In Transcripts

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

“On today’s show, optimism is at high levels, in fact, levels that have only been matched by the pre-crash years of 2000 and 2007. Are there consequences this time?”

– Kevin Orrick

“Do you get the same market reaction twice? Do you get the same attempt by central bankers to do the same thing all over again? “Just lower rates, it will be fine.” And will the market react the same way when it is not a brand new, shock and awe, “Oh my gosh, we’ve never done this before.” In 5,000 years of interest rate history we have never taken nominal yields negative. There is nothing impressive once it has been done.”

– David McAlvany

Kevin: You know, this morning, Dave, I was sitting and talking to a couple of guys in a study that we do, just about how people follow false gods, and why they would follow false gods. We got to the discussion of even what is going on right now economically. Tomas Sedlacek, who was a great guest of ours about a year, or year-and-a-half ago, pointed out that to think that continual growth is a normal thing is a false religion. He said the central bankers that can guarantee that continual growth, that security, are the high priests of this false religion. It hit me that, I think, one of the reasons that people have followed false gods all through history is because somehow, some way, they perceive that they will ensure them some form of security or continual prosperity.

David: If growth is something that we must have, and we must have it and achieve it at any price, it explains why we are much more comfortable today with growing levels of debt and government deficit spending. It used to be, and we have talked about these numbers before, that a dollar in deficit spending would add five dollars to gross domestic product or economic growth.

Kevin: So it almost made sense.

David: And now, newest studies show that every dollar in deficit spending actually reduces GDP by a dollar. So, fascinating that we are in this transition from monetary policy to fiscal policy at a point in time when, actually, because of our great love affair with growth, we are blind to what comes with added debt in the system, which is actually a diminution of our economic activity.

Kevin: And the steepness of the hill is getting steeper and steeper without people really understanding why. I was talking to somebody the other day who said, “You know, I need to really plan for this next downturn because we got hit in 2007-2008 – she was talking about she and her husband – they got hit, their portfolio was worth over a million dollars. They were in the stock market, and they were in the more aggressive markets when the thing came down.

Now, still in the market, they are at $400,000 in that same account, and they can’t quite understand how the stock market is hitting new highs…

David: (laughs) Somehow they didn’t participate, and they never pulled the plug, so what did happen? It is interesting, as we concluded the month of March several things stood out. We spent numerous weeks in the month of March in decline in the Dow and the S&P. By contrast, we had gold and silver which maintained a steady, and certainly not a heady level. It was reasonable. So, this was the first sputter that we have had since Trump took office, and it is easy to think in terms of Trump running into legislative hurdles, and to health care repeal impossibilities maybe suggesting his agenda may not be a slam dunk.

But there we were, the market peak of 21,169, and throughout the month we had this slow erosion off those levels. We reached the peak March 1st. Again, that was all before the loss of political momentum which was later in the month. So, I look at March as a very interesting month. As we fast forward to September, October, and November of 2017, I think we are going to be able to reflect on this month as having sent us some pretty critical signals.

Kevin: And isn’t it interesting, and you pointed this out at the time, that bullish sentiment was at its highest on March 1st, as well. So you’re ringing two bells at the same time possibly.

David: That’s right. Bullish sentiment was its highest, the highest in all but one month going back over 30 years.

Kevin: Now, let’s stop for just a second. Thirty years ago was 1987.

David: (laughs)

Kevin: That was the last time – 1987 was a huge crash.

David: Well, yeah. It was Hochberg and Kendall, the folks at Elliot Wave who pointed that out. It really wasn’t Trump’s policies that opened the door to 21,000 on the Dow, any more than it will be the cause of breaching those numbers. And I say breaching those numbers because I think we may well see a new all-time high coming in at closer to 22,000. That may still occur. I don’t know what the catalyst will be. Perhaps it is an announcement on fiscal spending, but I start with the comment on the ineffectiveness of fiscal spending here at the early stage of our conversation today because if we are going to deficit-spend our way into a financial Shangri-La, guess what? We already know the numbers don’t work.

