In PodCasts


The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Europe Somehow Is Missing 400,000 Truckers
October 27, 2021

“The energy crisis, policy-induced supply chain issues, this is the price of idealism, particularly when it comes to the energy crisis. And frankly, I have to laugh at Joe Biden going practically on his knees crawling to US oil companies, begging for increased output to avoid the dreaded $5 a gallon gasoline. This is the nightmare for 2022. Political outcomes are being determined right now.” — David McAlvany

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

David, I have to admit, this morning I woke up at about 3:00, and I couldn’t get back to sleep. So when 6:00 o’clock came, or 5:45 came, I got up, I turned the alarm off, I went back to bed. And it was like, I could do this. I could do this. And then I realized, no, no. Because of the routine of our recording every week at this time, I really have to stick to the routine of when I get up in the morning. Routines are important, aren’t they?

David: Yep, there’s two sides to inertia. My daughter reminded me of this last week when she was giving me a lesson in Newton’s law. And I’m calling her to the breakfast table and I hear, “Dad, I can’t get out of bed in the morning. It’s inertia,” she said.

Kevin: Well at least she’s learning her lessons, Newton’s law. But developing bad habits is just like developing good habits. If you allow yourself to get into bad routines, it can really catch up with you. Dave, you’re a guy of good routines, I have to admit. I’ve watched you through the years. I’ve watched you train for triathlons. I’ve watched your commitment to the weekly meetings with your team, every Monday morning. The commentary, all these things. You’re very, very committed to certain routines, and I think you’re trying to teach your family the same thing.

David: Yeah, on our last date night the topic of conversation was routines. And we’re all uniquely wired. I’m wired to appreciate and flourish with routines, and if you’ve read The Intentional Legacy, you’ve already come to that conclusion. That’s kind of how I am wired. So a Weekly Commentary in its 15th year, regular triathlon training six times a week. Date night, a Tuesday ritual that is also almost 15 years old, and here we’re coming into our quarterly call for Tactical Short, also a routine.

Kevin: Don’t you feel that when you have a good routine— okay, let’s look at this. I mean, you and I both know the joke here at ICA is that I like to wear white shirts and khaki pants every day. Well, why do I do that? Well, that’s also a routine. It sort of connects me to the fact that, hey, I’m here to work. And I don’t wear white and khaki anywhere else. But don’t you find certain routines, these little personal idiosyncrasies, allow you to also not react too quickly to things that are out of the ordinary? I think about your management of money. Most of the days, most of what you’re doing is quite boring and routine based. That way when something does actually happen that would cause panic, you’re still in that pattern.

David: Yeah, we punctuate our days with commas, and colons, and parentheses, and each quarter there’s this flourish of exclamation points and restrained periods, and this is what we do on our tactical short quarterly call. We condense market complexity into some actionable takeaways. Not every asset manager team does something like this, but we find it helpful to do a periodic deep dive into the subject matter we’re constantly, daily interacting with. And so there’s a lot of details relevant to the global macro environment coming out of China, and that’s our core topic this time around. That is a significant focus on the quarterly call I don’t think you want to miss. Thursday, this Thursday afternoon, 2:00 PM. There’s a link in the show notes where you can register for the call. As always, it’s free to the curious, so whether you’re inclined to hedge this market or just curious about an almost extinct zoological phenomenon known as a bear—

Kevin: Yeah, when was the last time we saw a bear?

David: That’s right. Well, I think you’ll gain insight and appreciation for the market structure we’re dealing with. I mean, what could go wrong? Charlie Bilello reminded us on Twitter this last week, stocks are at all time highs, home prices are at all time highs, bitcoin is at all time highs, wages are at all time highs, job openings are at all time highs, PCE inflation’s the highest since 1990—

Kevin: What could go wrong?

David: Well, and the Fed’s still digging in its heels, even with all of this, saying we need to hold interest rates down at 0% for another year to boost asset prices and inflation, and our response is, hedge accordingly. As David Rosenberg, also tweeting last week, “We’ll have to be patient and wait for Wile E. Coyote to start looking down.”

