- Could Covid and its variants be the new Bond Villain?
- Competing with giant hedge funds when buying your house
- Everything bubble (everyone buys) will be tested when everyone tries to sell
The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
The New and Villainous “Forever Virus”…who benefits?
June 29, 2021
“From stocks to bonds to real estate, we will discover what new liquidity dynamics look like. Either when we run out of buyers or buyers become sellers due to some panic or reaction to changing circumstances, a change in rates, a change of relations with China, an external event like a default in one of the great Chinese behemoths, or maybe it’s a change in the public encounter with the forever virus. Time will tell.” — David McAlvany
Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany.
Something that I miss from my childhood, Dave, is a common villain. You remember growing up when the family would sit down and watch a James Bond film and we all agreed that the enemy had to be defeated?
David: Right. Yeah, in the ’80s, the PG-13 was the equivalent of R, so it really was something of a creative take on family planning, shall we say? But clearly there was the good guys and the bad guys—
Kevin: The bad guys.
David: —and this was the Cold War—
Kevin: And James got the woman, he always got— or the women, right?
David: But you knew that communism was bad, and James was good.
Kevin: Well, you remember some of the villains. In Live and Let Die, there’s Mr. Big, he got eaten by sharks. I remember he got his. And there was Sir Hugo Drax in Moonraker, and Sir Hugo Drax escaped in a Soviet submarine. See, that’s that common enemy. He was going to destroy London with a nuke. And we had Dr. No, and he was going to disrupt our guided missiles, and he got buried under a pile of guano by Bond. And Goldfinger, that hits a little closer to home. My last name is Orrick, this guy was named Auric Goldfinger, okay?
David: Yeah, exactly A-U-R-I-C, Auric.
Kevin: He was going to steal gold from Fort Knox and, of course, fund our common enemy, right? They always had an Eastern European accent or something that you knew was not you.
David: So unification was around threat, and that seems to be the theme then. But of course, we lived in the Cold War, and things changed post-fall of the Berlin Wall, 1989. Foreign Affairs writes a special paper for July and August of this year, 2021, titled, “The Forever Virus.”
Kevin: That’s our new enemy. The forever virus.
David: A strategy for the long fight against COVID-19. And the future they describe as one where the virus never goes away. Global herd immunity is unreachable and the prospects of reliving 2020 all over again are high. Barely mentioned is the origin of the virus, the conspicuous funding of a Wuhan lab explicitly for coronavirus research, or the emergency adoption of experimental shots on a global basis.
Kevin: Yeah, don’t mention Wuhan. I mean, it couldn’t have come from there, unless it was a bat.
David: But the celebrated success in the paper is that we rolled out the vaccine. Although there is the admission that if every human on the planet were vaccinated tomorrow, COVID would still be an issue, it would be an issue because, look, it’s already moved to monkeys and cats and deer and mink and other animals. And so now we have the lingering concerns of transmission back to the human population in a new and virulent form. And exhibit A in this paper was Denmark, where 200 human cases have already been identified coming from minks.
David: Right. Variants are the driving energetic force of the future as it relates to the forever virus.
Kevin: Okay, but Bond still nails it on this, okay? If you saw Her Majesty’s Secret Service, you had Ernst Stavro Blofeld, and he developed a deadly virus to destroy livestock and cereals and what have you. So the deadly virus enemy started to sneak in, even into the Bond films. I don’t think Wuhan’s got anything on this.
David: No, but this is a global unifying factor like the Cold War was, and it helps us understand the difference between good and evil. And it’s a paint-by-numbers approach, but that’s generally what your global elite want in terms of dividing the world into who are you for and who are you against?
Kevin: Yeah, but you can’t really end up having it eaten by sharks or buried in guano. What do we all have to do?
David: And now it’s what are you for? Or what are you against? You get the airwaves filled with concern over variants, and the faster efforts to vaccinate whether it’s against the UK variant or the South African variant of the Delta. They all have these designators, B117 or B167.2.
Kevin: So what are you sick with? B1.17, yeah.
David: So you get this sizable global anti vaccine movement, and then you’ve got the issues of production and distribution limitations, which, again, the writers of this article are basically saying herd immunity is off the table—
Kevin: This is Foreign Affairs that you’re reading?