In the current environment, a new dollar of debt takes away a dollar from GDP growth. That is not good. That is not healthy. And yet, you know what the announcement may be? It may be a bridges-to-nowhere program where we are going to spend billions or trillions of dollars and that may rally the Dow back to 22,000, back above the recent peak of 21,169. And it is going to take sober-mindedness to say, “Hey, wait a minute. It doesn’t matter if they are spending money they don’t have. That really doesn’t get us out of the pickle barrel that we’re in.”

Kevin: Every time they increase that debt it does increase the steepness of the hill that you have to roll that rock up. What I’m talking about is just meeting expenses. Speaking to people who are getting ready to retire right now and looking at assets they are saying, “Wait a second. I’m looking at my monthly bills and I’m looking at what I have saved for retirement, and it is getting tougher and tougher every month to make my bills, and I still have a job. How can I retire?”

David: At these levels – and I’m thinking about the Dow again – at these levels for the Dow, S&P and NASDAQ, if you are heavily exposed to equities and you are in a three to five-year timeframe for retirement, the current levels in anything else that you see above 21 is an absolute gift. And I don’t know how to say this strongly enough. I think you need to get out of harm’s way. I think you’re looking at a generation of investors who are ready to retire who are in harm’s way, and if you’re pricing your retirement in U.S. dollars and if you have them sitting in U.S. equities, I think over the next three to five years it is not going to put you ahead.

Kevin: Let me, then, take the other side. I am going to say, David, have we possibly eliminated market conditions? Market conditions usually – as Tomas Sedlacek was saying, “You don’t have unlimited growth. You have ups, and then you have downs. Things become too high-priced, and then they come back down and they become lower-priced.”

David: That’s the nature of a free market because what is expensive today may be cheap tomorrow.

Kevin: Do we have a free market? That is what I am asking you.

David: Right. And if the markets are tinkered with, like so many elements in a lab, does that somehow go away? There is an element of economics and finance which, to me, and I think to many others, is very intriguing. When you are looking for an explanation of why there are swings in market value and economic shifts from periods of expansion and growth to decline, understanding market behavior is like a wormhole for the curious-minded into the internal motivations and the measured beliefs and preferences of millions of people. So, you are taking on a study of psychology and sociology while you are looking at economics and finance.

Kevin: And you foam at the mouth when you can actually do that, Dave. You absolutely are intrigued with the markets. I have watched you all through the years, and you have studied, not just the markets, but psychology. You have studied economics, you have studied politics. The reason behind it is because it is intriguing to you. Now, when these guys, with debt, with the Federal Reserve, or Bank of Japan, the European Central Bank – when they smooth out these market ups and downs, it is not as intriguing.

David: No, the domain becomes less intriguing when there is more and more evidence of a rig, which I believe is present today. You are destroying market dynamics and putting what Joseph Schumpeter described as creative destruction on hold, and that, to me, seems like a tragedy. To those of us that are free market in our orientation, we cherish the idea that price discovery is important, and that it is best done by individuals acting in their own self-interest. And that collectively, it reflects itself in supply and demand fundamentals.

Kevin: But if you are a central planner – remember, we talked to Carmen Reinhart, who is a voice, a mouthpiece into the central planners. She said they are doing what they think is right, and what that means is, creating a captive audience. Now, a captive audience doesn’t have that free market right to do what they want to do with their assets.

David: Captive audiences imply controlled outcomes. As you have mentioned to me before, Kevin, what is a tragedy to us, the control of the free markets, may, in fact, be a triumph to the central planners.

Kevin: They think they are doing the right thing.

David: After all, less volatility in the financial markets may suggest less volatility in your political power structures. Unless, of course, they are wrong, and the benefits of controlling prices only go to the few at the expense of the many, in which case, guess what you have?

Kevin: The political reaction that we have seen over the last year.

David: Yes, whether it is Trump, or Le Pen.

Kevin: Or Brexit.

David: A variety of protest votes that emerge from the ballot box, quite unexpected by the established powers. So who wins in the end? History suggests that games can be played, manipulation can pervade in the short run, but in the end, the power of the popular vote is what drives political revolutions, is what drive ideological revolutions, and yes, revolutions in the marketplace, otherwise known as the wild and erratic swings of volatility.

