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Peak To Peak To Peak Inflation, The New “Transitory”
July 19, 2022

“They are losing the last vestiges of credibility, and somehow think that projecting an image is sufficient to carry the day. If you say it, therefore it becomes reality. It brings me back to a significant reason to own gold in any period of time. That is stupidity insurance because here you have a recreation, a regeneration of Plato’s cave sequence, where you’ve got shadows cast against the wall and that is supposed to be reality.” — David McAlvany

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

I think all of us sometimes wonder if we’re going to just wake up from a very long dream, like we’ve been missing something. We have certain things in our life where it’s like, “This is too good to be true.” We’ve talked about this for 10, 12 years. How is it that America, the United States, could just print trillions and trillions of dollars? In all these years, we really didn’t experience inflation. We scratched our heads, but strangely enough, you had the Berlin Wall falling. You had the communist countries like China that were producing goods for much, much less. We should have been experiencing falling prices. We didn’t, but are we waking up from a dream where we were getting something we didn’t deserve, and now we’re finding out what it costs?

David: Isn’t it funny how we internalize those things and normalize them?

Kevin: Yeah.

David: This must have something to do with us and our exceptionalism that we can do something that’s never been done in the history of the world, but that’s because we are who we are.

Kevin: Yeah. We’re Americans. We’re here to help.

David: Yeah, and so it is curious to see the monetary policy experimentation, the fiscal policy experimentation. Books have been written about this, deficits without tears. We run the deficits without tears. Of course, Jacques Rueff’s point was that ultimately there are significant prices to pay, emphasis on the word ultimately, because nothing is free in life. Although, that’s what we’ve internalized and normalized is this world of easy money and free access.

Kevin: Now we’re facing double-digit inflation. But here’s the strange thing. Here in America, we’re feeling the inflation, eggs and butter and rent. Everything’s going up. But if you were from any other country in the world, the dollar’s going up, gold’s going up. We’re getting sort of an altered reality as we look at it right now.

David: Yeah. Often, our colleague Doug Noland will look at trading dynamics that seem healthy, but are actually an expression of another dynamic once removed, somewhere else in the system, which is anything but healthy. Perhaps the dollar trading to multi-decade highs is an example. When an asset at the core of the financial universe trades well, like the U.S. dollar has in recent weeks, of course it can be on its own merits, or it can be on the demerits of an asset at the periphery, somewhere else. Frontier and emerging market stress has, in recent weeks and months, intensified. The dollar has moved into higher gear, moving into territory un-trod so far this millennium. As frontier and emerging markets have calmed down here in the last day or two, lo and behold, the dollar has come off the boil a bit as well, so maybe it’s not the merits of the dollar driving it higher.

Kevin: Okay. The pound’s lost its prime minister. We’re already looking at the English, seeing a weakness. The yen, they’re trying to keep anything from happening with the yen, and it’s just— the currency is crumbling relative to the dollar.

David: As we look at the first half of the year, it was tough for almost every asset class. This Thursday we’ll get together with Doug Noland and we’ll do our Tactical Short quarterly call. We do this every quarter. This one is uniquely titled, “Nowhere to Hide.” We’ll be looking at not only the performance of asset classes in the first half of the year, but also consider some of the frailties around the world that will impose themselves on our financial market realities as the rest of the year unfolds.

Kevin: The listener who wants to tune into that, you don’t have to be a tactical short holder. You can listen. It’s at

David: Register ahead, 2:00 p.m. Eastern Time for Thursday, this week. 2:00 p.m. Eastern Time. I think you’ll find the conversation informative. If you’re trying to figure out what is going on in the world, you won’t find a better macro overview anywhere.

Kevin: You can’t hide in the pound. You can’t hide in the yen. I mean, or you can’t hide in China. A lot of people don’t know where to hide.