David: That’s right. So Foreign Affairs, the folks at CFR, Council on Foreign Relations. Variants are recorded and they’re discussed in the paper with reference to where there’s been a sizable breakout. So where did it begin? That’s why we have the South African variant, right? So the nomenclature, they’re suggesting, should not be geographic because one of the things that that does is raise the issues of nationalism, or, shall we say, non-globalism. So we need to reflect on the source of the recommendation. Again, Council on Foreign Relations, consider the meaning, let’s get rid of the nomenclature, those are kind of trigger words to say, South Africa or UK variant, it makes you think negative things about South Africans and Brits.
Kevin: So political correctness, it’s got to be factored in. So in other words, instead of herd immunity, they want herd ignorance, right? Is that what it is, herd ignorance?
David: Well, I appreciate the comment that the vast majority of mutations do not make the virus more transmissible and deadly. There’s one line and 19 pages where it’s like, “Yeah, the mutations aren’t actually that big of a deal.” But you consider the scale of the math involved and you have what they call variants of concern. So on the table are the required booster shots and new vaccines, because you’ve got variants of concern, which are the result of, again, these mutations, and the booster shots and new vaccines bring back in the numbers as they’re improving. Because there is an issue. If you have improving numbers, then you also have a decrease or a decline in motivation to do anything. So the motivation for the non-vaccinated goes away. The variant discussion keeps the impetus for shots front and center.
Kevin: Well, and you wonder, too, I mean, if it doesn’t change things, why in the world would you jeopardize yourself? When we watch TV, they have these drug commercials that come on, and you’ve got happy people and happy music, and you sort of can try to figure out what the drug was for. But then you’ve got the next three minutes where it tells you all the bad things that can happen to you if something goes wrong with the drug. Guess what the vaccine doesn’t have to do? They don’t have to tell you all the bad things because it’s not even FDA approved.
David: Well, it’s gone through a different process. Again, emergency circumstances provide the legal protection for pharmaceutical companies. So what that has essentially done is remove the usual accountability for efficacy, long-term disease complication, and the liabilities attached with the application of the drug, because they have to disclose all the possible ramifications under normal circumstances. These are not normal circumstances. Again, emergency circumstances. It’s a different approval process.
The FDA has looked at it, but it’s given the stamp of approval in a different form and fashion, which again, it’s really a curious thing when pharmaceutical companies are removed from the liability structure. I mean, I can understand the rush to market of Moderna and Pfizer solutions. Again, we’ve got a crisis, and the fact that they went through the first, second, and third rounds of trials as quickly as they did was impressive, it was very impressive. But now, time has passed, and with the passing of time, you’ve got the opportunity for robust science to catch up with panic circumstance and those governmental protections that are allowed for the pharmaceutical companies under emergency circumstances. So I’d love to see a normal FDA approval at this point, and sort of a leveling of the playing field where all of these treatments are on a par with every other pharmaceutical on the planet.
Kevin: One of the things that you always asked, Dave, and we should all ask, is who benefits? And is there a benefit to the long emergency?
Kevin: I was talking about Her Majesty’s Secret Service, Ernst Stavro Blofeld, he developed a deadly virus, but what’s the gain? And who does gain? Do they really want FDA approval, because then they would have to tell people the bad stuff as well?
David: No, if I were one of the pharmaceuticals, existing in this space is the ideal place.
Kevin: Because you’re making money.
David: You did good science on the front end, and although you’ve got limited trials, there were trials, but you don’t really have to look over your shoulder on that. And you don’t have to look ahead to see what the future health ramifications are. And the disclosures, yeah, they are starting to have some disclosures, I know the fact sheet both for Pfizer and Moderna had to change because they’ve had some heart swelling, and, “Whoops, didn’t see that one coming.” Well, that’s right, because they don’t have to look into the future on a lot of this because there is no liability—
Kevin: But who benefits?
David: —isn’t a perfect world.