Kevin: I was just talking to my son the other night about Enron. We were talking about what a sure thing that was – until it wasn’t. And when it wasn’t, guys were just shocked. It was a one-day deal where they walked in, a little like Lehman Brothers.

David: How about WorldCom? They owned 90% of the Internet backbone. If you want to know who owned the bandwidth, it was WorldCom – was.

Kevin: And I guess they never came and went, they just were larger than all of the airlines in America is capitalization at one poiny.

David: But I think, if history is a guide, the more noticeable the calm, the greater the storm that is coming. It is a little bit like this. Let’s say you have a radio on and you have a mute button, and you go ahead and press the mute button and continue to turn the volume up. No one notices. And if you accidentally hit the mute button again and the sound comes live again, what happens? It is shocking! And I think the VIX index is like that. It is rarely below ten.

Kevin: And you’re talking about volatility here.

David: That’s right, the Volatility Index. It rarely gets to the single digits. When it is in that single-digit range, you should prepare for massive volatility. We went sub-ten in February. Is it March? Is it April. Is it October? I don’t care, but the last time we went sub-ten – guess when that was? October of 2007 (laughs).

Kevin: Dave, do you remember when we read a favorite book of ours, Deep Survival? He talked about survival situations, or situations where, actually, people get killed doing something that they had always done before with no consequence, so they started to realize there was no consequence. At some point, it catches up with them. I’m thinking about the guys who were bombing up the hill with snowmobiles and they had never experienced an avalanche before. Then sure enough, at one point, and he gives this story in the book, Deep Survival, at one point the avalanche goes and it is all over all of a sudden. Now, if you have never seen an avalanche, but you have played in the snow, you are probably going to go back and play in the snow again unless somebody says, “Hey, sometimes it breaks free.”

David: I think it is a great point because the threat of something, as you and I have talked about, is no longer enough to motivate people. There is nothing, in terms of risk analysis which makes sense to people. It is almost as if we have moved so much to real time news and real time data feeds that we don’t need to react to anything until we have the information in real time. We won’t worry about Russian ICBMs until one is launched.

Kevin: Isn’t it human nature, though, Dave? Human nature is, unless you have experienced pain, or some form of consequence for what you are doing, you are not really going to believe the threat?

David: When we reflect on the certainty of the average investor that prices will continue to rise, we remember times where this certainty was, by degree, at an equivalent level. And of course, that takes us back to 2000 and 2007.

Kevin: Right. The tech stock boom, and the financial crisis.

David: As I mentioned, October of 2007 was the last sub-ten Volatility Index reading. This is where the man on the street opted in at the very moment he should have been opting out – opting out of his 401k mutual funds, and whatever the latest promise or guarantee of growth was. In the end, mankind repeats the errors of optimism because it feels good, because, quite simply we want to.

Kevin: And also, everybody else is doing it, Dave. Why wouldn’t we?

David: In both of those earlier periods, 2000 and 2007, you certainly had monetary policy tinkering. But now, for nearly ten years, tinkering has taken on a Mary Shelley Frankenstein-like characteristic. What are we celebrating? We are celebrating creations we do not really control. We are, in our great pride, elevating an experiment to the level of scientific certainty when, frankly, we don’t know what happens next, any more than we knew what would happen next when the economic corpse was being electrified by QE, by other pseudoscientific monetary policies.

Kevin: That is a great analogy because when Dr. Frankenstein was creating this monster he thought he was doing something – well, you were talking about intriguing earlier. He was intrigued with the possibility of creating life. He had no idea what he was creating. I think of Richard Bookstaber, a guest of ours in the past. He wrote the book, A Demon of Our Own Design, and talked about when you create these complex systems that are artificial, once they come apart, you have absolutely no control. And the outcomes are unpredictable.

David: There is this theme that runs through Hebraic literature, and through all of literature. It catches up with Mary Shelley and Frankenstein.

Kevin: The gollum.