David: Yeah. Certainly, there are problems by contrast to the U.S. dollar. If you look at the pound, yes, you’re right. They’ve lost their prime minister. They’ll get another one. The euro, they’re tightening financial conditions, and that is a real bear to deal with. If you’re in the European financial markets, if you’re in the bond markets, and certainly if you’re in the euro, it’s been a tough road in the last six months. The yen, where loose conditions have set in motion a significant devaluation of the currency— Recall, they’re doing their yield curve control and trying to keep the 10-year Japanese government bond at less than 25 basis points. That’s taking an unrelenting toll on the Japanese consumer, but there are a dozen countries that are even worse—a dozen countries that are under acute stress, and close to a half a dozen which are already in default or days away from reaching that status. You’ve got Lebanon and Sri Lanka and Russia and Suriname and Zambia. As I mentioned, the one that’s kind of one foot on the banana peel is Belarus. It’s on its way to default.

Kevin: There was a guy from Belarus that I knew 20 years ago who came over to the office. He was like, “Okay, so what do you guys do?” He was visiting for a couple of weeks. We said, “Well, we help secure people’s savings.” Savings, Dave, was something that he didn’t understand at all because Belarus had been through inflations. He said, “What are you saving money for?” He says, “When we get paid—“

David: We spend it.

Kevin: “—we either spend it or we give it away because within six weeks it has no value.”

David: Isn’t it interesting that we only have the opportunity to appreciate the benefits of a market economy and excess savings which become the foundation for investment and capital. It’s the capital in capitalism when you have stable value within a currency system. Somebody from Belarus doesn’t appreciate the value of capital and savings because it’s a novel idea. It’s an alien concept that this would have some future benefit. It’s like potential energy. All they know is kinetic monetary warfare on a day-to-day basis. There is no bottling up of energy for future use. That’s an absurdity. Reuters highlighted at least $400 billion in debt that has a thousand basis point spread. You remember, we talked about spreads and the gap between Treasury yields in another bond market—

Kevin: That’s 10%. That’s a 10% spread.

David: Yep. 10% spread to Treasurys. You’ve got Argentina in that category with 150 billion. You’ve got Ecuador at 40 billion. How’s that cryptocurrency thing working out for them? They wanted to back their currency and issue bonds. Crypto— It’s not working, long story short. Egypt, 45 billion, just to name a few. 

When the dollar trades higher and you have a safe haven like gold that trades lower, I think it’s worth getting macro and looking for context. Is it the merits of the dollar? Could it be the demerits of gold, looking at supply and demand, things that are related to that, perhaps? The demerits of other peripheral currency and bond markets, really with no connection to gold whatsoever, except there’s sort of the knee-jerk dealings of leveraged future traders, that they match up their currency play with a commodity play, as if an inverse relationship were axiomatic. In this case, as the world stability score is being marked lower, as it is now, you’ve got the knee-jerk trades, and they have to be discounted.

Kevin: It’s like a flinch. You can either look at the macro or you can flinch every time you see something short term.

David: Yeah, the real sources of instability need to be accounted for. As we’ve mentioned in recent weeks, the gold move lower in U.S. dollar terms is relevant, but it’s particularly relevant to a small number of U.S. investors.

Kevin: Just us, just us.

David: The better part of seven billion people have gold in a rip-roaring bull market in local currency terms. There has only been one year in recent history when gold prices were down double-digit in all currencies around the world.

Kevin: I remember that year. That was 2013. I was at Lake Powell with the other guys at the office. It was, oh, April 12th, 2013, and gold went down 100 bucks on that Friday, and then that April 15th, it went down another 100 bucks. Some of that was a manipulation, Dave, but yeah, that was a tough year for gold. But you’re saying that’s the only year that we had a double-digit loss across the currencies.

David: Where it was down in all currencies, so gold slipped. As you say, maybe it was pushed, but inflation was no concern. Central bank balance sheets were smaller then. QE was a newish thing then. Mario Draghi, as the European Central Bank president, who was in the middle of monetary Houdiniism, escaping the clutches of the European debt crisis, so these were the unique aspects of 2013.

Kevin: We’re not 2013. Now, I haven’t gone back to Lake Powell with a bunch of guys from the office either, though. Because I think we left just a couple of guys here. It’s like, “Hey, everything’s calm. We’re going to go fish,” and the markets went down more than any time in my career, 35-year career.

David: Yeah. We don’t go to Lake Powell anymore. There’s no water there anyway.

Kevin: That’s true, that’s true.

