In PodCasts
  • Gold to Silver Ratio narrowing… finally
  • Covid providing cover: Spending trillions for political gain
  • Tesla close to being worth more than all auto manufacturers combined


The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Politicians’ Bidding War – Who Can Give The Most In Trillions?
July 15, 2020

This country needs great diplomacy. This country needs great civility. This country must have sufficient sentimentality to recognize that what we have in the historical log, there is something worth preserving. The world gets really rocky from here if we don’t embrace some of the intangibles that keep legacy alive.
   -David McAlvany


Kevin: We were talking last night and I was sharing with you, my wife got back from the store this weekend. She went to the grocery store and she said, Kevin, I didn’t get any change. And I had forgotten to tell her that I’ve been getting emails and texts from clients around the country showing signs that say, we need exact change or you’re not going to get any change back because there’s a “COVID related coin shortage” right now. I just think it’s interesting, Dave, you’ve been talking and I’ve been talking last few years with people who are saying that cash is cursed, and it’s actually going to be eliminated from the system at this point. I’m thinking of Ken Rogoff, you know Reinhardt worked with Rogoff. I just think it’s sort of a convenient thing at this point to look at cash as something that whoops there’s contact, maybe it would transmit COVID. Maybe we need to eliminate cash.

David: Remember Gresham’s law, where bad money drives out good money, and…it’s kind of interesting because it’s as if Rogoff would say, yeah, but what if we take out the ability to move? And I think that’s ultimately what they’d like to do. You know, the same thing was happening where currency, a similar experience to what your wife had and what is coming now with getting changed back or not getting it back. Hoarding of coinage started in the 1960s, early 1960s, before devaluation of the US dollar and the breakdown of the Bretton Woods system. But you started to see coins disappear in ‘62, ‘63, ‘64…

Kevin: That was when they had silver in them.

David: And by the way, inflation was 1%, it was 1.5% and it stayed between 1% and 2% for 5, 6, 7 years, and it wasn’t a concern. It wasn’t like, oh, people are hoarding because they think they need a real tangible specie, a currency. There was no indication of inflation, but there was a wisdom in the common man’s view of things. And that, I think, is perhaps what we see now. If you look at the massive amount of credit that has come into the system, credit being the new form of money, maybe it is that bad money is driving out the good again.

Kevin: And, you know, I brought up silver being in the money while you were talking there, but you know, the gold silver ratio, which typically fluctuates from around 31 ounces of silver to one ounce of gold. You know, in our career here, it’s gotten to 90, even 100 one time until this year, and it went well over 100:1. We’re starting to see that narrow, just like we thought, over this last week.

David: It had a peak of 125, as you said, never seen before now, where in the nineties, was stubbornly between 96 and 98, slipping to 94 this week as silver plays a little catch up in the $19 range, with gold holding above $1800. And you mentioned last week in the commentary that if we got to see the price of gold stable above $1800 for a number of days, it is a very positive sign. And that probably meant opening up the door to retesting the old highs, 1920, 1930. And by the way, if there’s that kind of energy in the gold market, you can expect quite a little spurt in silver in here is well, will those gains at some point be digested? Certainly will. But this is positive momentum nonetheless.

Kevin: You know what I like about the gold silver ratio? You own something that’s real either way. So you buy some silver, you buy some gold. It’s real. What a difference a week makes, you know? Last week you brought out that Tesla was half again over the size of Toyota. Right now, Tesla has been in the news this week since you spoke about it.

David: Well, that’s right. Toyota, 20 times the production in terms of units of cars, but less in terms of current market value. No surprise, of course, to see Tesla shoot up to $1400 a share last week. Then, Monday of this week, it tacks on an extra 12% early in the day, to $1795 a share, only to finish the day back at $1495. $1495 at the close. That’s a 16.5% reversal from its intraday peak. You have to have a story to sell a stock like this.

Kevin: Well, and you would almost think that they’re the only people who will ever create an electric car. You know, when somebody brings up Tesla it is like well, yeah, but electric cars are going to replace other cars. Everybody else is going to make one, too, are they not?

David: Tesla is the only company that can make electric vehicles. We know that.

Kevin: (laughs) Well, the stock market tells us that.

David: Exactly. So there is this grand story relating to Tesla, and yeah, it’s so amazing, in fact, that the prospects of the company, at least according to the market today the prospects for Tesla are greater today. Looking at the current valuation on Monday of this week, Tesla had a market value which exceeded the combined market caps of Ford, GM, BMW, Daimler, and Volkswagen.

Kevin: So what would it take for them to actually exceed the market value of everybody who ever makes a car?

David: You mean every auto company in the world today?

Kevin: Yeah, Yeah.

David: Probably just north of $2000 a share gets you to a market cap greater than every other auto manufacturer around today.

Kevin: And it got to $1795, so only a couple hundred points away from that.

David: Yeah, and it really is as if investors in Tesla have forgotten that electric vehicles are produced, are, current tense, produced by all of these companies, and in a more attractive unit price. So I mean you’ve got the combustion engine, which is, it’s not the only vehicular choice for the auto industry in terms of production. And yet at the upper end, because Tesla’s priced towards the upper end, they ultimately have to compete against BMWs and Porsches. And then, of course, on the low end, they’ve got all the other automakers that they have to compete with as well: Ford, GM, Honda, Toyota. I think one of the factors driving Tesla in recent days to these kinds of numbers in such a short period of time is that, lo and behold, we have options expiration this week.

Kevin: Well I think you need to explain on the market expiration what occurs because you’ve got pros that come into the market highly leveraged during the expirations of these contracts.

