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Cognitive Dissonance—Please Don’t Confuse Me with the Truth
December 14, 2021

“I can tell you what will worry the markets, and that’s capital losses. If you’ve watched the market over the last two weeks, one of the most fascinating aspects of behavior is how radical the swings are. We’ve got crude oil up 8% this last week. We’ve got it down 10% the week before. I mean, we’re seeing massive swings that suggest that we are at the end of a cycle, and you’ve got major players trying to decide how they’re going to position for this.” — David McAlvany

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

Dave, just a quick reminder for our listeners. We are taking questions right now for the end of the year question and answer program. We’ll probably be doing that going into the first of the year. Send those questions to

David: Make sure and take a quick minute and jot down a question or two for the end of the year Q&A session. And if you can get those to us this week, we will begin thinking, researching, writing, talking amongst ourselves, and then include them on a program for your benefit as we get to the end of the year. Just send those to

Kevin: We’re preparing for the holidays. There’s not only Christmas parties, but we have birthdays in December, not to mention your own. And it’s interesting when you go out and shop for balloons, I was so surprised at how much the price of balloons went up. So what I did was I went ahead and called Powell, Jerome Powell, and I was like, “The price of balloons, are you measuring that?” And of course I called the White House and I got somebody, they said they were Joe. And I said, “Did you see how much balloons are going up?” And I got the same answer— From Yellen I got the same answer. Over and over and over. They basically said, “We’re not surprised. There’s always inflation in that business.” Balloons. Inflation. Okay. All right. I’m sorry.

David: That’s like a dad— You are getting ready for the holidays and family coming home. And that’s a classic dad joke right there.

Kevin: Well, it is, it is. And actually we have our receptionist here, puts a joke up on the board every day. And today that was the joke. And it’s like, you know what? This is going to make the Commentary. All joking aside though, I mean, we are preparing for the holidays and I was telling you, we went and bought meat. 20% from last year to this year. It’s better than 20% increase in meat. We talked about farmers, the chemicals that they’re putting on their crops and the things that they use to actually function, over a hundred percent increase in prices.

David: The Department of Justice is being called in to make sure that those fertilizer companies are being fair. And it’s like, well, how does this work? Prices go up and they smell a rat here. The department smells a rat.

Kevin: Oh, I’ve got to find somebody to blame. Yeah. Yeah. Well maybe the clowns are the problem with the balloon inflation then. Maybe they’re just buying too many. All I know is you’ve got to find someone to blame when you’ve created a problem, whether it’s the Federal Reserve or— 

We’re being told now, and I want to talk about this today, Dave. Is this gigantic package that they’re trying to pass, is it going to be anti-inflationary? Is it going to deflate the balloon or is it going to continue to create inflation? 

But before we talk about that, because we know what creates inflation in the long run, it’s yeah, it’s printing of money, but actually it starts with debt. Debt, what you do is you start borrowing money and you have to figure out a way of paying it, so you print money. Let’s go to Evergrande, okay? Because there are different ways to default, and you can default on your debt by just inflating it away, or you actually have to ask the person that you’ve loaned the money to give you a little bit of grace, because you can’t pay it back.

David: Well, and corporations are in a different position than governments are. Governments can create as much as they want, run the printing presses, and there’s little consequence. Well, at least early on there’s little consequence. Corporations don’t have the same latitude. They can’t print. They can issue lots of debt, continue to finance growth through that means, and Evergrande has done that. $300 billion worth of bonds are out there. Evergrande enters into default officially this last week. They’ve only missed payments on a small number of bonds. They all went past their grace period. And then the question is, what about the rest? It’s not an insignificant amount of money. Again, global financial crisis started with a couple of hedge funds here in the US, about 400 million with an m. This is back when m meant something. Now we’re onto b, Evergrande’s $300 billion worth of bonds are under pressure.

Kevin: Correct me if I’m wrong, but the difference between 400 million and 300 billion, I mean you almost have a thousand fold difference.

David: It’s a little bit of a difference. I mean, at some point it starts adding up to real money.

Kevin: And it’s not just Evergrande, right? I mean, we’ve got other companies that are facing the same thing.

