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The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Lagarde’s ECB to Save the World with “Green Bonds”…
October 2, 2019

“That’s what makes this show particularly interesting, as an observer, because the consequences – it’s not just a question of: Does it bounce when it hits the ground? If they’re juggling something of greater fragility, then the consequence of losing control and watching one thing that they are currently managing quite well – watching it drop, the consequences are much, much greater.

– David McAlvany

Kevin: David, we have been looking at some of the things going on, and it doesn’t necessarily spell true trouble yet. I’m thinking of the repo market and the Federal Reserve quietly putting 50-75 billion dollars in at night to just try to keep things calm. You know what it reminds me of? Years ago, back when I was 18 or 19 years old, I went to a festival that taught me how to juggle. I bought the juggling balls and actually, I did learn to juggle. And I still do that. Just to clear my mind I’ll pick up three rocks and juggle, or what have you. But I can only do it for so long before one of the balls starts getting a little far to the outside. And then I reach, and then another ball gets a little further to the outside, and then I have to reach.

David: (laughs)

Kevin: You know, you’ve seen jugglers where it’s not going terribly wrong yet, but you know something is going wrong and you know a ball is going to hit the ground at some point.

David: I see it in the treasury market today. You have treasury yields that have moved this year by close to 50%. You have the ten-year treasury that has gone from 2.79 – this is a U.S. treasury. That was its high earlier in the year. It dropped to 1.47 – 2.79 to 1.47 – and then from 1.47 in September to 1.9 in less than 30 days. That is massive volatility. Today it sits about 1.66, but the marked characteristic in the U.S. treasury market has been that of radical volatility.

Kevin: Watch interest rates. You talked to Jim Grant. He writes the Interest Rate Observer. That is a very expensive newsletter, and people pay good money for a guy who understands interest rates. But you interviewed, probably, the man of all interest rate observers, which was Dick Sylla, five or six weeks ago. He wrote the book, The History of Interest Rates, 4,000 years.

David: That’s right, Homer and Sylla. It is kind of the standard text, and he is a man who knows a thing or two about interest rates. Make use of our archives. If you missed that interview with Dick Sylla I think it is really key. We know that bonds are subject to natural bouts of supply and demand shifting, and with that you do see some volatility.

Kevin: Yes, but we’ve seen central banks be guaranteed buyers. Why in the world do we see volatility at all in bonds? You know they are going to come in and buy them if they need to.

David: This is to your point. It is all under control as long as you keep those three or four, or however many things you are juggling, kind of close to you. As they get a little bit out of control, a little bit out of reach, all of a sudden that appearance of, “Look at me, I’ve got all of this managed.”

Kevin: Order becomes chaos really quick.

David: Right. We are getting used to the use of central bank balance sheets as a fresh source of demand. They’re there, they’re in the market, but importantly, it’s not just a distortion in price which results, but there is an erasure of vital information which is conveyed in that rate of interest. We have to remember – don’t forget that the cost of capital, or borrowed money, signals risk. It measures and it compares the risk implicit to giving money to someone, and when somebody uses your money for temporary use, that interest rate is measuring your risk of return of capital.

Kevin: That’s why you’re interested in interest rates in the first place. You used the words – vital information. It actually tells you the price of risk.

David: That signaling function has all but gone away in the European bond market, and it has been merely – merely – distorted everywhere else. But where it is the worst, you have the buyer of Swiss bonds, recounts Mark Faber, who today would pay 1087 for one bond, and in ten years he will get back 1000 dollars, that is currency units, rather, or Swiss francs in this case.

Kevin: Let’s repeat that. You would pay 1087 today for a Swiss bond and you would hold it for ten years and get a 1000 back out of it. This is an upside-down world.

David: Yes. Negative yields translates, if you are using the King’s English, that is a negative return, or more simply still, it’s a guaranteed loss.

Kevin: What about some of the “risky” places – the Greeks, the Portuguese, the Spanish. How are their bonds doing?