David: Exactly. In Jewish literature it was known as the yetzer. You had the good yetzer or the evil yetzer. This was the work of imagination, and in this work of imagination you had all the possibilities of good and all the possibilities of evil. We always want to think that what we are creating is, actually, all the possibilities of good, when in fact, oftentimes we are surprised.

Kevin: Well, we are avoiding pain. Why wouldn’t it be good, Dave?

David: So far, when we look at 2017, we have a landscape that has offered, really, something for everyone. You have U.S. stocks. They are getting the headlines. Why are they getting the headlines? Look at the prices – new nominal all-time highs. And yet, it is emerging markets which have impressively out-performed the Dow and the S&P. With the idea of growth in the economy coming in, that was coming in vogue with the Trump election, you have had sectors which you might expect to be exploding with the prospect of making lots of money, again, from fiscal policy spending and things like that. And guess what? They have remained in the shadow of companies that make no money at all.

Kevin: Well, how about Tesla? Let’s just look at Tesla.

David: But again, if you don’t make money today but you tantalize the imagination, that is sufficient. And you are right. Ford was just eclipsed in terms of market value by Tesla, and to see in the month of March, earlier this year, Snap, its IPO – last year it lost 500 million dollars.

Kevin: Yes, but who cares? It is a good idea.

David: Use your imagination. They lost 500 million dollars last year and they had a market cap which reached in excess of 40 billion dollars. And here is the interesting thing. The shares offered a very new, innovative twist. You have no voting rights. You merely are along for the ride.

Kevin: Get on, hold on, but you don’t have any steering.

David: Obviously it is not trading at 40 billion today, but what is a 40 billion dollar market cap compared to something that you do know, say, the largest car manufacturer in the world? GM still is the largest. You have over 160 billion dollars in revenue with GM. You have net income of nearly 10 billion dollars. That is billion with a B. GM has a total market cap of around 50 billion. And Snap go to 40 billion because we have imagination.

Kevin: Well, and Dave, this reminds me of 1999 when we had the tech stock boom just raging and you had these same types of things that are happening with Tesla going on in all the technology stocks. Who looked at price earnings because, of course, they didn’t matter. It is the best idea out there that matters. You had brought up about Elon Musk. This is a man who says he would like to retire on Mars. Well, maybe he will. This is a man who says that you really can’t keep up with technology – you, me, our kids – without some sort of trans human type of implant, because we are not going to keep up with machines. He may be right on some of these things, but it is a little bit scary when you have a Tesla that is worth more than a Ford when Tesla has been losing the kind of money that they have.

David: Right. So, you can argue old economy versus new economy all you want. And I think what we are tempted by, and again, this goes back to Frankenstein, when you say brain implants in humans because we can’t compete with machines, Frankenstein absolutely comes to mind (laughs). It is like turning ourselves into the next, newest, latest, greatest model. We are tempted by our creations to reach beyond, and we are tempted to make a great to-do about our capacities, about our capabilities, about the trajectories. And I think we would be wise to remember the story of Icarus.

Kevin: Yes, what goes up does come down. And actually, day before yesterday Elon Musk was mocking anyone who had shorted Tesla in the markets. Now, of course, it is a wise short, possibly, at some point to short Tesla because they are not making any money compared to what they are worth, but he was mocking them openly in his tweets.

David: When pride blinds us to how we arrived at elevated levels – again, this is Icarus with waxen wings flying too near the sun and, of course, falling back to earth – the reality is very simple. The markets have gotten there, not on their own merits, but on the basis of easy money, and we have those purse strings actually being tightened as we speak, and the reality is quite simple. Between 2016 and 2017 we are at work putting in generational highs in both the equity and bond markets. Keep that in mind – generational highs. The perma-bull would say, “That’s impossible. What are you talking about? Equity prices and bond prices putting in tops, you say? Not a chance.” I just ask a sociological question. When has the majority been right?

I have to reflect – this is confessions of a second-generation businessman, so maybe I have a little bit of cynicism built in, but you grow up with certain sayings in a household, and those sayings may impact you. They may create an impression on your mind, on your spirit. They may even warp your perspective. But two that come to mind that I was raised with: One, always mistrust the obvious.

