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The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

“The last eight to nine years there has been no chaos. What’s the need? Let’s have a robo-adviser, let’s have artificial intelligence manage our money for us. And in a perfect world where prices are marching higher and there is no resistance to the march of progress, maybe that works. But in a period where you begin to see a market sell-off, it’s much easier to rationalize the engagement of a professional in that way.”

– David McAlvany

Kevin:Welcome back, Dave. You’ve had quite an adventure since the last time you were in the studio.

David:Currents and waves. Currents and waves. Lots of them.

Kevin:You swam the channel between Nevis and St. Kitts?

David:Yes, about a two-and-a-half mile gap through the shallows. But some decent currents, and on certain days with a little bit of breeze it will roll you a little bit.

Kevin:You said it was a little choppy. We had done that half Ironman in Hapuna Bay in Hawaii and it was like swimming on glass. It was beautiful. But you said that in this particular case you sort of had to pay attention to the tide current a little bit.

David:Yes, I absolutely did, but it was a great challenge, and about twice the distance that you and I have done in Hawaii, and the longest I have done in open water so far.

Kevin:You slayed another giant. I remember two years ago you talking about, “Wow, I saw people doing that, and I think I’d like to do that.” I looked at you like you were crazy and here you are. It reminds me, I was reading Fred Hickey the other day. He was talking about something in relation to tides. He said, “When I’m in Costa Rica there are times when I go out and walk the ocean. He said, “If I went out every time when the tide was high I would think the tide was always high.” The problem is the tide isn’t always high. And he likened that to the market conditions over the last eight years. He said, “The guys in this marketplace, the guys who are running the money, or at least the algorithms, have never seen the tide go out. They have only walked outside when the tide was high.”

David:In terms of appreciating market dynamics and the ebbs and flows of the market, I’d encourage you to register for the tactical short quarterly call at That is next Thursday, April 19th. Doug Noland and I are going to review market dynamics, trade tariffs and higher rates. That will be at 4:30 Eastern Standard time. You can either go to our website or click on the link there on our page and learn how our tactical short has become, in our opinion, the smartest hedge for a long equity portfolio.

Kevin:That’s partially for when the tide goes out, is it not?

David:Yes, as volatility increases, as valuations push the outer bounds of reason, it will help you learn how we are managing the tactical short as a hedging tool, and opportunistically, as a money-maker as stocks sell off. This is by far the most challenging environment Doug has ever been in – 25-30 years of experience and this is putting him to the test. You don’t want to miss the conversation. He is alive and excited and absolutely intrigued by the dynamics in play. If you want, submit your questions ahead of time if you would like for them to be aired.

Kevin:As I was saying, when the tide goes out you have to react differently. Whether you are a boat captain, or whether you are swimming a channel, it’s a different factor. And you said that you had currents that you had to deal with, as well. In a way, the last eight years in the financial markets have not really had any challenge. There is no current because the Federal Reserve has just smoothed things over with quantitative easing and the artificial lowering of interest rates, and so I would highly recommend our listeners listen to you and Doug Noland talk. Again, that’s at 4:30 EST.

David:Remember to register ahead of time.

Kevin:You know, Dave, while you were swimming the channel, we were playing the program with Becker Polverini, just trying to make people aware of what is going on in the cyberspace world. And that is a truly real world, as intangible as it feels. We’re losing our privacy very, very quickly. While you were over there we had the Facebook thing blow up, so the timing was perfect in having Becker Polverini on this show.

David:Right, so whether it is Internet privacy or the sociological changes resulting from social media interactions, that may feel like it’s big picture stuff, but it’s very important. It’s very important for us, it’s also important for how we engage in the markets. In the markets we saw Facebook, which as you say was criticized for privacy issues, down 18% from early February.

Kevin:So it’s not just being aware of what they’re doing, but it did have to do with the markets after all.

David:Yes, and at the same time Facebook has had to deal with ongoing concerns – this gets to the core of its business model – over advertising reach legitimacy. Are there people who are actually viewing the videos and clicking on the links, or is it bots and robots? So there is an inflation of views and viewing time on the videos. Varying assessments have been that that inflation of numbers could be anywhere from 20% to as high as 60-80% inflated. The claim there would be fraud, and frankly, that does damage their business model if this sticks.

