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The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Market Drama: Does “Godfather” FED Still Have Us?
June 22, 2021

“In the Godfather, there’s a point where the Godfather’s judged to be losing his grip, and you then have the other families previously beholden to him test him. In that testing, where leadership is not crystal clear where those families imaginations, they run wild, and there’s visions of grandeur, which are filling the heads of potential rivals. There’s chaos, and there’s blood in the streets. A muscular Vito Corleone keeps the peace, and everyone goes about their business. Monetary policy keeps the peace too.” — David McAlvany

Kevin: Welcome to the McAlvany weekly commentary. I’m Kevin Orrick, along with David McAlvany.

We were talking last night, Dave, there’s a book that I read, actually read is probably the wrong way of talking about it, because I actually worked through it, called Guesstimation: Solving the World’s Problems on the Back of a Cocktail Napkin. It was written by a couple of professors, Lawrence Weinstein, and John Adam. It’s very unassuming. It basically talks about how to check math and figure things out using big numbers. It’s got everything from transportation to energy, to environment, hydrocarbons and carbohydrates, the atmosphere. What ends up happening Dave is when you do math on the back of a napkin—when you’re told something that sounds, well, you want to just trust the number—you can actually break it down and learn not only about math, but learn about science, and actually learn about politics and control. I wanted to bring this book up to our listeners because as we talk about these numbers, whether it’s economics, whether it’s environmentalism, whether it’s politics, we need to check the numbers to see if we actually agree with the direction that the politicians, or the economists are pointing us.

David: I’m not a nutritionist, but it was my version of back-of-the-napkin math to figure out what the water usage would be before a workout and after workout, and weighing yourself before and after and figuring out what your weight loss is, is a part of that. Then trying to figure out, okay, if my average consumption of salts is X, Y, and Z, or electrolytes are A, B and C, what does it need to be if I’m losing at double the pace, or three times the pace because of the temperature, because of the— and again, it’s not high math, and I’m not a nutritionist, but it serves me well, and I think the back of the napkin, actually, it’s what we do with the perspective triangle. In the sense that we want someone to be able to sit down with their kids or grandkids, and describe, here’s what you’re asking your money to do. In rough terms, these are the assignments, these are the mandates that you have. Liquidity is a mandate, insurance is a mandate, growth and income is a mandate. When you go around—

Kevin: It’s only three or four things, and you just categorize them and you go, okay, now what do we do with these three or four things?

David: But if you can put it on the back of a napkin, and explain it and distill the world down into something that is simple, it’s amazing how effective, how useful it is. You can make the world very complex. I think it was Oscar Wilde who said, I wouldn’t give a fig for simplicity on this side of complexity, but I give my life for simplicity on the other side.

Kevin: In this day and age, it’s very important to understand what are the drivers of things. Not what we’re told are the drivers of things. I want to look at last week, Dave, because if the listener who heard the program last week paid attention, you were saying that there were several indicators saying that the metals market could come down some, and of course within a couple of days Powell spoke, and we had quadruple witching. Can you explain quadruple witching? These were things that we knew were coming. Can you explain that?

David: It was a big week, and depending on whether or not you want to spend time in the complex side, or just get to the simple side. The simple side would be a lot of leverage in the system, a lot of speculators, and their date to be right was Friday. That’s the simple side. The simple solution.

Kevin: The price and the date. This is one of those where you have to hit the target, and hit it perfectly.

David: That takes us back towards the complexity involved, where quadruple witching references four different expirations. You have month end and you have quarter end, and it’s month end for options, it’s also month end for futures.

Kevin: So everything comes together at once?

