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- Talk is cheap, follow-through is what matters.
- Former Dallas Fed Chief says Pelosi took advantage of inside information.
- Gold tests $1675 then bounces $100 higher.
Whitehouse Declares “Not A Recession,” … Move Along Citizen
August 2, 2022
“As we exist in a stagflationary environment and contemplate stepping a first foot into recession, Congress’s way of dealing with these anxieties and pressers is to consider an extra 400 billion in spending and a tax increase of $739 billion. It sounds like genius at work.” — David McAlvany
Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
Well, you know this is the day you’ve been waiting for, at least I have. I wanted to hear how the trip to France was, and what is it like to ride a bike up the Alpe d’Huez, a 10% grade? Sometimes I think it’s 10% plus. What was that like, Dave, this last weekend?
David: Well, there were parts of it that were magnificent and beautiful, and there were parts of it that were absolutely brutal. And just one pedal stroke at a time was all I was responsible for. One of the reasons I like to do races like this is because so much of my life is focused in the present moment. It’s that healthy balance to find a future focus and have some aspirational goals that are way out on the horizon and require some daily disciplines. Because the daily grind of operating within the financial markets can have you so focused on this day and this moment in the here and now that I just think it’s a healthy balance to be very present, but also have some attention put on something that is months or even years ahead. This was so beautiful. Again, I can’t imagine a more beautiful course, the French Alps. I’d love to go back. I don’t know if I’ll to that race again. It was probably like childbirth. There’s enough pain associated with it. I think I’m probably fine for now, but we’ll see.
Kevin: One of the things I love about you, Dave, is we’re learning, especially right now with our leadership, talk is cheap; follow-through is everything. While you were doing the race, my wife and I were replacing a propane tank. We have a 500-gallon propane tank because in the wintertime that’s how we heat the house, and of course the stove uses the propane, and the hot water heater. So propane’s critical. We had a company who would fill our tank that we thought was local, and over time, they just went away. They didn’t tell us.
So it’s just interesting the difference between follow-through— When you say you’re going to go do a race, you do it and you follow through. It’s not like going and buying an exercise bike and giving it to the thrift store a year later. What we finally had to do, my wife and I, we would make calls and say, “Hey, when are you going to fill the propane tank?” And they’d say, “Oh, well, we’ll be there on Tuesday.” And it’s like, “All right.” And they weren’t there on Tuesday. Then we’d call and say, “You told us you would be there on Tuesday.” “Oh no, no, we’ll be there on Thursday.” Well, this happened a few times. This winter, it actually became very tense because we realized there was no real follow-through.
I bring that up, Dave, because if you say you’re going to do something, you need to do it. And that applies not just to racing, not just to propane tanks, which we switched companies who actually does follow through, but that applies even to geopolitical events. You look at what’s going on with the Ukraine. A lot of talk is going on with the Ukraine. China’s watching closely right now. Bill Burns, the head of the CIA, said that’s going to be critical. Are we going to follow through, or what’s the world doing with Ukraine? And what does that look like in relation to Taiwan, which China has on their radar?
David: I’m not sure why, but you’ve got two of the free world’s top spy chiefs talking to the Financial Times about their views on China and on Russia and Ukraine. Nevertheless, like you say, Bill Burns, the head of the CIA, suggests that the Chinese have learned. They have learned from Ukraine that if they choose to move on Taiwan it would be with overwhelming force and with a quick and decisive victory in mind. And then, counterpart at MI6 Richard Moore, similarly reflects on the Chinese observations there in Ukraine, suggesting that it’s critical for the West to hold the line on Ukraine through the winter for what that communicates to the Chinese.
Kevin: Yeah, I had a client yesterday tell me, “Did you see what the People’s Liberation Army released in relation to Pelosi’s visit.”
David: This provocative video in advance of the visit, and you go through it and it just doesn’t end. It’s minute after minute after minute of military firepower in every respect. It’s by land, by air, by sea, overwhelming force. It really does convey a certain severity. I think that just backs up what Xi Jinping was warning to Biden, to not play with fire. Which raises the question, why is Nancy even going to Taiwan?
Kevin: Isn’t it strange, Dave? You’ve got the stock market over here, I mean, you’ve got the Chinese literally threatening with the Pelosi visit. And yet, you have a rally in the stock market right now. Is talk cheap right now, or is there follow-through?
