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The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

DOW Drops 1,000 Then Closes Up – First Time Ever
January 25, 2022

I think it’s fascinating to understand what is unfolding. We started this Commentary in 2008, for a reason. There’s a lot to talk about. I think we’ve got a lot to talk about today as well. I would be remiss in not noting, it’s fascinating to watch the gold market perform its function as a safe haven here in the first month of the new year. Also, fascinating that the Bitcoin rivalry seems to have faded. Maybe it’s fading with the price. — David McAlvany

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

What a week! What a week to have the Tactical Short Call with Doug Noland. If you’re going to have the kind of volatility that we have, not just in the markets, but I’m talking Ukraine, Taiwan, China, you name it. We’ve got the Tactical Short Call coming up and anyone— Right? Am I right on this? Anyone can tune in and listen to you and Doug talk.

David: Absolutely. Register ahead of time, show up day of, but we’ll look at the structure of the market, and we’ll expand on geopolitical variables, which add a complicating layer to the financial market pressures. But this is a very good week to consider the structure of the market. Doug has done a great job of that and this last week’s Credit Bubble Bulletin, and of course, as we head into the quarterly call for Tactical Short. Join us, Doug and myself, for the Q4 update for 2021 and a look at the current developments. They are legion in both the financial markets and geopolitical domains.

Kevin: And that can be accessed at mwealthm.com. So it’s M-W-E-A-L-T-H-M.com. And like I said, anybody can sign up and listen. So please do.

David: Yeah, I don’t think you want to miss it. With an impressive run to all-time highs in the market indices, being short has had its challenges. And the analysis, frankly, doesn’t get any easier just because valuations are stretched to unsustainable levels. Nevertheless, our process is a solid one, and the insights that that process shines a light on are likely to be immensely helpful for you in 2022 and beyond. So if you prize asset preservation, if you’re curious about the context and cause of one of the greatest market tops in financial history, you’ll join us this Thursday at 2:00 PM Mountain, 4:00 PM Eastern. We’ll have our prepared remarks and then Q&A. So the questions are already rolling in, send yours when you register for the call.

Kevin: One of the things that we’ve really talked about for the last 13 years is Ukraine. George Friedman has been a guest on the program in the past. We were talking last night, Dave, as we always do. I have my Talisker, and I think at this point you were drinking Coke because you’re on your training program. But we were talking about how a lot of times people see the world from a particular center, and George Friedman has centered on Russia and Ukraine long before it was in the news here recently. And I think we ought to talk to him soon, don’t you?

David: Absolutely. When you have a conversation with someone and it appears that their heart is stuck somewhere, and not necessarily in nostalgia, but there’s something that offers rootedness and groundedness. I can’t explain why the Donbas region is so central to the way that George Friedman sees things.

Kevin: I think what he would say is it’s like a chessboard. It’s the center of power because you think about Ukraine—he’s talked about this before—whether you’re talking about the days of Napoleon or the days of Hitler, or even going before all that, Ukraine, has been the 500-mile buffer, let’s say, between the West and Russia. And Russia is very, very insecure about what the West has done to them in the past, over the last few 100 years. And Ukraine is the one thing that has slowed those armies down.

David: You can appreciate how a vast expansive land all of a sudden is very important. An armored division in the US military uses about 600,000 gallons of fuel per day when it’s on the move.

Kevin: Wow. Wow.

David: And so you’ve got Russia deploying multiple divisions. What is our counterpoint? The vast expanse, you understand the cushion that the Ukraine represents for the Soviets is really critical.

Kevin: Well, Ukraine is tricky. If you really think about it, because we’ve got Obama and Biden were very involved back, remember in 2014, they were very involved in the threat to Russia, when there was the change of power. So we’re looking at this again and we say, “Okay, well, Biden’s possibly involved in this with Hunter and some of the background there.” But then you’ve also got the Putin factor. And the Putin factor is, he’s got his own goals at this point, whether it’s to break up NATO or just to gain enough strength to keep NATO from overpowering him. You have to look from all angles.

David: Yeah. I’ll cover this in as much detail as I can on Thursday on the Tactical Short Call. But by way of introducing the theme, I think Ukraine is as tricky as they come. And while I have an interest in international affairs, any one silo of interest deserves an expert deep dive, whether that be Europe security architecture, whether it’s German interactions with a post-Cold War Russia, whether it’s Ukraine’s history of being in and out of the Soviet sphere and the US and European involvement in the 2014 street protests.

