- Politics & media benefit from inflaming the masses
- To escalate or de-escalate is a choice, not a consequence
- Media: Don’t censor truth, give it to me & let me decide
The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
Election Outcome Prediction: Blue Or Red They Print More Money
October 28, 2020
“We need to be able to engage and not move toward writing someone off and assuming that they are uneducated, and uninformed, with a blanket accusation like, ‘You’re a socialist.’ End of conversation. ‘You’re a racist.’ End of conversation. Social media, of course, exaggerates the trends toward those unfiltered, knee-jerk responses, a kind of verbal tyranny, if you will, and I think this is where both the right and the left need to calm down.”
Kevin: In history there are turning points. There are forks in the road that make all the difference in the world. We have talked over and over about our economy being run by, worldwide actually, back in the late 1800s or early 1900s, it was founded on and run by a gold standard, which was implied discipline. You had to balance your payments over time. Then, of course, they changed it a little bit in the 1920s. We went to a different type of gold exchange standard. And then, of course, we went through Bretton Woods in the 1940s up to 1971 when we finally just lost the gold thing altogether. But that was a major fork in the road. Remember, you bought for me the book Monetary Sin of the West, which was published right before that fork was taken?
David: That’s right. Jacques Rueff was trying to make the case to Charles de Gaulle that there were issues with the U.S. and the U.S. dollar. He had been a young man in Britain just before the pound sterling devaluation, pretty massive sterling devaluation. And so, as an older man with some experience, was trying to get the ear of de Gaulle, but de Gaulle wouldn’t listen for whatever reason, and so he started publishing things to Le Monde, the popular magazine/daily newspaper in Paris.
Kevin: And that got de Gaulle’s attention.
David: It did.
Kevin: It made sense. What Jacques Rueff was saying made sense.
David: As soon as the people were paying attention, the politician had to, as well. He had to play a little bit political in order to get de Gaulle’s ear. Ultimately, he did. The Monetary Sin of the West is kind of the description of what is happening throughout the late 1950s, early 1960s, and what Jacques Rueff sees as a deteriorating financial circumstance for the United States.
Kevin: One of the chapters, Chapter Four, is a copy of de Gaulle’s press conference where he is calling for a European Union, but in a different way. He is talking about how as we have seen the move away from the gold standard to the gold exchange standard, it has really ruined the economies. And even though the U.S. dollar was still exchanging for gold, he saw the end of that line. So what he was calling for in this press conference that he gave, he was calling for Europe to go back to the gold standard that they had before 1914, before World War I. How different would the world have been if we would have gone back to an all-out gold standard instead of going off of the gold standard? Look at the inequalities that we see in society right now. A lot of that is based on some people being able to print their own money, and others have to earn it.
David: We know the world as it is, not as it could have been, and so there could have been a number of things that we didn’t like as a consequence of the gold standard, things that we enjoy today because of the excesses in the system. Household net worth has never been higher, stretching toward 120 trillion dollars. So there are those things that we think, well, we could have that, too. But probably not. We would be dealing with a smaller dollar that would buy more, but everyone’s net worth would be a little trimmer, I think.
Kevin: The timing of this book, I’m holding it while we talk. I love it, it’s all marked up. There is a quote by Henry de Montherlant. I think I’m probably saying his name wrong. It says in the beginning, “There is a tragedy in the world because men contrive out of nothings tragedies that are totally unnecessary, which means that men are frivolous.” Now, we record this program a week before the election. There are very, very strong feelings right now, Dave, and a lot of people feel like we are at another fork in the road. We could either break right, or break left, but it’s going to be a break.
David: Yes, I think the vast majority of Americans have strong feelings about the elections next week, but the majority of them are not inclined to tantrums if they don’t get their way, and I mean, really, outright violence. There is no doubt there is going to be unrest by the end of next week in a handful of cities and states because there is a minority of people who really do feel that strongly. But this notion of the preconditions for civil war being in play.
Kevin: Do you think that is being trumped up by media, or just the small minority?
David: Certainly, the mainstream media loves drama, and I don’t think the preconditions for civil war are there. You look at comments from political scientists. James Fearon from Stanford has been writing on the subject for a long time, and national poverty is an important precondition for civil war. Other scholars look and say that the vast majority of cases in the 20th century hinged on capturing or trying to take over a concentrated economic resource, whether it is diamonds or oil or the drug crops in Columbia, where there is a scramble for the control of an asset and violence meets politics for a concentrated gain. So precedence would suggest otherwise.
You do have people like Peter Turchin. He is an anthropologist who makes the case that inequality creates more and more political stress, and that could lend itself toward civil war. Again, he says it is stagnating wages, it’s too many college graduates and not enough jobs, it’s exploding public debt, it’s a widening gap between the elites with monopoly market positions and the deteriorating conditions for those in the middle class. And he says that you should not blame Trump, which I think is interesting. He just argues that the structural causes for this kind of political stress pre-existed and had been within the system for years, and all Trump does is sort of throw matches to the fuel, if you will. He magnifies these stresses in the present political context.
Kevin: When you talk about stress, a lot of people don’t know why they are stressed, they just know they are. The system, itself, in a free market system a lot of stress is eliminated. Even though businesses are allowed to fail in a free market system and some others succeed, there is a knowledge of what is going on, but when you really do have the inequality of a group of people who can print money and inflate the system but de-value the currency, it creates stresses and it actually forces people to become gamblers, people who are 75-year-old, 80-year-old people who are retired are feeling a stress that they have to make enough money to be able to make the bills for that month with the assets that maybe they stored away 20 years ago.