David: Yeah, maybe Nancy’s there to organize a private placement with Taiwan semiconductor, who knows? I jest. The reality is probably more theatrical. We could call her Kabuki Nance from now and going forward as she heads towards retirement. Pelosi needs a smoke screen for the Paul and Nancy semiconductor pump and dump scheme. We talked about that a few weeks ago with Nvidia. They’ve been called out publicly on that by some very significant public figures.
The reality is there’s no legitimate reason for a soon-to-be-retiring legislator to meet with the Taiwanese president. This is the top leading US official to have stepped foot on the island in 25 years, particularly with tensions between the two countries so high. I think she has been and should be remembered as one of the most self-serving US politicians of all time. I’m not sure I’d worry about anything more than saber-rattling, as the CCP is likely to respect the value of their asset and allow her to depart country before getting any more aggressive.
Kevin: Dave, the IMF has lowered its growth outlook globally, and it’s very concerned about inflation. The central banks are making different kinds of statements though. I’m just wondering, five years ago the central banks could speak and they just assumed the markets were going to react to them, the markets would believe whatever they said. But they had the ability to print. We didn’t have the inflation problem. Do you think the central banks are still operating as if it was five years ago where they can just tell anybody anything and they just hope that we’ve had peak inflation, hope that we’re not going to have a recession? Hope against hope against hope, but they’re speaking differently than the IMF.
David: When you hear that story of the king who doesn’t have any clothes on, there is the reality of being garment-free, and the crowd begins to realize something at some point. I think, actually, the central bank community at this point is assuming a lot about their credibility and about the perception of who they are and the clothes that they wear. So they’re operating with a certain bravado almost, or confidence, that is unfounded given how the communities around them—we’re talking about the business community, the household community, and even government operators outside of the central banks—have already begun to question their legitimacy.
So the IMF has lowered its growth outlooks globally, you’re right. It’s increased its outlook on inflation. They now see economic prospects everywhere, to quote them directly, “overwhelmingly tilted to the downside,” as is reported in the Financial Times. You contrast that with central banks that hope, Kevin, they just hope that peak inflation has already occurred.
The IMF has raised its inflation expectations by a full point for this year and next year. Interestingly, if you look at the top economist at the IMF, he does not think the forthcoming economic environment will be stagflationary like the 1970s. It will not be stagflationary again. I don’t know where he gets this, but we’re already there. But he bases this, and this was a really interesting view of an economist judging fellow economists, he bases the low probability of a stagflationary environment like the ’70s on there being more credibility with central banks, that they’ve maintained more credibility in this period than in the 1970s. That just strikes me as odd and inaccurate as an assumption in his argument. In our view, and we see this as a growing issue, central bank credibility hangs by a thread.
Kevin: Yeah, that’s why I think they’re probably living in their own bubble, Dave. We don’t have a Volker right now who’s raising rates that actually exceed inflation. In fact, they’re acting as if they’ve raised rates enough and we’re still, what?, negative 7% based on the inflation that’s now being reported. But Arthur Burns, go to Arthur Burns with his redefinitions.
David: Yeah, if you wanted to say that Jay Powell and Madam Inflation, Madam Lagarde, have more legitimacy than the central bankers of the 1970s, I guess you could say that the very low bar comparison to an Arthur Burns or a George William Miller, it’s almost not a fair comparison. So perhaps there is a bit more credibility with Jay Powell than an Arthur Burns, but that’s a very low bar comparison.
But I think if we’re discussing central bank chiefs and economists that have this view, arguing for credibility now versus then is very much like arguing for US dollar legitimacy today. On a relative basis, you could argue the US dollar is strong, but in absolute terms, it’s a very challenged currency.
The reality is that Powell is no Volcker, and it was Volcker that resolved the last period of higher inflation. We have a hope-and-pray Federal Reserve team in place today, that’s their strategy, which is hardly better than the Burns and Miller Keystone Cops duo. If you want to argue for real credibility in central banking, you’ve got to roll the clock back to look at William McChesney Martin, who followed the Burns/Miller duo, back to Volcker. Then you can make the case for credibility in central banking. Credibility in central banking sometimes is like getting hit upside the head by a two by four.