Kevin: Who benefits? What I want to know is, okay, it’s easy to say the pharmaceuticals. Let’s say that there is a cure. I mean, you’re going to take punches, because you have to get it out quickly. So in all fairness, I don’t want to just completely trash the pharmaceuticals, but behind the scenes, would it benefit certain groups of people to continue the long emergency indefinitely?
David: Absolutely. The benefits of a long emergency, this is not a question of science and solutions, it’s one of surveillance and social modification. I don’t think it’s merely eradication of disease that’s on the table. You look at the instinct of Foreign Affairs and our friends at the Council on Foreign Relations, and it gravitates towards the circumstantial conditions that justify a transformed global order. Reflect on that, it’s very convenient to have something that centers the attention of the entire globe, and unifies public policy. We haven’t had anything like that since the Cold War.
Kevin: One of the things I love working with you and your family at this company, Dave, is we have some amazing clients. And I’ve got doctors who I talk to, who are very well educated, not just in the medical field, but they’re also educated in the political, in the economic field. And looking at this, I remember a doctor I was talking to about six months ago, he says, “Don’t write off epidemiology, even if you’re not for the vaccine.” He says, “In the 20th century, there’s hardly been anything more valid and more life saving.”
David: That’s right. And just to qualify what I said earlier, actually, since the Cold War, we’ve had the War on Terror, which is something that definitely served as sort of a smokescreen for various public policies, wars of aggression, etc. So why were we doing what we were doing? Why did we show up in the Middle East? Why were we in— Why have we been in Afghanistan for 20 plus years? Well, again, there actually are things that have been justification of public policy, but—
Kevin: And was Saddam Hussein really involved with 9/11? Was he involved with 9/11?
David: Yeah, that’s a reasonable question. And now I think we can answer it pretty clearly. But in the moment, in the moment of crisis, there was a justification. And now you’ve got something that’s not just on the basis of national interest, but on a global basis.
Kevin: Right. But we’re not writing off the fact that there are vaccines to things that can kill us.
David: No, that’s right. I mean, you learn from science and the epidemiological success in recent decades, we’ve battled smallpox, we’ve worked past SARS, and MERS, with various forms of influenza. If you go back in time, you go through measles and cholera and more. And yes, there are major successes in society would not be what it is today without the application of science and reason to an approach that has brought us out of exposure to disease and given us a lot of health. There’s an appropriate role for science, as there is a role for deduction, and practical problem solving. 1854, the outbreak of cholera in London was solved by the removal of the handle from a water well pump.
Kevin: Really, that was the solution?
David: The infected well was identified as the source, and measures were taken to mitigate the further spread. In fact, it’s a little bit like the Taiwanese. Their decision was instantly to close the borders to residents of Wuhan in early 2020, implement screening, and immediately create a command center to drive a national response. As of May 1st, 2021, Taiwan had reported 12 deaths from COVID. 12. Deduction, practical action, there’s clearly a benefit here.
Kevin: So 12 deaths in Taiwan. I sometimes wonder, too, Dave, because this last year or two has been so different than any time in my life. A lot of times art is a predecessor or an imitator of modern day. I think of even Wagner in the late 1800s. The Nazi movement, the National Socialist Movement in Germany, actually picked up on that, whether it was right or wrong. It was something that they used because it explained what they wanted to see the times moving toward. I just wonder, you were talking about watching some things with the kids here recently that are starting to show this continual crisis. Was it Disney, the Disney Channel?
David: Disney Channel is playing off of the same theme, kind of reminds me of James Howard Kunstler’s Long Emergency. And over the weekend, I started a new Disney series with the kids called The Mysterious Benedict Society.
Kevin: That’s what it was, okay.
David: And in it, there is the emergency, which is this sort of perpetual state of social concern, and everyone is sort of living with anxiety and fear. But it’s through this general setting that information is distorted and behaviors are groomed. And someone in society wants other people on edge. Someone is leveraging policy decisions off of the accepted narratives of conflict and of environmental decay. It made for great discussions through the weekend. I actually could hardly believe it was Disney.
Kevin: You were talking about Taiwan, and they basically just said, “No one from Wuhan come in,” and they’ve had 12 deaths as of, what’d you say, May? But we live in America, wouldn’t we cry out that that was actually draconian and something that was way beyond our own personal freedoms?