David: The quote that you mentioned from The Monetary Sin of the West, that opening quote, does remind me that one of the big decisions that is important here is the impact of monetary policy. What if we had a restructured society as we have known it, artificially lower rates simultaneously boosts asset prices? And you’re right, it turns everybody into sort of the scrambling gambler. And if you don’t have assets, then you’re kind of the frustrated non-participant, sitting on the sidelines watching the game play, and you’re not in it.
So I think, to some degree, the Robinhood investment app is an indication both of easy money on the one hand and the flimsy bull market dynamics which that easy money promotes, but also kind of a desperation to catch up financially. People who don’t have enough in the game, and would like more, and so make a haul as fast as you can. The monetary mandarins are doing more than just monetary policy and an increase in the money supply.
It is fascinating to see as we get toward the end of a cycle, it is becoming believed that whether it is the ECB or the Fed, that we can solve all problems if we just print a little bit more money. So climate change is quickly becoming on the list of things to do by the world’s central bankers. Inclusion issues, again, on the list of things to do by the world’s central bankers. And apparently, more money is all that you need.
Kevin: But you talk about these various institutions’ confidence. We may not be going toward civil war yet, but the confidence in these big institutions is waning, is it not? People at this point are looking up and thinking, “Can they really hold this thing together forever, and are they creating the problem that is stressing me out?”
David: I think that is what most academics do agree on, whether it is civil unrest or civil war, there being a pretty big difference between the two, there is an agreement that institutions, and the confidence that the average man or woman has in institutions, that is waning at the popular level. You can see it, as you’ve looked through the Economist in the last year, the magazine out of London, the Economist has bemoaned the death of the international liberal order, and of course they don’t like Trump’s contribution to that, but whether it is Congress – and we mentioned the very low ratings that Congress has gotten in recent months – you also have the question over the legitimacy of courts, you have the question of the role that the IMF and the World Bank play. Good? Bad?
Kevin: They are considered experts. You’ve said this many times. Leave it to the Ph.D.s, but you’re saying that tongue in cheek because the Ph.D.s want you to believe that they have it under control. Dave, the times that you have actually talked to them on this commentary they are much more humble. They are like, “No, no, we don’t know as much as you guys think we know.”
David: I think that was one of the things that was impressive about the gentleman from the Bank of England who joined us earlier this year.
David: Yes, he basically said, “Look, if we have a mandate that is too broad, you understand that there is the opportunity for politics to play nasty against us. We may find ourselves out of a job if we allow for overreach in terms of our mandates. Let’s just do what we’re supposed to do and not try to solve everyone’s problems.” So I think there is actually a lot that hangs in the balance here, whether it is the IMF or the World Bank, even central banks, to a degree, at least for me there is this appeal of leaving it to the experts, which rings hollow. And to the degree that we do depend on the experts, there is also the opportunity in here for there to be a disappointment in expectations.
Kevin: So it’s not civil war, but it is civil unrest at this point.
David: Yes, exactly. And I think that this is where, again, disappointed people take to the streets, and for whatever reason, they may be disappointed. If you go back to our June podcast, I think it was the first week of June, we had the podcast, “The Late, Not So Great 1968.” We talked about what civil unrest was about, why it was coming at the end of a cycle. 1968 was the end of a bull market cycle. 1949-1968 had been one heck of a bull run, capturing the postwar pent-up demand. And of course there was a pretty big expansion of money and credit. You had the war period and Johnson’s guns and butter policies, all of this sort of factoring into expansion. And of course, by today’s standards, the credit expansion back in the 1960s was miniscule.
Kevin: That’s when Jacques Rueff was writing this material and saying, “Look, we’ve got a fork in the road coming. Let’s go back to a gold standard.” We didn’t do that, but like you said, by today’s standards, could you imagine if Jacques Rueff were alive right now? What would he be writing?
David: I think he would be shocked. I think anyone of his ilk would say, “Frankly, this is beyond imaginable.” By 1968, it was our foreign creditors who had noticed what we were doing and they started calling loans. I think everyone recalls the 1971 Nixon ending of the Bretton Woods monetary system and closing the gold window, discontinuing dollar convertibility to gold. But it was in 1968 that, as a country, we were making threats to our creditors, and we were defining the terms of friendship by those that would continue to take the quickly inflating currency and payment of debt, rather than the second choice, which was an agreed-upon option. You can take gold bullion, or you could take greenbacks, and we started to say, “But if you’re our friend, of course you’ll take the greenbacks.”
Kevin: And Jacques Rueff had been through this cycle back with Britain before he was with France.
David: Which was his whole point to de Gaulle, which was, “You may want to be friends with the Americans, but you’re going to get hosed. My suggestion is you take the gold, not the greenbacks.”
Kevin: And he knew it was the end of the cycle.
David: Yes, he knew it was the end of the cycle, and sure enough, a big devaluation occurred. The French knew we were at the end of the cycle and things got crazy, not only in terms of policy desperation, but also a deterioration in international relations, a real stress on these international bodies, again, this pressure and confidence in institutions. Think about the riots that you had in Paris in 1969. This was an expression of discontent with all institutions. And so this is not like we haven’t seen it before. It was street-level organization of riots and unrest, but also the end of a trend in terms of the markets. No surprise, the bull that began in 1949 ended in 1968.