I see no reason to shift perspectives from a stagflationary outcome being highly probable. In fact, you could argue it’s here now. Linking persistent above-target inflation rates with declining global and domestic growth, we’ve got it. From that same IMF discussion, there was a chart showing successive forecasts on headline and core inflation going back to January of 2021. And in every instance, in every instance up to the present, there was an overly rosy expectation of the central bank community’s ability to deliver and keep inflation in check.
So overly rosy expectations of both a very short duration for inflation as a problem, low levels of inflation, proven to be well under the actual numbers. So no one wants to drive against a consensus of positive thinking, having already committed to a future belief that it just can’t be that bad. That’s where the Fed has landed, “It’s not going to be that bad. It’s not going to be that bad.” And it turns out to be worse than expected.
Kevin: That’s where follow-through is so important, Dave. We lean on these 21st century tools, but in reality, are they really 21st century tools? Is the printing of money out of nowhere a 21st century tool, and then the manipulation of interest rates? I have a series of books from Winston Churchill, History of the English-Speaking People. In the first volume, he talks about hoards of gold that were found in England, buried around 300, 400 AD because the Roman Empire, they were debasing their currency to the point where they had virtually no gold in it. They were adding copper. Are these new tools, these 21st century tools, or is this just another way of saying, “Hey, we can print money, now shut up and listen”?
David: When I think of 21st century tools, I’m probably thinking of the people who are the tools and not the policies. This is maybe a different definition of tools.
I think noteworthy, Kevin, in the last two weeks, speaking of policy shifts, you’ve got both the European Central Bank and the Fed moving away from forward guidance. I think it’s fairly significant given the fact that this was one of the tools that they said, and have said and used for decades now, would guide the market and allow there to be no more upsets. Now they’re saying, “No, we’re just going to go meeting to meeting. We’re not going to project forward. It’s going to be a little more hush-hush.” So no more invitations for the market to front-run policy shifts. That’s pretty intriguing, I think.
Kevin: Yeah, it reminds me when Greenspan used to speak, he purposely didn’t tell people what he was planning on doing. You go back from there, you can talk a market only so long. You have to start doing. And so, with this rally in the recent weeks, why don’t you address the rally a little bit, because oftentimes people will say, “Well, gosh, if it’s so obvious, how come people are buying stock?”
David: No, I think this is the normal part of a market deterioration. We’ve had significant first half decline, and we are getting powerful rally, very tepid in recent weeks. On our last Commentaries talked about how the rally attempts have not followed through, not followed through, not followed through. Last week was a bit different. Yes, a rally needs to occur, and that’s what we’ve been suggesting for some time now. It’s now, or else there’s going to be a pretty aggressive acceleration to the downside. We’re getting it, bear market rallies are sharp. They’re generally short. Looking at the NASDAQ 100, we rebounded on the last few weeks of July by close to 13%. That was intriguing to me, a counter-trend rally in the equities markets, and we’ll have to see how far it goes, what kind of energy it can create. But what we also had, Kevin, is a precious metals rally, and an attempt to break a three-and-a-half-month consolidation following that peak back in March.
Kevin: Speaking of talking and follow-through, for years you have talked about the Summers-Barsky thesis. Larry Summers was the Summers in that thesis. As you’ve brought out in the past, he basically wrote with Barsky an essay saying that, “If you’ve got high inflation, interest rates are going to have to go beyond a certain point for gold not to be the go-to item.” Larry Summers has been speaking very frankly here in 2021 and 2022, which is unusual, Dave, because when he was in positions of authority, oftentimes we didn’t get that same level of frankness. What are your thoughts of Larry Summers right now on his criticisms of the central bank?
David: Well, you’re right, I do think it’s an important read, Gibson’s paradox and the Summers-Barsky thesis, and here recently I continue to be impressed by Larry Summers. Pretty contrarian in 2021 with some of his perspectives, and it continues to be in 2022. No punches have been pulled in his response last week to Jerome Powell, as Powell was asserting that we are already close to a neutral interest rate. It was meaningful, and it was necessarily sharp.