Kevin:One of the things I remember my dad asking me all the time – he could not understand the Internet because he said, “How in the world do they make money if all of this is free? Why is this happening?” I think what we see is, the way that you actually bring the dollars and cents in is either you charge people for clicks, and that’s what Facebook is doing, and then now they are being accused of having robots doing that and still charging. Or you monetize people’s personal data. Twitter is being accused of that at this point.

David:Just one more thing on Facebook, they also had, while I was gone, the executive memo leaked which was rationalizing terrorist use of the platform, and that has not gone over well either. But the greater good would be served by the platform, so all of these bad things that might be tag-alongs, we have to live with them. Again, it just didn’t go over well, and I think, as you mention Twitter, on the positive side, they’ve earned 400 million dollars on a gross basis from data licensing. What is data licensing? We have learned from Becker in recent weeks that that is really a euphemism for monetizing and selling individuals’ personal profiles and online information.

Kevin:We talk about things coming for free, too, online. And these companies have not necessarily had to be profitable for a long, long period of time. We’ve talked about Tesla, but even Twitter has not been a profitable company until this last quarter, I don’t think.

David:That’s right, after 12 years of being in existence, they just had their first profitable quarter thanks to that reselling of your data, otherwise known as data licensing.

Kevin:I mentioned Tesla, which hasn’t really had to really have a profit either. We’ve talked about how their stock continues to go up, but they continue to lose money.

David:The boys and I love to watch SpaceX, and love to watch what we are now doing to feed the international space station, and Musk is involved with that. It is absolutely fascinating. And just as you had a fascination with space as a young boy, I’m watching their eyes grow wide as saucers as they watch rockets not only take off, but then land themselves again for re-use later. There really are some marvelous things happening, but one of the most marvelous things that could happen for his other company, Tesla, is that they do turn a profit. It hasn’t happened yet. They are down by 34% since September.

Kevin:Yes, but they did launch a convertible into space. Given them that (laughs).

David:Of course, that’s unique. Yes, I suppose, if you don’t have to turn a profit, you can just launch crud into space. But they’ve got 123,000 vehicles that are being recalled, and again, it doesn’t help them, having reached a peak in September of 2017, they have been in a downward trend since then. I think it was notable this last week, there was press coverage of the Saudis looking sort of a post-oil economy.

And they are in talks with Richard Branson, also an innovator, also a serial entrepreneur, but they’re not in talks with Elon Musk. Branson, quite frankly, has more winners than losers at this point, and Musk is, I think, to some degree still riding the credit boom and relying on investor hope. At least, he has been accessing the markets for more and more credit and capital from investors to run his businesses, because they are not running themselves on a profitable basis yet.

Kevin:I think of 1999, when people really felt like they were out of it, socially, if they weren’t captivated by the latest technology. So we had this tech stock bubble and things were coming up that seemed unreal but they were more profitable than things that were real. What we have had is this fanaticism now for bitcoin, ethereum, V-chain – this whole blockchain technology formed in cryptocurrencies. I think we need to look back just a single quarter, I mean, really, just a quarter to the size, bitcoin and cryptocurrencies in general, were over 825 billion strong, as far as capitalization. That has changed, hasn’t it?

David:That’s right. The peak in December of 2017, if you added them all together, mash them all together, 1597 different cryptocurrencies had a total market value of 825 billion. Currently it is sitting at around 253 billion. So for most stock market practitioners, they view 20% as a pretty serious correction. So I guess the question is, what is 70%? Because that is what we have had. Is that a collapse? Anecdotally, I must say, nine out of ten people I know who have really bet the farm on cryptocurrencies still own everything they did before the decline. And I think because of that there is another round of selling which is possible.

Think about what is involved in a capitulation. Capitulation is one part price action where the price is declining, but it is one part psychological revulsion, as well, and the revulsion in the cryptocurrency world is far, far off. You have that fanaticism which hasn’t been damaged at all. Of course, the uses of at least a few of these cryptocurrencies will continue to have a profoundly disruptive impact on the way things are logged and tracked and remembered. But remember the price action of late 2017 – October, November, December – radical spikes to all-time highs. That took place in the broader context of a final push higher in a nine-year-old equity bull market.