David: They don’t appear risky at all. In interest terms, the Greeks pay 1.31, the Spanish and the Portuguese 15 and 16 basis points respectively. As mentioned previously, the U.S. is at 1.66, which in today’s terms is relatively high yield. So this is fascinating to me, rolling back to Dick Sylla’s comments in August when he was with us, in this world of zero interest rate policies, negative interest rate policies, gold is almost a high-yield asset. And it is really the first time in U.S. history that what we generally categorize as only collecting dust – and of course, gold doesn’t collect interest – now has a higher yield than tens of trillions in government and corporate issued paper.

Kevin: And that is what makes me wonder. We normally don’t think of gold as a yielding instrument, but at this point, if you’re sitting in cash, you’re getting eaten up by inflation. If you’re sitting in bonds, you’re getting eaten up with negative interest rates. I think this reminds me of why you started the Vaulted program in the first place, so that a person can say, “I’ve got my gold and silver and platinum, what have you. What do I do with my cash savings, or the money that I would normally keep in bonds?”

David: This is a fascinating point that Russell Napier made here recently, which is that changes within the eurozone are reshaping just how large a target is on the back of a saver. He describes the saver as being the target of retribution within Europe, where there is going to be a price to be paid for the political goals and the fusing of monetary and fiscal policy on an intrastate basis, and it is the saver who will pay the price. So yes, this is precisely why our Vaulted program is taking off, because it is the nature of savings, it is the nature of bank deposits, which is transforming rapidly. Central banks are committed to lower levels of interest in the future, and yet monetary policy is not having as much impact on the economy, which means there is going to be more need for fiscal activity. So what are the implications there in terms of the one-two punch between inflation on the one hand, caused through more fiscal policy spending, and repression on the other, where monetary policy mandates keep interest rates at a very low level.

Kevin: We have many financial planners who listen to the program, and this is not an insult at all, but without gold and silver you really just have a paper asset portfolio. Most financial planners would agree. They would say, “You know, when someone would come to me and say they don’t like stocks because they are too risky, they would immediately go to bonds.” That’s what the training is. Bonds are normally sold as a safer investment than stocks.

David: And in one category they are. Bonds, generally, are safer than stocks, and that is partially true if you are talking about corporate bonds and the increased chance of getting your money back should a company file for bankruptcy. So in terms of being in the equity portion, you don’t get anything back. It depends on your priority in the bond stack if you get your money back or not. But again, they are “safer” on that basis.

But I think what is interesting is we tend to think of bonds as boring, and this year has been a case in point where they are anything but boring. The noteworthy aspect of the moves in treasuries this year is that only two other times in U.S. financial history have yields compressed so much so fast. You had that during the global financial crisis going back to 2008-2009, and then during the European debt crisis. I guess I’m stretching this to a bigger global picture, where in 2011-2012 Draghi said “we’ll do whatever it takes.” When he put that machinery to use, we also had the same thing, where massive compression in yields, massive volatility, and I wonder, is there a signal in that?

Kevin: So going back to the juggling analogy. You see one ball starting to go out, which is this compression of rates which we haven’t seen but two other times at this rate. Then you have another ball that is possibly going out of bounds because of the liquidity crisis that no one years about because they are sleeping overnight while the Fed is infusing funds.

David: So if we’re talking physics, is it fair to say that actions cause reactions? If it is fair to say, that’s what we have in the speculative community, where the new game in town amongst speculators, the reaction to the actions taken by central bankers, is to speculate in currencies, and to speculate that central bank commitments guarantee the artificial demand from central bank balance sheets will continue to drive rates lower and lower and lower. On the other side of the equation, as rates come down, the price of bonds go up. So the speculator who is looking and saying, “Ah, but I know what the central banker must do,” is saying, “I’m betting on bonds, not because they are boring, but because as a speculative bet, I see where the central banks must go.

Kevin: You brought up the word signal. Is there a signal when rates march down that quickly? What occurs after that?

David: (laughs) This is where a little bit of history, if you are interested in charts, I think in every case of an emerging market debt blow-up – I’ll have to go back and look in Lex Rieffel’s book, Restructuring Sovereign Debt – but I think every emerging market debt blow-up that I can recall, there were rates that were marching inexplicably lower, even as the price of bonds moved inexorably higher, until there was this reversal which came sharp and swift, and all of a sudden rates are going higher, the value of bonds is dropping through the floor, and there are devastating economic consequences, which in a lot of instances require restructuring of that debt.