Kevin: Another Newtonian thought is, what goes up must come down, okay? And at some point, it does. This weekend, you texted me a picture of your son. He was in a bow tie. I mean, he looked great. But I have to admit, my eyes went up to the Saturn V that you were actually speaking under, right there in Huntsville, Alabama. You were giving a speech, your son was there with you. But that Saturn V was hanging up there. Tell us about the talk. You were probably talking about the inflation that was caused— the 1960s was the Apollo program.

David: That’s right.

Kevin: It cost $25 billion at the time, which is about a quarter of a trillion dollars these days. I think that’s about two months of QE these days, so—

David: Yeah, it’s only two months of QE.

Kevin: For the whole Apollo program. But you were speaking in Huntsville Alabama. What were you talking about?

David: Yeah, I mean, I’ve never sat under a Saturn V rocket. We were there at the Davidson Space Center in Huntsville, and the glories of 1960s engineering. And frankly, in some respects, the yet-to-be-surpassed feats of Wernher von Braun, his designs. And I saw an uncomfortable juxtaposition between that engineering and my comments on social and economic engineering of the same period, because in that same period we had Johnson’s war on poverty, which ultimately ended up contributing to the inflationary 1970s.

Kevin: Well, and so let’s put it in perspective. We talked about the Apollo program costing a lot of money, which was $25 billion at the time. Like I said, take that tenfold and that’s about a quarter of a trillion dollars. But the war on poverty, I was reading a piece on that. It was signed in 1964, and in 2014, which was the 50th anniversary, the Heritage Foundation came up with a number of what the war on poverty actually has cost, and it was between 22 and $23 trillion. So talk about inflation. We look at the Apollo program, and a lot of times people say, “Well, we ended that program because it was so expensive.” Well, the war on poverty was many times more than that.

David: Yeah, and we have this speculative view that stagflation might emerge, which is now moving towards more of a consensus view as data is stacking up of slowing domestic and international economic growth, and of course that’s meeting with rising inflation.

Kevin: Yeah, well that’s not what Powell said just a couple of months ago. I mean, look at August. Powell was talking about inflation being under control.

David: That’s right. He had sort of his five reasons for thinking that inflation was a nonissue. CNBC reported this last week, and it was very critical that all five of his assumptions on inflation have since then been undermined, so that the views supported by— and again, his view supported by hundreds of PhD econometricians gathering data for the Fed and helping him come to these conclusions, where one, there was a lack of broad-based inflationary pressures. That’s been obviously debunked. Two, they expected lower moves in high-inflation items, which frankly they don’t need to be concerned with, because those high-inflation items are never counted in CPI anyways.

Kevin: Right, they count them out.

David: So the third pillar of why inflation was a nonissue back in August was that they saw low wage pressures.

Kevin: I wonder where they saw that.

David: They must’ve been looking in obscure places. Leave it to the PhDs for exceptional vision and insight, perhaps lost on the rest of mankind. Then you had sort of what they considered at the time tepid inflation expectations. Expectations hadn’t moved, weren’t going to move. Inflation was going to be behind us in no time. Oops. So last but not least, the fifth pillar of the Fed’s dismissive inflation view was that we have maintained the long-lasting forces that have helped keep inflation low on a global basis, and I take that to mean global cooperation, the free flow of capital and goods, and continuation of labor arbitrage which allows us to source products other places, and just ship them in on an on-demand, just-in-time basis.

Kevin: You know what they really need to do at Jackson Hole? They need to bring my wife in and have her talk, because consumer expectations and consumer experiences, she goes and does the shopping. And the elite, this elite group of people who meet at Jackson Hole, and we know some of them. I mean, I’m not taking a shot necessarily. We’ve had them on the program. But are they really in touch? Powell’s got his $25 million portfolio with BlackRock, and I’m just wondering if he has any idea what it costs to buy a bag of Fritos, which by the way, you can’t right now. We’ve been looking for Fritos everywhere, but we can talk about that later.

David: Rates will not rise, according to the Fed, and don’t need to rise until sometime next year. And this is again where I’m not quite sure how long the Fed’s credibility remains intact, because as interest rates have risen, and most recently the 10-year to 1.7%, rates are not supposed to rise. And this is sort of an inconvenient truth, again, in line with the other five pillars of non-inflationary—the argument for non-inflation, we may have a credibility issue.