So you have enthusiasm and bullishness, in general, which found a focal point more narrow than, say, the biotech or the social media or the AI. It found a focal point in the cryptocurrencies, in a currency maybe soon to be or want to be. But now what are the big headwinds? The big headwinds going forward are central bank and regulator crackdowns, which are going to be very tough to work around. My suggestion is that the ones that survive will survive only if they have been co-opted.

Kevin:Speaking of tech that now has to fear the government, in a way. Amazon right now is in a fight, not with the post office, but with the oval office.

David:(laughs) It leaves you pretty vulnerable in the marketplace because when governments decide to interfere it’s a big deal. All you have to do is ask the oil conglomerates and the rail barons of old how the fight with D.C. actually felt. Amazon has a market cap north of 725 billion dollars. Can it maintain that? Now we’re talking about a fight, as you mention, this is oval office. This is a street fight. And I think time will tell if they can maintain that kind of market cap. But you have bear market pressures emerging in equities and then political pressure rising. My suggestion is, they cannot maintain that value.

Kevin:We talked about the difference between the virtual and the real, an underappreciated move since December of 2015, the last couple of years, has been the gold miners.

David:2016 was the year that put them back on the radar, 2017 fairly lackluster, and nothing really to speak of here in 2018 either. But off of the lows in December 2015 the gold mining sector has outperformed the NASDAQ 100. This is amazing because the NASDAQ 100 can do no wrong, and yet on a relative basis, during that timeframe, the gold mining sector has outperformed the NASDAQ 100. I don’t think anybody has noticed.

And this small niche sector in the natural resources is, in our estimation, going to be the big winner over the next two to three years. If you’re looking at a speculation, and as tech faces challenges of an extended multi-year bear market decline, I think gold marches to new highs and it takes some of these miners with them.

Kevin:I remember 31 years ago before I actually took this job, Dave – we’ve joked about it before because I applied three times, I went through the interview process, and over time I was accepted into the family as far as ICA and McAlvany. And it’s been a great ride. But I remember when I was thinking about if this was a career change that I wanted to make, I was trying to understand what it was that we did – what we do. I thought about history. All of world history sort of goes from a representation of wealth or value to the real thing, and then back to the representation, and to the real thing. I’m counting paper currencies as a representation, a debt – paper representations of things.

What we do here, actually, for the most part, is the real thing. Gold, silver, platinum, palladium – we talk about oil. We still live in a world where you need real things. Now, why would we be negative, necessarily, on tech? We have shifted with the tech industry, which is mainly a virtual type of thing. Most technology is virtual. We have shifted from that after the crash of the NASDAQ, what we call the tech stock bubble crash back in 2000 that I was talking about before. But at this point tech seems to be doing something very similar to what we had back in 1999 before that crash.

David:Over a long period of time, you’re right, what we see is a migration of money, and it is a migration of money depending on a particular popularity of a theme or growth in demographics or organic growth within an economy. Why are we negative on tech? Because it seems that the kiss of death is often success. When you see a migration toward one area or one sector within the economy, and when any sector grows to an over-weighted or bloated level, it’s almost as if it’s gotten ahead of itself, and then it has to allow everything else to catch up.

So that either means it stays put and doesn’t grow anymore, or it actually recedes in value. So you think of the gold market in the 1970s. It exceeded 25% of the value of the S&P 500. You look at different times where either tech or financial stocks have also gone north of 25% of the entire index. And when any sector grows to be an over-weighted component north of 25% it has grown beyond a reasonable weighting relative to its economic contribution, and in that sense has become a speculative magnet. Attracted too much interest, it has pushed prices in that sector to levels that are nearly impossible to maintain.

So the overall tech sector today is north of 27%. It has doubled its percentage of the index, the S&P 500, over the last six years, and is to the point where you say, where does it go from here? This is, again, a question of monetary migration, but it is about time to see the migration to something else.

Kevin:As we see this migration, maybe we’re going from the virtual, now back to the physical, but I can’t help but think about silver. The way we view silver here with in the walls of this office is, every time we buy silver we’re actually thinking about doubling our gold. That’s what we think when we think about silver. But silver really has lagged behind gold over the last two years.

David:I understand the importance of technology in the sense that people migrate there because they see an infinite horizon, infinite possibilities, all of the changes. When you think about Moore’s law and the speed with which things are changing…

Kevin:Every 18 months doubling the data capacity.