David: That’s right. Yep. Shimao, Sunac, KWG group holdings, they were just a few of the names that joined the cascade parade. And so you had debt selling off, you had yields on the rise, and it sort of forced the hand of the PBOC. Had some intervention in shifting of reserve rate requirements, which frees up capital for lending. Again, it’s you have a debt problem, but that’s okay. We’ll solve the problem with looser standards that allow for—

Kevin: Well, didn’t they blame Omicron? Didn’t they try to just— It’s like, hey, let’s get rid of the fear here. We’ve got this Omicron thing going on. Forget the debt in the background.

David: Yeah. Now the interesting thing is the PBOC is saying that, with Evergrande, they’re going to let the markets sort out the value of the assets in question. So it doesn’t look like there’s going to be a bailout, which is interesting. You’re not on the preferred list. Maybe you’re on the list of losers instead of the list of winners this go round.

Kevin: But if you want to get great interest rates, I mean, you’ve got Evergrande, you’ve got Pakistan. I mean, if you want to get great interest rates, Greece, let’s talk about all that.

David: Yeah, when you get 75% returns per year, it’s pretty enticing. And this is where, again, be careful what you wish for. Your 75% may be, well, may not actually come through. May not actually come through.

Kevin: May not get your principle back, is what you’re saying. Yeah.

David: Last week’s PBOC, the People’s Bank of China intervention, diminished concerns over the severity of Omicron. Those two things ended up turning the global equity markets from fear of loss to fear of missing out. It happened pretty quick.

Kevin: FOMO. Yeah.

David: Exactly. So try not to forget that it’s not “Omnicron” that the markets are afraid of, it’s the policy responses which can cripple the economy that are of consequence to the financial markets. So keep an eye on the stats because the health officials and governors may just surprise you. And they’ve done some crazy things so far, and we just don’t know their sanity limits. 

So Omicron’s now 13% of all new cases in New York, New Jersey and Washington state, and about 3% nationally. So these are states that are doing a lot of testing and they’re finding quite a few Omicron cases. And the rapid spread is likely to have ramifications for the teacher’s unions. And when the teacher’s union starts saying, we’re not going to work. That has an implication for people who need to now stay at home with their kids. And of course, you’ll have a whole parade of bureaucrats eager to fill the shoes of petty power-tripping tyrants. 

I mean, that’s really what they love to feel, is this sense of importance in the context of crisis. And this brings into question whether or not we’ll have stag as a part of flation. And stag is not front and center with the flation, but it could quickly lock arms for that classic economic one-two punch. Inflation’s clearly here and we’ll talk about that in a minute, but if policy makers want to make much ado about Omni, then you’re looking at weak growth. You’re looking at weak growth being on the stage for the lead role in 2022.

Kevin: We were talking about easing fear when the PBOC came in and just eased again. And so easing fear in the areas where you want to ease fear and then creating fear for the control of the people. The question would be WHO is on first? And I mean World Health Organization, WHO is on first.

David: Well, they’ve got the variant categorized as the most transmissible yet, and the numbers seem to be supporting it. Fortunately, the complications are minimal. Deaths to date are almost nonexistent. I think we had our first case in the UK this week, and there’s heightened concerns over Omicron from an economic standpoint. So you get the IMF chief economist looking and saying Omicron represents this thing that could be the beginning of significant stagflation. Haven’t seen it yet, but we will see it if Omicron persists. So not only the chief economist at the IMF, but also the chief executive officer at Pfizer. He’s on point to try for another record quarter. Make hay before the rain falls, or no, it’s— wait. It’s make hay while the sun shines.

Kevin: Yeah, no, finally, finally, I was watching another commercial. I mentioned last week. Finally, the shots are here for children, so maybe Pfizer will make it.

David: But update on the FDA, the request to release the Pfizer research over 55 years for compliance with the freedom of information act request, which was made recently. Now the request, they’re pushing back. They’d prefer to spread that out over 75 years because there’s too much sensitive data in the documents and it requires redaction. And it is just under a lot of pressure. There’s not enough staffing. And it’s going to take a while to get that out.

Kevin: To release anything negative. Yeah. 75 years.

David: My 15-year-old commented when I made mention of that in the last 24 hours, “That’s awfully suspicious.”

Kevin: Oh, you think?

David: Really? Yeah. Yeah. But trust the science. It’s in motion.

Kevin: Yeah. This is why, when you’re betting against a market, Dave, if you’re betting on fear, you’ve got to be careful because if you’ve got somebody who can play with the game, you may be short a stock that may go way up. That’s what they found last week with PBOC, right?