David: Yeah, so when you’re when you’re buying a stock, you obviously are a part owner in the business. But you can also buy an option, which is time sensitive, and it’s relating to the price of the stock in question, as well as the timeframe, and at a certain point this option to buy or option to sell those shares, it expires, and that basically becomes worthless.

Kevin: And it can have a huge payoff, though, right? I mean, a little bit of money in can pay off quite nicely if you can manipulate the market or just play the market correctly.

David: Yeah, so what do you want to bet that there are leveraged operators playing for $1500 a share on the Tesla share price and every incremental dollar above $1500? You’re talking about fortunes being minted, and so you look at that, by comparison to momentum, which is stalled in the S&P 500. Between 3000 and 3200 we are just kind of sitting here moving sideways, with the exception of a few high flyers. That’s all that’s left to push around. You come into an options expiration week, and you definitely want to gun it and get to a particular number so you can cash out with quite a payday. Tesla is one of those options expiration stories, in my opinion.

Kevin: Okay, so let’s give credit where credit is due because, you know, we are awfully tough on the Federal Reserve, Dave. You know, in October of 2019 they had reintroduced quantitative easing again, and we were like, why are they doing this? But actually, you go back a few weeks before that into September of 2019 and they had been massively intervening in the repo markets, which is the liquidity markets, and I think they’re backing away from that right now. Did they get a restart? Is that what they wanted? I mean, we’ve had what, nine months or more of repo intervention, and at this point, the Fed says they’re going to step back.

David: Yeah. So the overnight lending markets, that is the markets between banks where they lend to each other, that was freezing up in September. That’s what they call the repo markets. And yeah, so we’re happy to inform you that after 10 months of outsized interventions, the Fed…I mean, imagine this, at one point, the Fed said there is on offer up to $5 trillion tonight.

Kevin: All the money in the world if you need it.

David: And that’s essentially what they’re saying. It wasn’t like that amount was used in overnight lending, but they basically, to use your words, provided all the money in the world should it be needed. So we spoke at the time of what was under the surface in the financial markets, and we spoke of what banks might be looking at to motivate them to not lend to each other as they traditionally do, at a reasonable rate. And, of course, the rates were just astronomical into the double digits. This was the point at which we commented on something brewing in the financial markets and our wealth management group started raising cash levels. We got ultimately to between 40% and 55% cash. And then, in January, China announced it had a new coronavirus.

Kevin: Which was a very convenient excuse for what had been going on since September.

David: Yeah, and what it does is it provides cover for all kinds of monetary and fiscal policy maneuvering. And, of course, to us, there’s the elephant in the room, which is C257 which we’ve talked about ad nauseam. C257, that is, global debt. Credit 257 which was a backdrop issue before we got to C19 and now C19 is an issue of convenience. It allows us to do what is necessary, anything that is necessary. And that’s what we’ve seen. We’ve seen $18 trillion in fiscal spending. We’ve seen $5 trillion in aggregated monetary policy initiatives by the world’s central banks, three coming from the U. S. So that, in in our mind, the debt issue is the larger issue, it is the primary reason central banks have had to intervene so aggressively because the debt is too much for any slowing in the economy. So they’re trying to fill a very, very large gap.

Kevin: One of my favorite guests that I love to hate, Dave, and I hate to love, and I have to go both directions, is a guy named Richard Duncan. I know he’s coming on here in the next few weeks, but one of the reasons that I love to hate him is because he says we’re too far down the road to stop and we need to do more of this, what he calls creditism, because he pointed out that we don’t have capitalism anymore, we have creditism. It’s all run on debt and he doesn’t want to see it end, because if it does, he knows it’s just, for him it’s the end of the world. But what makes me mad, and when you interview him, every time I learn something, and when I read him, I learn something, but I can also hear my heartbeat in my ears. You know how that feels when you’re just about to explode, because I don’t want him to be right.

David: What he’s basically said is there’s a new reality. And when we unhinged from the Bretton Woods system, when we unhinged from a convertible dollar system where you could convert the dollar to gold and there was that gold backing, we basically opened the opportunity to create as much credit as we wanted. And of course that’s created a lot of political opportunity as well. Because if you have all the money in the world, guess what a politician can do? Spend all the money in the world and promise all the money in the world and establish a political dynasty with all the money in the world. 

So that 1968 to 1971 period brought us into a new reality and firmly entrenched this idea of creditism. It’s an economic structure that relies on increased credit in the system for economic growth to continue. And, as you said, Duncan’s going to join us in a few weeks time to review not only the difference between capitalism of the bygone, you know, it really is from a bygone era. Capitalism based on savings and investment vs. creditism, which is growth based on credit expansion. 

But we also want to get his opinion and perspective on the interventions thus far, and I’m sure you’re right. He’s been asking for $10 trillion for years now and now there’s an excuse to get it. So anyone who has listened to Duncan in the past, you won’t be surprised to hear that he thinks we need even more interventionist measures, pump up the three trillion to ten trillion to get things kicked off. And I think there’s an undercurrent there though that is important. 

What shifted in the last, let’s say, five years since he wrote the book The Corruption of Capitalism, that was I think around 2009, is you had massive interventions on the part of the Chinese coming out of global financial crisis, and the scale relative to their economy was staggering. I think there’s a concern that perhaps the Chinese takeover as the number one leader in the world. And we’ve talked to Peter Zeihan, and he thinks that’s improbable. We’ve talked to a number of folks who don’t think that this is a likely outcome.

Kevin: But Duncan thinks it might be?