Of course, the neutral rate is that theoretical level at which interest rates are neither a drag on the economy or overly stimulative. Summers said, “There’s no conceivable way that 2½% interest rates in an economy like this is anywhere neutral.” What I love is he holds Powell to his own standard. He says, “Powell said in 2018 that the Fed’s rate had reached neutral 2½% when inflation was just below 2%. How could he be saying the same thing today when the inflation rate is where it is? It’s inexplicable to me. If you think it is neutral, you’re misjudging the posture of policy in a fundamental way. It’s the same kind of,” and this is what Summers says, “to be blunt, wishful thinking that got us into the problems we have now with the use of the term transitory.”
So again, Kevin, I return to the IMF’s assessment that the central bank community stands tall on the stage of credibility, right? And that’s why it’s going to be so different, and we’re not going to have stagflation because of how credible our central banks are. And Summers’s like, “Don’t say things that are laughable if you want to maintain credibility.” And of course, it’s not just the Fed. Lagarde is “fighting inflation” with rates at 0%. Seriously? You’ve got the Bank of Japan, how credible are they in an environment where the yen has lost 25% of its value in a six-month period? We can try to define reality with a few words, but a direct experience of the external world brings us right back to the harshness of this environment.
Kevin: Well, and that’s what I was sharing with the propane tank, Dave. The direct experience that we had was that we didn’t have propane, and yet, we were getting words that were saying, “Oh yeah, we’re fine. We’ll have it by Tuesday,” or what have you. So the harsh reality is that we are negative real rate. I mean, how far negative are we? If we just take the government official number for inflation, which I think right now CPI is 8.8%, how negative are we?
David: Yeah, so if you want to know how much stimulation there still is in the economy and how absurd that notion of being a neutral, in interest rate terms, we actually are, you take the two-year interest rate, and this is just sort of back in the napkin, it sits close to 3%. The fed funds rate sits at its new target of 2½ to 2.75. Oh, wait, the most recent inflation number was 9.1%. So we remain negative in terms of real rates. Negative real rates of greater than 6%—that is not an effective strategy for ending inflation. That is not neutral. That is, in fact, by any historical standard, wildly accommodative. Negative real rates of greater than 6%, if that’s what you want to describe as neutral, then perhaps the credibility issue is going to get worse before it gets better.
Kevin: Well, and we haven’t even brought up the word—oh, I’m not supposed to say it—recession. Remember when recession was a bad word? What was it replaced with? Banana, I think. But we haven’t even brought up the fact that we’ve had two negative quarters, two negative quarters with GDP down. If anybody else were in office, I think we’d hear that we were in a recession right now.
David: That might be history that our listeners aren’t aware of, but the absurdity of trying to speak something into existence or out of existence today, it echoes from the same period of time—1970s. Thanks to Bill King for his reference from the Washington Post on this one.
But the current word forbidden from polite circles, at least the polite circles in the Oval Office is the word recession. You’re not supposed to mention it. It’s not here, it’s not a reality, makes people feel uncomfortable, and it makes an election cycle far more volatile just months away, as you know.
People who are experiencing recession attempt to lay blame on others for the plight that they experience, and this was true back in the ’70s as much as it is today. Then, you had economist Alfred Kahn, he was working for Jimmy Carter, our favorite president, the peanut farmer at the time, and instructed to drop the word recession from any formal writing or speaking because it seemed to make people nervous or irritable, including the president at that time, Carter. If you think about Carter, there’s actually some similarities between Carter and Biden. I’m not suggesting they’re the same on the scale of decent human beings, they’re definitely on a different scale in that respect, but they do reflect a lot of each other in terms of effective leadership in the Oval Office. They’re like two peas in a pod.
So Kahn substituted the word banana, as you mentioned, for the word recession. I mean, just think of the absurdity here. That’s how it was credibly handled in the ’70s. The nation was at that time in danger of the worst banana in 45 years. We just don’t want you to feel triggered or nervous or irritable. This is just classic politics. You try to shift the emphasis, shift the focus, and have people focused on what they should be thinking about.
Hoover tried the same tactic. He started using the word depression, was actually one of the first to describe an economic malaise as a depression because he thought that was a better word for panic. You talk about panic, and panic kind of says, “Oh, well, why are people panicked? If there’s a panic, should I be panicking too? Well, this is only a depression.” And of course, now we know from the ’30s, depression’s even worse than recession. I don’t know what happens when we can’t use the word banana anymore.
