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The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

How To Spin The Tale On Inflation
March 2, 2021

“It’s fascinating, isn’t it? That the most obnoxious and hated president in recent memory was the only one in a 30 or 40 year stretch to not start a war or increase our military commitments. In fact, he pulled troops from Syria on day one. And the big guy who’s in the Oval Office now is dropping bombs in that place. And we haven’t even heard the State of the Union yet. Of course, we’re thinking maybe Kamala might be indulging us on that one.” — David McAlvany

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

Dave, I’ve been reading C.S. Lewis, and there was a quote about storytelling. And he said, to break a spell, you have to spin a better tale. And I thought that was interesting, because we all have a storyline, you and I’ve talked about this, you can take the same facts, the same circumstances. And you can tell a completely opposite story. And we’ve talked about how the press does that. And actually how social media can actually alter the story that’s being fed to you.

David: There’s some nights that my mind spins on an idea enough that I have to get up and work on it. Because I think maybe if I just roll over, it’ll go away. It never does. So going back to sleep isn’t an option unless I work it through. So earlier this week, the question of commodity prices and inflation relentlessly was pressing my brain, and I re-looked at current supply demand figures for gold and silver and for copper and for nickel and for zinc and iron ore, fascinating.

The industrial commodities have moved impressively in price. And the first thought is that inflation is returning. And so it may be. You look back in the last major run up in commodity prices reached peaks in 2007, 2008. You had at that time corn prices, precipitating the tortilla crisis in Mexico, running short of chips. I would protest, too. And actually the price of corn was high enough that it was just getting too expensive. You had oil at 140. That was in June of 2008. And you hit Hubbert’s peak again, becoming sort of a popular explanation, peak oil, then by 2010, the impact of rising costs, they pass through a sort of, call it social insecurity and despair into the masses. And you had the primary cause of the Arab Spring that year, was the increase in commodity prices.

Kevin: Yeah, Out with the old and in with the new. We talked about that at the time. We talked about, inflation may affect our pocketbook here in America, but starvation sets in some places, when food prices go up 10%, 15%.

David: And we’ve also referenced the role of social media platforms and technology in a new way as well. Grassroots popular unrest was like a wildfire.

Kevin: Yeah, spinning a different tail. They’re breaking the spell by spinning a different tail.

David: It’s electronic. It’s digital, it’s telephony. And in that early stage, social media fanning the flames of frustration. Again, it came back to the burden of inflating food prices and the impossibility of feeding a family. So in that case, you had politicians blamed, and a series of dynasties came to end. And I think that’s one of the things that is a challenge for policymakers. When people experience inflation, they don’t necessarily know who to blame. But the ire gets expressed and policymakers face career risk.

Kevin: Remember when we read Adam Ferguson’s book, and later you interviewed him. The book The Death of Money, he wrote that back in the 1970s, but it was actually about the hyperinflation in the 1920s. And of course, the massive, massive money printing of the mark at that time, the Weimar mark. Well, the sad thing is, even when people lost everything, they didn’t really realize it was money printing. It seems like the tale that’s being spun right now to break the spell, because I’m getting calls from my family who’s saying, “Gosh, have you noticed food prices.” But Jerome Powell is actually spinning a different tale.

David: That’s right, monetary aggregates have no connection to inflation. There’s no longer sort of a valid succession. Doesn’t matter that M2 recently has been rising more than any other period since the 1970s.

Kevin: Yes. Money printing doesn’t have anything to do with it.

David: Yeah, it means nothing. And according let’s call him JP. JP, Jerome Powell. That’s not a reason for concern. In fact, what we’ve been spinning is this idea that inflation is friend, not enemy. And it’s actually the new policy objective. But the connection is no longer a reality. Printing, or let’s look at its digital equivalent, and the prices. They’re not connected.

Kevin: Well, when we have high inflation, you have wealth inequality to an extreme. Even in the 1920s. What was the name of the guy – you bought me the book – who saw what the inflation was going to do? And he actually redistributed his wealth into things. He became very, very wealthy during the inflation.

David: Well, the fascinating thing about the Stennis family businesses, I mean, he was kind of the serial entrepreneur, they never said he was very good at managing businesses. They said he was more like an acrobat than a manager, he actually ended up buying companies from himself without realizing that he owned— well he owned 6,000 companies, that’s happens. But yes, Stennis managed that timeframe very well. Part of the benefit that he had was foreign currency income, he had businesses across borders. And so what was happening with one particular currency, it’s not like he was a part of that captive audience.