David: Well, I think the idea is, as you and I’ve talked about, the Space Race and the nuclear race and what was happening. We were willing, and this really culminated in Reagan being willing to push the envelope in terms of an expansion of credit…

Kevin: Beyond one trillion to three.

David: Yeah, so you triple the national debt and can we afford it? And my dad’s answer 30-40 years ago would have been no, absolutely not. This will bankrupt the country.

Kevin: But it bankrupted Russia or the Soviet Union actually, that is what happened.

David: It did. So is there a different kind of credit arms race where the idea is who can spend $10 trillion first and who gets the biggest benefits from creating new infrastructure, new technological development first? Because whoever is the leader in technology moving forward will be the leader of the world, whether it’s the free world or not. And I think that is the point.

Kevin: You think that’s what’s driving him? Possibly just a deep-seated fear that China might outpace us if we don’t outpace them with debt.

David: Right. If this is a new version of the Cold War and it’s not tanks and bombs and guns, it’s not the space race and Star Wars, but instead it’s 5G and everything technology related.

Kevin: So we have to go into debt because the other guy might do it better or faster.

David: That’s right. So there seems to be a fear that’s connected to it. And again, I mean, we’ll explore this with him in conversation in a few weeks, but there is something driving it more than you know, look, I’ve abandoned Austrian economics and there is a new form of economics, modern monetary theory. I don’t think he’s going that direction. And yet he’s veering awfully close.

Kevin: Let me ask you a question, then, because I remember, this was back in 2013, we were at a conference, a real large building. You know, where they opened up the walls for three different conference rooms while you were speaking. And you gave everyone an example, because you’re an athlete, Dave. And you talked about, okay, so now if I were to run from that wall all the way to this wall and it was, like I said, it was a large room. You said I could probably run pretty fast, but give me a 50lb bag of concrete, okay? And I’m gonna run a lot slower, but you’re probably still gonna make it. Give me a second bag, you may be able to make it, but you’re not running anymore.

David: It’s more like a duck waddle.

Kevin: And you likened that to taking on too much debt. Whether we’re racing the Chinese or not, there’s a point where you become less and less and less efficient by carrying more and more and more debt. Is that not like the concrete?

David: Well, certainly for the economy, the economy is like the being who is carrying the weight, and I still hold that debt in aggregate is like exercising. Maybe it’s with a weighted vest or like carrying a sack of concrete. Every incremental bag you add slows you down, and the strain it puts on the system quickly moves to the breaking point. In this case, if you have interest rates that start to step outside of some sort of a tolerable band, interest rates in an over leveraged system, this becomes very consequential. So we have the renewed discussion of yield curve control. We have the Japanese who have been doing this for years, and we have the entertainment by the Fed of something to compliment QE or even replace QE, yield curve control, and I want to discuss yield curve control with Duncan as well.

Kevin: Okay, so the repo markets, we’ve already said the Fed has said we are going to back away. We’re not going to, it’s not needed anymore, but you know they’ll be there within seconds if it is, right?

David: Exactly. They ended the repo market interventions in recent days. Largest overnight demand for liquidity came as no surprise, middle of March when things were getting pretty crazy, with a $495.7 billion demand for overnight liquidity, half a trillion dollars in overnight demand. Again, the five trillion was offered but never used. Repo rates, which, by the way, I think, is one of the powerful aspects of yield curve control. You say, we’ll do whatever it takes, and it might take less than it would have otherwise. Whereas with the QE that we have today, it’s a firm commitment. They are doing that today. $120 billion a month split $80 to treasuries and $40 to mortgage backed securities, and they’re on the hook for $120 billion because that’s what they said they were going to do. 

With yield curve control, you may not have to buy120. Maybe it only takes you 10. Maybe it takes you 350. The number is undisclosed, what you’ve conveyed is we will do whatever it takes. And I think that’s really what they were conveying with the five trillion too. As you said, we’ll put all the money in the world to this. How much do you need? And so, you know, they’re back to normal. At least repo rates presently around 0.13 of a percent, back to a range the Fed is comfortable with. And, I mean, anytime the Fed backs away from interventionist staff, I applaud that. So I applaud the end of the program. And you’re right, they keep it as a tool in the tool chest. If they’re not employing it, it can be redeployed when it’s necessary. So it’s wise to let the market sort out what it can on it’s own, only intervene when necessary, and, you know, to be honest, it seems like the “when necessary,” it’s almost all the time these days.

Kevin: Okay, but they almost always have an excuse. The excuse last September was the mismatch because they had the quarter end and they needed extra liquidity because of…you were already talking about expiration on stocks. You also have quarter end periods where there’s a need for liquidity. And they said, well, it was just a mismatch. But here we are ten months later, nine or ten months later, that mismatch, did that just continue?

David: No. I mean, there were the ridiculous stories about the end of quarter that a September liquidity mismatch is in the corporate world. And that might have taken ten days of intervention and sort of rate smoothing, so to say…

Kevin: If that was the real reason.

David: But there’s a difference between ten days and ten months. The partial truth is always the most powerful lie. And so what they were pointing to is a real liquidity need at the end of the quarter. But then overstating and misattributing that that corporate need for liquidity was somehow what was driving what has been in place for the last ten months. Again, I’d say the partial truth is always the most powerful lie. 

The markets were only too happy to ignore what for us represented pre-shocks there in the fourth quarter of 2019, you know, which were a good indicator of what was coming, the main event, Q1 2020. We started 2020 with a word, which was, I mean in a number of my public speeches in January and February, uncertainty. Uncertainty. I gave a speech to two different real estate groups and said uncertainty and here are your categories of uncertainty, and this is why we think stocks are heading lower, because if you trigger any further uncertainty, frankly, doesn’t matter if it’s in category A or B or C. If you have more uncertainty, there’s going to be a repricing of assets, which are already at elevated levels.