Kevin: Right.

David: The overthrow of Viktor Yanukovych, who was decidedly pro-Soviet. The Donbas region, and the seven years conflict that’s lingered there. It moves toward or away from Ukraine becoming a part of the EU, becoming a member of NATO, which has been something of a teenage romance: decision, indecision, we’re in, we’re out, we’re interested, we’re not interested on both parts. So hopefully what we do is start a conversation, but a deeper dive is necessary.

Kevin: Well, and you brought up Germany. The German Naval head said, “We need to also respect Putin.” And he ended up having to resign for saying that, but he said it because of China. Now China factors into this, don’t they?

David: Yeah. Not only does Russia have to be considered alongside China, but both have to be put in context. Because you have the US strategic capacity, which has been deliberately reduced over the last 20 years. And so what would’ve been feasible after the Cold War, managing two wars simultaneously, is no longer the case. You’ve got Hal Brands, who’s at the Johns Hopkins School of Advanced International Studies. He describes the defense spending cuts back in 2011 as a part of the Budget Control Act. And later the 2013 sequestration cuts as forcing the Pentagon from the two major regional contingencies, where they could manage two conflicts at once to what they would revise down to a one plus. One plus war standard aimed at defeating one capable aggressor, as he describes it, and stalemating or imposing unacceptable costs on the other against. So his description of the process is in the most recent Foreign Affairs article titled “The Overstretched Superpower.” I think it’s very much worth a read.

Kevin: About 30 years ago, I read a book called A Man Called Intrepid. It was really good because you could go back to the late 1930s and see from the spy side of things how important German and Japanese relations were before World War II started. Japan understood exactly what Germany understood, that somehow, some way, when you can get these Allied Forces fighting on two or more fronts, you have a pretty good chance of causing a lot of harm.

David: Well, I think that’s one of the things that’s in motion here. The military capacity constraint is understood by both Putin and Xi. And the best leverage they can apply on the US is achieved by a coordinated engagement. We have Putin actually traveling to the Olympic games here shortly. And my guess is that it’s a very full-fledged meeting. Not only will it be watching some of the competition, but there’ll be many closed door meetings, which are productive, shall we say—

Kevin: So a Russian in China. I guess the question that will be discussed is, what does Taiwan have to do with the Ukraine?

David: Taiwan and Ukraine are separate concerns, but the link is the insufficiently resourced cop on the beat. So the US is in the position of being stretched too thin, going back to Hal Brands’ assessment— and it really is a great article, “The Overstretched Superpower.” 

But we’ve got an engagement potentially in the South China Sea and an engagement potentially in Eastern Europe. We’ve shifted our military focus already to the Indo-Pacific in an attempt to contain China. And that’s really been a concerted effort over several years. We saw that transition occurring under Trump, and it is continuing through with Biden. And a part of the removal of our troops from Afghanistan was in part to be able to focus more energy on Chinese containment. So how far we are able to stalemate or impose “unacceptable cost” on Russia remains to be seen.

Kevin: War games are an interesting thing. I mentioned last week that we’ve got a client and friend, and he was even a Commentary guest, who was at the Pentagon for several years. He’s a mathematical genius, and he worked through war-game types of scenarios. I wonder right now, Hal Brands, what he’s talking about. We are no longer designed as a country or able to fight a war on two fronts. So talk about a war game. You’re going to have to figure out how to placate somebody while you’re fighting somebody else.

David: And I think it’s worth that historical reflection back to the British and what an overstretched empire looks like most recently. Brands suggests that historically overstretched superpowers have eventually faced hard choices. He says, “This has to do with how they address mismatches between commitments and capabilities.” And he does reference the United Kingdom, which found itself with more rivals than it could handle in the 19th and early 20th centuries, and began appeasing those that were less dangerous and proximate. Now. I read a fascinating article just before we stepped in here. Harold James printed it this morning, Project Syndicate.

Kevin: Another guest. Yeah.

David: Asking the question about “A Whiff of Munich,” and he’s going back to 1938. Is the Biden administration— now that the Biden administration has offered to hold another summit with Russian president Vladimir Putin, he writes, “Following the weeks of abortive negotiations, are we witnessing a replay of Chamberlain’s efforts in Munich?”