Kevin: Yes, I have heard your dad say that many times.

David: And the second, the majority is always wrong. I think, growing up in the McAlvany household, always mistrust the obvious, and the majority is always wrong – that we understood better than the doxology (laughs). We knew exactly what it meant because Dad had given us 1,000 demonstrations. And the crowds that are gathering into the equity and bond markets today – are they right? Is this the first time in history where the majority is right?

Kevin: Listening to the program last week, Doug Noland, replaying that several times, Dave, Doug Noland said, “No, it will catch up. There are consequences.” He talked about the nature of credit expansion and who benefits from price dynamics of cheap money and what that creates in the financial markets.

David: Right. So, financial market prices go up, and in countless conversations here on the Commentary, the question has been raised, if asset prices go up as the cost of capital goes down, that is, interest rates go down, can you say also that those same asset prices are vulnerable when the cost of capital goes up? What has changed in 90 days from November to the present? You have residents at the White House – that has, of course, changed. There has also been a series of interest rates hikes which, if Boston Fed President, Eric Rosengren gets his way, will introduce further hikes as we go throughout 2017.

He is suggesting at every other Fed meeting that we raise rates again, and again, and again. You have Rosengren and Williams, who could not see bubble dynamics in late 2016 when Mr. Obama was attempting to pass the baton to Hillary – keep this in mind – now they both say the markets are getting frothy. And this is the new assessment that is being made by a growing number of Fed decision-makers in early 2017, even though prices aren’t up more than, say, 5% since January 1.

Kevin: It is interesting – we have talked about this for years, Dave – the Federal Reserve is mainly Democrats, and so, of course it is going to be different. The markets were perfectly fine until they found out Hillary wouldn’t win. Now the markets are too high. Now, you would agree with them, though, that the markets are too high, but isn’t it interesting that the one tool that they have, the big tool, is the interest rate hammer?

David: And I don’t know that they determine the course of the markets. I don’t think that they do. But rate hikes, or a series of them, have classically gone alongside the end of a move higher in equities, and that has usually set the stage for a number of instances where you have had significant stock market declines. Think the late 1960s. Think the mid 1980s, coming into 1987. Think the year 2000. Again, if you are looking at interest rate hiking cycles and declines in equities, there is an interesting correlation.

There are other contributing factors, of course. But as a signal, rates do send a clear message to market speculators, to the leveraged speculative community, and that is that the easy games are over. More skill will be required to win in the years ahead. That is what a leveraged speculator has to say. It is not going to be as easy to make money when interest rates go up.

Kevin: Well, isn’t it interesting? Usually, we see people finally sign up for something right at exactly the wrong time. The large investment platforms out there, your largest trading firms, at this point, can’t really make money. They can’t compete with discounts brokerages. We are seeing from the government side almost a forced autopilot in investing, and we are seeing these investment platforms basically having to sign up for the same thing. Instead of having skillful players in the market, understanding market dynamics, what we are now being sold is this game of, “Hey, just put it on autopilot and don’t touch your investment. You are going to do fine.”

David: Riding the index.

Kevin: Riding the index, yes.

David: So yes, we are witnessing a pivot, both in easy money and easy returns, and yes, we are watching this pivot as investors opt for that autopilot investment tool at precisely the wrong time. So, when monetary conditions tighten, guess what? Risk analysis and fundamental homework for individual companies becomes critical to stock selection. And there is a process involved. I think that is also a period of time when riding an index, as a viable game, is over, unless you happen to be short (laughs), which we covered last week, and it maybe isn’t the stress-filled job that you want, but we can do it for you.

Kevin: Well, let’s face it. Most short funds are not a good idea because you are short almost always at the wrong time.

David: And you don’t want to do it on an autopilot basis.

Kevin: Exactly.

David: That’s right. That is what Doug hammered home last week. 100% short all the time…

Kevin: Is just a death knell.

David: It is risk indifference, and you can’t be risk indifferent. You have to be paying attention.

Kevin: You have to be able to move to liquidity and safety whenever you are not short.