David:It’s very difficult to argue that tech has a very big future, but where you see a shift back toward tangibles and away from – let’s call it an intangible or more ethereal wealth – it’s when there are concerns. So it’s based on concerns that people look at gold and silver and say, “I just need to have something, something in my hot little hand, something that is real, something that is physical.” It’s the same reason that people buy farmland or art or things that are substantial, because you just gain some comfort from presence versus, again, ones and zeroes in the digital ether.

Well, silver has lagged gold for two years. I guess another way of saying that is, it has underperformed terribly for two years. I don’t expect that to continue. Over the last year, silver is down two dollars. If you go back 12 months, it made its way into the $18 range, and here it is now a buck-fifty to two bucks lower than that. But I don’t expect that to continue. The ratio currently between gold and silver is above 80-to-1. North of 60-to-1 there is a compelling value play in silver, relative to gold, with a very rare stretch of that number to 100-to-1. This is a ratio that we play over time to maximize ounces, and it takes years to play out as the ratio swings from one extreme, a low number, to a high number, anything north of 60. And it is obviously most effective to play that ratio in tax-deferred accounts where the exchange has no tax consequence.

Kevin:Like an IRA.

David:Yes, and it’s a game that we play for free ounces over time. If you are positioned in metals for a long period, I think you should talk to our team about maximizing the ratio if you haven’t already.

Kevin:The maxim is sort of, if you want twice as much gold in a few years, buy silver now at this ratio.

David:That’s right. There is a curious set of numbers from the COT reports which the commodity traders – there are different segments within the commodity trading segments playing the paper market. We’re talking about futures contracts only. But there are speculative shorts and longs, there are commercial shorts and longs, the folks who are actually in the business of.

Kevin:They may even be working for a silver mine and trying to hedge the mine.

David:Sure. So the commercial traders who are often early in their positioning, just remember that they are very rarely wrong. And we have reached a new all-time low net short position in your commercial traders.

Kevin:So what does that mean? That means that they are not betting that it is going any further down?

David:That’s right. It means the group has assumed the downside in silver is minimal, and the upside is worth waiting for. So what do you do? You take your shorts minus your longs and divide that by your interest. Again, that puts the net short position in the first quarter of 2018 at the lowest levels recorded – ever. And by ever, we mean going back to the period of time when that data was first kept, 1986, when that log was started.

Kevin:Not to at all neglect gold, in fact, just this afternoon we received boxes of Gold’s Next Wave, the special report that you wrote, Dave, that we are happy to send to listeners. In fact, we should talk about that.

David:The next wave has already begun. We’re 30% into a significant move higher for gold and I think transitioned from being off the radar for investors to glaringly obvious and on the radar for most investors will be the break above $1400, really $1370-ish, but $1400 sets what is likely to be a two to three-year trend. Anything above that number, adding $1000 an ounce is going to take less time than it has taken going from $1000 to $1300. And we talk about some of those dynamics in that special report. The context is really set for that third wave. If you’re interested, feel free to give us a call and we will send it out to you.

Kevin:Call that number, 800-525-9556. Just let them know that you want to have Gold’s Next Wave, and we will be happy to send that to you. You know, each crash that we have been through, and Dave, in most financial industries the guys who are working there may have only gone through one crash, if even that, in their career. When we go through crashes a lot of times we have to say, experience matters. Have you ever been through this before? Someone is managing your money and the stock market is down 1000, 2000, 3000, 4000 points, you’re going to want to know that the guy who is managing your money has been through that before.

David:I was born in 1974 at the tail end of a recession, in the middle of a crash, and I have to tell you, I don’t really remember much of it.


David:I do remember a little bit more of the crash in 1987 because of just the weird dynamics in our house and the things that we would talk about around the dinner table. But I really remember 2000 because that is when I started to cut my teeth on Wall Street with Morgan Stanley. And then, of course, 2007-2008 we were smack dab in the middle of it, as well. So I’ve seen two already, but according to Marc Faber, more than 50% of the people employed in the financial sector today have never experienced a bear market. Having experienced managers working with you in the context of chaos is critical.

You could say, “Well, look, the last eight to nine years there has been no chaos. What’s the need? Let’s have a robo-adviser, let’s have artificial intelligence manage our money for us.” Look, all I can say is, in a perfect world where prices are marching higher and there is no resistance to that kind of march of progress, maybe that works. But in a challenging period, in a period where you begin to see a market sell-off, I think that is where all of a sudden it’s much easier to rationalize the engagement of a professional in that way.