Kevin: It’s funny that you’d bring up Chamberlain—or Harold James would bring him up—because I was thinking that Biden wanted to meet with the Germans, and the Germans said, “No, thank you.” So we have weakness. Neville Chamberlain is remembered as a weak man, and look what happened after that.

David: Yeah. His conclusion is, no, this is not Munich. This is not 1938, but there is some recall of leaders who are trapped and it’s important how we engage. He says both sides feel trapped. The real lesson of Munich is that there are ways to deal with the political psychology of entrapment. Hitler won the contest in Munich because he gained unrivaled domination over Eastern and Central Europe, but he soon became frustrated.

Kevin: Well, and then you’ve got Berlin in ’39. And if you didn’t understand what Hitler really wanted, Neville Chamberlain did not understand what Hitler wanted. He came out and he said, “They’ll be peace in our time.” I believe that was after Berlin in ’39. I think that was August of ’39, if I remember right. And right now let’s ask the question, what does Putin want?

David: Interestingly enough, what he has wanted for the past 21 years in office, by the way, he and Biden share a 2024 election date with destiny. It is interesting that their elections are overlapping.

Kevin: I got a feeling Putin’s going to be there a little longer than Biden.

David: In 21 years and counting, it’s like Xi Jinping. It’ll be, well, 10 years complete, but 15 and counting at the end of the third cycle. I don’t think he’s going to lose in November. So what does he want? What has he wanted for 21 years? Putin has wanted to halt NATO’s Eastern expansion. He’s wanted to freeze the alliances, that is NATO’s military reach, with both weapon systems and new military bases, which we’ve been promoting and building in former Soviet influenced and controlled territories. And he wants to prevent missile systems being placed in a range that neutralizes Soviet interests. So we have both intermediate range missiles, and long-range ballistic missiles that are in place and can target virtually every major Soviet city. So what he wants is a rolling back to a clear definition of where his border is.

Kevin: Well, okay. I don’t want to sound sympathetic necessarily to what could be the enemy. NATO has expanded pretty dramatically during his term.

David: That’s right. In no way is this an apology for Putin. But in his 21 years in office, he has watched four different NATO expansions. He has watched the US withdrawal from anti-ballistic and intermediate range nuclear missile treaties. And he’s now saying that if NATO wants to woo Ukraine, and this conversation has been going on since 2008.

Kevin: Yeah, but this is his line in the sand, right?

David: This is his last red line. It’s pushing— NATO’s establishment of a foothold in Ukraine is one too far. So the push Eastward by NATO is now too close for comfort. And the amassing of Russian troops on the border of Ukraine establishes a diplomatic conversation starter. And it’s actually a pretty rough conversation starter. A fairly exacting one, but it establishes who is controlling the conversation. Russia is at an advantage. So the conversation has not started well, and Russia’s expectations are not likely to be met. In fact, they laid out expectations late in December that you could check the boxes, no, no, no, no. NATO and the US were not going to be interested in any of those things. Which leaves open the possibility, frankly, of any outcome. Diplomacy may be propaganda for a home audience. We do know that this is not about a bluff. This is not about a bluff from Putin’s part because he’s got as much to lose from that as gain. Doing nothing would not show well at home or abroad for him. Biden last week was giving his first public address since— in the new year, and he’s right. Something will happen.

Kevin: You know what comes to mind? The movie Tombstone, Doc Holiday, that character, he is perfect. Every line was perfect. But I remember when he looked at the guy across the way, and he said, “Say when.” Say when. In a way—

David: I thought you were going to say, “I’ll be your Huckleberry.”

Kevin: Oh, well. Well, he could say that too. You know what that is? That’s a pallbearer. That’s what a huckleberry is. So I’ll be your pallbearer. One of the two, we’ll have to say when, or I’ll be your huckleberry.

David: Well, I wish Biden had said, “I’ll be your pallbearer.” Rather than say, “We’ll accept some sort of a minor incursion.” It was pretty embarrassing. Yes. Psaki walked that back.

Kevin: Isn’t it strange that we’re coming into an Olympic game period of time? Ukraine, we were talking about this on the Commentary in 2014, right after the Olympics. Coincidence, I don’t know.

David: The characteristic here versus 2014, the Sochi Olympics were in motion. That was early February of that year.

Kevin: Wasn’t it March? Wasn’t it right after the Olympics that Yanukovych got rejected?

