world where one does not exist.

Kevin: Do you think maybe that is why we have the shift in emphasis from the right versus the left, really, to those who want an international order which would eliminate war, at least in their mind, and the more nationalist-focused view?

David: It is interesting. When we talked to Otmar Issing, there was this idea that the European central bank and the liberal international order which was being set up in Europe…

Kevin: Would avoid the next World War.

David: Right. And from a man whose father was a guard in a prison camp, for his son to be working side-by-side with a man whose father was a hostage, a prisoner in that prison camp, you can see there is a different existential appeal to peace. I guess it is a question of respecting the individual and individual rights in the context of eliminating the possibility or probability of conflict. This is where I’m not sure everyone has the same motivation as an Otmar Issing. There are some people who are just flat power hungry and are happy to be the technocrats in control, as opposed to being someone who is sort of well-intentioned about designing a world full of peace.

Kevin: There is this illusion, Dave, that the more globalist we become, the more peace we have, but that hasn’t really played itself out, either.

David: No. You’re right, there is a shift in emphasis from right versus left. The left in Europe is being destroyed. The traditional left-leaning politician who had a platform in France – they’re gone, they’re blown up, they’re completely done. You look at Macron, and you look at Le Pen, and nationalism, socialism – I don’t even know if I can call him a socialist, I don’ know what I can call him. But the old socialist regimes of France – they are dying. What is happening? And it is down to a fight between those who want a liberal international order and those who want a nationalist-focused policy.

And frankly, back to this notion of triggers, that may still be what destabilizes European politics, and the global financial system with it. That political trend is playing out without a negative impact in the U.K. You can see that their economy is actually not suffering, and their currency is not suffering as anticipated in the post-Brexit era.

And so far, you would have to say that the U.S. is doing all right, as well. No real damage to the penchant toward nationalism which was feared when Trump was elected. Of course, there has been stump speech rhetoric from the campaign trail which has been sort of polished up, and cleaned up, and he is now appealing to more the D.C. power club and everyone is deciding that, “Hey, he’s okay, he has brought in the establishment guys.” Certainties. Best-case scenarios – they are few and far between.

I guess what is concerning to me is that the markets are remaining priced for perfection. Again, certainties and best-case scenarios – they don’t exist! When something is irrational, as I think the stock market is today, it can stay irrational, and will stay irrational for a while.

Kevin: Price earnings ratios can go higher.

David: Yes. But I think rationality, just like the law of gravity, can be denied for a time, and then – and then – and then – that’s what we’re talking about.

Kevin: Right. So, we talked about a government shutdown. That’s really not on the horizon, right? Let’s face it, they’re going to do something to keep that from occurring.

David: Well, if you’re looking at, again, efficient market hypothesis would say, “Today’s predictive market has no concerns about a government shutdown on the horizons.” But perhaps it will become a concern in tomorrow’s reactive market, because there is one thing we have learned through the global financial crisis – the markets are not quite as efficient as they are supposed to be.

Kevin: But they do have to pass a spending bill. That has to happen.

David: New spending bill is needed. The controversial insertions of border wall funding, sanctuary city defunding. What does that mean? It means that we have verbal spats and political fights fast approaching. I thought it was very interesting this last week looking at Bureau of Economic Analysis published numbers. What we are already doing is allowing for government spending to be a larger part of our total economy. And you can see it in the bar charts, and the numbers that the Bureau of Economic Analysis published last week. You have the GDP stats from 2013 to the present showing private goods and service in decline in lockstep with the GDP numbers, because GDP was shrinking, too. But you have government spending, which, according to the BEA – and actually, we’re talking, about government deficit spending – that is filling the gap.

Kevin: But that calls into question what we are being told – the thought of a tax cut which actually reduces the amount of money coming into the government. The thought of a tax cut, unless that turns into more revenues from companies that are more successful, you would have to replace a lot of dollars for that to occur. Now, I’m all for tax cuts, Dave. I hope that it happens. But to think that the revenues, the increased revenues with companies, initially, are going to overcome what the tax cut actually incorporates – that seems like wishful thinking.

David: That may work on a two-year timeframe, but we’ve got a 2018 election around the corner and it could cause some chaos in the short run with a blowout of the deficit. Nobody is concerned about an increase in the deficit because, you’re right, they do think that the tax cuts are going to create so much business activity, business investment, private consumption, that by reducing the tax burden, we will get more tax dollars. We talked about this last fall, what they call dynamic scoring, where you cut a dollar in taxes, get a dollar or more in tax revenue projected off of the increased business activity. Dynamic scoring – let me be quite frank. Dynamic scoring feels a lot like a pro forma-driven sales pitch. Have you ever had anyone present an investment idea to you and they have the Excel spreadsheet as if that is a scientific measure of anything.

Kevin: Right. “All we have to do is earn 11% per year for the rest of your life.”

David: “And this is what has to happen for you to have these guaranteed returns.” A, nothing is guaranteed. B, there are loads of assumptions that go into every cell in an Excel spreadsheet. And last and not least, guess what we have? The best-case scenario, which is not realistic if you spend very much time in the real world, if you spend very much time there at all.

So, I guess the question that lingers, as we come back around to the French election is, have we adequately scratched where there was an itch? This revolt of 2017 or 2016, what have you, is a popular revolt. 100 years after the Russian revolution we have our own version of a new revolt, and it is a popular uprising. Well, are we going to see that follow through in the second round of the elections coming in May in France? And of course, we have the fall elections in Germany. Or, have we seen enough? Was there enough pressure released in the U.S. election and in the British Brexit where that is really not going to be so much an issue.

Kevin: Don’t you think, though, if the stock market were to come down substantially, or if the economy were to turn down to actually where it really is, this perception right now. There is a comfort right now, this spring, Dave, and I’m thinking that possibly, when that comfort leaves, if the central bankers can’t keep this thing together, you will have a recurrence, even worse, of this Brexit mentality.

David: So, as we often do, we see this connection between the political, the geopolitical, with the financial, and in this case, really holding the sun, moon and stars together is not the God of the universe, but the central banking crowd who believes that they are, in some proxy, gods of the universe. And what do they want to do? They want to keep everyone happy. They don’t want there to be concern in the marketplace. They do want to see the DAX and the CAC and the S&P and the Dow and the NASDAQ continuing to move higher.

And they don’t want a revolt of the masses. If they can keep those concerns at bay, this will turn out to be a very, very interesting year, as we say, one that is potentially an epic top. And the dominoes that fall thereafter will be the most interesting to watch because if it is an epic top in the marketplace, is it also an epic top in political stability the world over? And how do politicians respond to that? I am very interested, and actually, a little afraid.

By | 2017-04-28T10:08:54+00:00 April 28th, 2017|Transcripts|