Kevin: But while the rest of the country went broke, he actually became quite wealthy.

David: Because he had money coming in from other places, he was able to consolidate a lot of real assets from people who just couldn’t hold on to them anymore.

Kevin: So liquidity— Jerome Powell says that that does not affect wealth inequality.

David: Well, at least from his speech highlights last week, that’s correct. Not an impact there. Liquidity created by the Federal Reserve does not affect wealth inequality. And he boldly asserted last week that he doesn’t expect upward price pressures as the economy opens. Again, this idea of inflation, and if there is a little inflation, it’s going to be temporary, it’s not going to be lasting. So according to Jerome, the Fed has all the tools they need to deal with the unwanted variety of inflation, because again, they’re the champions of inflation, and that’s a policy objective. But if there’s the unwanted inflation, we’ve got tools, don’t worry about it.

In fact, he likes the rise of interest rates in here. He says they’re increasing on the basis of improved economic outlook. And it’s fascinating because you look at three different areas. And on the one hand, the Financial Times talks about the return of the bond vigilantes this week as interest rates are spiking. And you’ve got the gentleman who manages the Australia Sovereign Wealth Fund saying, “Look, interest rates are very consequential, and we’re going to see a stock market cleanout as a result.” Then on the other hand you’ve got the PIMCO boss, the guy who is in charge of $2.2 trillion. He would agree with Powell and say, “Yeah, inflation, inshmation. Who cares? It’s not going to work. It doesn’t bother me.” It’s not going to hurt the bond market. Meanwhile, Warren Buffett—again, not an investor to trivialize—is suggesting that fixed income investors worldwide face a bleak future. That was in his letter to his clients. So there’s currents here that are very important.

Kevin: Yeah, but they’re all telling a different story with the same facts. They’re basically saying, okay, with the facts I have I’m telling a particular story. What story do we tell Dave? I mean, when we sit down and say, “Okay, what is truth?” And you and I try to do this on Monday nights, and then we record and then of course, the commentary comes out and everybody can still hear us think out loud. But the question is, what is the story we tell?

David: And we’re heavily influenced by the stories we tell. Because facts are never really facts. I think this is one of the current media absurdities, this fascination with truth and falsity without any external reference point. Facts are never facts, because we arrange them conveniently to tell the story that helps us make the most sense of the world.

Kevin: That’s the metanarrative.

David: And that’s the case with science being organized to tell a particular story. Logic to come to a particular conclusion, or true news to lead us to a reality which we must embrace. And the news media, they’re not dissimilar to us. We are like the media, making convenient arrangements of details to fit a narrative that works for us. And I asked one of my sons last night, if he had thrown his brother against the door, I mean, his little brother’s crying. I’m like, “What’s going on here? Did you do what he said he did? Did you throw him against the door?” And his answer was no. Crystal clear answer. “When he wouldn’t let go of the stuffed animal that I was holding, he swung himself into the door.” And I’m thinking, “Wow. Okay, so fascinating organization of details.” That was on the fly, supportive of convenient conclusions. Kevin, it doesn’t matter whether you’re 10 years old, 14 years old, or in Jerome Powell’s case, 68 years old. Facts are what you organize to prove your point. And they can be organized differently to prove something else.

Kevin: Well, and you can actually demonize someone else for the thing that you caused, okay, like Jerome Powell blaming speculators on inflation, not money printing.

David: Well, and this is again why I spent some time looking at commodity prices, because I want to understand what is happening here. Is this supply demand-related? Is there a global boom in commodities? Is there a speculative trend within the commodity space, or are we seeing a repricing of commodities reflective of inflation? Some combination may exist there, too.

But Jerome Powell sees what he’s doing in the marketplace today. He sees that there is no connection between wealth inequality— again, asset price inflation, according to him, doesn’t come from liquidity creation, so he’s not responsible for wealth inequality. He would say it comes from speculators. They make their own individual choices. They bid up prices of assets for which he’s not culpable. And there’s an aspect of truth to that, except that you look and say, “Well, what are the tendencies of investors and speculators when they have interest in or access to free money?”

Yeah, so Fed policy may, in fact, influence some assets. He can claim not to be culpable. But when you talk mortgage-backed securities, when you talk Treasuries, when you talk about whatever else is on the weekly monetization buy list, yes, he’s influencing asset prices. And no, according to him, monetization is not inflationary anymore. Volcker was wrong about that. The whole Fed leadership, this just isn’t Powell on his own, but we can QE to infinity, and they very well may. And they’re convinced that actually there’s no connection to inflation. Doesn’t matter.