David: Right. Well, a little backstory in the months leading up to the Sochi Olympics, Yanukovych had rejected an EU Association Agreement. And instead he leaned on the Russians, he got a loan bailout from the Russians, and that genuflection towards Russia was not popular amongst Ukrainian voters, and certainly was not favorable to NATO inclusion and therefore European and American interest. They called it the Revolution of Dignity, which sounds like it came out of a US State Department chop shop.

Kevin: I love some of these names.

David: But what ensued immediately following the Sochi Olympics was the overthrow of Yanukovych. Again, we had some play in that. And then you had Putin’s response to the loss of his friendly associates in Kiev. And that was, again, his response was moving into Crimea. So we tend to think of Crimea simply as Russian aggression. Certainly it was Russian aggression, but Putin would see it as the overthrow in Kiev of a friend. And he would see that as American and European aggression, not merely as another color revolution looking for “dignity.”

Kevin: Well, again, the buffer zone that we talked about, it’s threatened.

David: Yeah. So admittance to NATO has been on the table since 2008. And so if you want to do a full playback, the Russian angst over losing its territorial buffer zone has been in play the whole time. So as Ukraine maintains alignment with NATO interests, Russia feels compelled to neutralize the threat.

Kevin: You showed me a map, and let’s just attach it to the show. You showed me a map that George Friedman had published.

David: Yep.

Kevin: The European division of NATO and Russia—or the Soviet Union—in 1990.

David: What I love about old maps is that it shows you what was, and sometimes it’s confusing, because you say, “Wait a minute, I don’t recognize this.” And that’s exactly right.

Kevin: Right.

David: So if you visit our Wealth Management office, we have old maps of old empires. Every empire that’s ever existed, we’ve got a map of. And just to recall that what was, and what is assumed will always be, is no longer in almost every case from history.

Kevin: Yeah. Things change. Yeah. That’s consistent, but this map, okay. Going back to 1990, just about all the countries that are on the West side of the Soviet Union are now on the Eastern front of NATO. Right?

David: Well, that’s right. So if you’re looking at the Eastern edge of NATO’s land interests, they now include Estonia and Latvia and Lithuania. They include Moldova. They include so many countries that were former Soviet republics. And as you look at that map, look at the one that is in question right now, it was Russia prior to 1990. Now, NATO would like to claim it, like all of the other spaces on the Eastern side of NATO’s boundary of interest, if you want to call it that. And this is what’s contested.

Kevin: Well, and we’re being prepared. We’re being prepared for a conflict. Don’t you see it? Just what’s coming out of NATO and in politics right now.

David: Particularly out of the US and UK and those press setters. So again, just glance at that map, the listed countries on the Eastern front. Almost all of them are in NATO today. Ukraine is being courted, not just by Hunter and the big guy for personal financial gain, but they’re also being courted by NATO for strategic advantage, right? So thus far the UK and US, and to a lesser degree NATO, have been preparing the public for conflict. But the depth of commitment remains pretty limited.

Kevin: Haven’t we’ve been sending them guns though?

David: We’ve sent them a couple billion dollars in arms, and that goes back several years. We’ve suggested sending some troops, not as an actual deterrent, because if we sent a few thousand troops, you’ve got somewhere between a hundred and a hundred and fifty thousand Russian troops on the border already. So not really a deterrent, but it means that we may try to hold the conflict to a particular area and prevent it from spilling into— becoming a larger regional European debacle. So in this context, you’ve got the Chinese who are watching. Both Xi and Putin know that Biden is weak, and is viewed as ineffectual at home.

Kevin: Well, let me ask you a question, though, could we even fight a war right now with the supply chain problems? There are things that are going to our weapons systems and just the way we function that come from China.

David: We have supplies. We may not have resupplies. And I think that may be the secondary question to it. Some sort of an extended military conflict would put a strain on our capabilities. But again, you see pressure emerging in the Biden White House, in some strange ways. You had a straightforward question asked on inflation this week, and Biden in his strongest voice, it was more of a contemptuous whisper, said something like, “What a stupid son of a.” And he’s talking to Peter Doocy. Peter Doocy asked Biden, if he thought inflation is a political liability ahead of the midterms. That was the question. Again, not a real— is it a political liability ahead of the midterms? And Biden’s response was, “No, it’s a great asset. More inflation. What a stupid son of a bitch.”

Kevin: Gosh.

David: Says under his breath.

Kevin: He needs to talk to my wife because my wife doesn’t see it as an asset at all. She just sees it as a drain on assets.