Kevin: Contrast that for me. I mean, the consumer experience. My wife talking at Jackson Hole, what is the difference? The consumer experience of inflation.

David: Yeah, I mean I think this is where you could say, “Houston, we’ve got a problem.” The smartest guys in the room don’t know what’s going on. Bloomberg summarized the consumer’s experience in an article last week, and it was kind of a short list of CEOs and CFOs discussing the recent increases in price, as well as what they anticipated as price increases. So this is Unilever, this is Procter & Gamble, this is Nestle, this is Dannon, this is the maker of WD-40, and they’re all discussing how they’ve moved prices already. We’ll need to do so again in the fourth quarter. There’s not a household on the planet that won’t feel the pinch of rising costs, and that’s on consumer products.

Kevin: Well, and the temperature’s dropping. I mean, even last night, did you hear the wind and the rain and everything else? And I’m just thinking about my propane, because propane is what heats my house, Dave, and energy costs, they’re through the roof.

David: Not to worry, not to worry. Energy costs through the winter are only expected to be up by 30 to 50% here in the US, which again, not to worry. It’s not the doubling, tripling, quadrupling that Europe is experiencing. So again, a little bit higher here, 30 to 50%, who can’t afford that? In Europe, again, the spike’s been much more dramatic. I think one of the things we should be watching is the food shelves at the store, just as a sort of anecdotal measure. If you want to look at an uptick in inflation expectations, empty shelves will help us anticipate higher prices coming, because the pantries are going to get filled in advance as people start to say, “Yeah okay, they’ve raised prices already. It’s time to just put a little bit more food away.” And again, with that mild form of hoarding comes another round of supply chain constraints with food, driven off of excess demand dynamics.

Kevin: Well, and I brought up Fritos just as a joke, but it’s really true. All the stores in Durango are out of Fritos and a lot of other things. We tried something this last week, because my wife wasn’t feeling well. So we tried the delivered grocery thing. Have you ever tried that? Where they actually—

David: Yeah.

Kevin: That’s an amazing thing, but what was also interesting was just the simple list that she put together, the person who was doing the shopping for her had to continue to call and say, hey—

David: Substitutions.

Kevin: “They don’t have it. They don’t have it.”

David: Substitutions.

Kevin: She kept doing FaceTime, and sending pictures, and showing that the shelves are bare.

David: Well, Europe is somehow now missing 400,000 truckers, and we’re missing 80,000 here in the US. I’m not exactly sure where these truckers went, or if we’re just talking about the need to upgrade the equipment. I know certainly this is an issue in California, where you cannot drive into the state if you have an old truck. We’re talking about a truck that’s 10 years old. Bear in mind, these trucks are meant to go a million miles, which is well beyond sort of a 10 year mark, but you can’t drive your truck into California to pick up stuff at the port of Long Beach—

Kevin: If it’s older than 10 years?

David: It’s about 10 years, it’s about 10 years.

Kevin: Wow, wow.

David: So we’re missing 80,000 truckers here in the United States, 400,000 in Europe. A part of the breakdown in product delivery from ports or other distribution hubs is the lack of drivers. And in some respects, it reminds me of a stubbed toe. So many little things go unnoticed and are taken for granted when they’re functioning well, but the whole system pays attention to a little bit of pain.

Kevin: Okay, so we’re talking about truckers, but my admin assistant, you know her. They just got back from Disneyland last week, and she said, “When we went to the beach, Kevin, we saw probably 60, maybe 70 container ships that were just lined up in rows, waiting to be unloaded, and they had been there for weeks.”

David: Right, right. Well, and I know this was reported 50, 60 different container ships off the port of Long Beach, which is now 70, 80. It continues to increase in terms of the backlog in California. So it’s—

Kevin: That would have something to do with the truckers too, wouldn’t it?

David: Yeah.

Kevin: I mean, you’ve got people who won’t unload the ships necessarily, but you’ve got to have trucks to take it away.