David: That’s right. You’re leveraged players that have picked both the specific price target and the narrow timeframe to be right, add a lot of short-term volatility to the market, when their expiration of bets occurs, that was Friday. But for all the drama in equities and currencies and commodities last week, we looked at the indicators of structural stress and they were almost non-existent. We are talking about a lot of volatility between lumber collapsing, 15.2%. It’s now down almost 50% from the May 10th highs. With doctor copper down 8%, zinc down 7.3, nickel 5.9, the metal tin down 5.4%, silver down 7.6, platinum 9.3. It goes on and on. Soft commodities as well, soybeans, sugar, coin, wheat. But again, it comes back to what was really happening Friday, and was it informed by what happened Wednesday with a recounting and shifting of the [unclear] plot? The Fed meeting mid week was important. Also, midweek we have the print for PPI, previous week we had had inflation over 5%. Now, the Producer Price Index, a little bit different than CPI, 6.6%, that shouldn’t be forgotten.

Kevin: Even higher.

David: Then again, Friday is expiration of speculative bets. But Friday, just as an example of how big this was. If you’re talking about just single stock options, not indexes, and not your futures plays, but just single stock options. $818 billion was expiring on Friday. Now, you’re either right or wrong, but as of Friday, it’s expiring. There was a lot of people who had their options expire worthless. Now, there’s some gamesmanship—gamesmanship is a friendly way of saying manipulation involved coming into expiration. Again, 818 is not including your leveraged future contracts or index options. It was a big day, in a context of a big week.

Kevin: What you’re saying is we had a lot of drama, but you were talking about the structural stress indicators that you and Doug Noland watch, and your team. One of the structural indicators I think you watch is, people who are insuring for volatility. Those hardly moved.

David: That’s right. Now, there was enough concern in the white house for the President to gather what’s known as the President’s Working Group on Financial Markets, affectionately known as the PPT or Plunge Protection Team

Kevin: We’ve seen them really since 1987.

David: They gathered the White House prior to the market open on Monday. We did have a strong rally Monday, no surprise there. I don’t know that they were pulling strings as much as answering a question for the President, which is, “All is well. We’re fine. We’re good.” In fact, that’s, as Doug and I and the whole team we’re looking at particular indicators, there was not a lot of stress within corporate credit, there was not a lot of stress within the credit default swap markets. In spite of the high drama last week, there really wasn’t a lot going on.

Kevin: But the question Dave is, is the Fed going to continue to have everybody’s back? Wasn’t that the question when Powell, when he spoke, people were starting to say, “Wait a second, maybe it’s not always going to be there.”

David: That’s the deal. The old mode of QE and stimulus, and the shifting of the ‘dot plots’ where you have a certain, almost polling, that takes place among your voting members, and how are they going to vote? To tighten, to raise rates, what are they going to do? There’s a migration in terms of the number of people on the committee that do think we should be raising rates at some point. Are they just talking tough, or are they in the old mode of QE and stimulus? That’s the question the market’s trying to solve is, is there a new direction in terms of monetary policy accommodation?

The significance of a reduced footprint in the market, the Fed’s footprint in the market. This is a big deal because it deals with an underlying assumption that market participants and speculators have. The market has tended to ignore issues, real issues, but chosen to ignore them with the idea that the Fed is willing to provide a tonic for any market jitter that emerges. If it’s a bigger issue, the stock market in the last few years has gone higher, not lower, on the belief that the Fed would step in even more. So the worst is better mindset. The worst is better mindset has been operative, and now all of a sudden, if the Fed is not going to be as active—

Again, many issues have been ignored, that’s because of Fed largesse. The market’s forced to reappraise if that’s no longer going to be the case. What are we concerned with if the Fed is backing away? We could be concerned with anything. We could be concerned with Chinese tensions in the South China sea. We could be concerned with growing tensions between the G7 NATO and China, we could be concerned with Chinese credit, we could be concerned with emerging market volatility given a spike in the dollar. There’s a ton of things that we can ignore if the Fed is in play, but you do tend to pay more attention to all those little things on their own or collectively, if the Fed’s backing away.