Kevin: Okay, so let’s go to that uncertainty because one of the things that I love about this show, Dave, I learn a lot. As we sit and talk, I learn a lot as we sit and talk on Monday nights before we do the show. I also learn a lot from the guests that we have, a lot of the guests that we have I don’t even agree with, like we’re talking about with Duncan. I don’t want him to be right, but I remember in January you were talking on this show about uncertainty, but you were talking about the oil and the gas industry and how desperately they needed continuation of credit. And if there was gonna be any kind of change in the economy, they were very, very vulnerable. Of course, the change in the economy came. And look at the asset prices, what happened?

David: Absolutely. Have you ever had a conversation with someone that really kept you thinking? Your brain was engaged and long after the conversation ended you were still going on in your mind with a debate?

Kevin: Maybe arguing. Yeah, with him, at three in the morning.

David: Yeah, but, I mean, that’s what I love about having a variety of guests on the program, not all of whom we see eye to eye with. Or it may be we only see eye to eye with 10% or 50% or 90% but not 100%, right? It is like iron sharpening iron. Every conversation I’ve had with someone that I’ve really disagreed with…

Kevin: as long as they are thinker. Okay, if they’re not a thinker then don’t bother because they haven’t thought it through. But if they’ve thought it through and they disagree with you, you may have something to learn.

David: Absolutely. I have to check my assumptions and I have to go through their process and see where they may be off. And so it is an engaged process, and I think it’s a healthy process to go through, regardless of how certain you are about any particular position, whether it’s an economic outcome or a political projection or what have you. To the degree that you allow for some back and forth, your position will either be destroyed or further refined, both of which are positive outcome. Destroyed if it is a false position, great, and if it needs refinement, that’s great too.

Kevin: How often has this company been saved because of the executive committee? In other words, you have a number of different ideas. These guys come together, everyone’s invested in the company doing well, but not everyone agrees.

David: Right, and that disagreement is really a healthy factor, and we tend to look at peace in relationship, and prioritize calm that we assume comes with it. But I think real peace is where you’ve come to be settled in a position and well established, and that can be hard work. In our family, I remember having 5-6 hour discussions, debates with my dad, and they could be very heated. But we knew that there was a topic on the table and the topic was not me and the topic was not him. It was not a relationship that was in question. We could put the gloves on, so to say, and verbally hit the mat and tear apart an idea or an opinion, and then when we were done with the conversation, it was back to being Don and David again. And we were in relationship father and son, and the outcome of the conversation had no bearing on our relationship. The topic on the table warranted focus, and it warranted our full attention. And so we gave it. And then we’re back to father and son.

Kevin: Well, you agreed on the two Ts. You agreed on the topic and you talked about it. But your goal was the truth.

David: Well, that’s right. And so you have to be willing to budge, recognizing that you may not have the truth. We talked in the past about Madalyn Murray O’Hair and a famous debate that she got into, and this happened to be a debate on the existence of God or nonexistence of God, and he asked her two questions. One, madam, what percentage of the world’s knowledge, the universe’s knowledge do you possess? To what she said 10% and he responded with, and do you think the existence of God perhaps could be in the other 90? And so there’s this back and forth, right? The back and forth is important, and that’s, I think, where you have to realize that if you think you have 100% of the world’s or universe’s knowledge, then and only then could you have complete certainty. You see what I’m saying? So it’s possible that in any debate political economic that there’s more information that you’re not privy to. And perhaps you should always have some humility in conversation because you may not get it. You may think you get it, but you may not have all the information you need.

Kevin: You brought up uncertainty. One of the things that I think we’ve found through this show is, when something doesn’t quite make sense, like the repo intervention in September, okay, or the need, the oil and gas companies dramatic need, especially the fracking portion, the dramatic need for credit, that didn’t quite make sense. They were actually losing money – if they weren’t getting credit, they were losing money, but they were making it up on volume. You know the old joke, right?

David: Yeah, easy credit is something that has fueled the oil and gas industry, and particularly, you know, not your majors, but the folks who are developing new prospective land and whatnot. So the events on the horizon, I think, are always worth keeping in mind. That’s why in January and February, we were talking about the borrowing based redeterminations, that is where a bank will look at the value of an asset and then determine how much they’re willing to lend on the basis of the value of that asset. 

So you re-determine that on a quarterly basis, and, you know, looking at sort of the April to March timeframe, March to April timeframe, you’ve got that happening with banks. So loans and credit lines would be restricted in light of the change in energy asset values, of course this was prior to oil going negative, but then a few weeks back, again sort of with the idea of keeping our eye on the horizon if you if you expect…we’re talking about mortgages. When you’ve got commercial and residential mortgages, which are today in forbearance and you know, so here is your grace period. You don’t have to pay right now, but you will have to make this up in the end. But you’ve got that event, that forbearance period coming to an end at the end of July. And it coincides with the unemployment benefits and the expiration happening also at the end of July.

Kevin: Do you think this has anything to do with why the banks and the financials are doing so poorly during this period of time? There seems to be a disconnect between Tesla and some of the FANG stocks and what’s going on in banking.