David: Yeah, and it is not just a stubbed toe. It’s not just a few hundred thousand truckers as the missing link in the supply chain, and I think this is— I really enjoyed Jeff Currie’s article, he was the head of commodities research at Goldman Sachs. He wrote a very helpful piece for the Financial Times last week titled, “The Revenge of the Old Economy.” And he argues that labor and Covid, the impacted production bottlenecks are not the primary driver of commodity price increases here, but rather the chronic underinvestment in the old economy.

Kevin: And why wouldn’t you? I mean, if you’re hearing Biden and the administration saying, “We’re not going to use carbon anymore. We’re not going to use oil anymore. We’re going to switch just to something else,” you are going to plan ahead and say, “Okay well we’re not going to produce that much.”

David: Except there’s many a slip between the cup and the lip. Years of underinvestment now have us in a sustained commodity up-cycle, which will only end with much higher prices. And these higher prices are the needed element to embolden investor capital, which has been quiet and abandoning that space for some time. And it also needs to embolden company managers planning towards increased supplies.

Kevin: Do you think that in the boardrooms there’s almost a shaming that’s going on if they actually talk about creating a carbon footprint?

David: Oh certainly. Because the big headwinds to expanding supplies come in the form of decarbonization and the environmental objectives, which have really placed a bulls-eye on any industry that pulls stuff out of the ground. So I mean, investor capital has been scarce for nearly a decade, and the popularization of that social shaming shows up in the investment community in terms of expectations, but also in terms of the actions taken by boardrooms, where you’ve just had a constriction in project pipelines. And that delivers a classic mismatch between stagnant supplies and increasing global demand.

Kevin: Well, and there’s so much pressure. Remember the book The Scarlet Letter, and that had to do with adultery. At this point, the scarlet letter is what, C for carbon?

David: It’s a C, absolutely.

Kevin: You’re not net zero, you’re wearing a C.

David: That’s right. So the scarlet letter that the old economy— it’s the old economy that wears it. And again, this comes back to this idea that we’re moving towards a net zero world, these are our objectives. You look at the radical shifts in weather, we’ve got to do something now. It’s one of the reasons why commodity up-cycle may be a long and drawn out one, because again, there hasn’t been a lot of motivation to increase supplies. And again, we’re talking about the old economy. The old economy is responsible in some estimates for 80% of carbon emissions, and so it’s an easy target for climate change crusaders. But to under-invest, appreciate the consequences here. We make our choices, we live with the consequences. To under-invest in the coal, oil, natural gas, copper and other commodities spaces, while sounding great in the boardroom or an endowment meeting, has the consequence of higher prices for those types of commodities. Capacity growth fell over the past decade. This is Jeff Currie’s argument for a major commodities super cycle. Capacity growth fell over the past decade, and now prices are rising. There’s no surprise here.

Kevin: Aren’t we fooling ourselves a little bit when we start to think net zero? When we, any consumer item that we use, we’re using components that come from the ground. Components that actually have to be processed. Components that actually create a carbon footprint. We were talking about jet exhaust, we were talking about Davos, Switzerland and jet exhaust, and one of our listeners commented that there’s not much of a carbon footprint to jet exhaust, but actually there is a carbon footprint to jet exhaust. It may be converted to something else, but even the belt that I wear Dave, is processed if it’s not leather.

David: Well, there’s two kinds of green washing. The green washing that happens amongst corporations who are trying to advertise as kind of the do-gooder, “I’m the right kind of citizen now.” And so you look at the environmental social governance scoring, and they’re able to play games with their scoring to look like they’re doing more, and again, are in that better citizen category. But the other kind of green washing is something that every person I know does, where they don’t adequately account for the decisions that they make. Think about all the things you consume. Which of them are not, in part, from the earth? Does your shirt or pants, does it stretch?

Kevin: Oh yeah, stretchy pants, they’re the greatest thing ever, but they’re made with what? Oil?

David: Oil, yeah—

Kevin: Petroleum.

David: Or a derivative thereof. Polymers that have— so do you own a computer? Do you realize that you are a demand component for silicon and plastic and copper and gold and aluminum and zinc and iron and nickel? I mean, you may think of the tech trend as a departure from the old economy, kind of leaving the old world behind and moving to the new, but the dependencies are there. Inside every computer, you’ve got cobalt, you’ve got ruthenium, you’ve got tantalum. I mean, you don’t want to think tech is dirty, but polyvinyl chloride, mercury, lead, these are things that are in the mix right? So we think tech is clean versus dirty oil, and frankly it’s a little bit naïve. 