David: Right. So maybe Biden was misunderstood, and that was just a moment of quiet self-reflection. But I think when you look at Xi and Putin, they recognize an opportunity. Not only are Chinese supply chain dependencies a real pressure on global inflation. Look, you’ve got Chinese zero-COVID policy, which is in play in real time, and that’s reintroducing supply chain pressures. It’s not as if what happened in 2020 stays in 2020. No. We’re still dealing with supply chain issues. And a part of that is supply and a part of it is, as we’ve described in previous discussions, excess demand stimulated by fiscal handouts. So that is a known consideration in terms of US actions in the South China Sea.

Kevin: So what are some of the dependencies right now that maybe we haven’t looked at?

David: From a supply chain standpoint, we’re very familiar with things that US manufacturers need and can’t move forward with production without, but even behind the products we’re missing are the resources, things like rare earth metals. So that’s a part of it, semiconductors, many other parts, again, which US manufacturers are limited by. So that’s on the Chinese supply chain side, and yes, that does have an impact on inflation. But real sanctions, if you want to think about addressing the issues in Russia, the big stick that we carry is sanctions. Focusing it on banks, focusing it on energy. These are logical ways of hitting the Russians hard. 45% of their exports are oil and gas. This is a huge part of what has built up their foreign currency reserves, currently sitting at about $620 billion. In fact, if we were to implement sanctions, they’ve got a big cash cushion and it wouldn’t necessarily hurt them right away with that 620 billion sitting there. We could focus on banks, Russian banks. We could focus on Russian oil companies, but that’s also a challenge. Those are hard sanctions to actually put on at scale due to the inflationary trends they exaggerate both in Europe and globally.

Kevin: But you remember when oil just dropped through the floor and we talked about it on the Commentary that it was going to affect Russia because what does Russia need? About 85 to a 100 dollars a barrel oil to really function.

David: That’s what it was at the current spending levels. And through both diversifying their economy and reducing some of their expenses, I think they’re running about double what they need now.

Kevin: Okay. So if we were to hit the oil price purposely, like a manipulation in the oil market.

David: I think you’d have to take it below 50 to really impact the Russians.

Kevin: Okay. Okay.

David: Actually, at 80 bucks, they still have some cushion in here from a price standpoint. But if we start playing games on the energy sanction side with the Soviets, can Europe and the US afford higher energy inputs or an unbound timeframe? Again, going back to the supply chain resolutions with China. Sanctions on Russia end up having an outsized inflationary impact on our European allies. If we’re trying to beat the Russians with an energy stick, we’re doing the same thing to the Germans. And thus really to the heart of the European economy, right? So it impacts Brent crude prices, it ends up impacting us as well.

Kevin: We’ve talked about how you need to have reserves for that time. You’ve talked about physical reserves, what have you. And one of the things that we’ve been able to really enjoy over the last decade is printing money and throwing money at anything and not having inflation. Now we have inflation, do you think Xi and Putin are looking at that right now, going, “You know what? They’re running out of options”?

David: Absolutely. Now, due to US inflationary pressures and the political costs of 7% inflation, our range of options and the degree of application with those options is limited. And I think both Xi and Putin know it. It’s an excellent time to reshape the global security architecture, and deflects on the competition. And I think it’s exactly what they’re both doing. This opportunity is not being missed.

Kevin: Okay. So the listener who’s sitting here going, I was really wondering how this is going to affect the markets. We should shift over to the financial side right now because fiscal spending and Fed action, that’s all going to come into play here.

David: It sets up the current market structure as a fascinating context for any policymaker to operate in. Whether you’re talking about domestic fiscal policy here in the United States or the Fed’s monetary policy implementation, or if you’re talking about our foreign diplomats, trying to figure out the best way to engage. Again, whether it’s their counterparts in Asia or in Europe and in Russia. But it adds a layer of complexity because of the interrelated consequences.

Kevin: Not to mention that it’s an election year. Biden’s going to have to push on the Fed a little bit, right?

David: In two years from now, it’s an election year for Xi and it’s an election year for, again, the midterms for us in the US. And then two years out, both Biden and Putin share that election space too. So Biden’s going to have to lean heavily on the Fed for interventions in the event of market declines. And the Fed is unfortunately now taking a harder line on the direction of policy, precisely when Biden needs them to be pliable. And why are they doing that? Well, three obvious reasons. You’ve got the 3.9% unemployment number, you’ve got the 7% inflation number, and you’ve got the $9 trillion balance sheet, which is staring the world in the face as—

Kevin: And a partridge in a pear tree. Yeah.