David: So 2016 and 2017, we have talked about a pivot in stocks. We have to look at interest rates. The ten-year reached a peak this last month of 2.63.

Kevin: Yes, but aren’t we still negative? If we take inflation into account, we are still negative rates.

David: True. Interest rates remains accommodative. Even though rates are moving up, you are right, we are still in a negative real return territory. The government says inflation is 2.7%. If you look at the folks over at MIT who have created an algorithm to capture the prices of what they say is a billion products – maybe it is just few million – but they call it the Billion Prices Project. They put inflation currently at about 3.6%. So, what we are trying to do is measure the upward trajectory of prices. Do you want a sample size of a billion prices versus the selected to fit the model list that the government prefers? I think what you find is that everything on the yield curve is negative in real terms when you are looking at a real rate of inflation – at least 3.6%.

Kevin: I am going to go back to Doug Noland’s conversation with you last week, and actually, there was more detail brought in the conference call that occurred at the end of last week. Now, my suggestion would be that we attach it to this program so that if a person wants to listen to the conference call where people called in and listened to their questions being answered by Doug – this is not to necessarily sell a person on the product as much as it is to let them hear Doug Noland answering questions.

David: It is good, structured thought on why we do what we do. Last week on the Tactical Short conference call we mentioned that margin debt surpassed all previous records here in the first quarter of 2017. Again, that is money that is borrowed to go out and buy that sure thing, which is the next move higher in stocks. Here in the first quarter of 2017 it is now 50% higher than the record set in 2007.

Kevin: It is over half a trillion dollars, isn’t it?

David: 528 billion dollars. Fred Hickey reminds us that this number does not tell us when the market will crash, just that it will. I think that is really important to keep in mind. Our view is that there is a sell-off and a short run that rattles a few cages, maybe followed by a hope-and-hype recovery rally moving above those March 1st highs. And sometime between summer to fall we see a swoon that puts 2008 and 2009 in perspective as mere child’s play.

The difference between then, 2009-2009, and now – you have to look and say that the Fed is less inclined to be supportive, for a variety of reasons, perhaps even political reasons, and you have a central bank community, globally, that has already plumbed the depths of the interest rate nether region. Do you get the same market reaction twice? Do you get the same attempt by central bankers to do the same thing all over again? Just lower rates, it will be fine. And will the market react the same way when it is not a brand new, “shock-and-awe, oh my gosh, we’ve never done this before?” In 5,000 years of interest rate history we have never taken nominal yields negative. There is nothing impressive once it has been done.

Kevin: If they pull the same tools out, it is inflationary this time.

David: That’s right. So, I ultimately support an inflationary outcome in the years ahead where, yes, we see central banks desperately trying to prop up the system, unwilling to throw in the towel and allow for a broad, systemic, deflationary collapse. But I don’t think they can prevent pockets of deflationary pricing. I don’t think they can prevent liquidations, which may be triggered by a reappraisal of credit quality.

What have we had happen the last ten years? We have had cheap money, which has brought future growth into the present, so we have already lived it up large over the last ten years, and have already gone through and chewed through what was tomorrow’s growth. We have done that. And we have also pushed forward and forestalled corporate catastrophes with an endless lifeline of credit and debt. If you price that close to zero the markets have had a great time over the last five to seven years.

Kevin: This goes back to that religion of perpetual growth that Sedlacek brought out. It is a false religion. It cannot be continued forever. But look at consumer confidence right now. Reuters is reporting that consumer confidence right now is as high as it has been in 16 years.

David: Right. Home prices get to high levels and people feel good about that. I understand that. People do feel better when prices rise.

Kevin: It is the largest asset in most people’s portfolio.

David: And you see the same thing when stocks go up. People feel better. People are more likely to go out and eat and do other things that they just wouldn’t do if they felt financial pressure.

Kevin: Unless you are a retailer.

David: This is interesting. The verdict is out whether or not Amazon is gobbling the entire retail universe, or if in fact, there are multiple themes going on. Yes, they are capturing some, but not all. You have had the retailers singing the blues so far in 2017. Here are the closures – 138 store closures for J.C. Penney, 42 closure for K-Mart, 42 closures for Sears, 68 closures for Macy’s – all this in the year 2017 – 32 for Gander Mountain. Forbes reports that there is a total of 21 retailers that are closing a total of 3,951 stores.