Kevin: When you had the massive infusion of liquidity back in the 1920s in Germany, which turned to hyperinflation— Speculation was rampant at the time because people are literally trying to figure out not just how to make a buck, but how to save the buck that they have. In this case, it was the Weimar mark, but you know, look at what’s going on. We brought it up at GameStop, and bitcoin and that type of thing. A lot of it is speculation, but some of it is just going, “I’ve got to get out of the dollar.”

David: Yeah, it’s this symptomatic-of-desperation speculation. Speculation which— everybody says, look, it’s not worth saving 1000 bucks. I might as well blow it on a poker game or blow it on the craps table. Because if I could have $10,000, maybe that’s something. If I could have $100,000, maybe that’s something. But because money has been devalued, savings have, too. And if you just don’t have that much, you just don’t care to try to accumulate all those little somethings into something more. Expanding the supply of money—again, this comes back to Jerome Powell—expanding the supply of money, according to him, does not diminish the purchasing power of existing currency in circulation.

Kevin: When I first came to work here, I had some Yugoslavian currency, and I hung it up on the wall along with Deutsche Marks and a couple of other currencies. Paper currencies that I knew over time would probably be devalued because that’s what happens with all paper currency. What was interesting was I had 100 million notes that within a month had to be a 500 billion note to pay for the same thing, and I hung them both up on the wall to remind myself that printing money has consequences.

David: Well, my friend James Howard Kunstler sent me $100 trillion in Bodleian bank note. And that was to compliment my $10 billion note. My kids are fascinated. I mean, they’re fascinated by the obvious. In some cases, academics easily ignore the obvious. But, yes, expanding the supply of money does ultimately impact purchasing power. Jerome was asked a question in this banking Senate interview by one of our representatives, “What do you consider to be sound money?” And he danced and hemmed and hawed, and he basically said, something that holds its value. Well, I mean, that’s almost absurd in and of itself, because he’s saying something that holds its value, but not that much, because we need to devalue it to a certain degree just for the sake of economic growth.

Kevin: Yeah, economic growth. A lot of times that goal looks like it’s being attained when you’re printing money and throwing liquidity at it.

David: Again, this is an old convention, this idea of printing money, and it devaluing. Somehow, the quantity of money, diminishing potency, we don’t need to worry about these things anymore. Those are old conventions. And I don’t know, it seems strange to me, you look at the different voices on Wall Street, and they cannot agree either. Are we moving into a serious, serious inflation, where interest rates will move higher and that pierces the bubble within the stock market? Or are we just too worried at this point? And shouldn’t we be enjoying the fact that we’re coming out of COVID and can kick up our heels and we are free to live again?

Kevin: Well, and it does look like growth. I mean, Germany in the 1920s, I keep going back to that. They were in what felt like moving into a depression, and then they started printing money. And sure enough, they had what looked like growth. Now the problem was, the growth didn’t keep up with the devaluation of the currency.

David: Yeah, and in fact, a certain amount of diminishing purchasing power—that’s what’s argued today—contributes to economic activity, what is called growth. Last week, I listened to a Financial Times video interview with Jeremy Grantham, and maybe it’s a $60, $65 billion asset manager, retired now actually, but GMO is a very reputable firm. And I love to hear a well-spoken, mild-mannered gentleman get a little agitated, and on the idea that increasing debt was a good way of increasing economic growth. He was appalled. So, sorry to Richard Duncan, Jeremy Grantham is organizing the facts differently. And again, the facts are the facts, but how they’re organized—very different stories.

Kevin: Well, an increasing debt, I mean, we haven’t even seen the impact of the CARES Act.

David: Well, two quotes from the Grantham interview were pretty phenomenal. Jeremy said, “the marketplace is more a measure of hysteria than a measure of value.” And then his second comment was, “markets turned down on the second most optimistic day of the last 20 years.”

It’s one of those things where it’s never bad news. It’s never the context of bad news where you see a market turn into a bear market. It’s just slightly less good than the day before. And all of a sudden, the trend has changed. And no one really even recognizes it.