Kevin:Just off the top of my head, just thinking about this office and the McAlvany Wealth office, you have Doug Noland, you have Dave Burgess. These guys have seen two to three crashes, themselves. I can think of three crashes that I’ve been at this company through starting in 1987, and I can think of a handful of people here at the office…

David:Three to four.

Kevin:Three to four.

David:Right (laughs).

Kevin:So yes, there is experience. But there is something else, though, Dave. It’s not just the market managers that haven’t been through a bear market, you have a whole slew of baby boomers that have retired who have never been through a bear market while they were retired.

David:And that’s the key because they saw it in 2001 and they had time to recover. And they saw it in 2007 and 2008…

Kevin:They were still working.

David:And they’ve had time to recover, but the reality is, there is not sufficient time to recover should they find themselves in an awkward position. So I think the bear market is going to season many a young investment professional and I think it is going to separate many a boomer from their retirement hopes and dreams. And in some respects it will carry the elements of the bear that stretched from 1968 to 1981.

You had the very acute phase which I mentioned just a moment ago, that recession circa 1973-1974, and frankly, those two years were the years that brought everyone’s attention to the price action in the Dow, which to that point had been kind of ambiguous. The market was volatile, but it was range-bound, it wasn’t disastrous. There was just enough in the markets to keep people hopeful. 1973-1974 really got dicey, but in large part, because you were range-bound, a lot of investors kept their seats hoping for the best.

So again, it was not the cataclysmic 1930-style collapse, but kind of a grinding sideways in between the Dow 600 and 1000 on the index, and it just floated for over a decade. But the problem was the real returns were damaged more and more as inflation went from the equivalent of a low-grade headache to sort of seizure-worthy migraine status. Inflation really began to exaggerate the downside in terms of real returns in that period.

Kevin:I sometimes wonder if it’s not better to just have the 30% or 40% crash versus this grinding on, because people don’t really realize what is occurring to them. The inflation is just eating them alive and they’re getting no returns.

David:(laughs) It took the better part of two days for my daughter to toy with the Band-Aid that was on her arm. It was half off and it hurt so bad.

Kevin:She wouldn’t pull it off completely.

David:No, she wouldn’t. It was too painful. So I just walked by and in about a nanosecond it was gone. And she looked at me like, “What have you done?” And then all of a sudden it was like, “Oh, I’m glad that it’s done.”

By the late 1970s, it was a disaster. Remember, again, in real terms, because inflation was the deal, the real deal by the late 1970s was a total disaster. And anyone who had stayed in with the hope of financial market gains ended up being the biggest losers.

Kevin:Yes, but if you owned gold…

David:Yes, if you owned, frankly, any tangible assets in that period of time, you were one of the biggest winners. You were one of the smarter ones. Now, of course, selling those assets at a high price, at the zenith, was also wise. The Bass brothers come to mind. I have told the story many times, but for new listeners I think it is worth retelling. The Bass brothers, a Texas family, made their fortune in the oil patch – oil, gas, land – all very real things. They brought in a gentleman by the name of Richard Rainwater. He came over and worked for them from his stint at Goldman-Sachs.

His advice and counsel to them was to start liquidating, in the late 1970s, some of their physical tangible assets, which they did. In terms of market timing, for those who think that markets can’t be timed, I would beg to differ, and so would the Bass brothers. They still are worth billions and billions of dollars becauseof Richard Rainwater’s advice and what was technically marketing timing, moving from one market to another in a very propitious way, at a very propitious time.

So out of tangibles, into cash for about a year, year-and-a-half, and then ultimately, in 1982 they backed up the truck, and in the infant stages of a bull market in stocks, they bought very, very well, inexpensive shares, and they rode the equity bull market up into the mid 1990s.

Kevin:I think it is important to point out that at the time that they did that, you could buy the Dow for an ounce of gold, and by the time it was finished in 2000 it went to 43 ounces of gold.

David:The Dow would buy you 43 ounces of gold.

Kevin:That’s incredible.

David:Right. It’s 17 to 18 now, and I think we’re working our way back toward a 1-to-1 ratio where gold buys you a lot of shares, and then guess what? You play the ratio the other direction and you wait for your shares to buy you a lot of gold. If you could remain relatively agnostic as an investor, and be patient – I think the patience factor is something that definitely grinds on people. Daily volatility takes people out of playing this long game.