We have our own version of personalized green washing. Almost everything we consume has an element of it coming from the ground. So for us, particularly as an asset management group that’s interested in stuff that comes out of the ground, it’s really key to figure out who’s doing the best job of it. And if you are actually in an extractive industry, what are you doing to put it right? That’s a reasonable question, and I think there is an issue of stewardship involved in that, and there are corporations that do a much better job than others. But the whole notion of personalized green washing, or corporate green washing to get the perfect ESG score, which is just bunkum.

Kevin: But don’t you think a lot of this is anticipatory? I mean, we’re not talking— obviously you have to use elements from the ground, and yes, you can clean things up. But it’s the anticipation of not using those items that actually creates high prices. And what you’re talking about right now is, commodity prices are going up partially because a lot of people said, “Well, we’re not going to use them anymore.”

David: That’s right. So you think of electricity generation, you think of the direction towards green alternatives, and that’s all well and good, but we’ve not scaled anywhere to the levels that would make up for lost capacity from the old economy sources. So lo and behold, the revenge not only of the old economy, as Currie says, but the revenge of the cycle.

Kevin: Right. The price, you’re talking about the price cycle.

David: Of course.

Kevin: Low prices cure low prices, high prices cure high prices, and that just goes on and on and on throughout the millennia.

David: And we are nowhere near the end of that cycle. So politicians are painfully aware of the ramifications of rising inflation and cost pressures on food and fuel. With dollars flowing more freely from the fiscal coffers to low-income households, and in turn low-income households more likely to consume physical goods versus spending it just on services, you’ve got the upward price spiral. That’s already begun, and that’s a part of this commodity super cycle. It’s well underway. It mixes demand pressure as well as supply constraints from that lack of investment over the past decade.

Kevin: As we do transition to, let’s say all electric, that type of thing, there are unintended consequences and ironies that occur. Like I remember reading how many joules of energy were being spent creating batteries so that we don’t burn carbon anymore. And you realize, my gosh, they’re burning a whole lot more carbon than if you just actually burned it in the gas engine. Now again, those are bumps in the road that have to be worked out, but initially, there’s a lot of ironic things going on as far as energy use to green things up.

David: And this year is a perfect case in point. The green agenda’s thrown us back into more global coal usage in 2021 than you could’ve imagined. It’s inadequate provisions being made for the alternative. So electricity demand is higher. This is back to the conflict of reliables versus renewables. That’s kind of the way I see it. The reliables, like them or not, you have access to. The renewables, hydroelectric power, whether it’s in China, I read another article this weekend about Paraguay, and I’ve seen the hydroelectric stuff that feeds a huge part of the Brazilian grid. Not enough rain, not enough hydroelectric power, and they’ve got issues.

Kevin: And if you’re cold and you’ve got a stack of coal there, it really doesn’t matter what the green agenda is. You’re going to burn the coal.

David: You move to the reliables, exactly. So coal usage as a result now exceeds where we were, 2019, at pre-pandemic levels, and of course electricity went down considerably in 2020 and early 2021, but we’re now on track to exceed 2019 pre-pandemic coal usage. And—

Kevin: Did you see the scathing article from the CEO of McDonald’s? He’s been through this before. This is a guy who experienced the 1970s, and he’s calling the stagflation card out right now.

David: Yeah, Ed Rensi, the previous CEO. Yeah, he’s very keen on saying, “Look, ’70s and ’80s, we’ve been here before.” In fact he said, “I first experienced this when we had stagflation, back to the ’70s and ’80s. Transportation was limited, distribution was limited, we had to raise prices, we’re going through it again. It’s been exacerbated, clearly, by Covid, but it’s also been impacted dramatically by the policy changes that President Biden made before he was inaugurated.” This is what Ed Rensi says. When he said we’d have to shut down oil, shut down the pipelines, move away from fossil fuels. And before he was inaugurated, I think we have to be generous here. Greta Thunberg, she predates, the green agenda predates, Biden. I mean, this is not just the Biden administration.