David: Perhaps it’s more like the year 2000 or 2008. Gold was off by 5.3% in the year 2000, as we ushered in the new century. Given the Central Bank’s interventions and a shift in focus from technology and financial assets to hard assets, gold thereafter, if you look at the year 2000 and the years that came after that, gold proceeded to rack up positive returns for 11 years in a row in U.S. dollar terms. Lest we forget, that’s U.S. dollar terms. The importance of India and China in the mix, gold was up 10 out of those same 11 years in China, and in rupees, the gains were uninterrupted for 12 years straight. That’s the year 2000. Perhaps 2008, maybe this period is a little bit like 2008. Back then, commodities had a great run, up to that point. Oil went to $140-plus. Goldman Sachs was calling for $200/barrel oil. Then we hit the mortgage-backed securities financial market-induced global financial crisis.

Kevin: Well, and gold tumbled initially. A lot of people said, “Oh my gosh. We’re in a crisis. Why didn’t gold go up?” But gold’s liquidity aspect is sometimes what hurts it in the short run.

David: Yeah. It is a very liquid asset. You can raise capital quickly. You can keep all of your other bets in play by raising a little bit of liquidity. Gold traded off during the year 2008, as did silver, sucked into the vortex of a financial market shock.

Kevin: But remember how we ended.

David: By year-end 2008, gold was included in that uninterrupted decade-plus stretch of positive returns.

Kevin: As we talk about these things, we don’t want to just think as citizens of the United States because we don’t get a real read here. You brought up Doug Noland, and he’s such an interesting guy to listen to. He’s really been talking, the last few years, about the crisis coming from the periphery and working its way into the core.

David: Yeah. We mentioned last week that there were concerns with China, and certainly that factors into the relations regionally and how people relate to Taiwan. The Japanese are considering that. Obviously, Mainland China has. But everyone is.

Kevin: Yeah, but China is in a real crisis right now. If we’re looking across the pond, they’re in a real crisis. It’s a credit crisis.

David: What’s unique is that in the Credit Bubble Bulletin this last weekend, Doug highlighted the lender to the periphery coming under pressure. China is a real-time credit disaster. Not a theoretical risk, not a hypothetical scenario.

Kevin: It’s happening.

David: This is not, someday there could be slowing growth, or we expect a recession within five years. “Great, okay, whatever. A bunch of unhappy people when that happens. A lot of them.” No, this is a real time disaster unfolding daily.

Kevin: And the central bank’s not helping. Every time they intervene, nothing’s happening.

David: It’s not that they’re standing pat and doing nothing, but each PBOC intervention of the past month has failed to shift the trend. Perhaps the Shanghai exchange or [unclear] trades higher in response for a day or two, but the credit markets have been relentless. They’ve remained under pressure, regardless of policy intervention, regardless of liquidity accommodation. This is really important because the Beijing challenge this week is the same as last week, and for the last six to 12 months, but it’s getting worse and worse by the day. They’re still dealing with the property developers, one of the largest contributors to GDP growth in recent years. These are the developers that have helped put an extra—an extra—60 to 100 million apartments on the market on the expectation that buyers will come.

Kevin: See, that’s the “build it and they will come” mentality. I brought up the movie “Field of Dreams” a few shows ago. Well, they only built one field of dreams, so if you build it, they will come. There was only one, but what if they made thousands of fields all across America? That’s the problem with China right now. They made, what did you say, 60 to 100 million apartments?

David: Extras.

Kevin: They’re just like, “We’ll build them and then they will come.”

David: Not only are those units sitting empty, but a host of units under current construction are in a new problem category. Buyers are not clear on when they’ll be completed, but they’re expected to pay a monthly mortgage regardless.

Kevin: You’re not even moving in yet.

David: No, but last week, there were—this was on Monday—28 projects where the buyers went on strike and refused to pay their mortgages. By Wednesday—this is sort of viral discontent in a population of 1.3, 1.4 billion people; this is how things get out of control quickly—by Wednesday, discontent was spreading like wildfire. You’ve got 100 projects, up from 28, in 50 cities subject to the same payment protest.

Kevin: Wow, and this is China. There are definite consequences when you live in a communist country.

David: Now it’s 230-plus projects and $130 billion in mortgages that are being left unpaid.

Kevin: Wow.

David: It’s protests.