David: Yeah and if you look at the Goldman Sachs most short index, that is companies that have been picked on for fundamental reasons, they went sky high last week. Short stocks were up significantly. Markets generally were jammed higher with the S&P hitting all time highs. And it’s pretty normal to see stocks played, gamed higher in that fashion, coming into triple witching week. That’s this Friday, we’ve got options and futures expiration on Friday. 

But it happened last week instead of this week, because you’ve got the FOMC meeting midweek here, and traders are concerned that you may have the FOMC comments, which are going to be hawkish. Which would really be like a splash of cold water in the face of the market. So they went ahead and played their games, got ahead of things, maybe booked some profits last year. Hedges were unwound, short stocks again were pushed significantly higher. Those who were short the market had a tough time of it.

Kevin: You know what my wife calls it? She says, “Got to go paint the barn.” Okay. And she’s beautiful. My wife is beautiful, but yesterday we were going out and she goes, “Give me five minutes, give me 10, I’ve got to go paint the barn.” Well, in a way, that’s what they’re saying with the markets at the end of each year, right? When you’re talking about triple witching and everybody’s trying to make things look good because you’ve got the end of the year report that’s going to say something, all the way through the next year, about how this year was.

David: That’s right. Month end, quarter end. And it’s also booking for the full year if that’s where you’re counting your year. So get the year in, run for the roses in before options and futures expiration. Call options amongst retail investors are owned at an extraordinary scale.

Kevin: Just buy, just buy. Yeah.

David: And last week, again, all we needed was an excuse. We had the PBOC and the easing of Omicron concerns, at least temporarily. And that’s where you saw the markets reverse those hedges, send short sellers back into tuck and cover mode. And that tuck and cover mode, actually, Doug and I were talking last week. And he said, “I don’t think I’ve ever told you about Caddyshack, and how sometimes when you’re short the market, it feels like you’re the gopher.” He said, “You are old enough to have seen Caddyshack, right?” I said, “Of course I’ve seen— Of course it’s a 1980s classic. Who hasn’t seen Caddyshack?” I asked people in the office this morning, there was about six blank stares. Wrong generation.

Kevin: Oh well, but I’m still trying to get his reference. Okay. So you’re the gopher in Caddyshack. Is that, could you get hit with the ball?

David: No. The gopher is constantly evading the guy who’s managing the green and trying to get rid of you.

Kevin: Okay.

David: And so it’s basically keeping your head down. You go back into gopher mode, which is survival mode, essentially.

Kevin: Well, okay. So tell me, I made the joke in the beginning about balloons and inflation. Okay. And inflation in meat and inflation everywhere else, but fixed income investors, are they just ignoring inflation? I mean, it’s costing us a lot more money, but you’ve got this high inflation and these people, or bonds seem like there is no inflation?

David: Right. So last week we have not only an increase in the rate of inflation where we’ve gone from 1.1% to 6.8% fairly quickly. And this is the same kind of thing we saw in the late ’60s, early ’70s, where we started at 2% rate. And this is of course following the guns and butter policies of the Johnson administration, and they carry over into future administrations as well. So it’s 2% and then it’s four and then it’s six and then it’s eight. And you begin to see this rapid increase. 

Well, we’ve had that rapid increase in a much shorter period of time. That, in itself, is concerning, right? But here we are with the consumer price index printed at 6.8% last week. And that’s largely ignored by fixed income investors. 30-year bonds beyond, in the face of an inflation figure that’s three times its size. Wrap your mind around that. 2% versus the fresh inflation CPI of 6.8. And for broader context, you’ve got the global debt levels, which have increased from $250 trillion, circa the global financial crisis, 2008, 2009. 250 then, 300 trillion today.

Kevin: With a t. Trillion. Yeah.

David: And this is where you can have a conversation about capacity limits on debt and no one’s really concerned about debt or those markets, as long as interest rates are controlled at a low level. And so far, you’ve got to hold the belief that, even though inflation is on the rise, interest rates are not going to be on the rise. They don’t have to be on the rise because we got a new sheriff in town. And so the central bank community has the power, has the authority, has the wherewithal to do what they will with interest rates. There will be compliance, no questions asked. No ifs, ands, or buts.