Kevin: So there are times when you can make a lot of money, possibly, at the end of a cycle, or you can do what Barton Biggs did and write a book and just say, “You know what I think I’m going to do? I’m going to stock my wine cellar, I’m going to buy some gold, and I’m going to get out in the woods and I’m just going to go ahead and settle in on the last few years of my retired life.”
David: “Sit on the front porch in my rocking chair.”
Kevin: We read that book, too.
David: He basically implied, a shotgun resting over your lap, just a few friendly shots over the front gate if anybody decides they’re curious about what’s behind it.
Kevin: You were with the company that Barton Biggs was with for many years.
David: Right. He was one of the Morgan Stanley moguls. I think you can ignore the end-of-cycle dynamics and run with momentum, and there are plenty of people doing that – Robinhood is a good expression, sort of the last gasp of momentum traders. Or you can quietly exit, find your place of peace somewhere on God’s green earth.
Kevin: A little like Barton Biggs did.
David: And just kind of see what happens next and let it pass by.
Kevin: So we talked about unrest. It’s not as if they are not people who benefit from the unrest. Partisanship actually plays a key role in political success.
David: Yes, I’m not saying that the political environment and social environment are not nasty, just not nasty enough at this point to make for the move from civil unrest to civil war. Our commentary guest in a few weeks, Justin McBrayer, points to Nathan Kalmoe’s – I think he was at LSU – and Lilliana Mason’s research on radical partisanship. Currently almost half of people who self-identify as Republican or Democrat view those in the opposing party as being evil.
Kevin: So it’s not just a discussion, this is actually a moral judgment call.
David: Right. And there’s not a lot of space for dialog or old-fashioned debate on the issues when someone is evil, not just somebody who disagrees with you, but someone who is defined as the embodiment of evil. According to the research, a fifth of partisans think of political opponents as less than human. Isn’t that fascinating, because when you think about what happens at the extremes, again, go back to how people justify certain actions against other people, and it’s usually by dehumanizing them.
Kevin: But you’re talking 20% of the people that were polled believe that the other side is less than human. 20% of them – wow.
David: I thought this was fascinating, 16% of Republicans and 20% of Democrats think the country would be better off if large numbers of their opponents died. And nearly the same percentages thought that violence would be justified if their candidate lost the 2020 election.
Kevin: So here we are in the 21st century and we’re looking at ourselves. How barbarous.
David: Well, we’re supposed to be civilized. I thought our public schools were encouraging and teaching tolerance. Isn’t that what happens if you go to a public university today? Isn’t that one of the things that you learn? The acceptance of all people, the acceptance of all worldviews.
Kevin: Except what has occurred is the love of many is waxing cold, Matthew 24.
David: This is tolerance, where if my candidate loses, up to 20%, again, this is the folks at LSU doing the study. Violence is justified? It’s fascinating.
Kevin: The news is pushing the buttons, though, and AI is actually manufacturing the news feed that you get to your computer based on what they think you are going to respond to.
David: McBrayer says that a key contributor to the move toward civil war is the inflaming of the masses with fake news, and that, of course, is what his book is about. I think we’ll have the opportunity to weigh whether it is fake news or other contributing factors in our conversation with him. But certainly, as I reflect on the Strauss and Howe thematic of The Fourth Turning, I think it makes fake news a coincidence in the larger historical context. Maybe it is a part of what happens, or is happening, but yes, I think it does contribute to hyper-partisanship. I think we would still be at a similar place in history even if we didn’t have it.
Kevin: You bring up Neil Howe, and what a fascinating guest. A person who was highly influenced by Neil Howe and The Fourth Turning was Steve Bannon. Neil told you on the Commentary, he said, “Steve Bannon is not really driven toward conservative politics or liberal politics. His main driver is the interest in changing culture.” That’s his main driver, changing culture. So in a way, mainstream media, or whatever method that is being used, is really just like adding heat to this partisanship, is it not?
David: I see this with my kids on occasion. Somebody is going to poke somebody until they scream or just go crazy.
Kevin: Just because they can?
David: Right. And I think it’s the Bannon-like sensation of, “Let’s just see if we can change culture here. What’s going to happen if we…” There is no commitment to a set of ideals, it’s more like just change for change’s sake. And I would suggest that a lot of unrest can occur without civil war entering the equation. Again, go back to 1968 and 1969, and these are not times of peace. We had bombs going off here in the United States. We had, what we didn’t have a word for at the time – domestic terrorism. We had people being shot on college campuses. We had all kinds of crazy stuff happening in this period of time, and you could have argued that things were going to boil over.
If you have ever watched a pot of noodles, it will boil over, and you know that it will continue if you don’t turn down the heat.
Kevin: That’s when you run into the kitchen. Yes, you have to turn it down or it will just completely boil over.
David: And this is probably easier said than done, but we should all be seeking, at this point, more light than heat. We don’t need more heat. Our problems, frankly, are not partisan, they are structural in nature. Go back to the original contention that Peter Turchin was talking about. There is an issue with a lot of college graduates and looking at the jobs and saying, “Are we going to be able to pay off our student loans at stagnating wages since the 1970s, exploding public debt, a widening gap between the elites and the common man?”