Kevin: Does anything predate Biden? Are you really going to say that? I mean, Biden’s been in political office for almost 50 years. But you’re talking about the green agenda here.

David: Point and counterpoint, well taken. Yeah, carbon reductions, Biden’s merely solidified decisions that were being considered in the boardrooms, and he’s helped CEOs and CFOs and board members, whether it’s at ExxonMobil or Chevron Texaco or BP, raise the alarm in terms of averting climate disaster. It’s a noble goal, and we just have to remember that poor planning as we move towards those goals has a cost. It may cost lives, it certainly costs livelihoods.

Kevin: Yeah, so if we have an energy crisis, it doesn’t have to be an energy crisis. This is a policy-created energy crisis is what you’re talking about. It’s not an actual one, it’s policy.

David: And it’s an execution crisis. It’s like watching the slow-motion disaster in Afghanistan. It didn’t have to turn out the way it did, but when you made a choice, that was fine. Now make sure that you do proper planning to make sure that the choice is executed well and professionally, versus being an utter disaster. 

So policy implementation, there was the implementation risk which became a reality in Afghanistan. That’s what we’re watching with the green agenda, is the implementation risk and the lack of policy provisions. We have not moved past the reliables. In fact, all we’ve done is highlight just how far we are away from that. So the energy crisis, policy-induced supply chain issues, again, what we’ve talked in recent weeks about being Covid-induced in terms of reactionism, we have a recurring theme here in the commentary on that of late. 

This is the price of idealism, particularly when it comes to the energy crisis. And frankly, I have to laugh at Joe Biden going practically on his knees crawling to US oil companies, begging for increased output to avoid the dreaded $5 a gallon gasoline. This is the nightmare for 2022. Political outcomes are being determined right now. It’s not campaigning, it’s not lobby groups, it’s not on the basis of demonstrations of effective leadership. It’s the strain of rising costs, and it’s the budgetary frustrations of middle class households, which are being experienced now, logged now, and I think remembered in 2022.

Kevin: Yeah, the fact of the matter is, when you are entering a recession or high inflation, it’s very hard to get reelected or get your party reelected. This upcoming election’s going to be critical.

David: Yeah, I listen to and read the Babylon Bee on occasion, and Saturday Night Live is really no different. They are the modern day jester. When Hillary was running against Trump, it was interesting to see how SNL portrayed her as absolutely unlikable. And they portrayed it very accurately. They’re doing a great job again as they address the reasons for Biden’s popularity crash. The public is looking and seeing the insightful answers that he’s giving as the press corps asks the most penetrating questions imaginable, and as he sits and he ponders, and philosophically gives the most compelling reasons as to why public policy is solving the issues of our day.

Kevin: Yeah, you must be watching a different press conference than I am.

David: Or a different president.

Kevin: Okay, something hits me, though.

David: But no, think about it. The Gallup polls now have been dropping more than any president post World War II, which actually puts him worse than Carter, if you can imagine that. His polls at this point in his presidency are worse than Carter’s were, and that’s saying something.

Kevin: And he’s asking oil companies to increase production, when he was saying before the election that he was going to tell them to cut production, right?

David: Not only cut production, but we’re going to cut your access to federal lands, we’re going to cut off pipelines. Again, this is clean and green.

Kevin: You’re talking about the price of ideals, okay? And you’re using terminology that’s interesting that we even use it. Old economy, new economy. Old economy, new economy. I mean, what is the old economy? The old economy are normal people who actually have to go to their job. I would imagine high-income usage of energy is very, very different than the normal Joe. I mean, a guy, middle class, who has to actually just function. He has to use carbon.

David: Yeah, low income or high income. I mean, how we use our money is different, and this goes back to Jeff Currie, I think echoing our recent discussions on high-income households, low-income households. High-income households control more dollars, that’s a given. The 1%, obviously the 1% have benefited from the post-global financial crisis monetary balloon.

Kevin: Yeah, QE to the moon is also nice for the 401(k).

David: But low income households, if we want to just generalize and say the 99%, they control the volume of commodity demand. And this is a really key point. This is a function of greater numbers of people and their spending habits. Consuming physical goods is higher amongst low-income households in proportion to services. So our point a few weeks back on stoking excess aggregate demand is very telling here. Money in the pockets of the 99% spends differently and impacts the economy differently.