David: So perhaps for the Fed, it’s just a question of delayed implementation. If you’re talking about a market intervention and the call from the White House, or a specific threshold of pain being reached first prior to market intervention and the triggering the Fed Put. And anymore, I think we have to modify what we’ve called the Fed Put and what we know as the Plunge Protection Team. We would probably have a better comprehension of what goes on, if we looked at it as the BlackRock/Citadel Put. You’ve got close to $10 trillion in financial market assets and then the high frequency trading models that are running a huge amount of volume. And frankly there’s enough hubris in those two organizations to try and redefine the laws of nature and of nature’s God.

Kevin: And Richard Bookstaber would tell you that those models are ultimately going to be what bite them in the butt. Okay. Because let’s face it, what we’re talking about here, there is no historic precedent. This is all coming to pass at the same time.

David: Well, and again, I think this is why I want you to join us for the Tactical Short this week because that call will look at some of the models that have put us in such a dangerous position. It was the insurance modeling in 1987 that gave us the 22% one-day crash. Why? Because again, we had an insurance and a way of protecting against downside, which ended up being quite the opposite of protection. It exaggerated and magnified. It was a force multiplier in the market. And instead of protecting, it damaged further. That’s the danger that we have in market structure today.

Kevin: Well, and he was involved in the Volcker Rule and he talked about how the market makers will not be there this next time.

David: That’s right. So when you go to sell, who is buying? I think any tightening in the market has been from the bond holders, from the global investors taking heed and looking at the need at the Fed to shift directions. And they’re taking that seriously.

Kevin: The bond vigilantes.

David: So far the Fed has done nothing to tighten. And they’re not scheduled to do anything until the end of their asset purchases sometime in March at the soonest, but here’s why they must stay on course. Here’s why they must tighten. They have to, the current inflationary backdrop requires it.

Kevin: We’re not just talking about inflation. Inflation also creates negative interest rates. Because if inflation is 7% and you’re getting 1% at the bank, well you’re negative six. Okay. And that’s not even counting taxes.

David: Stephen Roach has joined us on the Commentary before to discuss China. And he has some practical experience there. He headed Morgan Stanley Asian operations for years. And that was after years as a professional economist, both at Morgan Stanley in the home office and at the Federal Reserve in his early, early days, post PhD. So part of his practical monetary policy experience was back in the ’70s. He was working under Arthur Burns at the Federal Reserve.

Kevin: Wow.

David: So he was ringside to the greatest inflationary crunch in modern American history.

Kevin: And he is still practicing. These are the guys you want to listen to.

David: Well, he’s now at Yale, he’s sitting on a comfortable seat at Yale and teaching what I think are some very valuable insights.

Kevin: Didn’t he tell you that he flew over a million miles in a year? Yeah. So he is happy at Yale sitting in a comfortable seat.

David: Yeah. Not the first class seat in the plane this time. Yes. He lays it out simply this week. Consider the math, the inflation rate as measured by the consumer price index reached 7% in December 2021. With the nominal federal funds rate effectively at zero, that translates into a real funds rate, the preferred metric for assessing the efficacy of monetary policy, of negative 7%. That is a record low.

Kevin: A record low. Wow.

David: So he goes on later to say, again, consider the math. Let’s say the Fed’s projected policy path, as conveyed through its latest dot plot, is correct. And the Central Bank takes the nominal federal funds rate from zero to around 1% by the end of 2022. Couple that with a judicious assessment of the disinflationary trajectory, not too slow, not too fast, that foresees year-end CPI inflation moving back into the 3 to 4% zone. That would still leave the real federal funds rate in negative territory at negative two to negative 3% at the end of the year.

Kevin: So even best-case scenario. It’s ridiculous to think that inflation’s going to drop to that, but—

David: Right. But his summary is that even getting to that level, even getting to that level, he’s giving some conservative numbers. We only take the federal funds rate to 1% and we see inflation moderate by half.

Kevin: Right. That’s not going to happen. But even if it does—

David: What he’s saying is if we get to that level, a tall order from where we’re starting, that leaves us still with more monetary accommodation, live and in the system, than at any time under Greenspan, under Ben Bernanke or Janet Yellen, under Jerome Powell and the periods that followed the dot-com bust, the global financial crisis and the early shifts in the COVID pandemic.