Kevin: Forget about Taylor, forget about the Taylor rule. If we were utilizing the Taylor rule right now—and of course you had John Taylor on, who basically said you have to keep interest rates at a certain level above CPI—we’d have to be over 9% right now on those bonds. So the new sheriff in town doesn’t really know Taylor, does he?

David: No. That’s exactly right. And the Taylor rule, this is not some wing-nut theory of interest rate management. It’s pretty well established, and there are not that many detractors from where interest rates need to be. And so, yeah, 9.15%, according to the Taylor rule. Can you imagine the United States with 9.15% interest rates? We’ve added, what? 12, 13, 14 trillion dollars to our debt levels, and, again, all’s well and good as long as you can keep a cap on interest rates. And that’s the reality, is Taylor has to be ignored. He has to be pushed into the corner and just treated like, I don’t know, a dunce or something, so that we can move on to a different world, a braver world.

Kevin: And we’ve seen this over in Europe. Remember when we were scratching our heads. Okay. So let’s go back seven or eight years. Greece was going to go. I mean, and it was possibly going to take Europe with it, at least the European Union. And somehow, some way, Greece was bailed out long enough to have extremely low rates that didn’t measure up at all to the risk. And two years ago, I remember on the show, you’re scratching your head going, how is it that Greece is only having to pay about what the US is on Treasury bills? I guess it’s catching up with them now.

David: Yeah. And you’re hearing the plea from the Greeks that you really should consider adjusting the programs that are in place to buy Greek debt. Greek debt is, by and large, not investment grade, and therefore cannot be purchased except through the PEPP program, PEPP. So we mentioned the expiration of PEPP in March. We mentioned that a few weeks back. And that’s where, and when, the true, or to borrow a term, the natural rate of interest is going to become obvious in the Mediterranean debt markets. Because you’ve got yields that are already diverging notably from the rest of Europe. 

And there you’ve got— the primary prop for the Greek debt markets may very well go away as we get to March. So, prior to COVID, Greek 10-year paper yielded a ridiculously low 2.4%. And that’s ridiculous all things included. The ability to collect taxes in Greece, the credit quality implied by past performance on loans. As you mentioned, the 2011 and ’12 debt debacles in Europe. And so here we are at an unnaturally low level at 2.4%. And then central bank purchases offset debt, brought the yield as low as 50 basis points for Greek 10-year paper. And that just redefines ridiculous. That’s redefining ridiculous.

Kevin: Buy everything. That’s what they did.

David: And now the rates are back in the 120s. So 1.2%. Under one and a quarter with the spread to German 10-year paper quickly widening, as investors are quickly realizing that prices are not guaranteed forever. So, I mean, negative 39 basis points for German paper versus the 1.2. So that spread is beginning to widen. More on that in a minute.

Kevin: Okay. So the question would be, you’re a fixed income investor. Where would you invest money right now?

David: Well, if you’re purely pragmatic, I mean, the question is where are you best able to make a buck? We’ve forgotten that risk is a variable anymore. We’re really not concerned about getting our money back.

Kevin: Central banks have your back. They have your back.

David: Yeah. We believe principle’s coming back. The only thing you need to be worried about is the interest component, and actually where the central banks are going to continue to buy, because then you can, in spite of financial repression, continue to make money on a trade. Look at the income component solely. 

But I’m going to go back to when you might have said, if you buy a bond it’s for the income. So if you’re creative, if you’re clever, if your mind wanders all over the globe, you might find yourself in Pakistan. It’s an outstanding place to buy government paper.

Kevin: There’s a winner. They do have nukes. I mean, may as well just buy bonds wherever they have nukes.

David: Yeah. There’s that. I mean, and right now Turkey’s not in vogue, but Pakistan, it’s an outstanding place to buy government paper. And yes, in today’s curious world of dumb and dumber, or curious and curiouser, Pakistani debt yields 8.75%. And with an inflation rate of 11.5%, believe it or not, it’s a superior real return to German 10-year paper.

Kevin: Wow.

David: Or US Treasuries. So just do the math. 8.75 versus 11½ percent inflation.

Kevin: Which means you’re negative two or 3%, right?