David: Well, I mean, we did see a limitation of flights early on in January. And that was one of Trump’s first criticized moves, the Democrats were up in arms that he was overreacting. In January of 2020, I spoke with a friend living in the Middle East, and we were just exploring what was going to happen, knew that we weren’t going to see each other this year because his wife would be unable to travel. He explained that his country of residence was already in total lockdown, strictly enforced, a year jail time for leaving the house.
And I thought at the time that was draconian, and he gave me sort of the short critique of American culture that would find people bristling at any sort of infringement on personal freedom and autonomy, and just how there’s benefits to that, but there’s also drawbacks. And he’s right, at the front edge of a crisis, when you consider leadership, at the front edge of a crisis, you don’t know if measures taken are too much or not enough. And in time, you’ll be judged by what was too much or too little. So the challenges of leadership are great in the early stages of any particular crisis.
Kevin: Well, and you wonder if they can even handle a crisis, right, when they’re politicizing everything. Remember, this was an election year that we were talking, this all happened during an election year. So you were either for Trump or against Trump, you were for Biden, whatever the case was, we weren’t getting real facts. What we were getting was just a ton of argument. Remember that?
David: Political opportunism at every turn. The 2020 US election was occurring during a pandemic. And that meant that everything was politicized, both sides, viewpoints were codified, not around science, although they got tagged with that, not around deduction, not around sort of a national or global solution, but you had everyone in DC who was on one side or the other of a deranged political crusade, you are either one of the Trump haters, or you’re one of the Trump supporters, and the world was very easily divided. COVID conveniently leveraged political energy and existential fear across the spectrum of left and right. And much of what was politicized still lingers, and some of it we still call science.
Kevin: Well, we’ve talked about command and control economies, but command and control from the top is almost always the goal. I mean, independence is not the goal, that’s why this country was so different when it came about. But the Council on Foreign Relations, Dave, you take Foreign Affairs magazine, there are some interesting articles in there, but you have to understand the bent that they’re coming from. Would a Foreign Affairs or Council on Foreign Relations type of agenda, actually prefer a forever virus?
David: 100%. The election is behind us, but it would appear that Foreign Affairs is still preparing for the forever virus, as they title their paper, “The Forever Virus.” Now, I wonder why? And it’s like the kid’s Disney story.
Kevin: So this emergency, it’s like the old Bond villain, except for it’s not a person this time. And the question is, what side are you on? Are you a good guy? Or are you a bad guy?
David: And the way it’s been framed is, are you on the side of science or are you not? And as we’ve talked about before, science is not something that is strictly definable, in the sense that it is the tools we use to interpret the data, and there are actually many approaches to science. Oftentimes, we get locked into one particular mode of thinking, and what makes it very uncomfortable is when someone comes to the floor with a different theory, and all of a sudden you’ve got a different way of interpreting the same facts.
So commenting before in the new reality of the post Cold War era, without a definable enemy, easy to recognize, easy to caricature, global leaders have struggled to focus the energy and attention of their voting base on matters of concern that drive election outcomes. James Bond no longer fights the Russian bad guys. If you look at the most recent films, they’re great, but he’s fighting his own internal demons instead. It’s psychological thriller, more than it is spy thriller. And I think it makes for more interesting films. But the point is, complex enemies are not easy to rally against, keep it simple.
So maybe it’s as simple as global warming cooling change as a leverage point, simple enough for every man, woman and child to rally around. If you check the weather, it’s changing, self-evident proof that climate change is real. Perhaps it’s the forever virus as an alternative point of leverage to define— And when you define a political course, channel political energies in the years ahead. Rallying people around what you’re for is a lot of work and leaves you open to critique, it’s easier to default to sort of a negative battle, what you’re against. I don’t know if you’ve ever experienced this. You can be creative, Kevin, I’ve seen constant conflict between creative types and those who kind of sit back and give an armchair critique. They will never leave and do and create, but they’re more than willing to have an opinion. And they seem to know everything about everything.