But back to your point on signaling, this is where if you’re looking at interest rates it says all is well, all is normal, all is fine, and in a New York Second it goes from all is well, all is fine, to “We have utter chaos and catastrophe.”

Kevin: It makes me wonder if we have the blind market hypothesis.

David: Instead of the efficient market hypothesis (laughs)

Kevin: Yes, because you and I were both trained, in economics, that the market tells the truth all the time. It basically has the right price because it has the information. But what if it doesn’t have the information? Is it blind, and then does it panic, when it touches a hot stove?

David: That’s right. The efficient market hypothesis is essentially what you described – faith in the wisdom of the market, and in the aggregated judgment of all investors, and their votes reflecting the true value of an asset.

Kevin: If they are given good information.

David: Right. So that is the efficient market hypothesis, and it is a thesis that drives tens of trillions of dollars in investment, the bond market, and specifically, the debt crises of the past 40 years look remarkably similar to the charts that we saw in the repo market just a week or so ago.

Kevin: This is where the infusion of funds, the 50-75 billion is coming in. That is in the repo market.

David: I’m not saying there is anything wrong with the repo market today. All I’m saying is that the chart – interest rates are moving lower and lower and lower in the repo market, and then one day they open up and it’s up to 8% and 10% at its peak. And so, again, rates come down and down and down, suggesting calm and a never-better environment, and then those same rates explode higher. And it is a surprise, and it is much to the chagrin of the blindsided investor. Perhaps that won’t be the case in the U.S. treasury market, and I guess time will tell.

Kevin: What would be a black swan that would do that?

David: (laughs)

Kevin: And I call it a black swan because they always say, “Oh, we could have never seen this coming.” And that’s not true.

David: 2020 could bring regime change that opens up any possibility – higher rates may be warranted (laughs).

Kevin: Is that a planned word? Elizabeth Warranted, possibly?

David: That could cause a major surprise in the bond market, and in the stock market, too. But let’s go back to September. Let this sink in. We went from 1.47 – that’s the yield – to 1.9 in a matter of days. That is real volatility. And what that reminds us is that even the Fed is an observer, not a controller, of our national destiny or of our interest rate trajectory. But can you imagine? We have had these perfect charts made for the Greek market, for the French market, for the Italian market, where bond yields have come down and down and down – they have been pressed lower. It looks like there is peace and calm. It looks like a world of perfection, actually. We know that the body politic is unhealthy.

Kevin: It’s funny how people want to see what they want to see. You and I were talking about this before. It is very hard to have a conversation with somebody who has already made up their mind. I’m thinking, let’s talk about the Keynesians or the socialists. They will take free market information about interest rates, and they will justify the cause of controlling interest rates. Think about 130-140 years ago, Knut Wicksell was writing about the truth-telling and the signaling of interest rates, which was a function of natural market pricing forces.

David: I think Wicksell has been misread by the neo-Keynesian central planners, where rates, according to Wicksell, will seek a natural level. Like a beach ball held under the waterline, the natural rate of interest is market-defined.

Kevin: Right. Leave it alone, don’t control it by a central bank.

David: That’s not central bank declared. That’s where the neo-Keynesians are saying, basically, “We can make it any number we want.” What is the bottom line here? We have rates doing things that are associated with financial market stress and strain. The volatility in September was erratic. It was amazing. And we also have peripheral weakness, if you’re looking at the emerging markets. Emerging market equities are trailing the developed world stock markets. Risk is being seen through a different lens already. And I think we’re getting closer to a monetary policy intervention being seen as sort of the obvious dud and the powers that be sort of pivoting to fiscal policy intervention.

Kevin: That is more political, isn’t it?

David: It’s more political. It also has greater inflation implications. And I think serious investors have already started exiting the room, seeing that the next step, given that the monetary tools in the tool box are limited. So what do we see as an implication of this? The bottom line is what we just told you. What are the implications? Greater currency volatility is around the corner, bond market volatility around the corner, and I think, again, much of this is tied to the pivot from dependence on monetary policy largesse to a focus on fiscal policy largesse.