Kevin: I know when my wife and I disagree, oftentimes she says, “Kevin, trust me, it’s science.” I look at the economy right now, and I look at the speaking around the economy and the financial markets, like what you’re talking about, banana versus recession, panic being replaced by the word depression, what it does is it puts science aside. We’ve been told, going back to GDP dropping two quarters in a row, that would be a recession in anybody’s book, except for right now. So whether Powell is speaking of a neutral rate or we’ve got people in the White House avoiding the word recession, isn’t science science? Isn’t economics a form of science?
David: Yeah, I mean, it is just interesting. A decline in gross national product in two consecutive quarters is the technical definition of a recession. We’ve had two quarters of decline, 1.6 in the first quarter, and 0.9 annualized for the second quarter. So it is what it is. Maybe there’s some complexity relating to the employment markets and labor markets, but we can at least call it what people have always called it.
And people think of you as having gone nuts or having gone bananas. Your credibility is not based actually on ignoring reality but on responding appropriately to it, whether you like it or not. That’s the problem, is when you ignore reality, that’s when people are like, “Guys, he’s got nuts.” When you ignore the facts, and those facts are staring you in the face, it’s a problem, to your point. I think it’s an irony of our time that between science and math and economic conventions, they are conveniently leaned on when it serves a political objective. And in turn, they are ignored and undermined when science, math, or economic conventions undermine a preferred narrative.
So what is truth? Who cares? Who cares? In the struggle for power, who cares what the truth is? Which is why those, again, economic conventions and science and mathematics, they become more pliable when pressured politically. So, Orwell was both an insightful commentator on power struggles and on freedom in many of his books. But 1984, from that book comes the quote, “The party told you to reject the evidence of your eyes and ears. That was their final and most essential command.”
Kevin: Yeah, we read that as an office, Dave. I remember when we all not only read the book, but got together and discussed it. So just a repeat of that quote, “The party told you to reject the evidence of your eyes and your ears. It was their final and most essential command.” Have we arrived at that, Dave?
David: There will be no recession, Kevin, and two consecutive quarters of economic decline can now be set aside as working definition of recession. You will be informed by the party of the appropriate understanding of recession in due time.
Kevin: We’re going to also ignore the fact that inventories are rising very, very quickly. As we were driving around this weekend, we could see that lots that used to sell, motor homes and campers, that were almost empty a year or two ago of inventory because everything was selling as soon as they got it, they’re just packed with inventory now. Are we allowed to say that? Is that part of the narrative that the party will not allow us to speak of?
David: I think you need to reject the evidence of your eyes and ears, Kevin, and you’ll be better off. You’ll understand the political reality of our time. Just reject what you see and wait for further instruction. The Wall Street Journal had this to say this last week, “The US economy shrank at a 0.9% annual rate last quarter. That marks a second straight quarterly decline in GDP, a common definition of recession. Businesses trimmed their inventories, the housing market buckled under rising rates, and high inflation took steam out of consumer spending.”
It’s fascinating because we came into this year with a huge inventory build, and now you’ve got a panic amongst retailers to do something about it, a real motivator to get rid of inventories. In Q4 of 2021, inventory surged $1.193 trillion. That accounted for 5.35% of the GDP growth that we had for the year, 6.9% for the year, 5.35% of it came from inventory growth. Then, in the first quarter of this year, inventories continued to increase but at a much slower pace, 188 billion. Q2 comes around and it’s at 81.6 billion. It’s nice to see the inventories building at a slower pace, but retailers are in an interesting place. Inventories are built now, and they need to be blown out—in part to make room for the 2022 retail year-end holiday push. This is the time where those orders are coming through, so the stuff that has sat stagnant has got to go.
Kevin: I remember being in retail, and how the purchasing managers who were buying that inventory that you’re talking about, they really were buying six to nine months ahead of time. Being in the toy business, I was in hardware and then I was in toys, but being in the toy business, most of the toys that would sell that next Christmas had already been purchased by April. So again, you can have politicians talking things down and saying, “Don’t use the word recession,” but when you have business managers and purchasing managers who are saying, “You know what, we have to adjust our behavior,” because they have to look six to nine months, even a year, out to see what they see coming. It seems that the business managers and the purchasing managers have already seen recession coming, going back to last year.