David: Yeah. German 10-year paper is negative 39 basis points on a 6% inflation rate. Or even the 10-year Treasury yielding a generous 1.45% with an inflation rate of 6.8. Maybe this is just short-term snapshot, right? And the German-American rate club would point out that you’ve got better tax collection ability in Germany or in the US, and you’ve got better political stability. I guess it’s arguable. You’ve got economic trajectory, which, in the west, is different than Pakistan. And so, in the long run, where do you want to be? Maybe you do want to be in German and American paper as opposed to Pakistani paper. But as Keynes so elegantly and drearily pointed out, in the long run, we’re all dead.

Kevin: Can you believe we’re here, where, you remember in the old days, people would call in, they’d say, “Hey, I’m getting an interest rate at this bank that’s positive such-and-such or positive such-and-such.” What we’re actually comparing here, and we’re bragging on, is I’m only getting negative 2.75% in Pakistan. What are you getting in Germany?

David: That’s right. So negative 2.75%, that’s more attractive than negative 6.39% in Germany. And I’m using the German rate of inflation as measured by all Europeans. Again, using a standardized measure for inflation. If you want to be generous, add back 80 basis points. 5.2% German inflation, as they want to measure it. Again, these measurements shift all the time. And finally we’re talking about the US investor tied to the mast of the risk-free rate. And the US investor, you take your 1.45, subtract 6.8, and you get a slightly better looking—slightly better looking, relative to the Germanic equivalent—minus 5.35. So indeed, at this moment in fixed income history, you’re making more money in short-term Pakistani paper than either German or US Treasuries.

Kevin: You’re losing less money. I’m sorry. I’ve got to rephrase that.

David: That’s fair. That’s fair. But my hat’s off to the officials in Lahore. At least they’re willing to name the beast of inflation for what it is, a dragon menace worthy of slaying.

Kevin: Okay. So, granted, I can’t tell a joke. So the balloon thing probably didn’t even work, but I wasn’t surprised that balloons went up because there’s always inflation in that business. There’s always a way that you can write something up. Look at our people right now. They’re just saying, imagine away inflation. It’s like, don’t worry about the inflation dragon. It’s not really there.

David: Right. So if you’re in Pakistan, you say, okay, we’re going to raise rates. Raise taxes. We got to get ahead of this. Nobody’s going to be happy. But take the hard medicine and maybe we can recover. Meanwhile, the West adopts a new strategy for dealing with the dragon menace, inflation, close your eyes, dream of pleasant days and ways in which you’re happy again, and you have the resources to pay all your bills. And so it’s sort of an adaptation from Descartes’s cogito ergo sum. If you imagine, therefore it will be. Not, I think, therefore I am. It’s, I imagine, therefore it will be. We’re simply erasing the CPI equation and changing the parts and pieces and weightings. And I say new because really there’s nothing new here. We’ve altered the CPI math as often as politicians have needed to look better, and that’s pretty frequent. So what are we saying?

Kevin: Well, what we’re saying is an election year is coming, Dave. So it’s time to change the mix.

David: That’s right. And the BLS is changing the CPI weightings in January to reflect, as they say, in their news communiqué, consumer expenditure data from 2019 and 2020. So just in time for the midterm elections and a confirmation of Brandon’s prophetic proclamation this week, that the worst of inflating prices are now behind us. And he knows that. He knows that because it’s factual, it’s about to be statistical. 

Adjustments are coming and just in the nick of time. If the numbers are dragging you down in the polls and inflation is reflecting poorly on your presidential tenure, change the numbers. It’s not that hard. It does speak to Biden. And, again, this is a non-economist leaning heavily on the economic experts that have, well, let’s be honest, they’ve underestimated inflation to this point and are now very much behind the curve. But some things we know for sure, like when a game or a match is fixed, then you can be pretty clear on the outcome. And that’s where Biden says, I know that inflation is going to improve from this point forward.

Kevin: So in the 1970s— I grew up in a family that loved flying. So in the 1970s, there were a series of movies that were very serious. And for me, very compelling as a kid. The Airport movies, Airport, whatever the year was, ’75, Airport ’77. I can’t remember what it was, but it set up this almost this situation, for me, I dreamt of. Okay. So a Cessna flies through the side of a plane. The pilots are taken out. All they have is Kevin sitting back in the back, he’s got to go land the plane. Those were serious movies at the time, but do you remember? Okay, Leslie Nielsen.

David: 1980.

Kevin: Yeah. They were like, okay, we’re going to take this to the absurd.

David: Airplane.