And this is where you have a bit of competition. He who declares, or she who declares, the largest fiscal policy largesse will attract a lot of capital, because you are going to see a bump in the stock prices, and probably a healthy move higher in those currencies on the front end. And then as people realize, “Wait a minute. How are we actually going to pay for this? This doesn’t fit into the budget.” Then the implications set in.

So you have the initial reactions of, “We’re going to spend trillions.” And I think that is positive for equities. That is positive for risk assets. And I don’t know if it’s a week, a day, a month – how long that period of time is, before people all of a sudden say, “Oh my word, we are done with the monetary policy gambit, we’re on to the final stretch of holding this thing together with bailing wire and chewing gum.

Kevin: But let’s say they are seeing the issue with the repo lack of liquidity in the markets, and they are seeing this volatility in the U.S. treasury interest rate, but they say, “I’m not going to move to bonds, I’m just going to move to safer stocks.” There are stocks that would be considered defensive and that can be a part of the migration out of very, very actively – what are called growth stocks.

David: That’s why I think 4th quarter 2019 could look a lot like the 4th quarter of 2018 because here in the U.S. growth stocks are already underperforming your more defensive stocks.

Kevin: So you think that may be happening?

David: Migration has already happened. The rotation to defensive stocks – that is already in play. And I think you have the lemming parade into the indices continuing because you still have four or five key names which are holding the indexes together. If you look at Microsoft, Google, Apple, Amazon – these are the names which are sort of holding the indexes higher. But you have this massive divergence between the top 5-7 names in the S&P 500, and everything else. So you’ve already seen a sell-off but it’s not reflected in the index. So people can look at their portfolios and if they have individual stocks in their portfolio, they say, “Huh. Well, we’re a percent or two off of all-time highs. I was actually better off at the beginning of the year than I am right here and now.”

Kevin: How can that be? Well, Dave, I know I bring up 1998 and 1999 often, but it was a period of time where people didn’t care if companies had earnings, they just had to have a good idea. You brought up the stocks – Microsoft and Google – some of these companies that don’t necessarily have to justify why they exist, but what happened at that same time was you had a massive influx of IPOs. They didn’t care whether it was going to be a company that was going to be around in two or three years, people wanted in on the IPO when it became a publicly-traded stock.

David: Even though there were companies going to the IPO market in 1998 and 1999, and into the year 2000 … the majority of the companies going public in the boom were making money. Then there was a bunch that weren’t, and they got to go public, too. But what is fascinating today, watching the IPO market today, year-to-date you have three times more money that has been raised for unprofitable enterprises than for start-ups that are making money.

So this is very different. And if you look at 2018 and 2017, this is now a three-year trend, and it is without historical precedent. So as we speak, the insanity appears to be unraveling. You have the slaughter of unicorns which is already in motion. My heart does not bleed for these poor, profitless creatures. But there are people who are very anxiously anticipating these IPOs and a number of them are just falling flat.

So I think we are already seeing some signs that the largesse of the last two to three years, the IPO market craze and the unicorns of the last two to three years, something is already transitioning in terms of the sentiment, and the market’s tolerance for no money being made versus, of course, to be an enterprise you have to be profitable. Who would want to invest in you if you’re not a profitable enterprise?

Kevin: But we’re talking about the United States here, which may be the healthiest horse in the glue factory. Europe is just about to go through a transition where you go from somebody who had banking experience, even though I’m not a Draghi fan, to somebody who is just a plain old politician who wants to probably change the world, the environment, green everything up, and “Oh, by the way, yes, I’m going to be running a central bank, as well.”

David: I think she was chosen for a reason, and I think her lack of banking prowess, lack of market prowess, and very able skills in terms of a politician, fit where Europe is today.

Kevin: But she has not used a plastic straw in years.

David: Oh, I’m sure she hasn’t.

Kevin: (laughs)

David: So this is a nice transition to the risk of politics and geopolitics, and that transition comes with Ms. Lagarde. She is the incoming ECB, European Central Bank, head. And fascinating in her comments to the European Parliament, September 4th if you want to look at the transcripts, it is really interesting. She committed the ECB balance sheet to specific political goals (laughs). That, in itself, you just have to let sink in. When has a central bank said, “Our purpose is to solve these political problems?” And yet, that is what she has done. She wants a common treasury. Do you understand what that means? A common treasury, she plans on saving the planet, and then she wants to complete the European project, which is inherently a political project. All these can be funded with what she is calling green bonds.