Last year we talked about the carnage at Walmart and the closings at Walmart. Is Amazon really picking Walmart’s pocket? To a certain degree, you have to say yes and clearly no. There is something happening where the consumer, even though he feels better and consumer confidence numbers reflect that, is not translating that into massive new spending, which is what you would expect at this point.

Kevin: You remember, when retailers were the thing, you would look for a line because a line would say, “Hey, they’ve got something that I want.” Or when you go to movie, you would look for the line. If no one is going to a particular movie, you are probably not going to be interested in the movie. Right now, the lines are not forming at retail stores, they are not forming at movies, they are forming in the stock market, of all things, which is hitting all-time highs.

David: I remember the 1990s, standing in a very long line to get into the latest, the greatest, the newest place, which had huge salads and huge portions, and reasonable prices. That was the Cheesecake Factory. Now, you can get into any Cheesecake Factory, anywhere you want – you might wait two-and-a-half minutes on a bad day. So, standing in lines – if you want to stand in line to buy assets, it is a little different. U.S. equities – the line is already there. You are standing in line to own U.S. equities. Index ETFs here in United States – again, it is probably the longest line of all.

Kevin: And worldwide, maybe gold, but certainly not here.

David: No.

Kevin: In the United States no one is standing in line to buy gold right now.

David: No one is in line for U.S. gold. No one is in line to short the market. As we talked about last week, we are talking about a near-extinction event for bears (laughs). If you are bearish in the market, somebody should call the World Wildlife Federation and let them know. Very few are in line to own silver in its physical form. Very few are in line to own the shares of companies that mine it.

Kevin: Yes, but you know, Dave, you were raised not to stand in line most of the time. Yes, you may have stood in line for the Cheesecake Factory.

David: That is not to say that I was raised in a family where we cut lines.

Kevin: (laughs) No, but you actually would go to the place that was under-valued. You were trained very, very well in your family to look for what someone else isn’t seeing.

David: Well, you are right. When the newest restaurant was opened in Denver, we still preferred going to the New Jerusalem, which was not that new; it had been around for 50-odd years and served the best fried kibi and hummus you can imagine. But you are right, standing in lines – I have never liked them. It may suggest I am inpatient, which is true. It may suggest that value is never popular, and lines are more common as an expression of mass appetite. So again, I totally understand standing in line for an in-and-out burger. I get that. But do I want to stand in line for beanie babies, play stations, tulip bulbs, Tesla shares? I don’t think so.

Kevin: Dave, I was a toy store manager. I just happened to be a toy store manager in the middle 1980s when I was in school when the Cabbage Patch Kid craze came. Literally, women were hurting each other, literally, physically accosting each other to get to the right Cabbage Patch doll. Now, you can’t give that type of thing away. So, will it be the same type of thing for a Tesla? Will it be like was in 1999, which was the hottest thing, and by 2001 I don’t think they even existed.

David: At the end of last year there were a third of the Russell 2000 companies that were losing money, before paying taxes and interest. In fact, since the election of Trump, the biggest winners on the various exchanges have been companies that are not making money. To make money is something that is almost passé. That is the way it seems today. The stock market has gone even higher, and isn’t is curious that the wealth effect which typically drives extravagant consumption has been lost in the momentum.

Look at things like high-end art. Those prices are softening. Demand and volume of dollars going into that market is waning. You have Manhattan real estate which is softening. You have Swiss exports of watches to the United States in the month of February which was down 26%. If you know the watch brand Bravado – according to Evan Lorenz of the Grants Interest Rate Observer – they are cutting their Swiss head count, they are cutting their U.S. head count, and they don’t expect to rebound any time soon. That is, a watchmaker in Switzerland, high-end watches. If things are going well, even for the 1%, you spend extravagantly. That is not happening.