David: Yeah, it’s true. Last week’s PMIs, the purchasing manager indices, speaking of recessionary indicators, you had new orders which continued to slip, you had inventories which continued to increase, and you had prices paid which were continuing to decline. So not all good news from the PMIs. And of course, those are US purchasing manager indices. We had the same from China, slipping below 50, which is not a good indicator. Japan, also negative numbers on their purchasing managers’ indices, and in Germany, this was, again, just another case of the worst in several years.
Kevin, it’s tough. It’s tough. If you’re thinking about how the consumer behaves, what they’re interested in buying, what their expectation is of delivery of a product, COVID has made retail a treacherous, a treacherous area. How do you order to meet the needs of a very fickle public who want a lot today, don’t necessarily want any tomorrow, and whose preferences may change from one week to the next? How do you order ahead for that? We can’t do the just-in-time inventory management anymore. I don’t envy. I don’t envy a Walmart, I don’t envy an Amazon, but I think they’re set up for real significant challenges going forward.
Back to recession, we can wait for the National Bureau of Economic Research to post data recession, which sometimes takes them as much as six to 12 months. I can guarantee you, we won’t have any news from them until after November, but the inflation piece is already there. It’s irrefutable. If you want to say, “Well, maybe we’re going to have a recession, maybe we’re not,” technically, we’re already there. But let’s give Mr. Biden the benefit of the doubt and say, “No, no, we got the memo, we don’t speak of such things.”
The inflation piece is irrefutable, and the GDP piece, the declining economic activity, well, that’s there too. Last time I checked, if you’ve got high rates of inflation and declining economic activity, it pretty well spells stagflation. I don’t think that’s theoretical. I don’t think that’s arguable. I don’t think that’s a technical definition versus needing to include a more nuanced discussion of labor and what have you. But I think what’s particularly interesting is, as we exist in a stagflationary environment and contemplate stepping a first foot into recession, Congress’s way of dealing with these anxieties and pressers is to consider an extra $400 billion in spending and a tax increase of $739 billion. It sounds like genius at work.
Kevin: Isn’t it amazing, you can’t run a household that way? Kids were out of money, so let’s go spend some. But you look at the timing of this, Dave, raising rates into a recession and now raising taxes into a recession. I mean, you can say you’re going to spend, but you got to bring the money in somehow.
David: Yeah, raising rates into a recession, let’s see how that works out, raising taxes as we head into a recession. As you know, the $739 billion, this is kind of a shaped-down, trimmed-down version, a rehashed version of Biden’s Build Back Better program. So let’s see how that works out.
[West Virginia Senator Joe] Manchin was on all the news networks Sunday, at five different news networks, claiming that the spending bill would not raise taxes. But it does. Again, sort of back to an abuse of language. I think what galls me more than anything is our legislative branch launching a new spending initiative and boldly calling it the Inflation Reduction Act. I mean, in what ways does a tax increase and a nearly $800 billion increase in spending contribute to reducing inflation?
I think that shows total disregard for their constituents. It’s an insult to their constituents. I think it’s consistent with an elitist attitude towards deplorables and useful idiots. That’s the position that politicians take. They can say what they want. They can do what they want. There are no consequences. You’ll believe what you’re told. If you’re on the wrong side of the aisle, you’re a deplorable. If you’re on the right side of the aisle, they don’t respect your intelligence, you’re treated as a useful idiot. I think we’re ready for significant change in Washington. As I’ve told you many times before, I care not for either side of the aisle, but just the attitude and the condescension is getting too much for me.
Kevin: Well, we’re just talking about the reduction of inflation, calling it whatever you want to call it, but the CHIPS [(Creating Helpful Incentives to Produce Semiconductors) for America] Act, okay, that CHIPS Act you had brought it up earlier, and you look at Paul and Nancy Pelosi, that passed and they were playing the stocks like insiders weren’t they?
David: They were playing with insider information. I mean, this is a $280 billion, the CHIPS Act, so that we can compete directly with the Chinese and the Taiwanese, build out our semiconductor capacity here in the United States. In an acknowledgement of the ruling class’s gross misstep, Richard Fisher, who’s the previous Dallas Fed Chief, says quite critically, “I’m sorry to see that Paul Pelosi and Nancy Pelosi and others appear to have taken advantage of inside information.”