Kevin: Green bonds. It reminds me of war bonds, Dave, because people who were patriotic back in World War I would buy a bond, really, to support the effort overseas.

David: How weird would it be for you if you were being enticed to buy war bonds before war had been declared? Where the solution on offer and the financing structure was already being advertised before there was any declaration of war.

Kevin: But these are green bonds. Why wouldn’t I buy them?

David: Because, basically, I think she has defined what the crisis will be in Europe, how it will be defined and discussed, and she is telling us what the solution is that they are planning on pulling off the shelf. You have a climate crisis. The climate crisis is, by nature, transnational. And the common treasury concept, and the green bonds to finance the solution to the crisis – that’s the solution, right? So Lagarde is not an economist, she is not a banker. And for this moment in European history, the head of the European Central Bank needs to be a politician. There is no other way to sell the loss of sovereignty, of national identity, except in the context of crisis via a non-elected political animal – precisely what she is.

Kevin: Do you remember when Ben Bernanke was talking about how the depression in the 1930s could have been avoided by just simply having helicopters dropping money on people? I know I’m oversimplifying, but if you recall, we called it helicopter money. This was back in 2008-2009 when quantitative easing was a relatively new concept to us.

David: He got the job because of the paper he wrote highlighting helicopter money back in 2002. He said, “The reason I deserve the job is because I’m the expert on the Great Depression, and I can tell you how it could have been solved.” So those were his academic credentials, basically, theoretically back-testing and saying, “We didn’t have to go there guys. It just would have required a lot more fiscal spending.

Kevin: We could have printed money, but we didn’t have the helicopters in the 1930s, doggone it.

David: But they have already been cued, and Lagarde is managing this fleet of helicopters, because helicopter money is coming to Europe. What does that translate into? All-time highs for gold in euro terms. Absolutely, it is coming. Demand for metals in the overseas markets? Yes, we need to remind you, we talked about ETF demand growing in 2017 and 2018 in Europe, even while there was zero interest in gold here in the United States.

Kevin: Gold ETF.

David: Correct. That was already growing in Europe and this is long before they chose Lagarde. Smart money gets it. They understand that once you exhaust monetary policy you have to pivot to fiscal. And this is where there are massive implications. Yes, there are political implications. Yes, there are economic implications. Yes, there are ultimately currency implications and credit implications in terms of how risk is repriced. And no, contrary to the powers that be, they may try to use central bank balance sheets to control prices, but as we saw in the month of September, price controls were ripped from the hands of the Federal Reserve, and the whole world got to see just how impotent the Fed can actually be. And for that matter, any other central bank.

Kevin: This is that juggling ball analogy again. That ball just continues to move a little further out every rotation. And we haven’t even talked about China, some of the other variables that could influence where those balls go.

David: Russell Napier shined a great light on this particular point – Lagarde, her impact, and quoting from his recent comments, the first major central bank to move to helicopter money may see an initial pop in its exchange rate as short-term capital moves to participate in a rally in risk assets. However, long-term capital will move in the other direction as savers recognize that their savings need to be destroyed in pursuit of these grand political goals.

So again, why is the ECB being run by a politician? Because the pivot is already here. We know that fiscal policy is the era of the 2020s for Europe, and there are implications for that – big implications – not only for Europe, but also for the U.S. So yes, we migrate here – political and geopolitical backdrop for the markets – this is an intriguing time to be investing. The markets absolutely loathe uncertainty, and we have enough of it, and frankly, for me to question why the equity indexes are where they are. You have trade conflict with China – that lingers, not getting better any time soon. We have, this week, the 70th anniversary of the CCB. The Chinese Communist Party was founded 70 years ago this week.

And then you have the 30th anniversary – this is less well advertised in mainland China, but this is the 30th anniversary of Tiananmen. We sat and talked about the picture of the man standing in front of the tank at dinner the other night, and I wanted the kids to see it. I posed the question, “Do you think he started the day knowing that is where he would stand, and that is what would happen? Or did he, in a moment of courage, say, “If not me, then who? If not now, then when?” Was that a spontaneous moment of, “I have to, and I will?”