Kevin: So it’s easier to be against something, and you can be against the anti-vaxxers as well. The problem is, if you were really wanting this forever virus and you wanted everybody to have the vaccine, okay, or move through various stages of the vaccine, what do you do when the vaccine turns out not to change your transmission of the disease? North Carolina baseball team—
David: I know, Wall Street Journal, June 25th, half the adults infected in an outbreak of the Delta variant of COVID-19 in Israel were fully inoculated with the Pfizer vaccine. So the article says, “It prompts the government to re-impose an indoor mask requirement and other measures to contain the highly transmissible strain. Preliminary findings by Israeli health officials suggest about 90% of the new infections were caused by the Delta variant. Around half of the adults who were infected were fully vaccinated.”
Kevin: Yeah, that’s a problem.
David: That’s a narrative problem. And yeah, you’re right, the NC, North Carolina State baseball team is now out of the playoffs. It’s a COVID story, the four positive tests for team players as of Monday were all fully vaccinated team members. Begins to change the conversation on masks and shutdowns and the assumptions you might have had about getting the jab and having protection, or might have had about getting back to normal. Because I tell you what, if we are in a forever crisis, and if this is a forever virus, we can go back to 2020 in a New York second.
Kevin: I just wonder, talking about art sometimes mimicking what’s going on, back in the old days, back in the days of kings and queens and castles, you had the jester, and the jester was able to say what he thought and the reason people enjoyed the jester was everybody else was thinking it too. I just wonder when comedy is going to start taking over on this and showing the ridiculous paradox that’s going on.
David: And everyone was afraid to say what the jester would say, knowing that they could lose their heads, whereas the jester could, in fact, get away with it. That was his role. It was almost like tension relief. Did you see the SNL skit, Boomers Got the Vax?
Kevin: I did not, no. Boomers Got the Vax.
David: Okay, if you like satire and can handle the body nature of SNL, then by all means, it’s must viewing.
Kevin: Well, it was always an experimental platform, even going back to the ’70s, so if this one was working, I’d like to see it.
David: Whether it’s NC State baseball, or the research that was done by the group in Israel, where half of those infected were all ready vaccinated, think about the narrative of that. Can you imagine if you were trying to sell birth control pills, and you said, “Oh, it will also require you to use a condom.” You’re like, “Wait a—”
Kevin: And you want me to do both? There you go.
David: Credibility might be an issue going forward. So in this case, what we have is blame on the variants. This is in fact what the World Health Organization is doing this week with the Delta variant. Vaccinated people, they’ve said vaccinated people still need to wear masks.
Kevin: I talked to a doctor yesterday who’s one of the top kidney doctors in the United States. He’s 78 years old, he’s— We joked about retirement, Dave, just a little aside. And he said, “No, never retire.” He says, “Just go part time.” He was in Maui at the time with his grandkids, but he’s still— He practices, and he said, “You know Kevin, be really careful with the vaccine.” He said, “You have to understand there are things that are being understated for other reasons right now.” Now, this is from what I would consider an expert opinion.
David: And so you’re saying he’s one of the better nephrologists in the country?
Kevin: Yeah, I find it easier to say kidney specialist, if you don’t mind. Yeah.
David: Well, this week, you’ve got the FDA adding a warning on heart inflammation to the mRNA fact sheets, both for Pfizer and Moderna. And according to a panel at the CDC, you’ve got that— I mean, it’s very rare, the heart disease that they’re seeing pop up amongst teens who’ve been vaccinated, but the CDC says it’s likely linked to the mRNA vaccines. That’s the TTP, thrombotic thrombocytopenic purpura. I don’t know what it is. But it’s—
Kevin: I’m glad we sell gold. That’s a four-letter word.
David: Right. It might give pause for expanding the shots to teens. At least it does for me. I have teens and you think, “Well, okay, maybe not.” You got the Israeli study looking specifically at the Pfizer vaccine linked also to that point of teens and TTP.
To be frank, there’s a lot riding on the forever emergency, and the forever virus to have a series of highly publicized child or adolescent vaccination catastrophes. So, I mean, if they really want this thing to stick as sort of a defining fear factor for shaping and molding public opinion, and defining public action, they’re going to not only need to disclose— Well, maybe they take the other side of the approach and say, anything that should be disclosed, we keep under wraps. I guess we’re going to have to see how it plays out. But the CDC, the FDA, they’re changing their tune a bit.