But yeah, the CARES Act money. As you mentioned, that was the first fiscal round in 2020, then the Trump fiscal gift was infused $900 billion fiscal round two. And now we’re on the edge of our seats waiting to see what impact $1.9 trillion will have. So this is round three, and what House Minority Leader Kevin McCarthy describes as the Pelosi payoff bill. But we want to see its impact on the economy, and still pertinent in my view is its impact on the broader monetary aggregates. What happens to M2 as we see $1.9 trillion slip into the system? M3 was discarded march of 2006. M2 is our broadest measure the money supply here in the US.

Kevin: Okay, so a question for you. Because if people are planning on the prospect of reopening, is that one of the reasons commodities are moving right now?

David: Yeah, so reining it in. Commodities are moving on the prospect of reopening. We are past the Chinese Lunar celebration. So you’ve got the huge demand from China returning, and you’ve got the COVID reopening thematic, has anticipation of demand in play. So copper and iron ore, other industrial commodities, are soaring, some of them as much as nine- or 10-year highs, and they’re moving because of speculators’ money. And I guess the question is, is that the same thing as inflation, or is it different? On the one hand, there’s a positive vibe when we think about pent-up demand, return to normal, the end of COVID. There’s a more negative vibe when we think of diluting the value of our currencies. And I say currencies, plural, because monetary policies across the globe have been similarly expansive. And we’ve got costs rising in all currencies, not just a few. And maybe it’s somewhere in between, maybe it’s somewhere in between an altogether different where commodity prices are rising in confirmation of an investment thesis.

Kevin: So this is anticipatory. Okay, so there’s an anticipation, whether it’s copper or oil or what have you, of higher prices in the future and a reopening.

David: Yeah, so it’s speculation on a future outcome, which includes inflation, but is not inflation quite yet. A number of weeks ago we talked about the broader social implications of unsound money. Commodities are not today reflecting the super or hyperinflationary trend where an asset is repriced daily to the loss of purchasing power in the extreme. You mentioned in a one-month timeframe, your $100 million bill buying one item, and it being a $500 billion bill one month later that bought it. But that’s a radical repricing where commodities do reflect that devaluation in real time. That’s not happening today. Commodities are higher today as the consensus sees rising prices on the horizon and positions investable or speculative dollars in line with its expectations. Oil is a great example. Oil is a great example because demand has yet to recover globally, we’re not using the same amount of oil we were pre-COVID. But prices have moved much higher farther in fact, than is supported by the current demand dynamic.

Kevin: So that’s speculation as well as anticipation. It’s an anticipatory speculation.

David: In anticipation, you have speculation. But speculation in all assets is exaggerated by the availability of capital. So particularly leverageable capital—and there is plenty of leverageable capital in the financial markets today—abundance is not a problem there.

Kevin: So my question would be, how can we not see CPI at 1.4% being a lie? I mean, what in the world do they measure anymore?

David: Well, I mean, you’re just talking about a basket of goods, and the basket changes through time. So the items that go into the basket are not always the same.

Kevin: They must be items none of us ever buy.

David: Well, they can choose how to weight each of those items. So the weighting changes, and the basket changes. So the statistic is a convenient one. And I like to think of PCE and CPI as one of those fiscal con jobs wherein, if you can understate CPI, you’re also understating the deflator, which is the factor that gets applied to—

Kevin: Social Security.

David: Your cost-of-living adjustment, COLA, or Social Security adjustments, so you can end up saving yourselves tens, even hundreds, of billions of dollars if you cheat just a little bit on that little itty bitty number. But yeah, I mean, if you look at PCE, 1.5, CPI, Consumer Price Index, at 1.4. It suggests that inflation is a non-issue.

Kevin: Tell that to a retired mother-in-law, who called me on Sunday talking about prices being just through the roof, she went shopping, and she said, “I just can’t believe what’s going on.”

David: Well, in Jerome Powell’s opinion, Jay Powell would say the market is overplaying something that’s very temporary. Let’s not get too excited about this. This has nothing to do with an impact of the bond market. It has to do with a very healthy economic recovery. Anything we witnessed in the commodity markets is overplayed, it’s temporary. And he’s saying that over and over and over again.

Kevin: It’s the story. Spin a tale.

David: And my view is that they need the latitude to continue QE, and the $120 billion in monthly bond purchases which are still happening.

Kevin: Can you believe that? That just sort of slips into the woodwork; 120 billion a month, they’re still just going in and buying bonds. No wonder interest rates are artificially low.