Kevin: Airplane. And there were other movies, because we had Towering Inferno back in the ’70s and we had all these serious things. But the absurdity, the absurdity of how Leslie Nielsen could show humor in a situation like this. We’ve got a situation. It truly is Airport 1975 or whatever. And we really do have no one flying the plane, and we’ve got Leslie Nielsen, except for people aren’t laughing. They’re actually assuming we’re going to take it seriously.

David: No, I know. It feels like a Nielsen movie. I mean, and the difference is that the absurd is supposed to be convincing.

Kevin: They want us to believe it.

David: It’s supposed to be credible. Right. And in policy circles anyways, this is supposed to all be— Again, we’ve been through the modern monetary theory conversation, we’ve been through— This is all supposed to be making sense to us instead of being comedic and entertaining. That’s what we had in the movies of the ’80s. You had Airplane, you had The Naked Gun. By the time you get to the nineties, you’ve got Robin Hood, Men in Tights. And again, it’s farce. Now we’ve got one giant fiscal farce and how Biden lands the plane is going to be interesting. You remember the stewardess in Airplane? By the way, is there anyone on board who knows how to fly a plane? And then of course there’s mass panic in the marketplace.

Kevin: Right.

David: But that’s what we’re dealing with, is we don’t have anybody flying the fricking plane and yet everybody’s gut calm. We haven’t gotten to that question being asked, does anybody know how to fly this plane?

Kevin: So I think we ought to address. There are several entities that could be blamed for inflation. One is the Federal Reserve and you have Federal Reserve ex governors right now who are blaming the Fed for making the decision for inflation. That’s one of several places that we could put blame, but let’s start with the Fed.

David: Yeah. Well, and so adjustments are coming in January. That’s going to be the case going forward. The inflation statistics should improve because they’re measuring, weighing, and counting things differently.

Kevin: The beatings will continue until morale improves. We just know at this point—

David: Until the numbers speak the truth, we want our truth, my truth. Adjustments are coming. How they count inflation, that’s going to shift. It’s going to better reflect 21st century reality. And by 21st century reality, what we should be saying is political reality. It’s the new acronym for PR, political reality. 

Kevin Warsh, who you were talking about, is an ex-Fed governor. And he was in the Wall Street Journal this week, saying, “The central bank has enabled price increases that may soon pose a risk to financial stability.” He went on to say, “If price stability is squandered, financial stability is put at risk. If financial stability is lost, the economy is imperiled and the social contract is threatened. Inflation is a choice. It’s a choice for which the Fed is chiefly responsible. The risk of an inflationary spiral arises when policymakers first dismiss the problem, then cast blame elsewhere. Inflation becomes embedded in the price formation process when the central bank acts belatedly with insufficient conviction. To date, the Fed has acted as an enabler. The Fed now has fewer degrees of freedom to keep the economy out of harm’s way.”

Kevin: Well, and probably the thing that’s the most concerning about what he’s saying is when he says the social contract is threatened. What he’s really saying— Those are fancy words for, that’s the only thing that keeps us from war with each other. Okay. The social contract is a peaceful way that everyone somewhat agrees on how to keep the peace. So I agree the Federal Reserve, we’ve talked about this for years, the Federal Reserve is at part to blame. But we’ve had central bankers on this show that say, wait a second, this can’t be all on us. This thing’s going to be really, really bad. We have to also look at fiscal spending. We have to look at other elements outside of the control of the Federal Reserve.

David: Well, and you get in this mindset of it’s just money, money, money, money, money, and who cares? It’s just a little bit more, a little bit less, what are the consequences? And what Kevin gets at, Kevin Warsh, the social contract being threatened. It’s the same theme that you pick up in When Money Dies, the classic book on inflation, that it’s not about statistics. It’s about human story. It’s about human pain and suffering. And it’s about what happens within a culture as it deals with a tremendous amount of fracturing. And it’s not just a fracturing of money and an appreciation for the value of money.

Kevin: No, this is life and death. This is starvation.

David: That’s right.

Kevin: Yeah. We see that. I mean, Afghanistan right now. But you look at this and so this isn’t just going and paying 20% more for beef that I can still afford, thank the Lord. But this is actually not being able to go to the store and buy anything.