The perception is that with this meeting on Wednesday, timeframes have been set for tightening, with rates going higher by 2023. So that’s a long time out, and they’re still going to do QE between now and then. Better part of $2 trillion in QE between now and then. The balance sheet will go lower at some point, but again, this is way off in the horizon. That’s the perception. I don’t think it’s the reality. The Fed’s part in the story is not going to diminish anytime soon.

Kevin: They had a Godfather marathon on TV this weekend, and my wife had it on in the background. Everything seems to run just fine with the mob, as long as you’ve got the Godfather maintaining full control. Sometimes, that’s a pretty bloody full control. I wonder if the Fed’s a little bit like that? As long as they’re maintaining full control, or the perception of that maintaining control is there, things run smoothly. In fact, you named a bunch of things that I should be concerned about. Why? Why would I be concerned as long as the Godfather Fed has control?

David: When I got married 22 years ago, we went on our honeymoon to this little chalet in Stowe, Vermont, and Mary Katherine had a high fever and was sick the entire time. It was kind of a drag, but we watched the Godfather. I married a Sicilian, and we watched the Godfather on our honeymoon, the whole series.

Kevin: The horses head in—

David: I’m asking myself, “What have I gotten myself into?” But, in the Godfather, there’s a point where the Godfather is judged to be losing his grip, and you then have the other families previously beholden to him, they test him, and in that testing, where leadership is not crystal clear, where those families imaginations, they run wild, and there’s visions of grandeur which are filling the heads of potential rivals. There’s chaos and there’s blood in the streets. A muscular Vito Corleone keeps the peace and everyone goes about their business.

Monetary policy keeps the peace too. Continued expansion of the Fed balance sheet provides the basis for so many presumptions amongst leveraged speculators that translate into stabilization within the financial markets, where there would otherwise be instability. A stabilized financial market instability, if you can imagine that. You remove the foundational expectation of monetary policy accommodation, and there are a variety of market uncertainties that emerge. Previously ignored issues, they’re already present, but minimized concerns. They returned to the fore, and factor in significantly in market direction. This is why we can play with the idea of financial market tightening, count the dot plots, and say, “Okay, well, two years from now, we’ll have two moves, and rates will be higher and the dollar will be higher.” But we know that the Fed is intolerant of equity and bond market price declines.

Kevin: We both remember the taper tantrum. The taper tantrum a few years ago when the market thought that the Fed was going to start tapering, they threw a tantrum, the market fell quickly, and then of course, everybody was like, “Oh no, no. Sorry. Godfather is still in control. Here. Here’s some money.”

David: Even if it’s not Vito, it may be Michael stepping in to reestablish family muscularity. Again, the monetary version of the Corleone family. It may not be Jay Powell. I don’t know who his successor will be, but if there’s any concern about the lack of muscularity in terms of monetary policy, be assured they are not done. The reality is, we talked about inflation being transformed and moving away from needing monetary policy inputs anyway. This is just icing on the inflationary cake, an asset bubble cake, where fiscal policy and directed political largesse is actually more important to the inflationary scenarios of the future.

Kevin: So what happened last week? We’re starting to see better economic numbers. Labor markets, what have you.

David: That’s a part of it. There’s an acknowledgement of improved labor markets, an acknowledgement of economic growth, and a recognition of rising inflation. All of that comes out in Powell’s testimony. These in themselves suggest that the Fed has to back away from radical market support. There’s a certain accountability there. In fact, that is what the market is engaged with. There’s no panic. We still have a year or more of QE, $120 billion a month in QE. According to the equity bulls, don’t worry, the game’s going to continue for the foreseeable future.

Kevin: That’s monthly. 120 billion a month. It’s just like the global financial crisis on steroids.

David: They’re right. They’re right. They have access to liquidity, that piece is not yet changing. Last week was interesting because we had nearly that kind of balance sheet expansion in one week, not one month. If you look at the numbers ended Wednesday, again, not a month, in one week, 111.93 billion in balance sheet expansion, 83.85 billion going into mortgage-backed securities.