Well, again, you know this, we talked about it on the Commentary several weeks ago, the purchase of Nvidia shares just before this goes to being approved. A $280 billion legislative boondoggle. Others know of the gross abuse of insider information that has built the wealth of our political elite over the last several decades. What do you find? Investigations? No. Suits, lawsuits, SEC sniffing here and there? No, no slap on the wrist. Your only real risk today if your politician is not being on the right side of history as defined by the party in power, in which case Biden has probably likely passed your name to the Department of Justice for political targeting already.
That’s not just my opinion. Richard Grenell, the Former Acting Director of National Intelligence—he tweets last week, “Joe Biden turned the Department of Justice into a Democrat hit squad on Republicans.”
Prosecuting your political enemies is a hallmark of third world fascists. But again, there are different sets of rules, and this is what’s bothersome to me, we’re playing with the potential for, and with circumstances that have repercussions up to and including, war. Nancy’s doing her theatrics in Taiwan as a smoke screen for insider trading. It’s appalling. It’s the epitome of corruption. We shouldn’t tolerate it. I can’t believe that we have such tolerance. And maybe we’re so concerned about our own lives that we’re just disconnected from the political spheres, but things are ratcheting up in terms of levels of corruption. And now we’re willing to even entertain a politician that has no need to be in Taiwan, and potentially bring us to the brink of war. For what? For what? She should be ashamed.
Kevin: Dave, as I replay just what we’ve been talking about, inflation, national debt, corruption, I have to think of the fall of the Roman Empire again. I brought it up earlier, what Churchill was writing, that the Brits were storing up gold as the Roman Empire fell. What would I hand my son or my daughter if I had to give them something that I knew would have value going forward? It would be a gold coin. And I’ve done that, and I’ve explained that to them, that in any generation, any generation for thousands of years, if you handed your child a gold coin, that was a way of getting through a lot of this garbage that we’re talking about: inflation, national debt, corruption, what have you. It’s a preserver of wealth like none other.
David: Can you imagine, just think of this as a thought experiment. You open up great grandpa’s cigar box, and in that box is a stack of Treasury bonds? And you’re thrilled. It’s been sitting there for 100 years. Or try this, it’s not bonds, it’s just currency. You’ve got a cigar box full of $100 bills. And 100 years later, you open this up and you’re just thinking to yourself, “Wow, what a find, a box full of hundred-dollar—” Hundred-dollar cigars, I probably would enjoy those more. I meant $100 bills. Or the third alternative, a box full of gold coins. We get it if we stretch time out far enough.
So back to inflation, back to interest rates and our national debt. I mean, another reason to consider gold as sort of a ballast asset in a portfolio, you look at the last week, we tested this key level 1675, and in a week’s time, we’ve bounced a hundred dollars higher. I wouldn’t rule out a retest, but that proved to be a critical support level, as expected. As interest rates adjust, you have higher budgetary strains exerted on the treasury. Ed Yardeni used the chart of fed funds going back to 1960, and it shows just inching off the lows. We’ve come down to all-time lows, and we’ve just barely come off those all-time lows.
And that’s about what we can afford from a revenue standpoint. The Treasury can take the pain of 2.5%, but if tax revenue is sitting right around $4 trillion, and an average interest cost on our debt is 1%, you’re talking about something in the neighborhood of 6% of all tax revenue goes to paying interest. At an average of 3% interest on our national debt, you’re going to gobble up 18% of all tax revenues. And if you go back to something that’s really not uncommon and not particularly high, but interest payments on the national debt at 6%, then you’re talking about something that’s over 35% of all tax revenue, 35% of all tax revenue just going to interest payments.
So Kevin, somewhere between 3 and 6%, the dollar goes to hell. And so, your box of Treasury bonds, your box of dollar bills, $100 bills, what are they worth to you? Will central banks let us get there, a 3 to 6% interest rate? Does an interim recession bring rates down further only to see them catapult higher later on? As I look at the world, I see a world of fragile confidences, of gross manipulations of reality, and a bending of truth to the whims of power. Having some small stake in a world of solid and tangible things makes sense to me, makes sense to me. I want to own real assets and move as far away as possible from the unreal valuations and values of the present era.
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, 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.