David: They can’t taper. They can’t slow that down in any way without there being a major market price ramification—not only destabilizing the bond markets and exaggerating the current trend and rising rates, but also the stock market eventually. When you begin to pierce those bubbles, you end up with a horrible psychological feedback loop starting. And once started, it’s really beyond the capacity of the Fed to calm down. And so this is where they do their best to speak peace and calm into the marketplace, even if and when they’re not particularly comfortable themselves, because they know the consequences of losing control is that they would have to print so much money that you would not only destroy confidence in the dollar, but destroy the dollar itself.

Kevin: So it’s a fine line though, they have to be able to talk about being monetarily easy, as well as look at tightening up.

David: And actually COVID is such a gift to them because it allows them classic doublespeak, where, on the one hand, we’re very encouraged, things are improving. On the other hand, the whole crew at the Fed must use dovish language. So there’s this glowing confidence in a recovering economy matched seemingly in a non-consistent way with incredibly accommodative and dovish language. And that’s okay, because we have COVID. And after all, we just have to play things a little bit differently here. So money will continue to flow. And the communication—the bottom-line communication—from the Fed in recent days and weeks is: Financial markets need not worry. Trust us, we’ve got this one.

Kevin: Everything seemed to change back in the 1930s when Keynes was writing. I remember when we both read the book by Hunter Lewis, Where Keynes Went Wrong. And it was an excellent interview as well. But Keynes came up with a science where if you can manage perception, and somewhat shift this monetary stimulation around in a way that people can’t see it, it’s almost a new science of economy. It’s a news story, it’s spinning another tale.

David: It’s almost as if truth became less important, and perceptions, and the management of perceptions, became the only reality that was, from a policy standpoint, the priority.

Kevin: Capitalizing the M in management.

David: Yeah, Keynes drew the distinction in 1930, in his treatise on money, between two different kinds of money. On the one hand, he said, there’s state money, and on the other, there’s bank money. The kind of money we would traditionally see as deposits in a commercial bank, State money is more like the QE projects, the quantitative easing projects we’ve seen in recent years. It’s there, it’s impactful on the price of assets, but not directly linked to the money in circulation through the deposits that come in and out of the commercial banking system. Key contrast there because the bank money Keynes described is where I believe the power to create consumer inflation comes from. Bank money is also where you tend to see more of an impact on velocity or the turnover of money. So just to contrast, loose financial conditions may create a speculative energy in assets and boost those prices. But, and here’s the distinction, the repricing of products, consumer products that we must have in our everyday lives, that is more critically tied to bank money, so called.

Kevin: Okay. And we’ve been talking a little bit about the difference between fiscal stimulation and monetary stimulation. And I think we have to continue to differentiate that because it has a different economic impact, doesn’t it?

David: Absolutely, because fiscal spending, like the two delivered last year and the one in motion now, are more directly tied to bank money. And again, no surprise, velocity of money. So fiscal dollars circulate in an economy more readily than monetary policy dollars. I mean, the monetary side, which the Fed is more responsible for, it’s like the conceptual balance sheet cleanup, they came up with Maiden Lane One and Two during the context of the global financial crisis. And they shoveled a bunch of junk assets into these special purpose vehicles. They created the liquidity to buy those assets created out of thin air.

That’s a conceptual balance sheet cleanup, versus what we’re seeing today with fiscal policy. It’s more like having direct access to a cash drawer. It seems that, since November and the proposal of the $1.9 trillion cash drawer, that has been enough to inspire investor and speculator anticipations of a rise in costs. And so we have commodity price appreciation in anticipation of actual inflation, which is why economists so often discuss the change in expectations rather than the change in the inflation statistics themselves. Expectations are the key. When expectations shift, one of the first things to register is commodity prices. Not because they, in real time, reflect the devaluation, but they’re measuring artificial demand as investors look for a hedge against future cost increases. Once the prices of raw material start to move, then all of a sudden you have inflation pervading through manufacturing input costs, and ultimately those input costs get passed along to the consumer. It’s a self-fulfilling prophecy, which, frankly, the Fed hopes to undermine—which is why the linguistics and the rhetoric are so key in here.

Kevin: Well, it’s also why you had a furrowed brow yesterday when we were talking. Because you said, “I’ve been I’ve been studying the supply dynamics of these commodities that are rising.” You have to make some pretty tough decisions when you’re managing MWM, McAlvany Wealth Management, you’re having to make some pretty tough decisions based on, okay, is the anticipation that’s in this market sustainable? And can it be justified in the long run?