Kevin: Wait a second. They’re going into mortgage-backed securities. I thought we weren’t fueling another real estate bubble from the mid 2005, 2006?

David: Yeah. That’s just about double what they’ve been putting into mortgage-backed securities on a monthly basis. They usually split that 120 monthly. 80 to Treasuries and 40 to mortgage-backed securities. This was slightly more muscular. Liquidity is still very present.

The bond market, however, was saying something different. I think it’s important to pause here. The most important moves last week were in the bond market, and what the market said, and how that message is interpreted, are two different things. Because I’ve read a dozen articles about how flattening of the yield curve, that’s an indication that the concerns of that inflation are gone, and this whole story of transitory inflation, I’m so glad that we were right about that. We had that confirmation from Jay Powell, who said, “Look, yeah, we expect an uptick, but then a downtick.” Talking about it in such a manner that it really conveys: they’re in control of those variables. But what we see instead, is Treasury purchases as a bid for safety, not as a part of the unlined of an inflation story, but actually as a move for, what does the world look like with less of the Fed involved? It looks like a world where volatility re-emerges.

Kevin: Yeah, and yields come down because people are running for safety.

David: Our team spent an extended time unpacking that yesterday. Long bond yields shrunk considerably last week. The yield curve flattened. Of course financials got crushed. You’re looking at a squeeze on that interest margin, so net interest income evaporates with a flattening yield curve for your banks, that’s the financials around there on their keisters. So someone wants to own long bonds in a major way.

Kevin: Is that then the judgment that inflation is transitory? We’ve been discussing that. Is it transitory? Is that why people are owning the long bonds? Because in the long run, owning a long bond is not good with high inflation.

David: That’s the issue I’m pointing to, is you’ve got the message and you’ve got the meaning, and they’re not always particularly clear. The convenient read that fits Jay Powell’s transitory inflation instinct we beg to differ with. Bid for safe havens is our bet. That’s our bet. Similar dynamics existed in the lead-up to the global financial crisis back in 2008, where bond yields started to decline, and the reality was that sophisticated and concerned investors were aware of instability layered into the system that was likely to become destabilizing.

Today, financial market instability is stuffed inside a box. We call it the Jay Pandora Powell box. He’s sitting on top of it. And last week’s move in long bonds, in our view, had very little to do with moderating inflation expectations, and more to do with market instability already existing, contained within the Jay Pandora Powell box.

Kevin: They’re questioning whether the Fed is going to not keep control of the chaos. If the dawn of the mob is basically stepping back?

David: That’s right. If the Fed’s not keeping chaos controlled with endless promises and infinite accommodation, then investors have to reappraise what risk looks like and what the consequences of risk-taking are in the world around them. Paying attention to the implications of destabilization, reappraising leverage and the degree to which it leaves you exposed, reappraising asset allocations.

Kevin: Even if it means negative rates. We’ve talked about this just over the last few months. Bonds right now, anything safe is well into negative territory.

David: Yeah. Bonds are in this weird place where you’re already at deeply negative real yields, but nevertheless, they represent a liquid and secure asset, in the case of general equity carnage, in an unwind of leveraged, whether it’s options, futures, or customized derivative positions, they represent a safe haven play. You remember our conversation with Andrew Smithers. He just felt like he was at an age where he didn’t need to take the market risk, and he’d happily take a negative 3% real return over a 40% hit to his net worth, and that was the appraisal. Take the bonds that are in that weird place of negative yields, but at least they’re liquid and secure in the case of an equity upset, actually we’ll see some positive traction there.

Kevin: He knew that the valuations were excessive when he stepped out of the market a few years ago. Don’t the professionals believe— with the Shiller PE up in the high 30s, do they believe that the valuations are excessive?