Kevin: Where do you get the cash to solve this problem?

David: That is the issue, because cash flow is a concern for the developers. Frankly, it has been for some time. They are the modern-day zombie companies. Too much debt, not enough income, and what appears to be the inevitability of bankruptcy, if it weren’t for the state. Now, this is—

Kevin: Well, the state usually wants to muscle that. How does the state muscle the money into this situation? This is an election year for Xi.

David: We’ve never had the opportunity to see how one of these episodes plays out. We’ve had capital markets and capitalism. We’ve had communism, but we’ve never had the blending of those two, and so timeframes, sequences, consequences, who pays what, when, and how, all of these things are new for the financial markets. There is a presumption that the Chinese, because they have control and lots of power, can avoid a negative outcome. But that is only a hope. That is only a hope.

Kevin: They’re pressuring the lenders right now to lend to people that they know won’t pay back.

David: That’s right. The PBOC is directing the banks to provide liquidity. These are commercial banks. They’re saying, “You must. You must lend to the developers.”

Kevin: “Or else,” yeah.

David: Does that end up impairing the commercial banks as well? That’s a reasonable probability. In those small banks— Now think about this, just again, the consumers’ interactions with mortgages is one thing, protest is on the rise. You’ve also had depositors locked out of their bank accounts in some of your smaller banks. In those small banks, where in recent weeks there was growing concern over stability and liquidity available, you basically had a bank run in miniature.

Kevin: Wow.

David: It’s been convenient for the local authorities to use the digital health passes as a means of restricting movement.

Kevin: Social control.

David: You want to go protest or go get your money at the local bank, well, wait a minute, “Show me your smartphone. Do you have a green QR code that allows you to move about the city, or is it red? You’re homebound. Get home or penalties accrue. You must not leave your residence.” We’re talking about someone being COVID positive? No. We’re talking about health concerns? Well, why, yes. If you have concerns over the health of your local bank, you are now frontline, state enemy number one with a voice that needs silencing, and mobility which has already been curtailed.

Kevin: Social credits become Sesame discredits.

David: When bank runs are as contagious as the latest COVID strain, you lock down those with maladjusted minds. The malady is in the heads of the Chinese people. They’re concerned that things aren’t going to turn out right. You must calm them by controlling them. Again, these are all a series of social experiments. We have no idea if this will actually work, if compliance is what they’ll get, or if this blows up in their faces. We could spend an hour discussing the nature of social control, and technology as a tool for technocrats. The point is a little different today. The financial markets in China are gradually unraveling, and they’re unraveling like that thread on your favorite sweater. This small little strand, and you pull it because you just wanted to make it go away, but wait a minute, progressively— It was a small issue at present, but progressively, it gets greater over time. Ultimately, you’ve got nothing that resembles a sweater.

Kevin: You’re talking China here. Anything that we think is small here in America, it ain’t small in China, so even the small start to that thread, it’s huge.

David: China’s a billion-plus, so not small. Exactly. The Chinese developers have well over a trillion dollars in debt. Their bonds are trading at steep discounts. We covered this last week, but things continue to get worse.

Kevin: They’re having to pay higher interest rates. They’re having to pay because people won’t take that risk without getting higher interest rates.

David: The first half of the year, there was nowhere to hide within Chinese credit markets, and it’s getting worse almost by the day. With yields ranging from 9% for Vanke, which is the most stable. Again, that’s been about 1% a month increase in yield since—

Kevin: How about Evergrande? You’ve been talking Evergrande now for the last month or two.

David: 140% for Evergrande.

Kevin: Whoo!

David: You’ve got Sunac, Longfor, Kaisa, all around 110% yields. If that’s the yield, then bond prices are trading at pennies on the dollar.

Kevin: You’ve saying the banks are being pressured to still lend—

David: Well, they must.

Kevin: —to— Yeah.

David: Yeah, and it’s being cast as a social obligation, as a social duty. It’s an interesting twist on the capital markets, where all of a sudden money has to be harnessed for a particular agenda. We have our own way of doing that here in the West, but this is a unique application. Lest we forget, we’re talking about bond prices and yields, but the equity in those same developer companies is moving considerably lower as well.