But if you can play this game between tangibles and intangibles, to be able to go from stocks, into physical gold, back to stocks, into physical gold, back to stocks – if you can do that in one generation, let alone two or three, you’re talking about a multiplication of wealth that is beyond your wildest imagination, on par with the lottery, although not quite with those same odds.

Kevin:I think that is one of the great advantages of working with this company, Dave. Your dad started it in 1972. We have been through a number of those periods of time where there is a ratio trade. In the period ahead, are we poised for that experience again?

David:Yes, and I just want to call it the Rainwater. If you want to conceptualize this and remember the transitions between asset classes, and again, what happened in the late 1970s, coming into the 1980s, and now where I think we are today, let’s just call it the Rainwater. I think the period ahead is going to need poise, it’s going to take experience. You might consider who you are working with and whether they can carry you through a rising tide of discouragement and the consequences of inflation and market losses.

I was watching Dr. Bogle’s comments – Mr. Bogle, rather, he is kind of the doctor or the king, if you will, of passive index investing. He started the Vanguard group. He was commenting today that he has never seen the likes of first quarter volatility here in 2018. We’re up 1000 points, we’re down 1000 points in a matter of days. And he is flabbergasted. In his history he has 25% declines in the equity market, he has seen 50% declines in the equity market. He has been investing for over six decades. But he has never seen anything like this volatility.

I will tell you, I venture to say that this volatility is telling you something. It’s communicating something. It’s the top of a market. It’s behavior consistent with confused models, algorithms that can’t fathom a changing financial backdrop, and investors that want to do what has worked for nine years, and thus are buying every dip they can. So the rallies are as sharp as the declines, and it’s manic – manic like many market tops are, with the bulls utterly convinced, even as the fundamentals are failing and the valuations continue to get pushed to the outer limits. The Shiller PE is now 31.6, Tobin’s Q, and other valuation metrics, put this market today between the all-time high, or in the second or third place. Of course, that’s the feel-good zone for an equity investor, but as a contrarian, the feel-good zone is also the danger zone.

Please, take the time, if you didn’t read Barron’smagazine this last week, April 9th, the interview with, yes, a permabear, one of the two who are still alive – Doug Noland and Albert Edwards at Societe Generale. Read the interview in Barron’s. He suggests that the S&P 500 could test the 2009 lows. Again, back to Bogle, if his mind is boggled – not bogled, but boggled – by current market volatility – he said this: “I’ve never seen anything like this before.” His quote. Why was his mind not equally boggled in 2017 when volatility was dead – dead as a doornail?

Kevin:It played into his philosophy.

David:Well, I think that is the reality – we see what we want to see, and we’re surprised by the things that we don’t necessarily like. From zero to hyper volatility, it means something, Kevin. It means something. And Bogle is uncomfortable. I think we could describe this as peak indexing.

Kevin:Well, and it could be peak passive investing. It could be the end of passive investing. You have to have some form of management. I mentioned Fred Hickey earlier. He, of course, was on the Barron’s Roundtable. You just mentioned Barron’smagazine. Let me read you a paragraph that I read the other day that he wrote. I thought it was so powerful because so much right now is driven by algorithms that really are written for this nine-year period that you are talking about, this low volatility period.

He says, “Here’s the challenge to humans, the program, the algorithms, the algos, the computer models that drive much of today’s buy and sell decisions. Go ahead and plug these variables into your computers. Coming up, a Fed rate hike cycle, one of the three highest-value stock markets in history. The other two, by the way, ended in crashes. One of the oldest economic expansions in history, 105 months, and margin debts that have tripled in size off the previous low and are nearly more than double the prior record level in 2007 before the last crash.

I won’t ask you to calculate the impact of 90 billion dollars’ worth of quantitative tapering – that’s pulling money off the market – that’s scheduled to occur in the second quarter, and 120 billion of quantitative tapering in quarter three, or 150 billion in quarter four. The Fed is selling assets. It has never attempted this before. What do your computers say are the odds of recession in a bear market? If the answer is anything less than 99%, you’re lying.”