David: No, professional speculators know that valuations are excessive. These players know that liquidity is driving asset bubble dynamics. You face a certain professional risk stepping out or reducing your market exposure, because then you underperform and assets migrate. But just as they were dancing in early 2008 because the music was still playing, so, too, you’ve got equity investors, they heard from Powell what they wanted to hear. This is last week. Look, there’s going to be real tightening of financial conditions, but it’s at least a year or more way. Liquidity is still flowing, today is another grand day for making money with money on a leveraged basis, whether it’s using the carry trade, or margin debt, or structured products with leverage built in, get up and dance for as long as the music is playing.

Kevin: Is there a difference, though? A typical equity investor is probably a short-term thinker. A bond investor is a long-term thinker, typically. Especially income investing. Is there a difference now in the way, you were talking earlier about the quadruple witching where you have to pick things, timing-wise, absolutely perfect. I don’t want to play that game because it ends in disaster if you don’t pick it right. But what about timing? Let’s say a person says, “All right, for the next year I get to dance, and then I step away.” Are you trying to catch a falling knife?

David: Bond investors blinked, and they were involved in the conversation last week in a major way because Powell blinked. Our take on the flattening yield curve is that at least a few big players see the shrinking of Fed accommodation as consequential for every category of risk and uncertainty. Which means that the markets are likely to be far more volatile and sensitive to any newsfeed, any newsfeed. Whereas those same news data feeds would have been ignored up to this point.

Last week was a big week. Bond investors have an eye on the horizon, and you’re right, they have the 3, 5, 7, 10 year view, not the 3, 5, 7 nanosecond view. They’ve got their eye on the horizon, and they always keep an eye on the door, the exits.

Equity investors—today that includes massive options trades—have a much shorter term horizon. You’re right about that. I think for them it’s, “Look, we’re feeling the music, we’re enjoying the motion of the moment.” Shorter-term players anticipate what is happening right under their feet, and are often ill prepared for the reality of the earth moving underneath them.

Anticipation is—and this is where I have a significant issue with the idea of market efficiency and the efficient market hypothesis—anticipation is supposed to be a part of the genius of the market, and a part of the presumption of market efficiency, but add enough leverage to the system, and everyone becomes a speculator. We’ve seen that happen even in the bond world, even with government bonds, where people are making calculated bets on the shrinkage of interest rates further, because of the expansion of central bank balance sheets, and it’s no longer a question of return of principle with an income component. It’s just a speculative bet.

Kevin: You’ve actually talked, as an analogy, that it’s like adding alcohol to the beverage at a party. The more alcohol you add, the longer they dance, and the more they dance. It may be that they’re not going to think about the headache for the next day, are they?

David: No, not at all. You add more liquidity in the form of a happy juice to the system, and it’s like the disco lights and loud music, obscuring the possibility of tomorrow morning’s headache. Get up and dance as the equity community. The Treasury investors, I think, are focused on different variables, and I think that’s worthy of noting.

Kevin: What you’re saying though, is if we’re going to talk anything transitory, it’s probably the perception that the Fed’s not going to actually be there, that they can’t raise rates. The Fed can’t taper because of— look at the interest we’d have to pay on that. Close to $30 trillion in debt at this point?

David: I think more to the point, last week when we talked about the Summers-Barsky thesis, is that if they move basis points by 25 or 50 or 75, you’re still talking about deeply negative rates in light of the inflationary environment. In terms of the long-term implications for commodities and precious metals, you have to know what is truly going on with the inflation numbers. We would argue that monetary policy shrinkage is only temporary, and if they do raise rates, you’re talking about a token amount. Again, Powell dethroning himself from atop of the box, Pandora’s box, there will soon be circumstantially driven justification for balance sheet expansion, bringing out all the other tools from the toolbox, in the not too distant future. Whether it’s swap lines or repo market activity, or any other needed tool to re-establish a steadiness in the equity market, they care about pricing, or they at least care to try to control pricing.

Kevin: But the catch, the catch is you always devalue the currency that you’re printing out of thin air.