Kevin: So if we were to summarize everything you’re saying up to this point, whatever the cause, inflation is coming and is here.

David: That’s right. So pricing dynamics in this commodity cycle may be more extreme given the combination, almost a perfect storm of mo money from the money tree, and low product availability, as the old economy remains out of favor. Again, lack of investment, lack of expansions in supply, mean that you’ve got bottlenecks that aren’t going to resolve right away, and certainly higher prices are a part of that resolution. High prices do inspire a fix, it just takes time for the production of commodities and product supplies to be remedied.

Kevin: Talking about inspiring a fix, I think we finally figured it out. The billionaire tax. Okay, so wealth tax. It’s not me. I’m not a billionaire, so obviously, what a good thing to do, huh? Go for the billionaire. I’m glad that I’m completely out of the sights of the scope of that particular gun.

David: Well, think about this being the nature of democracy. Democracy is the art of picking on the minority groups. Think about that.

Kevin: Yeah.

David: And this is one of the reasons why de Tocqueville said democracy is nothing but 51% tyranny.

Kevin: And you’re saying billionaires in this particular case are the minority group?

David: Right.

Kevin: You don’t usually think that way.

David: Well, they may be a very privileged minority. They may be a very privileged minority, but yeah. So loving the idea of taxing the billionaires and their unrealized capital gains. Should we consider the possibility that there’s a migration from, say, a thousand citizens to all of us? That in fact the taxing the billionaires is sort of the camel’s nose under the tent in terms of this new way of approaching capital gains taxes?

Kevin: Oh, yeah. Get the crowd to go, “Yeah, go get them. Yeah, go get them.” And then all of a sudden, they come and get you. Because I was being tongue in cheek before. The billionaire tax is really the Kevin Orrick tax, ultimately.

David: Ultimately, ultimately.

Kevin: And the Dave McAlvany tax.

David: Yeah, because the 1% gets extended to the 2%. You’re not a part of that either.

Kevin: No.

David: Gets extended to the 3%, not a part of that either. I mean, and ultimately it works its way down to capturing a huge swath of tax revenues. Think about how this idea of capital gains on an asset that you own but have not sold, think about how that shifts the idea of ownership. Think about how it promotes the creation of another set of books. I mean, think about how that kind of a shift underscores sort of trading and short term-ism amongst anyone that might otherwise believe in a long-term endeavor, right?

Kevin: Yeah.

David: It’s not going to be limited to a few. I think it’s dangerous to concede legitimacy to an idea based on personal distance from the impact. If you’re not a billionaire, it’s not going to hurt you, don’t worry about it. Is that really why we should give a nod to its legitimacy? I think it’s also dangerous to agree to policies based on some form of demonization which targets a minority, whether it’s a privileged minority or not.

Kevin: Well, put it into personal perspective. Your family is coming into the 50th year of owning a precious metals business, and now a financial—obviously you’ve done many other things—a financial management business. But what if every year, the gain on the value of that business was taxed beyond just the income taxes that you pay?

David: Yeah, so we’d have to get an assessed value annually, pay a percentage of that value in addition to the various income taxes already owed. It changes the calculus of business ownership. This is not just sitting on a stock position that’s appreciated.

Kevin: Why would you be an entrepreneur? I mean, if that really does pass down from the minority billionaires to all of us, why would anybody have any inclination of trying to grow money?

David: I think that’s a reality, is technocrats and bureaucrats have no interest in or appreciation in the details of a dynamic business community. I mean, you wonder at what point you kill the entrepreneur’s willingness to take risk. There are so many policies in play. Not just tax policies. In the last 24 months, it’s become clear that technocrats have no idea what motivates the business community and what keeps it vibrant, and what keeps the economy alive. I’ll never forget sitting in on a city council meeting last year.

Kevin: Yeah, here in Durango? I know what you’re about to say.

David: Okay, so this is, I’d never heard it before, and I never imagined hearing it in my lifetime.

Kevin: “Close the business. They’re not wearing masks.”