Granted, there are only 2200 billionaires in the world, but still, there are a lot of billions, in fact, there are quite a few trillions tied up in that little pocket of wealth. And it’s enough for people to say, “Is this working for me?” But there is a pretty solid choice here. If you don’t want to see an escalation in unrest, then be deliberate about taking every conversation, every interaction, off the boil.
Kevin: Dave, as you know, we have some clients that run a company and they fly all over the country. They teach large organizations and casinos and hospitals and various institutions and the employees of those institutions how to react if there is an active shooter, or if there is a situation where you have violence of whatever kind. I talked to one of these men yesterday, actually. They teach this de-escalation technique. He said it is much harder with the mask when you can’t see the face. It’s much harder to de-escalate. But what a noble drive to try to teach people who to de-escalate a situation in a period of time, Dave, when the media and others are trying to escalate everything.
David: Right. And I do think that boils down to a partisan priority to divide, and that is an accusation that I level equally to Republicans and Democrats.
Kevin: Pun intended when you said “boils down to.” You’ve already used the boils analogy. But you’re right, it boils down to people who – and you brought this up in the last couple of months – benefit from escalating a situation.
David: Yes, and I think our problems stem from an aggregation of poor choices, and this is where when you look at legacy issues, whether it is legacy baggage, or what we have and are grateful for from previous generations, you are dealing with an aggregation of either good choices or bad choices, an aggregation of poor choices, an aggregation of compromises, an aggregation of outright policy mistakes from Washington, D.C. Again, this is not one party, this both parties. It is the political machine, itself, it is the leviathan. And it is the financing of that leviathan via the Treasury and the Fed.
Kevin: Not just the Treasury and the Fed. This is a worldwide phenomenon at this point. Look how the Europeans reacted to the global financial crisis. It was “print more money.” The Japanese – look how they reacted. Look how the Chinese are reacting, the massive debt that they are taking on at this point to make things look normal.
David: Sometimes you and I in our conversations off to side, will go back to books that we have read. Last night we were talking about the Epic of Gilgamesh. You can boil the world down to city folk and country folk, and this desire for either freedom or control. And there is a certain elegance to control. Everything runs very efficiently and smoothly. But that is what we have been promoting.
Kevin: And the agenda changes, like even with the mainstream media. If city-state is the goal, then city-state is going to be the motive. You want peace in the city-state, even at the expense of the individual, or the individual’s rights and wealth.
David: Even in the Epic of Gilgamesh, which is something that predates the Bible as a piece of literature that says there is still this divide between two kinds of people, someone who prioritizes freedom and someone who prioritizes the pristine and controlled environment. I think, as you say, the issue has become global, because you have policymakers who have agreed that control is the better route, and we do want something that is polished. And so what they have unfortunately done is they have repeated the same poor choices and policy mistakes as those in the West. You have Reuters, who reminds us this week of dollar-denominated debt in emerging markets, surpassing 4 trillion dollars this week. Actually, it was the Bank of International Settlements doing the researching on it, Reuters was just putting it together. But the Bank of International Settlements charged this 7% year-on-year growth in that pool of obligations. When you think about it, any large pool of debt is just the aggregation of poor choices. You couldn’t afford it, but you bought it anyway, and you do that over and over and over again, and that’s how you end up with 4 trillion.
Kevin: Low interest rates are sort of the bait though, isn’t it, in a way? Even when people buy a car, it will say 0% for the first three months, or what have you? Are the low interest rates worldwide a large-scale worm on a hook?
David: Yes, the policy blunder is incentivized, and you are tempted by low interest rates, particularly in a foreign jurisdiction. We have lowered our rates here in the United States. Our central bank has done that using its balance sheet to buy down the rate of interest. Interest rates are low today, and that is what I would call the initial temptation.
Kevin: That’s the worm.
David: In finance circles it’s the next step that is considered the “original sin” because you are choosing to finance debt. The obligations require repayment in a foreign currency. And that’s the killer. Don’t denominate your debt in someone else’s currency. Iceland was destroyed financially by taking advantage of low rates in Switzerland. Imagine if you’re financing a house in Iceland and want to do it with basically a zero interest rate with a Swiss bank, forgetting that the Icelandic krona is different than the Swiss franc. And lo and behold, we went through a period of time when the Swiss franc appreciated, the krona depreciated, and the debt became unpayable.
Kevin: But when those currencies change values, as long as Europeans are borrowing in dollars and the dollars are falling relative to the euro, that’s not a bad thing. But what happens if the dollar strengthens?
David: That’s where we are today. Nobody’s worrying about it. There is probably a great argument for the U.S. dollar declining, so in the short run there is no added pressure on emerging market …
Kevin: But that’s Europe. It’s emerging markets that you are talking about.
David: Yes, 4 trillion dollars of emerging market debt is denominated in U.S. dollars. If the U.S. dollar ever strengthens relative to those emerging market currencies, the burden of that debt compounds negatively, and so, again, we come back to this structural issue, there will be people impoverished in this. And there are political consequences to it. But I love that quote that you shared in the early part because this is where you see the consequence of policymakers as it gets played out over time. Policymakers choose the expedient without regard to the future issues and consequences that emerge.
Kevin: Your background is philosophy, and one of the key elements of philosophy is the question, what is truth, and how do you know what truth is? I know when you are talking to our guest here in a couple of weeks, Justin, his area is philosophy, as well. But the question of truth is becoming more and more difficult. Let me ask you, if we allow ourselves to be played by these partisan extremes, are we going to be blind to actual truth?