To me, it is an amazing picture. It is fascinating to me how photojournalists have, in many ways, captured many of the historical high points, and one picture defines an era. One picture tells us the story and tells us what it was all about.

Kevin: I just wonder if the Hong Kong protestors, right now, are that picture again. Unfortunately, the man who stood in front of the tank, I don’t think, lived to figure out what was going on the next day.

David: No. So the tough spot for Xi Jinping is these protests in Hong Kong. They continue to intensify. And what will he do with domestic unrest? This has long been the greatest threat to Chinese political stability, and it is why, in spite of 70,000 small protests a year, the government is very good at snuffing out those flames. This one has yet to be snuffed out. What does that mean? Again, when you talk about the political and geopolitical backdrop, these are things that are unbounded problems, and the markets just don’t like that kind of intrigue.

Kevin: They create an uncertainty. I hate to even bring this up because to be honest with you, I’m worn out with everyone yelling about the Russians and Trump, and then now what we have is the Ukraine and impeachment. Trump is yelling at Powell because he wants Powell to lower interest rates at the Federal Reserve. You have the Democrats and the liberals all yelling at Trump, saying, “This Ukrainian thing is going to take you down.” We’re all getting tired of it, but it does create uncertainty because there are going to be outcomes that are unpredictable in this.

David: The President is at war, as you say, with Jerome Powell. And the President is apoplectic that the dollar is sitting at 29-month highs. That, to him, is telling the story.

Kevin: But part of that is, look what is coming to Europe. You just talked about that. How do you make the dollar go down when Europe is in such a shambles?

David: That’s exactly right. Then you have, as you said, on the home front, Trump’s interaction with Ukraine, originally framed as a campaign finance issue that was quickly cleared out as a non-issue. But the current whistleblower concerns over Ukraine introduce a measure of uncertainty for the market.

Kevin: Yes, and this is not necessarily for just the Republicans. This could be an issue for both sides.

David: One thing that stands out. This is a point of clarification. Whistleblowers generally need firsthand evidence before they write something up, but in this case we are talking about hearsay. Ironically, there is the cooperation treaty between the U.S. and Ukraine for the prosecution of crimes. That was signed by Bill Clinton while Joe Biden was a member of the U.S. Senate. So where does the uncertainty factor come from? The uncertainty factor comes from Biden being done in this race. He’s done. You look at his polling numbers. There is no way he is recovering.

Kevin: So where does that put Elizabeth Warren?

David: That implies that Warren moves to the front-runner position. That is bad for Wall Street. That is bad for Main Street insofar as their 401k balances are at risk with Ms. Warren. She introduces unknowns for any investor, a U.S. investor in U.S. assets, or a foreign investor in U.S. assets – she introduces unknowns, and again, we’re dealing with uncertainties. The market doesn’t like that.

Kevin: Well, let me ask you. Is this impeachment good for Trump, or bad for Trump? Who wins if this thing goes all the way to impeachment?

David: (laughs) I think Trump wins. If they march all the way to impeachment, guess who has to take the witness stand? You have Biden – both Joe and Hunter, his son. You have Obama, you have Clinton, you have a number of members of the intelligence community. All of these folks have to take the stand. And so Pelosi and Schiff, while they are pushing impeachment, I think they are pushing impeachment for the sake of negative press, but to move toward real impeachment proceedings, that opens the kimono for all kinds of cross examination of witnesses, and that is not going to happen.

Kevin: So if that happens, stocks, probably, at some point are going to tumble if there is an impeachment concern because that does create a disruption in the market.

David: Yes, I think if stocks tumble on impeachment concerns, the Democrats are in trouble, because in a strange twist of fate, the whistleblower issue gives Trump cover in a stock market sell-off.

Kevin: Which is overvalued anyway.

David: Where the Democrats can easily be blamed for the pain. So right how he is in a tough spot. And prior to the impeachment deal he was in tough spot. Market sells off that he has tied his economic success to. His great litmus was, “Look at the stock market. We’re doing so well.”

Kevin: But if he can blame the Democrats – what a brilliant strategy if that were the case. Even the Fed couldn’t come up with something that good.