David: The long-term cost, yes. The long-term cost. Ultimately, dollar weakness is the most likely consequence of them having been involved at this point and continuing to be involved. Plus, what we talked about with radicalized fiscal policy. Looking at last week’s short-term volatility, where dollar strength, commodity price weakness, including gold, silver, platinum, palladium, if anything’s transitory, that kind of commodity price weakness is transitory.

Kevin: You talked about something called the Mac D last week, and you talked about the moving average on gold. You had said, “Look, look for a correction here. It’s probably not going to be that great of a correction.” It really wasn’t. If you look at a five-year chart on gold, we’ve seen a number of these. It’s a quick correction down, and then a resumption up. Is that what you’re thinking now?

David: There’s a couple of things going on. One is if you’re looking at gold trading and a knee jerk reaction to a move higher in the dollar. The dollar is about three percentage points away from its cap. Now, of course you can break through resistance, but the dollar’s first major resistance is only about 3% above. You could say, “Okay, if the dollar is not immediately moving considerably higher, then gold is not moving immediately considerably lower either.”

Last week we discussed the perch gold was sitting on, technically weak, ready for a push to lower levels. We got the push. That’s normal. Momentum to the downside abated at the end of the day Friday. A little bit of weakness early this week, but nothing that would scare the whiskers off a cat.

What we had at the end of Friday was also the end of options and futures expiration. One of the unfortunate realities of the market in its current form is that derivatives—that is, the variety of leveraged bets on top of primary assets—those leveraged bets are abundant enough to overwhelm the prices of the assets that they derive their value from. Last week represents exhibit A.

Expiration’s behind us, and the markets are on a more even keel, commodities, equities. Treasuries remaining a little cautious, which is important to note, but it’s also important to note that not all bonds are created equal. Junk bonds, otherwise known as high yield bonds, were in negative yield territory for the first time ever, after inflation. So real versus nominal yields. Real returns on high yield, the indexes— This is mind boggling to be in negative territory, because over the last 15 years on average, junk has sat with a positive return of at least 3%, and now they’re negative.

Kevin: There’s something you brought up in the past, too, is that sometimes an index, like the S&P 500, can look like it’s setting an all time high, and everything underneath just a few stocks is actually going down. That seems to be the case. Now, I think of it like an iceberg. You see the very tip of the iceberg. Let’s pretend like the tip of the iceberg, we’re saying, “Hey, that’s the S&P 500. It’s hitting all time highs.” What we don’t realize is, this massive, massive amount of mountain underneath, of stocks that are not doing that.

David: That’s where we have seen a lot of individual company slippage. The S&P 500 is let’s call it 1% away from 52 week highs, and you’ve got a record number of individual companies trading at a one month low. That’s very curious. Record number of stocks that are one month lows at the same time the SMP 500 is within 1%. In 94 years of S&P history, the numbers have never looked like this. Never.

That divergence would suggest there’s a broad base of weakness even though the indexes are still getting some positive play. We mentioned weakness in gold technicals last week. If we’re looking at the SPY, or the S&P 500 Index Fund, a break below the 50-day moving average, for the SPY, ends up being highly consequential. That’s only about 2% below current levels. We actually broke that level last week. Monday’s rally kept the SPY in a positive technical position, but it’s on the edge. It’s on the edge of breaking down, and it’s doing so in the context you mentioned earlier, the Shiller PE or the cyclically adjusted price earnings ratio, but you can compare that also with the market cap to GDP, which is above 200%, you could look at the S&P price to sales ratio, never been higher, new record, 3.1.

These are, again, indications of a very expensive market, sitting on a technical knife edge, and yes, there’s people involved in purchasing Treasuries as a means of protection, and there’s other knee-jerk responses, which would say, “Ah, I don’t think we need gold because the dollar is going higher and the Fed’s backing away.” I think we fairly well covered last week that you have to see rates go considerably higher and inflation disappear for the gold story to become muted or negative. Again, this goes back to Larry Summers, and I forget Barsky’s first name. I apologize. But the research they did back in the ’80s in terms of the negative impact on positive real returns to the gold market.