David: I heard the voice of the Vichy. And this actually had nothing to do with masks or not masks. You had the city council calling for arrests and business closures if patrons in a store failed to wear masks. So the storeowner would face the wrath of the city council for not being a sufficient enforcement arm on the mask issue.

Kevin: In this one case, okay, the attorney, we have to say, you’ve got to love the attorneys in this particular case, because there was an attorney there who said, “Well, I don’t think you can do that without due process. In fact I know you can’t do that without due process.”

David: Yeah, that’s exactly right. So business closure was the aim of the city council unless compliance was absolute. And the city attorney informed the mayor, informed the mayor, think about that. Informed the mayor no such power existed to yank business licenses without due process, right? But the technocratic blindness was stunning. I met the Vichy in our town. Now our income tax started out only for the rich, and it was a single digit number back in 1913. You underestimate the appetite of the leviathan if you think that any limited tax proposal is limited, is actually limited. It’s like inertia. It’s like inertia. An object in motion will stay in motion at constant velocity unless acted upon by an unbalanced force. And that unbalanced force didn’t emerge until the Reagan era, and was put in motion very dangerously in the context of crisis. 1914 to 1951, the highest marginal rate was 91%.

Kevin: Can you believe that? Wow, wow.

David: And I think it actually inched a little bit higher than that for 1952, ’53, in that timeframe. But then under Reagan, he brought it down. It had already started to come down. It was at 70%, the highest marginal rate was at 70% when Reagan took office, and Reagan brought it down to the high 20s. 28 if I recall.

Kevin: And you talk about temporary. The income tax started out only for the rich, and then it moved. It migrated. I had mentioned that I was reading about Johnson’s war on poverty, and food stamps were also going to be a temporary program, and they only grew, and they grew, and they grew. I mean, look at the size of the program at this time. So you think about it, you brought up your daughter, who was laying in bed and she was using her homeschooling, which you’ve got to be proud of her physics, where she said, “I have inertia. I can’t get out of bed.” Inertia, there’s momentum as well, isn’t there? There’s inertia and there’s momentum, and momentum, you can’t stop the leviathan.

David: Science used to be an excuse for not going to school. Mom I have a fever, I’m sick, right? Now science is still an excuse, it’s just—

Kevin: Inertia.

David: She caught me off guard.

Kevin: That’s funny.

David: Well back to equities, we have the worst month of the year in motion now. This is October. If that negative seasonality can be thwarted, if we can hold it at bay, you’re probably looking at a run for even higher highs into January. Because you’ve got November and December, which are good months for stocks. You get what’s called the Santa Claus rally, plus we will have gotten out of sort of the October Bermuda Triangle. And we’re not out of that yet, by the way.

Kevin: Okay, but yesterday I came down and my wife, she was listening to the radio, and she said, “Boy, it sounds like China is really in trouble.” Evergrande, it’s just getting worse and worse. So China, even if we have a Santa Claus rally, China factors into this at this point doesn’t it?

David: In a major way. It’s a variable that can’t be managed effectively by Wall Street interests. So if the credit markets in China continue their slide, all bets are off. So you’ve got speculators here in the United States and professional investors who are trying to gin the system up to get us out of this seasonal lull. We’re at all time highs, so it doesn’t look like much of a lull does it? October is the worst month of the year for stocks. This ain’t bad, this ain’t bad. But we’re not out of the woods. As I say, there is something of a Bermuda’s Triangle in October. We fly over that, and we’ve got some room through November and December for progress. 

The X factors are plenty. The risk variables are clearly there, and it’s one of the reasons why in the Tactical Short call this week, we’re focused so much on China. It’s a variable that, again, if the credit markets in China continue their slide, all bets are off. You have between now and the end of the first week of November, which is frankly a nail biter, and past that you get the positive seasonality which is in play. I think, frankly, this is where you have to ask yourself, who am I? Who am I at the table? Am I a player or am I patsy? We talked to Bill King a few weeks ago, and he would say at this point, if you don’t have to, don’t play. David Tepper, who manages Appaloosa, sits on about a $15 billion fortune himself, commented last week that there’s times to make money, and there’s times to not lose money. I think we’re now solidly in the latter.

Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. You can find us at, M-C-A-L-V-A-N-Y dot com, and you can call us at 800-525-9556.

This has been 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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