David: No, so there are not likely to be impeachment proceedings. You have corruption within the Democratic ranks, and listen, I’m not saying there isn’t corruption within the Republican ranks. There is. I know Republican families who have done deals that – boy, corruption is the state of the union, it’s indicative of the times we live in, and as Neill Strauss and William Howe would describe it, very common and typical in a fourth-turning scenario. So when we are talking about Democratic ranks being corrupt, that is what precludes the possibility of a full-blown impeachment on an issue like the one raised for Trump, where, frankly, it would appear that he was operating within the bounds of that treaty – Treaty Doc 106-16 – signed by Clinton. There is a lot of history with Ukraine and a lot of dirty laundry that the Democrats don’t need aired.

When you look at Hunter Biden, he joined the board in in 2014, exited 2019. Hunter Biden was spared a serious investigation in 2016 due to his father’s running a political enterprise?

Kevin: Yes, didn’t Joe step in and make something happen to keep that from going forward?

David: If anybody wants to know if that was just one side of the news, I would encourage you, listen to Joe bragging about those exploits at a Council on Foreign Relations meeting dated January 2018? Worth googling – if you want listen to him brag about how he ,with great power and might, with the state’s pocketbook, with the state’s checkbook, basically said, “This guy is out. This investigator is gone or you don’t get a billion dollars. That is what, I think, is interesting. I listen to Joe bragging about those exploits, and he insisted that the prosecutor in the Barisma Holdings corruption base be fired or the U.S. would withhold a billion dollars in funding to the Ukrainian government. So what did Poroshenko do? No pressure there. Poroshenko complied, and the pressure on Burisma Holdings was lifted.

By the way, this is just for perspective, if you are ever asked to serve on a board for a company out of Cypress, or out of Malta, or out of Lichtenstein…

Kevin: Or Ukraine.

David: No, no, no, no. In this case, Cypress, Malta, Lichtenstein – you may be facing some reputational risk, because these are your preferred jurisdictions for facilitating questionable business, across the spectrum. Money laundering comes to mind first, but look, these are all places where governance is very loose. In this case Burisma is an energy giant in the Ukraine – a Ukrainian company but their headquarters are in Cypress, and then you start adding notable U.S. Democrats onto the board, including Hunter Biden. It brings in an air of legitimacy, you rope in a few very important Washington, D.C. rolodexes, and I’m sorry, if you’re thinking, “Oh, well, this is fine, this is all on the up and up,” that’s like thinking that the chicken ranch in Texas was in the egg business.

Kevin: This actually goes back to former administrations. We’ve talked about, this is not just a partisan issue on the Republican side or the Democrat side, I think Obama had some Ukrainian dealings and requests, as well.

David: Right. So the Obama administration was asking for dirt from the Ukrainian government on Paul Manafort. That was Trump’s campaign manager. And in an attempt to discredit Manafort and take down the Trump campaign, the Obama administration is seeking out assistance from the Ukrainian government. This is fascinating. The whole thing has an air of the pot calling the kettle black. And so, how can you, with a straight face, say, “Well, we’re very interested in this breach of confidence in the U.S.? We’re very interested in exploring how this is a seditious act by the president.” Wait a minute. Which president are we talking about here? You want to roll the clock back to 2016? Are we still talking about the summer of 2019? What are we talking about here?

Kevin: Well, for those of you who have had enough of the political side of things – or not. If you haven’t had enough just turn on radio and you can listen the rest of the day to this stuff. But let’s talk about the markets because one of the things that you have brought out in the past is the tremendous amount of share buy-backs that have been adding to the valuation of the stocks rising. Companies that are going out, borrowing money at record low interest rates, I will say, and then taking that borrowed money and buying their own shares back. It boosts the stock market, and again, it is one of those signals where you say, “Wait a second. Am I seeing the truth here, or is this just borrowed money?

David: The markets are a safer place, from a partisan standpoint (laughs), so maybe that’s where we should end. The share buy-back issue has been an issue for years and it continues to intensify. Bank of America reports that you have cumulative share buy-backs which year-to-date are 20% higher. We were setting records last year. We are 20% higher year-over-year, and if you are looking at the run rate, rolling average over the last four weeks, we are 122% higher than for the same period last year. So stocks are, at this point, if you are asking how it is that stocks are at these levels, one of the sources of funds that are keeping prices well supported. Corporations are stepping in to buy huge chunks of their own equity.