Kevin: Well, you talk about how they’re changing the tune. In perception management, we’ve talked about the Federal Reserve, which you’ve got the CDC, you’ve got the FDA, but actually the Federal Reserve, I’m going to shift us to the markets, because we’ll have people listening right now going, “All right guys, you guys are market guys. You’re not doctors.” We’re not. We play doctors on TV, but we’re not doctors ourselves. But the truth of the matter is, the markets are affected by this. And so I’d like to draw you into that line of thinking.
David: Yeah, well, uncertainty drives volatility.
David: So yes, this is still market commentary. If you say that the forever virus is something that needs to be whipped up, and concerns need to be brought to the fore on a routine basis, how exactly do the markets respond? Is that further excuse for Federal Reserve and central bank largesse? Or is that a reason for, just as we saw, March 2020, massive sell-offs in particular assets? Uncertainty drives volatility, so yes, this is still market commentary. COVID cost the global economy an easy $20 trillion. And we’re still dealing with exaggerated market dynamics that linger on even as the chaos and uncertainty of COVID at least appear to be dissipating.
Kevin: There’s unintended consequences to all this. We had the global financial crisis, and the enemy, going back to the Bond thing, the enemy actually became a downturn in the stock market or a downturn in the economy. So for the last 10, 11, 12 years, they’ve been managing perception, the Federal Reserve has. There’s been unintended consequences, look at real estate.
David: Real estate’s one of those COVID-influenced sectors. You’ve got a massive migration from city center to the burbs over to smaller towns, that’s been a significant change. Renters choosing to own, that’s another significant change. Eric Rosengren from the Boston Fed shared with the Financial Times on Monday of this week that we cannot afford a boom, bust, cycle in the housing market, that would threaten financial stability.
Kevin: Oh, you think.
David: In his view. To which we reply, you typically mitigate the bust by not introducing the elements that artificially promote a boom or bubble dynamics.
Kevin: So if you don’t want diabetes, don’t just overdose on sugar.
David: That’s about right, yeah. So fixed rate mortgages at 3% or less come to mind. Historically, loose financial conditions do as well. Is there a coincidence between skyrocketing sticker prices and subsidized lending? $40 billion in monthly mortgage purchases from the Fed. That’s more than a rounding error. 40 billion a month.
Kevin: Yeah, those are mortgage-backed securities. Okay, so mortgage—
David: That they’re bringing onto their balance sheet, setting artificially—
Kevin: Just like they did back in 2005, 2006, before the crash.
David: Well, you’re setting artificially low borrowing costs, and that naturally promotes artificially high asking prices on the other side of the equation. So over the last year, you’ve had existing homes which have increased in price by 23.6%. New homes by over 18%, according to the National Association of Realtors.
Kevin: Are these normal price increases, Dave? I don’t think so.
David: Not exactly. But the frenzy to own has emerged, not surprising in the context of pandemic, we want our own space. And to the degree that we’re cooped up, we want to define our freedom of movement and existence within the walls we control and the yard that we mow. Tell me I can’t go out, tell me I can’t have friend, great, I’m just going to need a little bit more square footage. There’s a huge psychological flexing going on here, coinciding with a below-trend availability of supply. And that also is coinciding with commodity prices going higher. A very unique cocktail.
Kevin: I have a client who owns a packaging company, and I’ve known him for 30 years, they’re quite successful. But he said, “Kevin, paper, the paper that we package, these cardboard boxes, it’s gone up 26%.” He said, “The glue’s gone up.” But he said, “You know what’s crazy…” I was telling my wife this last night because she wants me to get rid of a few pallets on the property. Wood pallets. He said, “The thing that’s really tough on him are the wood pallets that he has to put these packages on, because the wood, as its measured in board feet, has gone up from $300 to $1,600.” He says, “The pallets alone are creating huge inflation.”
David: In college, we would go to the cafeteria on a Friday or Saturday and ask if we could haul away their pallets and they were more than happy to let us take them. We’d take them to the beach, and we’d have a bonfire at the beach. College, playing guitar, sitting out at the beach, bonfire. We’d burn that stuff. It’s trash.