David: I think this is where voters often fall prey to political rhetoric. Politicians are very skilled at redirecting frustration and animus away from inept, and you can even describe them as corrupt, policies, and toward their fellow citizens. They get to do this every two to four years. The reality of polarization is that partisan politicians benefit from the energy that polarization creates, even if it does tear apart our social construct. And I think Trump has done this. I don’t think either one of them are innocent of that. So I think you have individuals who end up seeing each other as enemies instead of neighbors, and truth is something that becomes a casualty in the race to grab power. That is how politicians operate.
Kevin: But what if truth is being blocked? This last week has been amazing to me because there is a story that has come out. We don’t even have to go into detail. But that story, like National Public Radio said, “We’re just not going to report on that story.” Facebook, Twitter – “We’re not going to report on that story.” Do you not have the right, at least, to determine, based on the news that is out there, what the truth is, rather than just be denied, completely, the story at all?
David: Information block is kind of an interesting thing. And you might say that’s an issue there. They are being generous to us. They are doing the work for us in terms of sorting out what is fake news and not fake news. That would be one argument. Matt Taibbi – do you remember that name?
Kevin: I don’t.
David: He was an award-winning journalist for Rolling Stone. He has done some great reporting on Wall Street, very critical reporting. He has probably written six or seven best-sellers since 2008.
Kevin: What was the name of that guy – we read the article.
David: He described Goldman-Sachs as a vampire squid.
Kevin: Yes. That was him.
David: Yes. So this week he is livid that Twitter and Facebook opt to shut down any information flow on Hunter Biden’s laptop. He said that suppression is a bigger scandal than the actual story.
Kevin: I agree.
David: You have the New York Post, a 200-year-old newspaper, getting blocked. Again, I am speaking of truth as a casualty of politics. He says this: “The least curious people in the country right now appear to be the credentialed news media, a situation normally unique to tin pot authoritarian societies.” Give me good reporting and bad reporting and let me sort it out, but if you’re starting to curate for me what you want me to see or don’t want me to see, and expect me to believe that that is being done on an unbiased basis….
Kevin: It reminds us of what is going on in the markets this last ten years. No longer do you know the price of something because the Federal Reserve or the European Central Bank have determined the price because they came in and bought it out from under you. So, in a way, prices don’t match truth any more than news stories are matching truth at this point.
David: Taibbi also says, “Whether it is Fox or the Daily Caller on the right, or left-leaning outlets like Consortium or the World Socialist website, to writers like me, even, we are all now clearly in range of new speech restrictions, even if we stick to long-established factual standards.”
Kevin: You brought up 1968. If you just step back and be objective about it, not the issues, you can see the unrest, but actually, it was the end of a cycle. So these are end-of-cycle indicators.
David: That’s right. We shouldn’t be surprised at the vitriol. There is an unsettledness in an end-of-cycle period. So based in large part on the radical difference in life experiences people have, you can see them coming at things from different perspectives. To me, you look at the markets today, this is the most distorted the markets could be. If you could possibly imagine, you have Covid, which is providing the pretext for shutting down the world. The global economy has moved to gridlock with the exception of these interventionist measures. And so, the economy is not matched up with market pricing. Market pricing is reflective of this interventionism.
The greater the credit measures, the closer to normal things seem, at least in terms of pricing of assets. So real estate looks healthy, the stock market looks healthy, the bond market looks healthy, and yet you have this internal conversation which is really rancorous, and a difference between what people experience and what people see on paper. And it’s a pretty radically different thing. So the more interventionist the measures, the bigger the moves in asset prices, only exaggerating the difference between the very well off and those who are just barely making it.
Kevin: And so the question comes, just like we’ve asked decade after decade, when does the piper get paid? Because if the interventionist measures work, and if credit measures work, then we’re missing the party, Dave.
David: Right, and I think there is an argument that the party is just going to continue. I read a Financial Times article by Ray Dalio. He is the head of Bridgewater, invests for his client base 100-150 billion dollars in assets, one of the largest hedge fund managers in the world. He makes the case in his Financial Times article that China is an attractive place to consider investing right now.
Kevin: Never mind the debt.
David: I thought it was fascinating that the case for China was based on their robust recovery and the command-and-control dynamics. They are more effective in what they are able to orchestrate, far superior to ours.
Kevin: We control the vertical, we control the horizontal. We borrow money, but we control the vertical, we control the horizontal.
David: There was not even a mention of the over 5 trillion dollar credit expansion in China year-to-date.
Kevin: Just this year.
David: No mention of the state pushing out credit via the banks like a fireman pushes out water from a hose. The piece was not an exploration of, on the one hand, and on the other. This was not an exploration of risk and reward. In all likelihood it was an opportunity to talk up positions he already has taken. But there was no mention of the credit dynamics in one of the world’s greatest credit bubbles of all time. What was missing was, in fact, the elephant in the room. So we can pretend that bubble dynamics are the new normal, and let our guard down that there is money to be made in that respect, and maybe that is the case. Maybe China is going to be the next growth story, 2021 and undervalued stocks moving to an overvalued status, but at the end of a cycle there is even more money to be lost. I would argue that there is a generation’s worth of wealth at stake. And the allure of more, the appetite that grows with the eating, it temps us to overstay, it tempts us to indulge, and as Dalio does, justify a new model of capitalism. You should read the Financial Times article. Nothing in my heart and in my mind, or in my intellectual framework, is anti-China, but I’m reading this and I’m thinking, “This isn’t a very critical piece.” This new model of capitalism, it’s not just creditism.