Kevin: Yeah. You know what? It reminds me. I watched a show on PBS the other night on World War II. It was an excellent show. Toward the end of the war in Japan, Kamikaze warfare was suicidal warfare. When you brought up that it was sort of the responsibility of, if you are part of that society, that was part of the responsibility, was Kamikaze warfare. Now, it didn’t turn the tide of the war, but it caused an awful lot of damage and a lot of destruction. You’re saying that the commercial banks are being pressured right now because that’s their duty.

David: Well, I think there’s a variety of ways of constructing ethical systems, and to prioritize the one versus the many leads you down a certain road. To prioritize the many over the one leads you down a different road as well. Yeah, you’ve got the commercial banks being pressured to lend to the developers. Probably comes as no surprise that the cost to insure against default for those Chinese commercial banks has doubled since the beginning of the year.

Kevin: Sure.

David: Chinese bank stocks are, no surprise, under pressure. They sold off 7.7% last week. These are the circumstances you see unfolding in the Chinese markets. Hundreds of billions of dollars in developer bonds come due this year, next year, the year after. Hundreds of billions of dollars, so rolling over the debt is an impossibility at those astronomical interest rates. Would you want to refinance your debt at 110%? I think not. How about 140?

Kevin: You know what this is sounding like? This is sounding like 2007, 2008 when we started talking about Bear Stearns, ultimately Lehman. Remember Lehman?

David: Well, and this is the liquidity issue. Liquidity issue becomes a solvency issue. They can’t pay off the debt, because that’s the issue. There’s not enough money in play. It’s been spent. It’s been used up. Maybe through graft and greed it’s disappeared to other jurisdictions in the world. You have the liquidity solvency crisis dynamics alive and well that you had during the darkest days of the Lehman and Bear Sterns implosion. The key difference, perhaps, is that securitized financial products were spread into all sorts of portfolios globally in the lead-up to the global financial crisis.

Kevin: That is different, isn’t it? Because they were chopping these dead instruments into tiny pieces and they were moving it out into all different kinds of acronyms, three letter acronyms. Nobody really knew what they were holding, but it was spread out. The Bible talks about leaven in bread. It was spread out a little bit like leaven. It leavened the whole loaf. What makes this different this time?

David: The viral spread is different. Rather than distribution of engineered investment products like Wall Street accomplished in that period of 2006 to 2007, to borrow from Joseph Nye, you have an engineered soft power through loans to the developing world. Again, the lender is China and the object is for Beijing to create a political sphere of influence into the emerging markets, and they do that through a variety of loans. You look at Chinese sovereign CDS. Again, these are the credit default swaps. They’ve doubled from 40 at the beginning of the year to 90, which is modest compared to many countries that are under acute stress. I think that’s one area to watch, along with the Chinese offshore currency rate, as indicators of stress for how all of these loans that they’ve made to emerging market countries—and then of course all of the internal loans that they have end up showing real structural pressures in their economy.

Kevin: I was just reading an article this morning before I came into the office on cortisol and how cortisol rises. It’s a hormone in your body, and it rises when you’re under stress. Actually, it can be a good thing initially, because it can shut down the periphery of your body if it feels like there’s a threat to the core. Part of the protection of the core is that rise in cortisol. The problem is, if that cortisol level stays high, it ultimately kills the organism. It’s something you want. When stress increases or decreases, you want cortisol to be somewhat fluid, but I’m looking at Doug Noland. Let’s compare this to the financial markets in China right now. What you’re saying is these soft loans, they’re all coming from China, or virtually all, and they’re going out to the periphery to countries that, right now, may be looking at bankruptcy. You just said a number of those countries. What if those countries can’t pay? What happens to the core? We see the CDS rate going from 40 to 90. What that is, that’s the insurance rate on the possibility of default. I see that like the cortisol level, if you think about it, in a body. It’s like there’s a threat. It’s gone up, but what if that stays up and what if it gets worse?

David: Right. If you don’t resolve it, it becomes a big issue. Like you said, a sufficient amount of cortisol is enough to kill you. For me, there is a cortisol to nap ratio.