Kevin: Pallets are Legos for men, okay? I’ve got five acres, and my son and I, we would go get pallets, and we’d either play paintball with them, we’d turn them into ramps, you burned them. But now they’re very, very expensive.
David: Well, Rosengren is right about financial stability being jeopardized by a bust in real estate. All we see at present is boom, no end in sight. But like with any market, the solution for high prices is, as they say, high prices.
David: People slow their purchasing, even as— You have builders scrambling to catch up with seemingly unending demand, potentially throwing you into oversupply. And then a price correction.
Kevin: I think it’s worth repeating what you said there, the solution for high prices is high prices. I mean, it’s obvious, but it’s not obvious at the time, and it’s good to remember that.
David: And it’s always the same way on the other end of the equation. The solution for low prices is low prices.
Kevin: Low prices. Look at oil last year.
David: Yeah. Because what happens is you end up shutting down production, and as soon as you shut down production, you’ve changed supply, and you watch demand and supply sort of find each other somewhere in the middle, and that’s how prices take care of themselves.
The consolation in real estate is that a reversal in price takes a bit of time, more time than stocks or options or things like that, which can— or cryptocurrencies, which can reverse course in a day or in a second. You can lose 50% in an equity position in a month, right? Real estate takes more time, in part because you’ve got asking prices that have to be put together, appraisals, offers to purchase or sell. They’re not generated with a click of a mouse, right? They’re not run by an algorithm. It’s a process which typically takes weeks to months.
Kevin: We talked last week, too, about you don’t always have to have things rising in demand and have the price rising. In other words, the price can rise when demand is falling. And I think that’s happening to real estate right now, too. There’s a little bit of a delay, but aren’t May home sales down?
David: We’ll have to see if one month is a trend in the making. It’s too early to say because I think a part of the reason why May home sales were down was because there was a limitation on finished supplies. So you look at the current inventory, and only about 10% of that inventory was finished and available for purchase. So it really skewed, I think— May home sales were down 6% month over month. Again, limited finished supplies being an issue.
Kevin: But you said prices were up almost 25%.
David: Yeah, let’s go back to the year on year price numbers. $374,400 is the median sales price of new homes. Actually, the average was 430. But let’s just use the 374,000 number. If you look back over the last 20 years, that number has come up, it’s come up from 175,000. That was the median price in 2001. So over the last 20 years, you’re up roughly 114%. That annually compounds at about a 3.87% increase per year, okay? Annually compounded 3.87% per year, you rarely see an 18% to 23% increase in price. So the year on year change of 18%, it’s almost five times the average increase. What we’re saying is the rate of change for a single-family home is accelerating above a normal rate. If you wanted to look at it differently, the most recent year on year increase of 18%. If that was normal, if you assumed that that’s what happened every year, then over the last 20 years, we referenced the price of the home, the median price in 2001, 175,000. If it’s compounding at 18%, instead of—
Kevin: It would be millions.
David: Your single family home is now priced at $4.8 million today. All that to say—
Kevin: So it’s not normal.
David: It’s not normal. It’s not normal. This is not a normal market. And like all Fed chiefs, Rosengren is, to this conversation, a day late and a dollar short. His Financial Times comments, they’re great, an after-the-fact I told you so. But the reality is that he is on the team delivering bubble dynamics via asset purchases and artificially low rates.
Kevin: Okay, but is it just the low rates? You’ve got all these trillions of dollars that are being printed right now. You’ve got hedge funds and pension funds that are just awash with liquidity. We talked about the banks being awash with liquidity. And now you’ve got people who are needing to buy single family homes who are competing with hedge funds that have almost unlimited amounts of money. In this case, it’s not the artificially low rates because they’re not borrowing money to buy that property. They’re just coming in and buying it. I talked to a client in Texas, he was in Spring, Texas, and he said, “Kevin, you can’t buy a home in this area, because all of the pension funds and the hedge funds are coming in and buying it up.” It’s just causing massive— in Texas.