David:Right. Art Cashin – you often see him on CNBC. He echoes Mr. Index – Mr. Bogle. He says, “It is unfortunately reminiscent of some of the volatility we saw in 1987.” The idea that you can start to tighten, as Fred mentions, and take money off the table and no have an impact in the financial markets is ludicrous. And it is happening. It does bring to mind – can they actually continue to raise rates? What are the consequences if they do so?

To end this idea on a technical note on the volatility piece, on any one of these rallies prices are increasing – they are rising – on diminished volume. And when the prices are falling, it’s doing it on increased volume. This is a sign of distribution. Distribution precedes a cascade in price. Beware. This is a real time to be aware of some of those nuances. Again, just to restate, as the market is rallying, it’s on thinner and thinner volume. As the market is declining, it’s on heavier volume. For any market practitioner, that signals the beginning of the end.

Kevin:I was looking at Newman’s chart on margin debt, which is always a guarantor of a crash, right before the crash. I had to put it in terms, I was telling you the other day…

David:It doesn’t tell you when, it just tells you that it will.

Kevin:When margin debt gets to be this high you’re going to have a crash. And so, he shows a chart that goes back for the last two crashes. When you get back to 1999, margin debt had gotten to a point – I likened it to mountain elevations because when I was in my 20s I climbed a peak on the front range of Colorado called Long’s Peak,

David:14,000 feet.

Kevin:14,000 feet, right. Now, if the listener is imagining this, pretend that is the peak of margin debt – the 14,000 feet.

David:Circa 1999 to 2000.

Kevin:Yes, 1999 to 2000. Then of course, in 2007-2008 before the next crash, we had the next peak which would be likened to Denali – 20,000 feet, almost a third higher than Long’s Peak. But I looked at the chart, Dave, and it was like, “Oh my gosh, margin debt right now. The other two led to crashes, but margin debt isn’t Long’s Peak at 14,000, it’s not Denali at 20,000, it’s well beyond Everest at 29,000 feet. Now, I can throw billions of dollars out and it doesn’t mean anything, but if you think about the difference between a 14,000 foot peak and a 29,000 foot peak…

David:The rarified air where jets fly.

Kevin:Exactly. This is where we are. So the fall will be tremendous.

David:Also, issues that we will cover on the conference call this next week with Doug, Russia, China, the trade tariffs, fresh sanctions. Again, we’ll cover this in detail in the tactical short conference call next week. For now, it’s sort the tit for tat, 50 billion – that’s kind of the back and forth. Now we offer 100 billion that’s announced in trade items to be subject to tariffs. Soybeans are one of the things that are promoted – 14 billion in soybean tariffs from China as a reprisal back to us.

I think that the thing you need to look for, as a listener, is things are accelerating to the downside. Things are getting nasty if the Chinese begin to liquidate U.S. treasuries. Again, we’re getting to a negotiating table and there is a point to throwing and bandying these things about, but U.S. treasuries end up getting to our soft spot. That will get our attention.

Kevin:We now have foreign policy making enemies around the world. We did this show for eight years during the Obama reign. We were appalled at what we thought was an incoherent foreign policy. Or maybe it was coherent, maybe it was purposeful. We’ve had Dinesh D’Souza on in the past and he would say, “Oh yeah, Obama knew what he was doing on our foreign policy.” But whether it was planned or not, it was very, very different. It damaged our world stance, but at this point what you are seeing is allies being made between Russia, China, Iran. We’re almost forcing the issue, aren’t we?

David:It seems like an inadvertent corralling. You’re right, there has been damage done but we continue to encourage the alignment of interests between Russia and China, Persia – modern day Iran – and it strikes me as a little dangerous to be encouraging a new oil and trade troika when our own energy independence from the Middle East has a half-life to it. So we are importing less from OPEC now than at any time in history because we have found new oil reserves here in the United States.

But again, there is a half-life to that. We are not talking about a reserve that has an infinite timeframe to it. While we are in the process now of extricating ourselves from the Middle East, and in the process of confusing the old relationships with the Saudis and others in the region, it is worth remembering that these oil reserves that we have here in the U.S. are great for as long as they last. And our foreign policy should avoid encouraging too many deep alliances amongst countries that don’t particularly like us. We are in the international community fast becoming like the paper cut and lemon juice boys (laughs) – we’re an annoyance.

Kevin:America has built its entire power base on two things – energy, the petro dollar, and currency, the reserve currency status.