Kevin: So it’s not like just what Duncan says.
David: No, this is the command and control dynamics which should be appealing at this point. This goes back to Russell Napier’s lament from three or four years ago on our commentary. That echoes in my mind. The free markets are dying. And the only way to allow for the free markets to rejuvenate is to allow them to die. And we won’t do that. That is the nature of a bear market. It is a shadow of death experience that revitalizes the landscape.
Kevin: Well, a bear markets is healthy if allowed to run.
David: Right. Either gravity is going to bring the shadow, or political uncertainty will. But as the world was shaken in the 1968-1969 period, it is not an unfortunate event for that to happen again. Remember, the world never came to an end.
Kevin: It didn’t, but let’s do a thought experiment here, because there was a guy named Orwell who talked about command and control. He was a little early, but we have talked about the news cycle being command and control, and Facebook and Twitter, and National Public Radio and some of these other outlets, literally banning certain stories coming out. So, in other words, the narrative for the city-state – this goes back to the Gilgamesh thing – the narrative for the city-state may be trying to reach some sort of consensus. It doesn’t matter whether it’s true or not, it’s consensus. The market is doing the same thing. We have to see the parallel. So, instead of reaching consensus for the city-state, wouldn’t you rather be in a room of people who disagree with you, but they have thought it through?
David: Right. If you’re going back to the age of the Austrian coffee house where intellectuals would gather, smoke cigarettes, probably nonstop, and drink espresso nonstop.
Kevin: Ludwig Von Mises, Goetel, all these genius guys.
David: The would just have it out. This was an atmosphere of debate and conversation.
Kevin: Jung was there, too. These Austrian coffee houses were an intellectual fantasyland if you were willing to talk to people whom you disagreed with. Now, sometimes it got bad. Cambridge – you and I were talking about Wittgenstein and Popper in the 1940s. He took a poker from the fireplace…
David: And started chasing him around the room.
Kevin: So yes, there can be a difference. But what about active debate, everybody getting information, in other words, not trying to control the information for the city-state? And then actively debating, even if it risks a friendship, even if it risks a relationship?
David: Yes, I think Wittgenstein was basically trying to say, “Falsify this, as he jabbed him with the poker.”
David: But this was a great week for our Wealth Management Team, and I say that because I do love dialog and debate.
Kevin: And it can get hot sometimes, can’t it?
David: Uncomfortably hot.
David: And I love differing perspectives, and as we each created our own matrix for the election, various outcomes and the implications for particular asset classes, I was reminded of the importance of this kind of robust interaction. We are a team. We are going somewhere together. We are trying to solve similar problems, even though we come at those problems with different educational backgrounds, with different life experiences, and a different set of personal insights. So when I sat down and wrote out my opinions on a page, they were firm, they were defensible, they were what I think was the best reflection of what lies ahead.
Kevin: But here’s what you do. And this is different than the academics who have to defend a paper for the rest of their lives. You then listen. You listen to these folks.
David: And when you listen, you realize there is a huge risk in approaching things from one perspective because you lose a comprehensive view. You miss nuance. You race past assumptions that you have made, believing they are reasonable, but can, in fact, be overturned when scrutinized by others. So teamwork starts with respect, and I wouldn’t value the opinions of the people on our Wealth Management Team to overturn my own.
Kevin: Some of these people you have known half of your adult life.
David: I have respect for each of them, and so I listen, and I am willing to change my mind. It’s not that I come in with a soft view on things, but I’m willing to change my mind if they can give me a good reason to. On top of that, as you mentioned, this is not an academic project where ego might drive the defense of a thesis. I don’t need to go off a cliff holding onto something that I hold dear.
Kevin: Don’t you love the markets? If you have never been humbled, go try to get into the markets with your opinions.
David: Yes, the markets give you immediate feedback. Right and wrong is a little different in the sphere of asset management. You may think … you don’t want to be morally corrupt, you have to know the difference between right and wrong. I understand, there is a distinction between being morally correct and morally incorrect. That is a slightly different conversation. You can’t claim the high ground in the marketplace if the ground is falling out from underneath you. So, as you say, bring humility to the effort or the market is going to bring it to you.
Kevin: Could you imagine if politics was played the same way? They talk about bipartisanship, but they don’t mean it. If politics actually was pursued to solve a problem where you had Democrats and Republicans working toward the same goal, it would be like the markets. It would either work or it wouldn’t, but you would have guys, as a team, working toward something.
David: And one of the differences, of course, is that the feedback loop within the realm of politics and public policy is much longer. It may take quarters, or years, or even decades to see the implications of bad policy.
Kevin: And they need to be re-elected before that time.
David: And so much time goes by in between the dialog, the discussion, the debate, the implementation of policy and the actual consequences of it. So with the market you get a very short feedback loop. I could know within the next five minutes if I was right or wrong. Certainly, I’ll know within the next five days or five weeks. So reflecting on how we must operate as a team, there is a difference versus the approach to problem solving and the art of politics and the contrast I think is day and night. Rather than seeing ourselves on the same team, if you go to the area of partisan politics, voters see themselves as members of different tribes.
Kevin: Animal instincts start kicking in.