David: You’re right. So you’re talking about a state where you’ve got individual investors, pension funds, private equity funds, hedge funds, everyone is income starved. So you’re dealing with investor expectations. Blackstone picks up another 17,000 homes. That was a $6 billion deal we mentioned a week ago. 17,000 homes further establishes them as the nation’s largest landlord. Keeps the institutional buying pressure on single-family home supplies, and of course, on prices as well.
Kevin: Try to be a young couple trying to buy their first home. You can’t compete with Blackstone.
David: No, not really. So Mester commented that very low rates can lead to excessive valuations.
Kevin: Gosh, I love the obvious stated in this commentary. Keep going.
David: Does that include housing? Yes. Is it equities pushing towards a cyclically adjusted price earnings ratio of 37? Yeah. We’ll probably hit 40 this year.
Kevin: That’s 37 years of earnings. If you’re buying a business and you know it’s going to take you 37 years to break even, you might think twice about buying that business. The stock market is at 37 right now, and you think it will get to 40?
David: Well, I do, and then you’ve got bonds, negative yields. Again, Mester’s comment is stating the obvious. Yes, low rates lead to excessive valuations. It is the everything bubble. Believe it or not, relative to other developed countries, even though prices are high and going higher in US residential real estate, US residential real estate is still relatively cheap, relative to, again, your other developed countries.
Kevin: Okay, so if everybody’s buying everything— You talked about the everything bubble, and it was the cover of an Economist magazine last year, if you recall. I know you were subscribed to the Economist. If everybody’s just buying, okay, from real estate, to stocks to bonds, is anybody ever going to sell? And can we if we need to?
David: Yeah, well, the biggest concern in the market today is not an obvious one. Liquidity. It’s my concern. You think liquidity exists and therefore an asset price moves higher, and it moves higher. And you think, “Well, I can always sell,” because it appears that there’s always a buyer. But when the sell side is tested, and a bid is requested, you then figure out how much liquidity there actually is. The Financial Times ran an article last Wednesday, worth bearing in mind, downward spiral in liquidity is leading to more market shocks. The article says that broad market liquidity, the ease with which investors can buy or sell a security without affecting its price, has been in a downward spiral for more than 10 years. The market makers’ role has been largely taken over by bots running high speed algorithms.
Kevin: And they only know how to buy when everything’s buying, they don’t really know how to sell en masse, do they? I mean, the bots don’t know what to do when it comes time to sell.
David: Except back away, or hedge positions, which can exaggerate the downside in a particular trend. So volatility is something that is more and more common. It was interesting, I read one study where, over about a 25-year period, there were, I think, nine days, if I’m— This is just off the top of my head, forgive me. But I think it was nine days over about a 25-year period where you had volatility of 5% or greater. And yet, since the global financial crisis to present, we’ve had 62 of those days. Volatility is on the increase. We had an explanation for that by one of our guests who was a part of the creation of Dodd-Frank, and said on our commentary, “I think I created a monster.”
David: Yeah. So when Richard Bookstaber joined us to discuss his book The End of Theory, an excellent read, I highly recommend it, that was a part of his conclusion. We solved the problem of global financial crisis, creating more oversight and limiting the incentives of the bad actors on Wall Street. But oh, we also changed the incentive dynamics for every player on Wall Street, including the market makers. So if you count back to the year 2000, not only have we seen decimalization occur where stocks no longer trade as fractions, but instead as decimals. Then post global financial crisis, we’ve got market makers who lose an incentive to trade their own portfolios for profit, and thus are not really interested in taking on inventories of stock.
So the biggest concern in the market, it’s not obvious every day, it’s not obvious every day. But liquidity, you think it exists, and therefore the asking price is moving higher. But wait until someone tries to sell. So from stocks to bonds to real estate, we will discover what new liquidity dynamics look like, either when we run out of buyers, or buyers become sellers due to some panic, or reaction to changing circumstances. What might those circumstances be? A change in rates, a change of relations with China, an external event like a default in one of the great Chinese behemoths where we could see a massive default any day, or maybe it’s a change in the public encounter with the forever virus. Time will tell.
Kevin: You’ve been listening to the McAlvany Weekly Commentary. Now, I’m Kevin Orrick along with David McAlvany. You can find us at mcalvany.com. That’s M-C-A-L-V-A-N-Y.com. 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 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.