David: That’s right. So I kept circling back to the supply dynamics. And copper was the only commodity of those I looked at carefully—on the industrial side— that has anticipated supply deficits for several years to come. So with that in mind, any marginal demand increases have an outsized impact on prices. And the obvious note on all of the commodities—iron ore, copper, you name it—is the Chinese footprint in the market.

Kevin: We talked about that last night, and how it may have a parallel with pre–World War II supply situations and demand situations in Japan. I’d like to talk about that in a little bit. But we are vulnerable, not just to our own economy, China probably throws a greater vulnerability monkey wrench into the whole calculation.

David: Yeah, I mean, we’re very interested in hard assets. That’s our focus on the asset management side. And we define that broadly, including four separate categories, global natural resources is one, infrastructure is another specialty real estate is the third, and then precious metals, the mining companies that are in that space in particular. There is a realistic vulnerability for all industrial commodities with a Chinese financial debacle.

Kevin: Should it happen.

David: Yeah, exactly. Should the financial and banking system come unhinged in China, there is no escaping the physical demand destruction as end users quit taking delivery in China.

Kevin: Yeah, but what about the speculators, could they fill the gap if demand suddenly dropped?

David: Only to a degree. And I mean, I continue to like hard assets. But as we construct our portfolios on the asset management team, there is a reason from a risk standpoint that we balance natural resources, which are vulnerable from a cyclical and, in this case, circumstantial standpoint with three other categories of hard assets which have less of that vulnerability.

So now to the primary point of concern. Looking back at 2017, read, The Great Leveler. Reflecting on Scheidel’s book, he develops the idea of wealth equalization taking place only when you have one of the four horsemen of the apocalypse. Those would be war, revolution, financial collapse and plague. Encountering COVID in 2020, and having in the back of my mind some of the ideas that Scheidel put there back in 2017. So we finished 2020. And by the way, I think Scheidel likes the idea of equalization. I think he’s got some Marxist tendencies. But great research all the same. Very well organized, very well written, very well executed.

Kevin: So but one of the four horsemen was plague. And what he’s saying is that was a leveler, we didn’t see a leveling with COVID.

David: I think that’s interesting because we’ve just kind of marched through a global pandemic. To some degree it’s alleviating—to some degree. But it’s not a wealth equalizer as he described in his book.

Kevin: It was just the opposite, at least for now, with the printing of money.

David: In fact, as Thomas Piketty—big influence for Walter Scheidel—they measure wealth inequality using something called the Gini coefficient. And it gives you some insight into wealth equalization, or vast wealth disparities. But it’s supposed to have gotten better. That is the inequality equation. And in fact, it’s gotten worse, not better, through the COVID pandemic.

And it suggests two things to me. Number one, the pandemic was not that bad. And I know that that may sound insensitive, but I mean, keep in mind, when Scheidel is talking about the worst of the worst, he’s talking about the 14th century black plague, he’s talking about where 90% of the population are wiped out. On a best case scenario, 50%. So, and I don’t mean to be insensitive, but tax bases have not significantly declined, global population figures continue to rise. It’s not the Antonine Plague, where infection rates were 60 to 80% of the population and death rates were between 20 and 50%. It was not the Black Death of the 14th century, it was not the smallpox, measles or influenza, which we brought from the Old World to the New and where impacted populations declined in some instances by 80 to 90%.

Kevin: Okay, but it could be still that there’s a leveling coming, right? I mean, could it be front-loaded just because when you print a lot of money or when you pull the credit cards out, just even using your own family as an example, if you pull the debt out, you can make things look okay, but that doesn’t mean they don’t have to be paid.

David: Yeah, the second thing that stands out to me is that you’ve got the coordinated responses on the fiscal front, not only in the US, but globally. And it front loads a benefit. Yeah. So the costs are spread out over time. Front loads the benefit. It’s brilliant public policy in terms of delivering good to your constituents, but being retired and therefore blameless when the bill comes due. I mean you can’t be blamed.

Kevin: That’s perfect.

David: I mean, brilliant in terms of clever.

Kevin: If it works the way it’s planned. That’s perfect.

David: But the future is still a real concern, particularly when a lot of money is being spent. And it’s not being spent well. It’s reckless grifting and political gifting rather than actual crisis management, and COVID solution seeking. So, one illustration comes to mind, we’ve got, built into this $1.9 trillion package, a $21,000 bonus for federal workers only whose kids or family members are impacted by the virus.

Kevin: 21,000 bucks. Wow.