David: Yeah. Well, I mean, I agree with Warsh on the enabling comment, and I agree that the Federal Reserve has set the stage for financial market instability. And, to be fair, it’s not the Federal Reserve solely, but you can throw in the ECB, the PBoC, the BoE, the BoJ, all the acronyms for the world central banks. You can throw them into the mix as well. What needs to be added is that fiscal policy, helicopter money.

Kevin: Yeah, but don’t say that until they pass this bill. Don’t say the word fiscal policy.

David: Fiscal policy has contributed to consumer price inflation in a way that monetary policy did not do for over a decade.

Kevin: Right.

David: So the intolerable inflation is the one that angers the average household, who is in the position of being unable to make ends meet. No one cares if their assets are worth more. That’s a tolerable inflation. No one cares if they’re wealthier. Everyone cares if their savings buy less.

Kevin: That’s critical. So it does not matter what your stock portfolio does if you can’t afford to go to the store.

David: So Biden’s out to redefine our understanding of inflation with the help of the Bureau of Labor Statistics. And then he can shift the blame to the Fed for creating a mess while he will continue pushing spending programs blessed by the likes of Janet Yellen and sponsored by her as non-inflationary.

Kevin: That’s non-inflationary. Trillions of dollars.

David: She said back in October, “I don’t think that these investments will drive up inflation at all. First of all, they’re fully paid for and not by imposing higher taxes on anyone earning under 400,000.” Then she went on to say, “For many American families experiencing inflation, seeing the price of gas and other things that they buy rise, what this package will do is lower some of the most important costs, what they pay for healthcare, for childcare, and it’s anti-inflationary in that sense, as well.” So if I get this right, if I understand Janet correctly, the Build Back Better is anti-inflationary. Isn’t that amazing?

Kevin: Wow.

David: So, I mean—

Kevin: And we’ve never lied before, is what they say. We’ve never lied before.

David: Where is the credibility here? The congressional budget office has already looked at the, quote unquote, zero cost Build Back Better proposal. And they assign a price tag of $4.9 trillion.

Kevin: That’s two and a half times what they say it is.

David: Okay. So what’s the difference between friends? Is it zero cost because it pays for itself or 4.9 trillion? What’s the difference? What we’re learning is that statistics and number crunching can tell any story you like. So the Fed bears some blame for inflation. Yes, absolutely. The massive increase in money supply is truly consequential. The fact that they have artificially held rates lower has created bubble dynamics, the like of which the world has never seen. I’d just like to add the elements of political pork on a scale never witnessed in American history. Because I think if you look at what historians have agreed is the most expensive war we’ve fought, $4.1 trillion. If you go back to World War II, $4.1 trillion. When you adjust for inflation and bring those numbers into the modern era, Yellen wants to build a case that this is a disinflationary choice. Now I want to know what grandma’s putting in her cookies these days.

Kevin: It makes me think of John Denver. Remember his song? Rocky mountain high, Colorado— There’s a lot of shops around here that have the little green cross on them.

David: Green cross.

Kevin: Yeah.

David: Yeah. Like your salvation is in the cross. The green cross.

Kevin: The green cross. So Rocky Mountain high. Okay.

David: Yellen is—

Kevin: But I want you to repeat what you just now said, because if World War II, adjusted for inflation, cost us $4.1 trillion—

David: The CBO projects that the Build Back Better program is not what’s estimated and it’s not going to be, call it a $2 trillion cost. They’re saying no, it’s going to be 4.9. And that will be the hard cost. That’s not—

Kevin: That’s more than World War II adjusted for inflation. That’s more than World War II.

David: That’s right. So asset prices have been sent to the moon on a central bank rocket booster. Consumers are suffering from budget pressures, which reflect a post-COVID supply chain and government-induced spending spree. We talked about that in recent weeks as excess demand compliments of the stimmy checks.

Kevin: So if we’re not buying gold, is our only other salvation Pakistan? I mean, we were joking about, hey, I’m only losing 2% in Pakistan.

David: Yeah. Yeah. Before you completely move away from Pakistan, how farcical is the world we live in when buying Pakistani government bonds puts you ahead of buying US Treasuries or German bunds?

Kevin: Think Liam Neeson. Again, think Liam Neeson.

David: Yes. The absurdity is, as Kevin Warsh indicated, compliments of the Fed and their international colleagues. I just don’t want to let anyone in Congress who’s passing these massive boondoggle programs, fiscal policy programs— They’re not off the hook. They’re not off the hook at all.