David: Oh, yeah. I mean, a 300% move or more in Tesla, off of the lows, and you look at how the financials and banks have fared in recent months. And, you know, I think this is where bank investors, those who are longer-term investors, not just traders, they are putting two and two together. There’s a key confirmation here. If you want to look at this as a chart, this would be the KBW Bank index, the ticker symbol is BKX, and it dropped by 50% in the first quarter, and it is still down 33% from its January start. There’s just something you have to know. Any sustainable rise in equities will have the financials along for the ride. And if the banks and financials are not on board, then what you’re looking at in terms of enthusiasm in the equity indexes is probably a countertrend move. In other words, the market in this case is likely to move lower unless you see banks and financials confirm and move considerably higher. You’ve got a 1/3 gap to fill. You know, or from this level, actually, 50% rise to close the gap.

Kevin: So we’re thinking July, August. This is when that confirmation would need to come.

David: Well, exactly. You’ve got the stress in the mortgage market, both commercial mortgages and residential mortgages, coinciding with what the governments are going to need to spend, further stimulus. I think the Trump administration would be insane. From a political standpoint, I mean, if I’m judging by the numbers, I’m all for fiscal conservatism. If I’m judging by the politics…who should be spending an extra $600 a month, continue that on through August, September, October, November, what have you. Those benefits should continue if Trump wants to ensure his reelection.

Kevin: Doesn’t it go back to what we were talking about, back to cold war? I mean, we just want to make sure that they don’t outspend us and beat us by outspending us. So you think, I mean, the Republicans are going to probably, or Trump is going to—I hate to classify Trump as a Republican cause I don’t think a lot of the Republicans even like him from the way I see politics—but Trump is going to, in his mind, need to spend that kind of money because the Democrats, they’re asking for much, much more right now.

David: Yeah, so, I mean, watch the end of July early August in terms of market conniptions. I mean, you also have, keep in mind, you’ve also got the finalization of back-to-school policies, new procedures relating for that. Combine that with the rise in cases of COVID, and you have the makings for a fall in the fall, a fall in the autumn. I think that we go back to that operative word, uncertainty. Of course, not to mention you’ve got November within spitting distance.

Kevin: Can you believe we are three months away from the next election? It’s hard to believe.

David: I know, it’s crazy. So here we are talking about further stimulus. It is a competition. A trillion dollars is what the White House wants before the fall session is complete. The Democrats are proposing three trillion, which would include convenient flows to particular states that have recklessly overspent for years. And those states are under pressure. They’re under pressure now, given the economic challenges of COVID, but the previous irresponsible fiscal management, that’s a legacy issue prior to. And that’s the bigger issue. Yes, COVID is revealing, but what it’s revealing is what happened before.

Kevin: Do you think government jobs at some point are going to be in jeopardy with some of the states that were already in trouble?

David: You know, certainly at the state level before the federal level. We talked about this in previous years, where, you know, if you want to follow the money, so to say, the last place to implode is in and around the Washington D.C. Beltway. You know, if you want department stores and you want restaurants and you want everything to be happy and healthy, the last people to run out of money are the people who are being paid from your tax dollars.

Kevin: I’ll never forget that, Dave. We were filming in Washington D.C. one of your films, and we were there during the depths of the recession after the global financial crisis. Everywhere else, it really felt like a recession. But when you were on the Beltway in Washington D.C. it was like Disneyland. Everything was just fine.

David: (laughs) They’re the last people who run out of your money.

Kevin: OPM: other people’s money.

David: Well, so I think government jobs, they don’t get trimmed for a long time. But have you ever thought about, this is just a random idea, but have you ever thought about government employees because they have such a direct benefit from their paycheck and government policy…what if it was a requirement that if you were hired by a government, you could not vote? So if you work for the federal government, you don’t have a federal vote. If you work for the state you can’t vote in any state election because clearly you’ve got a conflict of interest, that personal conflict of interest, a vested interest in a particular outcome. Is it okay?

Kevin: I think, yeah, I think what you’re doing is dreaming at this point, Dave. I don’t see that happening.

David: I kind of like the idea. I think you’re dreaming.

Kevin: You’re dreaming.

David: (laughs) I’m dreaming.

Kevin: Okay, so let’s go back to fiscal stimulus.

David: There’s a bit of a headline competition over whose deficit spending plan is going to be bigger, right? Biden’s plan or Trump’s plan? Trump says 300 billion, Biden says 700 billion…

Kevin: You say tomato, I say tomato…

David: It almost feels like an auction of the White House. If you think about what’s going on, Biden is promising to deliver the White House at a cost, you know, again the risk is well maybe I don’t win. But that’s what it feels like, is an auction of the White House. How important will the handouts be? Making sure that income gets to the people who need it? And this is a huge concept, this fiscal cliff. It’s a big deal. It’s a big deal for households. It’s a big deal for banks. It is a huge deal for…I mean big deal for banks in the sense that they have lent to households, they’ve lent on commercial real estate. But it’s also a big deal for property owners. Think of the huge trend, as a result of lowering interest rates, investors have, in a very frustrated fashion, had to get creative, take on more responsibility for managing properties, looking for rental properties to supplement their income.

Kevin: Yeah, I’ve talked to so many people who say, well, where do I get income on my money? The only place you can get income at this point is real estate.

David: That’s where a lot have gone. But this is, again, super critical here as we get to the third and fourth quarter of the year. Most of those property owners are leveraged. They’ve borrowed money to own the property, and that improves their cash on cash returns. But they individually are not enough to matter. They are stuck between a nonpaying renter, which we have with COVID, which we have the possibility of if we don’t continue to see these $600 a month payments. They’re stuck between the nonpayer and the banker calling on delinquent payments, saying, you owe us, we actually will own that property if you don’t make payments. So, real estate, a leveraged return on investments, it is a great idea, unless leverage works both ways, which it always does.