David: And that kind of makes the $1400 check that goes to the non-federal worker look pretty small by comparison. And some animals are more equal, it would seem.

Kevin: So going back to Keynes, and going back to telling a different tale. Okay, well, when you’re trying to break a spell, you spin a different tale. And the focus on interest rate seems to be what Keynes was pointing out. That changed the science at the time.

David: Yeah. And I think the future is a concern. And the debt markets are looking ahead and trying to figure out what that looks like. The cycles within the debt markets are long-term cycles. And I’ve mentioned this on the commentary before, but looking at 200 years of US interest rate history, the shortest in the cycle is about 21, 22 years going in one direction, and the longest, about 36, 37 years. And we’re just about past that now, with interest rates having declined from 1980 to the present.

And you say, well, yeah but they could still decline further. Yes, but only if, and this is where reading Richard Duncan over the last couple of days, he’d say, we can define what our interest rate costs are, we just have to buy an infinite number of bonds and we can do that. I think he’d also say we should do that. I might disagree on that point. But what the market is doing is looking ahead, the commodity markets in particular, the debt markets in particular, and speculating as to the costs that we will bear for today’s somewhat necessary interventions.

So inflation is here, or inflation is coming. And I think we’re talking about the shift of expectations and anticipations of the future into a present reality, showing up in prices. And they’re showing up in prices like copper and iron ore and what have you. It’s interesting because you touch base with the neo-Keynesians of our day, and they don’t really care about that stuff because the interest rate communicates to them all that they need to know. And the interest rate is what they tend to fixate on, and not more broadly on other prices.

In the broadest sense, it was Harvard’s Alberto Cavallo who was pointing out that not only is the CPI and these baskets that we talked about earlier, these baskets of commodities, inadequate as a measure of inflation, but today his point was the online pricing. Online pricing has been rising much faster since the end of November, which is something the CPI is not reflecting at all.

Kevin: That’s something that’s not anticipatory. So far, what we’ve been talking about is anticipating inflation. But what we do have is we do have inflation actually happening in some sectors.

David: Yeah, the message in asset markets is that an inflation of value has already occurred. And again, it ties to the monetary policy interventions that we talked about in the “state money.” The message in commodity prices is that there is a growing belief that price inflation, consumer price inflation, is around the corner. This is your bank money. This is your much-more-sensitive-to-inflation infusion of currency into the system.

Kevin: The last couple of weeks, you’ve been talking about the bond yields rising and prices dropping, does that make central bankers squirm? They really can’t let interest rates rise.

David: Squirming looks different for different people. And the more someone has to talk, I would interpret that as squirming. And so between last week and this week, if you look at the number of Fed speakers that you have on tap, Monday, Tuesday, Wednesday, Thursday, Friday, I mean, it is a constant stream of messaging, and again, squirming looks different. You have to speak it well, you have to speak with calm in your voice and clarity in your thinking. But I tell you, the more they’re speaking, the more frequently they’re speaking—

Kevin: The more you squirm.

David: The more I recognize they’re squirming internally, and that has implications for the broader market. Last week in the bond market, you had what Bloomberg called a taper without the tantrum. That’s as bond yields were moving higher, of course prices move lower on the other side of the equation. Bond yields are moving higher, fascinatingly by market dictate and not with central bank permission.

Kevin: Isn’t that interesting, because they’ve been controlling it up to this point.

David: And there was there was a fascinating bit of chatter at the Fed all week, through the weekend, about not being concerned about bond prices. We see it, we understand it, we’re not concerned about it. And again, if you said it once, it would be fine, but anyone who says I’m not concerned about it five or 10 times, you begin to say, “Well, you’re not concerned or are you concerned about what you’re saying you’re not concerned about?” There is a difference, isn’t there?

And again, the parade never ended. You had similar messaging from Christine Lagarde, you had a warning to the bond vigilantes, which came from François Villeroy at the ECB. To me, it was very clear that this was a comment on central bank control of both narrative price and yield. He said, “The ECB can and must react to any undue tightening.” Of course, this is his response to the market is moving prices lower and bond yields higher. And oh, by the way, the ECB must react to any undue tightening. In other words, we will QE you to death if you keep pushing up yields, which, to my mind, is like never bringing a knife to a gunfight. The Central Bank community just wanted to communicate to the bond vigilantes don’t bring a knife to a gunfight, “Guess what I have that you don’t. It’s called a printing press.”