Kevin: So solving the world’s problems on the back of the napkin. A lot of times you’ll pull the napkin out, not when you’re trying to figure something out that everybody knows, but when there’s a strange anomaly. Dave, the strange anomaly right now, I’m switching gears here, but COVID, and the COVID deaths in India, how in the world do you get a drop this quick? We’ve seen it with bitcoin, but how do you get a drop that quick?

David: If you look at a bitcoin chart and you looked at COVID case, put that on a chart, in India, they look almost identical. This meteoric rise, and then this catastrophic fall. Only in the case of the Delta variant in India. It’s not catastrophic.

Kevin: It’s wonderful.

David: It’s great.

Kevin: A lot of people are not dying now.

David: You have the Delta variant expanding its global reach in India, where just a short time ago, new cases were at 400,000 a day. The New York Times has some great charts and graphs reporting the real time stats on India, and those cases are now down by over 80%, and only 4% of the population is vaccinated. I think that was interesting. Daily deaths are down 75% from their peak, and what the New York Times did not note, but which is commonly known, is the most common treatment in India is Ivermectin.

Kevin: It’s inconvenient, isn’t it for the pharmaceuticals right now? Ivermectin, I think most people can just get it.

David: It’s good for Merck, although it might not be good for Moderna, Pfizer, and Johnson & Johnson. You see the collapse in bitcoin, now past the 50% mark, and obviously it’s unrelated to Ivermectin, but the charts again look weirdly similar. Meteoric rise, subsequent fall. It’s hard to imagine, but they actually look almost identical.

Kevin: Dave we talk about anomalies and where you have to do your own math. We hear about the carbon footprint, and we’re told exactly how much we’re supposed to pay. The girl who cuts my hair every six weeks, she’s very environmentally connected, and she wrote an article about how we need to have a carbon tax. That’s going to solve the problem. But I have to go back to this Guesstimation book, Solving the World’s Problems on the Back of a Napkin. One of the questions that it has, and this is not a political book, it’s just trying to teach you how to do your own math. One of the chapters, section 3.8, says, how much domestic trash is collected each year in the United States? Then what it does is it gives hints. It says, “How much trash do you throw out each week?” Another hint is, kitchen garbage bags hold about 13 gallons. Then estimates of how many humans are there in the United States. You sit down and you do the math, and it comes up with a very large number, and he lets you do it first, and then he comes back in and says, “Okay, well, this is what we guesstimate.” But if you take the trash, I think I know some big players who are very environmentally conscious, who actually have a very large carbon footprint if you look at what they own in trash.

David: It’s been recognized that wealth and carbon footprint are correlated. If you have a private jet and have three different houses on three continents, and need to go from one place or want to go from the Hamptons to the south of France, you don’t exactly have a micro carbon footprint.

Kevin: But you may have a really high ESG score. Why don’t you explain the ESG score, and could it possibly be not the real numbers, or could it be political?

David: ESG stands for Environmental, Social, and Governance, and these are three categories of concern, where, a little bit like Sesame credits, you can be scored for your contribution—positive contribution or your negative contribution—to, again, what you could describe as carbon footprint or what have you. Environmental, social, governance concerns get put through a numeric scoring process. Companies and funds are assigned a score by it’s how clean, green, and not mean they are. If you want to think of boardroom construction, and again, environmental issues, and social cultural issues.

Reuters reported this week in an article called “Methane Menace.” A very interesting article. Two of the heavyweights in the green movement own assets that are nasty, trashy, and dirty. Where the information came from was NASA’s JPL, Jet Propulsion Laboratories. I used to work just down the street from them when I was with Morgan Stanley. We’d have some JPL guys come in almost every week. They just liked to hang out and shoot the breeze. But NASA’s JPL in Pasadena, California worked with scientific aviation, and they completed a study. It’s about a five-year study on landfills owned by two companies, in particular Waste Management and Republic Services.