David: Zero-sum game structure, so you’re talking about interests, you’re talking about priorities, you’re talking about limited resources. This is like watching Planet Earth with my kids and listening to David Attenborough explain to me why a band of baboons – I forget, maybe it was chimpanzees – it’s exactly like the election cycle, there is no difference here. We have our trees with food, we will kill to keep the other monkeys out of the tree. It’s tribalism. Tribalism is reinforced. It is fascinating.
I can’t help but think again about what failures there are in the area of education where we have been taught to celebrate diversity, we have been taught to look through the world of multiculturalism, and yet, there is really not a lot of celebration or invitation into unity and diversity. You look at how politics plays this out – I’m familiar with the team dynamic on the part of men and women from different parts of the country, with different ethnic backgrounds, we start with respect, we build out a robust dialog on the basis of there being value in the difference of opinion. We’re not the same.
Kevin: The people with the bumper sticker that say “Diversity” are almost always the people that will immediately tell you that what you believe is wrong. Have you noticed that?
David: Right. There is an irony in that the more we celebrate diversity and teach multiculturalism the more we underscore tribalism, and I’m not exactly sure how that happens, but it seems like it actually, in some weird way, reinforces it. Actually, I see this – NYU is considering segregated housing for their African-American students. How weird is this, that we go from segregation being an issue that we want to fight, to segregation now being the only way that we can celebrate diversity? What in the world are we talking about? New York University wants to segregate students. This is in response to how we acknowledge the legitimate bona fides of the Black Lives Matter movement? “Black lives matter so much we are going to segregate.” What happened in the 1960s, the earlier part of the 1960s? What in the world?
Kevin: One of the things about the wealth management team, David, is that you are not the same. You come at this with so many different backgrounds and different attitudes, and actually even belief in different political outcomes coming up through this election. That has been fascinating because emotionally you can’t help but react, to a degree, because you’re human. But that emotion, if you can just step past that and say, “I respect you. Keep talking. I’ll keep listening.”
David: Right, and of course, we’re trying to achieve the best possible results for our clients. The value comes from being forced to reassess all that you believe in light of someone else’s beliefs. You could be wrong. Someone else is likely to have an insight which you don’t. And so much of politics is different than that. It’s about power. Cooperation and team dynamics disappear. What we know, in terms of a healthy working relationship on the wealth management team, imagine if power comes into play, allow power dynamics to dominate, what you end up with is the same thing you see in partisan politics. It is at the expense of social cohesion, it is at the expense of respect. To a politician, unfortunately then, a voter is a necessary pawn in the game of power. Line them up, use them according to the needs of a larger end game, but make sure that you get what you need. And yes, it is something like the chimpanzee zero sum game, “Get out of my tree. It’s my fruit now.”
Kevin: I was talking to a client the other day about the short fund, and McAlvany Wealth Management in gold versus silver, platinum, palladium. And he started to realize that we’re not all in lockstep, even here in the company, that we have the freedom, and we always have. For the last 33 years that I’ve been here, I have had the freedom to think for myself and make recommendations based on what I feel a client needs, versus some sort of ideological totalitarianism.
You have never behaved, Dave, and your dad didn’t either, as if we have to all be in lockstep and give the same advice to everybody because you do respect varying opinions. I think we ought to just summarize some of the things that have worked and some of the things that don’t work. What does that look like when we all talk and maybe we don’t agree, but we come to some sort of decision that is tested by the markets?
David: What we are anticipating is that next week there is going to be an outcome. Is it a Biden victory and then red Senate? Is it a complete blue wave sweep? Is it a Trump victory with a blue Senate, or is it a red wave sweep? You have various outcomes and there are various impacts. One thing we know without a doubt is that there is still a lot of monetary accommodation regardless of who wins.
Kevin: Yes, both parties are printing money.
David: And there is not a lot of difference in terms of fiscal policy initiatives. There is probably half a trillion dollar difference between the Trump initiatives that get put in place and initiatives that would be inspired and sanctioned by a blue wave. So an extra half trillion going to states and municipalities, if you wanted to just simplistically say, that is really the difference – 3 trillion, as a base case, for a blue wave, 2.5 trillion for a red wave. Again, we could get finer in the details, but in either case what you are talking about is events which are dollar negative go positive. Treasury negative. Muni negative in the case of a red wave, muni positive in the case of a blue wave. We know that there is an impact to corporate tax rates and individual tax rates, so blue wave ends up being a little bit more hostile to the stock investor versus the red wave which J.P. Morgan’s base case now is with a Trump victory you have a minimum S&P 3600, probably stretching to 3900 by the end of 2021.
Kevin: So if you get all that, what you just now said, I’m thinking I need to do what Barton Biggs did, and that is, just go get a place, exit the system for a little while, and enjoy God’s green earth. Obviously, this is a minefield. What you just now said, Dave, any listener is going to be saying, “Okay, so what do I do next?”
David: Some pundits will say it’s not even worth saying what the outcomes will be. Does it really matter? And they will reference under Obama we had 130 new highs in the stock market, and under Trump we had 130 new highs in the stock market. In the end, does it matter? I think what is different this time, as dangerous as it is to say those words, is that we are at the end of a cycle. We are at the end of a cycle such that if you continue with trillions of dollars in fiscal spending, which I think Covid necessitates, Covid and the stimulus packages are going to happen this next year. You are talking about a threshold event in terms of the dollar. And there is a knock-on effect for the treasury market and how it doesn’t end up being neutral. You can’t say the treasury market is somehow a good way of hedging risk against equities, not when you are at this threshold event in terms of a re-appraisal of credit risk and dollar valuation risk.