Kevin: Isn’t it interesting while they are doing that, Dave, you have insider trading that is reporting some of the highest amounts of stock sales by the people who are running the companies. So these guys are selling their own stocks at the same time they are borrowing with company money and buying shares with the borrowed money.

David: Right. So on the one hand you have an allocation decision which is questionable, and it always amazes me how procyclical these choices are, where companies will buy their shares at tops, at all-time highs, and they will pay any price for them. But then they will, at all-time lows when stocks are sort of bumping along the bottom of the barrel – granted their treasuries are empty, they can’t do it, but that’s generally when they are diluting the shares and they are issuing stock at those market lows. So you begin to see the dynamics of corporations and it is a confirmational issue. They are confirming where we are the cycle.

This is the top of the cycle. Look at the Z1 report. We look at this from two vantage points. One, Doug Noland from a credit perspective, and we also like to talk with Richard Duncan, who loves the Z1 report because it tells a lot about how credit is growing, where it is growing, the segments within which it is growing. Duncan would argue we have to see 2% plus net of inflation or we’re going to be in a recession. And he cares about this sort of end-of-world deflation scenario where if we don’t see credit growth, whether you like it or not, we’re now dependent on it. It’s like the druggie being addicted to the substance. You gotta have it or you’re going to die.

I think Noland’s perspective is a little bit different. Just to document and record, we are at a market top. So are your securities – all securities, debt instruments and stocks as well, register 448% relative to GDP. The record was in the 3rdquarter of 2018 at 458%. So 448, 458, we’re hanging around the top in terms of securities market relative to GDP. Why is that important? Again, think about the engine. GDP is a measure of economic activity. That is the engine. When you have a price being put on that economic engine, all the paper around it is worth five times more than the engine itself and it has never been priced this high before? Well, again, within 10% of where it was 3rd quarter 2018. That’s problematic.

American net worth is at a record. Again, this is relative to GDP. It matches the 4th quarter of 2017 when it also hit this same number – 532% of GDP. These are absolutely astounding numbers. What does it tell you? We are at an inflection point. You brought up a very interesting point because on the one hand you have Bank of America reporting cumulative share buy-backs increasing. And yet the hypocrisy – September 23rd, the Financial Times, I quote, “Executives across the U.S. are shedding stock in their own companies at the fastest pace in two decades. Corporates insiders, typically chief executives, chief financial officers and board members, sold a combined 19 billion dollars of stock in their companies through mid-September.

Kevin: But this isn’t hypocrisy. This is, let’s borrow money with company money, buy stocks, let’s sell our own into that same market. Oh my gosh. How is that not illegal?

David: How is that not a conflict of interest? That puts them – just back to that article quote in the Financial Times – that puts them on track to hit about 25 billion for the year, which would mark the most active year since the year 2000, when executives sold 37 billion dollars of stock amid the giddy highs of the bubble. That projected total for the year would also set a post-crisis high, eclipsing the 25 billion of stock sold in 2017.

Kevin: And when it crashed in March of 2000, after all those executives had sold their stocks into a rising market, the NASDAQ didn’t come back to the same level for, I think, 14 or 15 years. Remember that? It went from over 5,000 down into the 2,000s and it did not come back for almost 15 years. So it goes back to what Howard Onstatt told us. We brought this up last week, as well. The cycle prevails.

David: (laughs)

Kevin: Don’t be fooled. The cycle prevails.

David: It goes back to what you were saying at the start of the show – Sit back and watch the show, because this juggling, as fascinating as it is, you are starting to see the divergence, you are starting to see the ball move slightly out of the range of easy reach, and this is where you go from controlled to out of control.

Kevin: Dave, when I’m juggling, I’m juggling balls or bean bags that I can pick back up off the ground and start again. Maybe I’m juggling eggs instead.

David: And that is what makes this show, particularly interesting, as an observer, because the consequences – it’s not just a question of does it bounce when it hits the ground? If they are juggling something of greater fragility, then the consequence of losing control and watching one thing that they are currently managing quite well – watching it drop, the consequences are much, much greater.

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