Kevin: These were more than back of the napkin. This was actually JPL doing the math.

David: JPL knows how to land things on other planets. In terms of trajectories and interplanetary travel, these guys can do the hard math. It’s well beyond back of the napkin.

Kevin: They look at methane from the sky. Those satellites that you see going over, a lot of them are taking pictures of the methane that they’re calculating.

David: Yeah. The study of these two companies and the landfills, mark them out and conclude that they’re super emitters. Super emitters of methane, and accounting for 43% of greenhouse gas methane, which according to the article, far outpaces fossil fuels and ag.

Kevin: Landfills, 43% of greenhouse gas?

David: It appears that landfills have a bigger play than cow farts. Go figure. Back of the napkin or otherwise. But you’ve got the gods of virtue, which are really the gods of virtue signaling, that are now awkwardly intertwined with these companies. The two heavyweights of the green movement, one is Bill Gates, and the other is Larry Fink, and these are two of the largest owners of these companies.

Kevin: What are their ESG scores? You would think that they—

David: They’re impeccable. No, they’re impeccable. The companies have impeccable ESG scores, and actually, if you look at how it’s composed, a part of it is for the environmental, a part of it is the social, and part of it is the governance, and they score very high on the E side of the equation, the environmental side, and we will have to see if that remains the case. But JPL knows a thing or two about science, and I think what they’re providing is something of an inconvenient truth for both the Bill and Melinda Gates Foundation, Cascade Investments, which is a part of their deal.

Kevin: Don’t read the book Guesstimation and do your own math, just read Bill Gates’ book.

David: Exactly. He published his book, what was it called? How To Avoid a Climate Disaster, and yet I’m very curious to see what the next move is, because right now he’s maintaining a multi-billion dollar ownership in a super emitter. Again, Wealth Management, eight and a quarter billion for Gates, 7.2 billion for BlackRock Republic services.

This is really astounding. Gates owns more than a third of the company, just shy of $12 billion in a methane super emitter. BlackRock slides in the number two position, with about six and a quarter billion. These are guys who are trying to change the world for the better, and yet every once in a while, you should check and see if your breath stinks. It’s one thing to encounter someone and be like, “I think you need a piece of gum.” What about you? What if it’s your upper lip that smells? “Hey, Mr. Fink, hey, Mr. Fink, what if it’s you that has the problem? Bill, Melinda—I think we can still put them in the same category; they’re not formally divorced yet—but Bill, have you checked your breath? It kinda smells like methane.

Kevin: One of the things that you learn in this book Guesstimation is it’s very important once you do your math to compare it to something that you can get your head around. Tell me, how much is it belching?

David: I loved it because that’s exactly where the Reuters article went. Quarter ton of methane into the atmosphere each hour, which is six times more than the EPA estimated was possible at these sites. The article explains that that equates to 12,000 cars idling on a freeway.

Kevin: Now, this is per hour.

David: That’s per hour.

Kevin: That’s per hour.

David: If you really care deeply about decarbonization, your carbon footprint, all this, and Gates and Fink say that this is really our future. We have to be cognizant of our 2050.

Kevin: Go read my book, read my book, is what Bill says.

David: At a quarter ton of methane per hour, 12,000 cars idling on a freeway, these are interesting times for Gates and Fink, and I’d like to see if they respond to Republic and Wealth Management the way they have to other companies in the fossil fuel space. You could argue that a correlation exists between wealth and carbon footprint, which many economists have already pointed out, but isn’t it strange that the loudest voices in the current decarbonization drive are some of the worst offenders? So divest? Will they? We’ll have to see what a net zero commitment looks like in practice, not just in theory.

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 a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.

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