Kevin: I want to revisit something that I said a little bit earlier, Dave, and just unpack that a little bit because there is the political establishment on the left, there’s the political establishment on the right, and there’s an awful lot of need to have things run the way they’ve always run. Trump, a lot of times, throws a stick in that, and I’m just wondering, okay, if it were up to the Republicans and they didn’t really like Trump in, this $600 a week payment that’s been coming in, it’s gonna end at some point. It’s gonna end here real quick, and if it ends, whoever decides to end that payment, I wonder if that’s going to affect the outcome of the election. Do you think there’s anything nefarious under the surface in the Republican side of things to say that’s fine with us?

David: Yeah. I don’t know why the Republicans have hesitated at all to continue the benefit because, I mean, it’s not like they know how to spell fiscal responsibility. So, you know, should the Republicans pretend to try and find fiscal restraint in their vocabularies, I think what you’re talking about is getting the White House to die on an unnecessary hill. It could toss the election. You’ve got enough people who are in desperate straits and who need that 600 bucks, it’s a real issue. So, yeah, $600 payments, they have been pumping $18 billion a week into the economy. To see that stop just prior to the election, what would the Republicans be thinking? Again, I can have a view on this which is fiscal related, I don’t like the fact that we’re pumping in $18 billion. Do I like the fact that we’re growing our deficit? No, okay, so that’s a clean and neat accounting perspective. But there’s more to the story, which is what’s going on in the political arena? And it’s interesting. Would the RNC rather have establishment Democrats in office than a non-establishment Republican for a second term?

Kevin: You know, it’s an interesting question. I talked about, I enjoy doing this commentary because we’ve gotten to see so much. And I said, all right, we’ll speculate ahead of time and then we can check ourselves. We’ve been through a number of elections since we started this. Obama was elected twice since we started this commentary. You know, Trump got in. And really, if you look at the polls, Trump was going to lose in 2016. Remember? We were talking about the polls and it was just absolutely Trump had no chance, Hillary was going to be in. That didn’t really turn out to be very accurate, did it? The polls, you can’t trust, can you? During this period of time?

David: No, but I think you can trust Saturday Night Live humor and they captured how unlikeable, how absolutely unlikable Hillary was. And it was classic, as classic as More Cowbell and Debbie Downer. I mean, they captured who Hillary was, and it was just absolutely hilarious. But you’re right. The media was reporting poll after poll of Trump losing in 2016 and the consensus was clear, the expectations were set.

Kevin: They said Trump did not stand a chance.

David: Not a chance. There was a singular voice that gave Trump a huge odds of success then, and has done a similar review of the primaries for this election cycle and suggests the same outcome this fall.

Kevin: Okay, so he’s saying that Trump will take 2020?

David: Trump is in in 2020. The methodology he uses is not perfect. It’s not 100% right 100% of the time, but it has allowed Professor Helmut Norpoth a model which has correctly, if you’re looking back, applying it through past election cycles, it correctly has predicted 24 out of the last 26 elections.

Kevin: That’s pretty accurate.

David: It’s not bad. Bill King was highlighting the fact that CNN’s model, this is their poll model, shows Biden running away with the election. Biden’s a shoo-in, Biden’s going to win. Norpoth was quoted as saying, “I don’t go by opinion polls, I go by the real polls. I go by what happens in the primary elections.” In those primary elections, especially in the early ones, Trump did very well, and Biden, as many of you may have forgotten by now, struggled in New Hampshire, where he came in fifth. So, for the sake of argument, entertain the possibility that Trump wins. Fair, free, no fraud, as Norpoth is predicting will occur based on evidence from the primaries. If you knew on the basis of a weak primary showing that you were slotted to lose, that is Biden, what would you do? What would you do? What would your grassroots organizers do?

Kevin: And if you saw that Norpoth was right last time, you may love the fact that public consumption, CNN polls, what have you, are going to say that your person is going to win, even if you know they’re not. But if you’re a strategist, what are some of the things that a strategist from the top could do if they’re like, oh, Norpoth is saying that Trump is going to be in again. If they were wanting to beat him, how would they do it?

David: You might need to improve the odds by this or that methodology. So the two strategies that seem to offer possibility to upset Norpoth’s prediction, again which is Trump will win in 2020, if you wanted to upset that, you could actually create 11 to 22 million new voters.

Kevin: A new voter bloc.

David: Yeah, and that would have to happen between now and Election Day. That may be far fetched, but that is a potential with immigration issues, which you may or may not come into the public policy arena successfully between now and November. But that’s one possible way of doing it, to upset Norpoth’s prediction. Another way is the mail-in ballots where voter fraud is much easier to pull off and that holds the possibility of being comparable to, sort of, the old ballot box stuffing.

Kevin: Well, you had talked about, again, going back to the cold war, it’s to say, well, you know, we can justify this because we can’t possibly have the opposition win.

David: Yeah, and I think stolen elections, if we’re talking about something that seems very remote, that’s not just Third World phenomenon, you know, fraud is to Chicago Election Day—Just ask the Daleys—fraud is to Election Day in Chicago like Fed market rigging is to a rough patch in the market.

Kevin: It’s just a given.

David: Yeah, both are from a playbook of situational ethics. Do whatever is necessary “for the greater good.” And so in that sense, I think the 2020 election cycle is going to be fascinating, and probably entertaining too.

Kevin: You told me you read a book, How to Rig an Election. That’s an interesting title. Was it helpful?