Kevin: The Fed is behind the curve. And I know his quote had something to do with the curve.

David: Well, he says, and this is how he concludes, “The Fed is so far behind that it can’t even see the curve.”

Kevin: Yeah.

David: It’s dot plots, not only for this year, but also for 2023 and 2024, don’t do justice to the extent of monetary tightening that most likely will be required as the Fed scrambles to bring inflation back under control. In the meantime, financial markets are in for a very rude awakening.

Kevin: So when Biden said, “No. No, inflation’s not a detrimental factor. It’s an asset.”

David: It’s an asset. Well, Doocy hit a nerve. Doocy hit the nerve. His question on inflation is a defining factor in recent sentiment surveys. If you’re talking about public sentiment, University of Michigan sentiment, and it’s a defining factor in the president’s polling collapse. Trump was raked over the coals for doubting the election outcome. Right? Okay. Great.

Kevin: But right now they’re doubting the upcoming election already.

David: Jen Psaki and Joe Biden are already doubting the results in 2022. Isn’t that the pot calling the kettle black?

Kevin: Wow.

David: What he knows is that without a doubt, he is between a rock and a hard place, and inflation is putting the pressure on.

Kevin: We’ve talked so often that perception is the one thing that the Fed has tried to manipulate. And we’ve seen manipulations, the Plunge Protection Team. I read something funny, there was a Tweet out that said, “Hello, you have reached the Plunge Protection Team. Due to high call volume, we’re not going to be able to answer your call.” But the manipulations. Reading Bill King on a daily basis, Bill just screams right now, he says, “Look at the manipulations in these markets.”

David: Well, and it goes back a ways. We’ve seen those manipulations almost weekly, certainly monthly, for several years now. And the bias has been upward on any major technical break. An attempt to correct the market upward anytime you— The market wants to correct down. You have impact trading that comes in. Call options are used to leverage the impact of insider dollars used to prop the markets and keep the energy positive.

Kevin: Okay. But people who are in the know are selling every time you see that.

David: Since the beginning of the year. So here is 2022, first month of the year. Since the beginning of the year, every attempt at buoying the markets and keeping trading vitality positive has been met with large scale organic selling. So again, Stephen Roach describes a rude awakening. It has only just begun. In our view this is not a correction. This is the beginning of a crash. This is the beginning of an extended bear market.

Kevin: Well, look at the volatility. A 1,000 points shift in the Dow. Have we ever seen that?

David: Bespoke Investment Group tweeted this, this week. “First time the Dow has reversed a 1,000 point drop to close higher on the day.” Then you’ve got an LPL Market Strategist who also noted that, “The S&P was down 3.99% today at the lows.” This was of course earlier in the week. Since 1950, he says, “There have been 88 other days to be down this much at one point during the day.” Since 1950, 88 days they’ve been down that much. “Today was only the third time stocks closed higher when the dust settled.” His final note was, “Both of the others were in October 2008.”

Kevin: Okay. So October 2008, we all remember that. That was the global financial crisis, but let’s go back.

David: The unwind did not end, if you’ll recall, until March 2009. So you had these major declines, massive rallies back and it was just the beginning of the chaos.

Kevin: Well, do you remember the rally before the tech stock bubble completely withered back in 2000?

David: It was huge. Bill King pointed that out in a recent missive. You had a 40% rally in NASDAQ from May to June 2000. Pretty decent rally. That came just before the final and most brutal 62% decline.

Kevin: Wow.

David: Well, Doug’s discussion of market structure over the weekend was important. We got the derivatives market, which is a dangerous addition to extreme overvaluation, extreme leverage in the system. And we have a market which is accustomed to excess liquidity and is expectant of ever higher prices. To me, that is a market that’s ripe for upset. And it may fall of its own weight. You’ve got the growing uncertainty on the global stage, which we just touched on briefly today, the geopolitical aspects, which may exert an extra gravitational weight. Join us for the Tactical Short Call this week. I think it’s fascinating to understand what is unfolding. We started this Commentary in 2008, for a reason. There’s a lot to talk about.

Kevin: Right.

David: I think we’ve got a lot to talk about today as well. I would be remiss in not noting, it’s fascinating to watch the gold market perform its function as a safe haven here in the first month of the new year. Also, fascinating that the Bitcoin rivalry seems to have faded. Maybe it’s fading with the price.

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.

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