Kevin: I like napping too, Yeah, but—

David: The cortisol to nap ratio. As I experience cortisol spikes, there’s a tendency to see afternoon siestas become more common. Yeah, let’s come back to a brief comment I made earlier. China is lender-in-chief to the periphery. Go anywhere in the world where you have questionable growth, where you have questionable public policy, where you have questionable ethics for certain subsectors or groups within your economy, questionable government stability, where that is actually par for the course.

Kevin: And China’s giving them a loan.

David: China has, in recent decades, attempted to buy friendship. Soft power, Joseph Nye’s idea, through funding development projects. This is not gifts. This is not philanthropic grants. These are loans, so when the probability of default and the cost to insure against it rises, as it has quite aggressively in recent weeks if you’re talking about Indonesia, Malaysia, the Philippines, Thailand, India, Hungary, Romania, Turkey, Mongolia, Egypt, Namibia—this is an extensive list of people who are under pressure now—Kenya, Argentina, Nicaragua. Real time. Columbia, Brazil, Guatemala, Costa Rica, Uruguay, Peru, Mexico. With that many countries coming under more stress, you begin to wonder how the lender will hold out.

Kevin: Right, and they’re in their own crisis. You were talking about the development crisis in China. At this point, you’ve got a one-two punch coming.

David: Yeah. Sure. The borrower being under stress is important, but when you aggregate your exposures, the lender can be at jeopardy as well. Put China in the category of marginal source of liquidity to the emerging markets, marginal source of liquidity to the frontier markets, and you get a marginal liquidity squeeze when they are instead forced to focus on their own domestic property sector, where land developers are circling the proverbial drain. They’re no longer a reliable source of liquidity to the emerging markets, and that shows up as stress in the emerging markets, à la the dollar goes higher. The dollar rises, sniffing out devaluations on a global basis. The dollar goes higher, and this is with a whiff of irony. The dollar appears strong.

Kevin: Yeah, but to us, it’s buying less and less every moment.

David: Yeah, so the strength is just relative to a peer group—best looking horse in the glue factory, as Ian McAvity always used to say.

Kevin: How long does that last? You’ve got Europe now trying to figure out how they’re going to address inflation, and it’s going to happen in Asia at some point.

David: Yeah. This week, you could expect actually the opposite trend, where dollar weakness is what we get on the basis of euro strength as the European Central Bank contemplates not just a 25 basis point increase, which would leave the target rate still at a negative 25. I, frankly, don’t think that advertises very well when you’ve got eurozone inflation at 8.6% and you say, “The best we can do is raise rates to negative 25 basis points.” You look foolish. That’s what you look like. The ECB has to take a step in the direction of credibility as much as they possibly can without unhinging the euro as a currency unit and that whole political construct. A 50 basis point increase, again, that just takes the target to zero, moves the euro higher relative to the dollar, the dollar lower. 

Lagarde and Powell both bring their own versions of tightening financial conditions to the world markets, even as the opposite is what the rest of the world needs. The rest of the world would appreciate, at this point, looser conditions. That’s what may be required in the far-flung, more exotic jurisdictions of the world, but this is the problem. Central bank chiefs are staring down the prospects of consumer price inflation reaching double digits this year, and they’re being forced to act. Yes, it is to the betterment of their currencies and to the detriment of the rest of the world. For the ECB, remember, this will be the first interest rate lift in 11 years.

Kevin: Yeah, so it doesn’t sound like they’re really fighting inflation. Do we think that the dollar could even get stronger going forward, relative to the other currencies?

David: Well, of course they’re still talking about their anti-fragmentation tool, and that’s going to be revealed. There’s a big reveal.

Kevin: I’ve always liked that one, yeah.

David: The more they say, and the more specific they are about the anti-fragmentation tool, the more that it can be discounted in a Goodhart Law kind of fashion. If the measure becomes the target, then it ceases to become a measure. If we’re measuring credibility by the details discussed in anti-fragmentation, it becomes a joke, so just be quiet.

Kevin: Yeah. It just reminds me of something. Remember the Road Runner and Wile E. Coyote. It just seems like something ACME would have, an anti-fragmentation grenade. You know?

David: No, absolutely. Pull it out of a box. It has ACME on the outside of it. You open it up and here it is.

Kevin: Yeah, yeah.

David: Whoop, whoop, whoop—anti-fragmentation tool.