David: Yeah, Nic Cheeseman and Brian Klaas wrote a book published by Yale University Press, How to Rig an Election. And it’s not that they recommend it, but they argue that we are not naturally democratic in our hard wiring, and…

Kevin: We act like we want both sides to equally have a playing opportunity, but actually we want our side to win.

David: Yeah, and we pretend like we want to hear dialogue. But, in the end, we want a megaphone and a monologue, and that’s what happens in the public square, is usually there’s a drowning out of conversation and it becomes a shouting match. You see that even in the presidential debates, it’s no longer about acumen and demonstrated awareness of the facts. It is more about one-line zingers and how to humiliate the other person. You have to win over the crowd to win an election, which is opposed to winning the argument, which is no longer relevant.

Kevin: Would you consider it tribalism? Because, really, we always want our tribe to win.

David: That’s it. And that’s what Klaas and Cheeseman are pointing to…Chaseman, Cheese-man, I don’t know how that is pronounced, but they point out that we’re not Democratic in our hardwiring. We are tribal in our hardwiring. And yeah, so it’s not dialogue on political and public policy issues. It’s do whatever it takes to win. That’s the case they make. It’s studying global elections, the methods employed to win at any cost. They look at a lot of strongman cases where, you know, what is it gonna take to stay in power? And chapters two and three and five stood out to me. Chapter two is titled “Buying Hearts and Minds: The Art of Electoral Bribery.”

Kevin: And isn’t it interesting that we have COVID-19 right now as an excuse? I mean, at this point, who’s going to give us more money because of our desperation because of the virus?

David: Yeah. I mean, the bidding war is on display, and COVID, you’re right, it provides a cover for the spending of trillions of dollars. Who is going to be the recipients of the trillions, who will promise the most money? One trillion? Do I hear $2, $3 trillion? And so, COVID has political gain written all over it. And that’s where, you know, I think a distinction needs to be made. Some people would say, you know, COVID is nonsense. Absolute balderdash. It’s being used as a manipulative tool. Okay, well, let’s be clear. There are real people who have died. I know a number of people who have contracted it and have suffered greatly from it. It is real. But what is also real is what politicians have done to use and manipulate it to their advantage.

Kevin: There seems to be a mismatch, doesn’t there? Between the amount of deaths versus the amount of change worldwide?

David: Yeah, and so politicians, globally, always see an opportunity…when there is fear in the equation, you can push the envelope in terms of the control that gain. A fascinating conversation. If you want to explore this idea further, you have to go back and listen to the conversation we had with Robert Higgs.

Kevin: Crisis and Leviathan.

David: Crisis and Leviathan. And it’s on the basis of crisis that he has his ratchet theory, where the size and scope of government increases dramatically during the context of crisis…

Kevin: And it never decreases.

David:…even though the crisis recedes, the footprint of government never does. So how do you end up with a major, huge government leviathan? It is through crisis. It is through the opportunistic approach. And this is where, again, what is COVID? It has political gain written all over. There is an air of legitimacy given by the concerns over transmission and death. That’s fine. But you see people operating in a way that is obviously self-interested. The L.A. Teachers union, they’ve said this: you can’t reopen schools unless police are defunded. Now I don’t know what this has to do with COVID, but unless the police are defunded and charter schools get shutdown…

Kevin: It has nothing to do with COVID. But it definitely has to do with agenda.

David: Right, so, opportunistic, don’t you think? It has this ring of Rahm Emanuel. Never let a crisis go to waste. This is the reality, and it doesn’t matter what stripe your shirt is. If it’s red or blue, this is how government has operated globally for centuries. If there is a crisis, there is an opportunity, and you expand your reach and influence as much as you possibly can while people are scared out of their minds.

Kevin: You addressed motivations about a month ago in the Commentary, and I thought it was really interesting. It’s true. The press, their motivation isn’t necessarily to bring the truth. It’s to entertain. And politicians, they’re not necessarily trying to bring peace on earth. They’re actually trying to win, you know.

David: They want to control a larger piece of the earth.

Kevin: That’s right, and they never do go back. You know, when I think of Higgs, what he’s talking about, never going backwards, you ever tried to go backwards with a zip tie? You know, zip ties, when you tie something off, you pull it, and the whole idea behind a zip tie is you’re done. Okay, you have to cut it off from there. You’re not going to be able to back it off, and that’s sort of the size of what goes on with the larger governments.

David: Well, I mentioned chapter two, “Buying Hearts and Minds: The Art of Electoral Bribery.” The other two chapters which were fascinating to me were “Divide and Rule: Violence as a Political Strategy.”

Kevin: Wow, have we seen that.

David: So it seems particularly apropos in the current environment. Politicians have long sought to take advantage of a divided populace, and the more you can inflame differences and get people pitted against each other, then all of a sudden you’re just redirecting that natural energy and animus towards what you want to happen. So inflaming differences whenever possible, again this is like, if you want to read Machiavelli, it’s almost like reading The Prince. What do you need to do to be a successful politician? Well, you, buy the vote, you divide and conquer. And then the chapter five was classic too, “Ballot-Box Stuffing: The Last Resort.” And I guess as we approach November, I think it would be worthwhile to hold our tribalism in check, hold it in check and attempt to allow a democratic process to unfold. I mean, I recognize we’re at a record low ebb in terms of civil discourse, like nobody wants to talk about issues, both sides will claim the same thing. Whoever wins, the other people won fraudulently. It doesn’t seem like there’s been a more contentious political environment since the Civil War.

Kevin: I remember when I was young, I came to work here and we brought up Howard Onstatt many times, and he taught me quite a bit about economics. But he also taught me about politics. As a young man, fiery, I was like, why in the world don’t we just have the popular vote? And he sat me down and he taught me about the Electoral College. I would imagine, just like this last election, the Electoral College, if it doesn’t go for one side or the other, it’s going to be criticized again.