Kevin: And that’s the amazing thing. It’s worked up to this point. But there is a point—just like in Germany in the early 1920s. There’s a point where it no longer works. But Dave, we’re in the real commodity business as well as the paper commodity business. You can look at the paper commodity markets and go, all right, well, they’re definitely not covered by the real thing. There are scarcities. I’m just thinking even in gold and silver. I look at the length of time and the delays in the gold and silver markets right now for physical product at the same time that the price has been dropping. So, with some of these larger types of industrial commodities— Precious metals is just the tip of the iceberg. But if you need something to build a house, and let’s say you’re in China. That lumber or that copper has got to actually be available. And we sort of depend on a global cooperation. Okay, I’m not talking about a world order, but global cooperation between countries to be able to get commodities that some countries have to countries that don’t have them. We were talking about World War II. That was one of the big problems in the 1930s.

David: I know we talked about this a month or so ago because the contrast between inflation as it’s beginning to show up in various places and poor planning in terms of supply chain management, where you end up with a bottleneck and a spike in prices. We just wanted to make clear at that point that there is a difference between the blow-up of a supply chain as there’s not enough available to meet demand— And that actually is not inflation, that’s just a one off deal. That may in fact be what the Fed is criticizing. But the real concern with commodities is a development story. It’s a development story and a bottleneck story, a bigger term and larger context bottleneck story, and the tensions that have long existed with truly scarce assets. I mean, truly scarce, as in, they’re not financial, you can’t create them ex nihilo—out of nothing. So we remember the past, the Japanese were cut off from the oil they needed. And Yamamoto responded in their strategic interests. Pearl Harbor was a pushback against a hostile first move by US policymakers.

Kevin: Well, and let’s just face it, you can go out and buy all the oil contracts you want. If you don’t have oil to power ships and planes and cars, you still need the real thing.

David: So, today, in the US, we can see this from several vantage points. Today we are short of semiconductors. And there’s a good number of our semiconductors which come from Taiwan. The Chinese are breathing down the necks of the Taiwanese. That matters, since one company on that small island produces close to half of the world’s semiconductor chips. And we are, according to the Financial Times, now seeing layoffs at GM plants, and production suspensions in Michigan for the Ford F-150, of the most popular sellers, because we don’t have the chips needed in the supply chain.

Kevin: So American made, but we’ve got to have the chips from Taiwan.

David: That’s right. So at the same time, our most sophisticated military hardware. The only thing that provides a strategic advantage in warfare today. And guess what? It’s dependent on a near-monopoly that the Chinese hold in rare earth minerals. I mean, F-35. It has 416 kilograms of strategic rare earth minerals in each one of them.

Kevin: Oh my gosh, 416 kilograms of rare earth minerals. What in the world do they do with that?

David: So it goes the other way too. Chinese expansion and growth requires a massive, and has forever— This goes back to, again, wanting to know supply and demand. What’s driving the commodity price today? Is it speculation on a future financial market outcome, monetary market outcome, or are we talking about real supply and demand? Because I tell you what: 2007 and ’08, it was the Real McCoy in terms of globalization, Chinese expansion. And that has not come to a close. Chinese expansion and growth requires a massive hoovering of global commodity supply. Over half of what they need is imported. And if that is ever constrained at all, we’re talking about challenges to Chinese strategic interests.

Kevin: So of the four horsemen, okay, maybe plagues not the leveler that we’re talking about here. Maybe the great leveler could possibly be war, I mean, is war off the table?

David: And while I’ve been reflecting on Scheidel’s chapters on plague, that was kind of the 2020, this is going to be interesting. Let’s see how far this goes. I don’t like counting body bags, but it’s just as a matter of market analysis. What are the consequences going to be? I’d have to say warfare is not off the table in 2021 and beyond. And DC is already back in the bomb dropping business. So we were joking tongue in cheek a few weeks ago, but so much for the Nobel Prize. It’s fascinating, isn’t it? That the most obnoxious and hated president in recent memory was the only one in a 30- or 40-year stretch to not start a war or increase our military commitments. In fact, he pulled troops from Syria on day one, and the big guy who’s in the Oval Office now is dropping bombs in that place. And we haven’t even heard the State of the Union yet. Of course, we’re thinking maybe Kamala might be indulging us on that one.

Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany. You can find us at, and you can call us at 800-525-9556.

This has been the McAlvany Weekly Commentary, the views expressed should not be considered to be a solicitation or 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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