So, to conclude, I go back to those phrases that I was raised with, these things which almost emerge as eternal verities (laughs). I am not saying that my dad was somehow an oracle of eternal verities or eternal truth, but he was onto something when he said, “Always mistrust the obvious.” And he was onto something when he said, “The majority is always wrong.” I found myself, a few weeks ago, reading poetry to a client. It was The Gods of the Copybook Headings, by Rudyard Kipling.

Of course, when you went to school in a one-room schoolhouse, everyone practiced in their copybooks various things so that their penmanship would get better and better. And you would practice these copybook headings over and over and over again. They were things like, “Stick to the devil you know,” and “the wages of sin is death,” and “if you don’t work, you die.” And you repeated these things over and over and over.

And Kipling’s poem – you must read it. You must read it. Kipling’s poem goes through and says there are all of these innovations and changes, and we have evolved and we’re moving toward something – he wouldn’t have used the word trans human – but we’re moving toward a brave new world, and we understand things today that could never have been understood before.

Kevin: Which is just purely hubris when you really look at it, Dave. I would like you to read that poem, but before you do, I just want to bring up Nebuchadnezzar, because you brought him up earlier today in a meeting. Here was a man back 500 years before Christ.

David: Responsible for the hanging gardens of Babylon.

Kevin: One of the seven Ancient Wonders of the World. And yet, Babylon was found back in the 1830s by the British Museum. All it was when they found it in the 1830s was a hill of sand. That was it.

David: (laughs)

Kevin: And as they started to dig they started to realize, “Wait a second. This is Babylon.” So, for all of Nebuchadnezzar’s greatness it ended in a hill of sand.

David: And with that reference, you have to read Percy Bysshe Shelly’s Ozymandias. That is a fabulous poem. But I will just read a selective piece from The Gods of the Copybook Headings. The first stanza says:

As I pass through my incarnations in every age and race,

I make my proper prostrations to the Gods of the Market Place.

Peering through reverent fingers I watch them flourish and fall,

And the Gods of the Copybook Headings, I notice, outlast them all.


We were living in trees when they met us. They showed us each in turn

That Water would certainly wet us, as Fire would certainly burn:

But we found them lacking in Uplift, Vision and Breadth of Mind,

So we left them to teach the Gorillas while we followed the March of Mankind.


We moved as the Spirit listed. They never altered their pace,

Being neither cloud nor wind-borne like the Gods of the Market Place,

But they always caught up with our progress, and presently word would come

That a tribe had been wiped off its icefield, or the lights had gone out in Rome.


With the Hopes that our World is built on they were utterly out of touch,

They denied that the Moon was Stilton; they denied she was even Dutch;

They denied that Wishes were Horses; they denied that a Pig had Wings;

So we worshipped the Gods of the Market Who promised these beautiful things.


When the Cambrian measures were forming, They promised perpetual peace.

They swore, if we gave them our weapons, that the wars of the tribes would cease.

But when we disarmed They sold us and delivered us bound to our foe,

And the Gods of the Copybook Headings said: ”Stick to the Devil you know.”


On the first Feminian Sandstones we were promised the Fuller Life

(Which started by loving our neighbour and ended by loving his wife)

Till our women had no more children and the men lost reason and faith,

And the Gods of the Copybook Headings said: ”The Wages of Sin is Death.”


In the Carboniferous Epoch we were promised abundance for all,

By robbing selected Peter to pay for collective Paul;

But, though we had plenty of money, there was nothing our money could buy,

And the Gods of the Copybook Headings said: ”If you don’t work you die.”


Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew

And the hearts of the meanest were humbled and began to believe it was true

That All is not Gold that Glitters, and Two and Two make Four

And the Gods of the Copybook Headings limped up to explain it once more.


As it will be in the future, it was at the birth of Man

There are only four things certain since Social Progress began.

That the Dog returns to his Vomit and the Sow returns to her Mire,

And the burnt Fool’s bandaged finger goes wabbling back to the Fire;


And that after this is accomplished, and the brave new world begins

When all men are paid for existing and no man must pay for his sins,

As surely as Water will wet us, as surely as Fire will burn,

The Gods of the Copybook Headings with terror and slaughter return!


Kevin: So indeed, there is consequence.

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