David: Yeah, and I mean ironically, if the popular vote loses to the Electoral College vote, the Electoral College will be branded as an anachronism. It’ll be a holdover of a system rigged by the privileged land-owning white males. I mean, you can figure out what the gap filling will be, but if you win with it, then the silence will be deafening.

Kevin: It goes back to motivations, motivations, and, you know, the motivation of politicians, it’s probably not to unite.

David: No, it’s not. I think it’s worth remembering that that benefit is there. Division. More than any other group, politicians benefit from divisions. Before you permanently say goodbye to a friend or to a family member this fall over political differences, remember that the animus that is being harnessed is for political gain, and you are, we all are, treated as pawns, pawns in a much larger tournament. And the issues as they’re presented in the media are never what they are presented to be. The facts, as clean and clear and pristine as they seem to be, are chosen, are selected, and are put under just the right light so that they shine just the way they’re supposed to shine. And so I think, divisions, that’s the key. We’ve got to avoid those as much as possible and let more thoughtful engagement occur while they’re trying to stoke less thoughtful engagement, stoke more rage, create more frustration, create more prejudgment. This is what you saw during the Civil War. Brothers fighting brothers, which there may have been a justification for it then, I don’t know that there is justification for it now. Prioritize relationship and make sure you realize that the conversation is not the conversation.

Kevin: One of the distractions, too, sometimes when you have a lot of division is what’s going on outside of the country. You need to find an enemy that everyone can consider an enemy if you’re the leader. And China, really…the relations between China, are they deteriorating as fast as it looks like?

David: You know, there are a dozen guests we need to have back on the program, from Stephen Roach to Minxin Pei to really explore that thoroughly. But it’s not as if we need other categories of uncertainty to be inflamed for the markets, but we have Chinese relations which seem to be deteriorating. We’ve got U.S. Defense contractors and politicians which are being sanctioned, and we’ve done the same to Chinese diplomats and politicians. Huawei has been blocked. A number of other companies are being sanctioned from the US side. 

The UK, as well as the US, does not want Huawei driving the 5G technology expansion and the US is highly criticizing and now sanctioning particular people for their involvement in placing more than a million people in detention camps in China. These are predominantly the Uighurs being sent there for reeducation. And I don’t know if you can roll the clock back, but generally Soviet-style reeducation camps are not the equivalent of a vacation and not the place you come back with a whole mind. Not completely lobotomized, but reeducation is a hard road. And what I don’t hear, I don’t hear the media congratulating Trump for aligning with human rights activists. I don’t need the media giving praise to Sam Brownback for his contribution in helping the Uighurs and establishing some legitimate questions around how people are being treated around the world. But that is par for the course when the battle lines for November have already been drawn. Now, all of a sudden, everything will go through a partisan lens. Our relations with China, how is that going to be interpreted through a partisan lens? Everything becomes partisan between now and November, unfortunately.

Kevin: Just before I came in the studio, Dave, we packaged up a few of your books to send to some clients of ours, and the letters that I was writing to them, just saying, you know, I think you’re going to really enjoy this. We talk about motivations. And if you’re getting your cues from people who are motivated by something different than what you think, like the media, okay, or the politicians or the Federal Reserve, if you’re getting your cues for your family from those sources and you’re missing the fact that their motivation is different than what they say, you’re going to lose, and that effects the long term legacy of your family. 

Now I want to bring the program full circle because as I write these letters to clients and say, hey, you’re gonna really enjoy this book or you’re gonna really benefit from this book, Legacy, which you wrote a couple of years ago, I’m not trying to give an ad for the book as much as I am just trying to say, look, weigh motivations out, including in your own family. Sometimes it’s wise, and I see you doing this with your kids, okay, you weigh their motivations out. Yesterday we were just talking about how quickly they moved to something that was to their own gain just as soon as mom and sister left. We saw that almost instantly. Now it wasn’t nefarious, but it was a change of motivation, instantly, while you and I were talking.

David: Yeah, I think, as we move towards this really dicey political environment where, again, politicians benefit from division, I came across an email to myself in an inbox, and it was, sometimes I have to send myself reminders of things.

Kevin: (laughs) That’s a good idea.

David: And this email was—I only had a title. It didn’t have a body to it, just a title—wait 24 hours to say what you think you must say. And when we feel riled up and compelled and passionate and like we need to change the world with the next thing that’s going to trip off our tongue or we’re going to tweet or text, keep in mind that words, they promote either life or death. And relationship is more important. It’s more important than this election cycle. It’s one of the things when I think about the Elles family, when I think about that 30-odd generations, 950 years of existence, this one particular dynasty…

Kevin: It was a single castle that maintained through all those various periods and empires.

David: Yeah, they had family conflict. But they were committed to three things. They were committed to diplomacy, and they weren’t allowing outside forces to take them down. They were committed to civility, which, they weren’t allowing to have internal conflict and strife destroy them from the inside. And they were committed to sentimentality. They were committed to seeing what was good about what they had. This country needs great diplomacy. This country needs great civility. This country must have sufficient sentimentality to recognize that what we have in the historical log, and this is not to cover over, we’re imperfect. I get it. We’re completely imperfect. But there is something worth preserving, right? So, sentimentality, just as the Elles family had it, we need it. Just as they had civility, we need it. Just as they have diplomacy, we need it. The world gets really rocky from here if we don’t embrace some of the intangibles that keep legacy alive.

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