David:So arguably, if you wanted to say the trade wars predate Trump, they do, because we’re talking about trade and currency wars which were started when Nixon ratcheted up currency debasement in 1971, closed the gold window, ended the Bretton Woods arrangement, and that was the first major foray into that particular war. The privileges that we have today are not necessarily guaranteed forever. Energy and currency stability both come to mind. Reserve currency status is not a guaranteed status – ask all the countries that had it before us and lost it. And energy independence, while profoundly positive in the short run, is a massive windfall for us.

But while profoundly positive, it is not to be held as a permanent economic factor state of affairs. We should be using the fat years to prepare for the lean. That is how commodity producers typically operate – how we should be operating. Many of the resource companies that have provided this windfall for us are ill-prepared for what lies ahead, either in lower commodity prices if we should see that – I don’t think we will – but certainly they are ill-prepared for a Fed rate hike cycle. Increasing the cost of borrowed funds puts your marginal creditor in current junk status at risk. And many of the oil and gas innovators who have brought new supply to market fit in this category. They are junk bond-dependent. And right now we’re watching the ten-year treasury march inexorably toward 4%.

Reverse that trend – if you read Barron’s and the article, the interview with Albert Edwards, he would argue no treasuries are going to see their rates decline yet again because of the panic ahead of equities. He may be right, but he also acknowledges that he may be wrong, and he may see a blowout in bond yields. So we will see. If the ten-year treasury marches to 4%, there are effects to be felt in the energy complex. Not to make this too complex, but it doesn’t take a lot to bankrupt the companies that are giving us an energy windfall with an increase in the cost of capital.

So what happens in the treasury market is very significant to our energy independence, and note how we’re gloating over our energy independence, and at the same time, because of it, recreating relationships, or undoing old relationships in the Middle East. So this is a nasty marriage from the outset. Long-term, why are we forcing this marriage between Russia, China and Iran? It wouldn’t be the first time we’ve done this, Kevin, but I fear we are, again, preparing for the next war, in part by creating the next enemy.

Kevin:I will never forget, there was a book that your dad gave me in the late 1980s before the Berlin Wall came down, written by Anatoliy Golitsyn, called New Lies for Old. He had fled from Russia but he had been part of a 50-year think tank of strategies. This, of course, was still during the Cold War. The Berlin Wall was still up. But he wrote this book saying that there were several things that were going to happen. One was that the Berlin Wall was going to come down, there would be perestroika.

But he also said that at some point Russia and China would unite. One of the key aspects of the Cold War for the United States was to keep Russia and China separated, because we knew that if they combined it was a force to be reckoned with. Russia understood that, too. So did China. And they had in the plan, at least that was the Cold War plan at the time, the 50-year plan, something called the pincer strategy. What is crazy is, these trade wars could be creating this pincer strategy whether they mean to or not.

David:Trade deficit numbers for the United States, larger than any going back to 2008, the ones out this last week. We have now a very prickly context in which to deal with other issues. So if trade is the talking point and it creates uncomfortable relationships, have you ever sat at a table where somebody says something and you think, “That was a party foul. You shouldn’t have said that.”

Kevin:(laughs) My wife says I do it all the time.

David:So that’s the way we are right now, sitting at the table with the Russians and the Chinese. Now, if you’re in the context of everyone feeling uncomfortable and a little sick to their stomach, and you all of a sudden have an issue with Taiwan, or you have the South China Sea all over again, those flashpoints are dealt with differently if you’re on friendly terms versus unfriendly terms. I think trade is just a broader context. Again, we’re entering the second chapter of a trade war which began in 1971, or the second volume – perhaps we should look at it that way.

Kevin:It’s not just trade wars that are occurring. We may have a constitutional crisis on our hands at this point, with crews going in and actually confiscating records.

David:Yes, when Mueller sent his folks into Trump’s lawyer’s office this week, I think they may have stepped into it this time. Watergate was a constitutional crisis of sorts, but what is seizure of privileged data from Trump’s attorney’s office and how can it be used? What does the law have to say about that? Watergate, I think, is shrinking in significance relative to this. I would guess that the unintended consequence is that Trump’s voting base is reinvigorated in ways that the left never could have imagined by these sort of tactics.

2018 elections are going to get very interesting, and if you did think that 2016 was peak vitriol in the political sphere, guess again. You ain’t seen nothin’ yet. Welcome to chapter two in the saga of a divided nation.

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