Kevin: It’s fascinating to me, Dave. Gold’s been held in check somewhat this year and the question’s been coming up, why isn’t it keeping up with inflation on a moment-to-moment basis? And I can tell you, after the 34, 35 years that I’ve done this, gold will lay sideways and then all of a sudden make up for lost ground. So I remember when it was $262 an ounce, and now it’s close to $1,800 an ounce. So when you draw a line, gold keeps up with inflation, but there are periods of time where there’s opportunities to see something a little better than a Pakistani bond. Okay.

David: Well, I mean, let’s come back to Greece for a minute because I think timing is everything.

Kevin: Okay.

David: Timing is everything. And they can’t reasonably get a credit upgrade. They can’t reasonably get a credit upgrade out of junk status and back into the lowest tier of an investment grade debt, until after the 2023 election. They’ve got an election that year. It’ll be after that, that they have a shot at— assuming that their economy continues to roll ahead and gain some momentum. But as we mentioned, there’s the PEPP program, which has taken tens of billions of Greek debt into its coffers. And that ends in March. The asset purchase program, that’s going to stay in place, but they won’t let any junk bonds go into it. So that’s the limitation. That’s why the Greeks are hollering, hey, wait a minute, don’t stop buying our bonds. We kind of need you. The ECB does get to recycle the money already in Greek paper, within the PEPP program. And they’ll just continue to buy Greek paper with that, recycling and—

Kevin: Will that be enough?

David: No, no. It’s 12½ billion. They estimate 12½ billion euros a month will still be recycled to Greek paper. And that is not enough to keep a lid on interest rates. This just tells you, again, theater of the absurd is what we have in the financial markets today. And so when you begin to look at gold’s underperformance relative to inflation, I would say, look, the next big move in gold actually has very little to do with inflation. Inflation is obvious, and no, in fact, we’ve made the case on the program before that gold is not your best inflation hedge. In the sense that, on a day-in, day-out basis, it’s not like a half a point moved lower in the US dollar represents a half a point higher in gold. There’s not that tight of a correlation.

Kevin: Not in the short run.

David: Not in the short run. On a longer-term basis, the correlation is much better, but the next move in gold really has to do with, again, this resurgence of fear within the financial markets. When we saw underperformance in equities between 2000 and 2012, that was a period where essentially the NASDAQ, Dow, and S&P were down to sideways for over a decade. Your returns were negative the entire 10 to 12 years, and gold and silver were up 500 to 600%. The next migration into gold is going to be based, not on a motivation of do we choose bunds? Do we choose Treasuries? Do we choose Pakistani bonds?

Kevin: No, but this is the big one. Because when people move in fear, gold will go well beyond what it should be at, actually.

David: That’s exactly right. So the frustrations that people experience about inflation this, inflation that. We are not done with inflation. So keep in mind the markets and the way people are allocating money today is with the idea that inflation is transitory. Even though we’re dropping the language and the Fed is dropping the language, there still is the ingrained belief, and you can see it in the 20- and 30-year bonds, no movement. No movement. We get a 6.8% inflation CPI number and there’s no movement to speak of in the long bond. No movement across any part of the yield curve. 

What does that say? People are saying, like Biden said, the worst is behind us. Inflation’s going to get better from here. We’re not worried about that. I can tell you what will worry the markets, and that’s capital losses. It’s capital losses. And the migration to gold very much predicated on those footprints, coming out of equities and risk assets into an inflation hedge. Yes, but also a volatility hedge. If you’ve watched the market over the last two weeks, one of the most fascinating aspects of behavior is how radical the swings are. We’ve got crude oil up 8% this last week. We’ve got it down 10% the week before. I mean, we’re seeing massive swings that suggest that we are at the end of a cycle. And you’ve got major players trying to decide how they’re going to position for this.

Kevin: Pakistani bonds or gold?

David: I think, for my part, even though you’re doing significantly better in a Pakistani bond than you are a US Treasury, I’ll take the gold.

Kevin: I choose gold, too, Dave. And let’s remember that we are still asking our listeners to send us questions for the end of the year question and answer program.

David: Send them ASAP. We’ll get to them. We look forward to it, but please don’t delay.

Kevin: Send that to And that’s spelled, And you can call us if you have questions you want us to answer at 800-525-9556.

This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.

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