Kevin: So if Jacques Rueff were here, The Monetary Sin of the West, 1968, 1969, 1970, 1971, there was a fork in the road. We did not keep the gold standard. Charles de Gaulle was not listened to. The European Union, ultimately, never was a gold-backed currency. But if Jacques were in the studio right now, would he look at us and say, “If you’re not going to go to a worldwide gold standard, you had better put yourself on a personal gold standard.” I know this sounds like an advertisement, but Dave, we’ve done this now at this company for almost 50 years for one reason, and that is, an ounce of gold still buys a year of bread at a loaf of bread a day – 365 loaves of bread. I just got off a conversation before we walked here, and he said, “Call me when there is a buying opportunity on gold.” This is a guy who needs some. He does not have enough. I said, “Well, I’m not going to call you because this is a buying opportunity on gold. Right now, an ounce of gold buys almost exactly 365 loaves of bread. So this is the time. What you just now said as far as various outcomes, the outcome is already so uncertain, I have no idea how you would actually place a bet before this election. It seems to me like you would want to take betting off of the table.
David: I think it is only fair to say there are really two phases, from an investor’s standpoint, coming into next week. Phase one is, starting on the 3rd and going through the inauguration, let’s call it a 30-45 day window, a short-term phase. And there is going to be volatility of one sort or another. And I wonder if that doesn’t capture our attention more, but actually it is less important. What happens in the next 300 days following, that horizon is really critical because that is where it is not just the market reacting to a surprise. Would a red wave be a surprise? To the market it would be.
So I think that is worth remembering, the two phases. Short term, there is going to be a reaction to the event. Beyond that there is an adjustment, and the adjustment is, in light of the new landscape what does it mean? Again, if that means corporate taxes are higher or corporate taxes are lower. If that means individual taxes are higher or individual taxes are lower. If that means a New Green Deal, or some alternative which is more pro U.S. energy. There will be a divergence. There is clearly a difference in terms of policy mandates.
When I have said that there is no difference between Republicans and Democrats, basically, I’m talking about abuse of power and use of free capital from the treasury market and the Federal Reserve.
Kevin: Sure, there are issue differences that are very, very important to you, but as far a money-printing goes, it goes both ways.
David: And the implications for the financial markets, I think this is where all of a sudden, if you follow liquidity theory of asset pricing, this is where there is not much of a difference. Where you will see, is sector-specific differences we talked about, muni-positive, muni-negative, there being a very different view there. Natural resource-positive, natural resource-negative. Very different there if you are talking about select energy assets, which, clearly, Biden is not full-up promoting.
Kevin: Listening to this, Dave, this is why you need a team that argues, unless you’re an expert in the market yourself and you want to do your own money management. The McAlvany Wealth Management Team – they do argue with each other, but they come at it from years and years and years of experience. So going back to ideological totalitarianism, you don’t have that in the team, but it actually, in the end, is very, very healthy. One of the prayers we are going to have to have is that we don’t have ideological totalitarianism in the political realm or the social realm, where any other view than the accepted one is wrong. That’s not diverse.
David: I think it’s worth clarifying, when I say argue, we’re talking about rigorous, generous, engaged discourse.
Kevin: You love each other (laughs).
David: Debates are about the issues on the table, not about the people promoting them. And so, the ad hominem attack is never an appropriate …
Kevin: You and your dad do that. Growing up, you and your dad would do that. Then you’d just hug and walk away, you guys would go do something else. But you didn’t always agree.
David: Right. I think that idea of ideological totalitarianism is fortified, it is reinforced, in the current paradigm. If someone doesn’t agree with you, they don’t accept the same paradigm that you do, they read the fact through a different lens, and say, “Well, your facts are different than mine because you don’t see things the way that I do,” or “you’re dealing with fake news and I’m dealing with the truth.” We need to be able to engage, and not move toward writing someone off and assuming that they are uneducated, and uninformed, with a blanket accusation like, “You’re a socialist.” End of conversation. “You’re a racist.” End of conversation.
Expand the dialog, expand the conversation. If you do have a simple phrase which becomes weaponized, which threatens social ostracism or has consequences to it, like that implied argument of, “Have you stopped beating your wife lately?” It kills any hope of dialog. It kills any conversation. It kills any sense of possibility that we can, as neighbors, disagree, agree to disagree, and do it on friendlier terms. You can’t make progress if you’re a racist, I’m a socialist, and we just can’t talk anymore. All we can do is hate each other and hope for violence, or death to come via Covid. Those statistics earlier were actually kind of bothering.
Social media, of course, exaggerates the trends toward those unfiltered, knee-jerk responses, kind of verbal tyranny, if you will. And I think this is where both the right and the left need to calm down.
Kevin: De-escalate. They need to de-escalate. We don’t have to go this direction, one way or another. We should encourage our listeners, this doesn’t mean that you have to give up your issues. But de-escalate. Try to solve the problem instead of making it worse.
David: I always thought it was funny, when I was in college and somebody said, “Well, if you’re going to have a beer with somebody you don’t about religion, you don’t talk about politics, and you don’t talk about philosophy.” And I would always respond to them, “What do you talk about?” (laughs) Because I’m not assuming that escalation is a part of the conversation. I’m assuming that there is a reasonable engagement, a generous engagement.
Kevin: Something to learn, from both parties.
David: There is something to learn, from everyone.