Kevin: And somehow, it’s going to solve the inflation problem. Going back to the dollar, could the dollar go even higher if these guys aren’t going to take it seriously?

David: That’s right. I think it can, and so we’ve got a reason for it to pause here this week. Maybe not be screeching for the skies the way it has here in the most recent couple of weeks. What’s consistent about the anti-fragmentation tool with the whole construct of the euro is that it’s a version of socializing everything. In this case, you’re just socializing the debt burden. You don’t want the countries that have the greatest stability to be benefiting from that, and you don’t want the countries that, because of too much debt, not enough income, not enough growth, can’t pay on their debt sufficiently. You don’t want them to pay any sort of penalties, so you’re just treating everyone the same. The good student gets a C. The A student gets a C. The F student gets a C. Everybody gets a C. We’re just happy being in—

Kevin: That’s the yellow ribbon. Yeah, we all participated.

David: Yeah. We all participated, but nobody’s a winner. Nobody’s a loser.

Kevin: Right.

David: We all participated. That’s what it feels like to be in this sort of anti-fragmentation, socialization of debt burden. A scenario, and this is what gets unfolded this week, it is very possible that the U.S. dollar has another leg higher, stepping up and stepping off the backs of the emerging market currencies as they go it alone. Imagine what the emerging markets do if they’re not getting loans from the IMF, or from the World Bank, or from the PBOC. Chinese policymakers shift to filling gaps at home versus filling gaps abroad. Now, all of a sudden, where do you get emergency liquidity from? Frankly, it underscores the importance of the U.S. dollar, the U.S. Treasury market, our swap lines, and as we move towards a crisis scenario, reinforces the dependency on a U.S.-centric system.

Kevin: Would they reach out to some sort of worldwide lender like the IMF or the World Bank?

David: That’s always possible. That’s always possible, but I think you look at the way the Argentinian government has most recently proposed dealing with these IMF loans. It’s kind of like, “That was then, this is now. We’ll pay if we can, and if we don’t, we won’t.” It’s an interesting way to treat a creditor relationship.

Kevin: Well, and you brought up, they’re looking down the barrel of double-digit inflation here.

David: Sure, sure.

Kevin: Okay, so CPI, it’s 9.1. You talked about it last week. But PPI is already double. That’s in double-digits.

David: After the podcast last week came the upside surprise on both of those numbers, for CPI and PPI. Consumers are not surprised by this because of the prices they pay. They are far in excess of the official statistic of 9.1%, but the printed number did exceed the highest average expectation, which was down around 8.8. We were supposed to go from 8.6 to 8.8, and that’s the peak. That’s the presumption. Instead, we’ve triggered an avalanche of concern that the Fed may have to raise rates bigly a second time in a row. 75 basis points. Well, at one point last week, there was an 83% chance. The odds of 100 basis point rate hike on July 27th hit 83.3%, so this is a bad, bad CPI number. They’re really behind the curve. They’re really going to have to raise rates. 

Then all of a sudden you see the recessionary fears triggered by higher rates play through. Equities sell off. Commodities sell off. Anything with economic sensitivity is in free fall. Then, of course, it’s like, “Wait, wait, wait, wait, wait, wait. Possibly 75 basis points. That seems reasonable and necessary.” Everyone in the market says, “Yeah, yeah. 75 basis points, no big deal.” It was the largest rate increase since 1994, the last time we did 75 basis points, but we’ve just gained emotional and mental space by letting our imaginations run to the debacle of a 1% interest rate increase, and now 75 seems reasonable.

Kevin: What happened to the word transitory that they were just using? They literally were using it up to a month or two ago. Inflation doesn’t sound like it’s transitory does it?

David: No, no, no. Well, and we have PPI as well. Producers’ wholesale version of inflation that went to 11.3, so peak inflation’s the new transitory, Kevin.

Kevin: Oh, so like labor pains. Okay. One comes, it’s like, “Yeah, yep,” but it’s transitory.

David: “9.1, the worst is behind us.”

Kevin: Yeah, it goes away. I guess, you’re not having a baby.

David: 11.3—

Kevin: Oh, there’s another one. Yeah.

David: Peak inflation is the new transitory, and experts know the worst is behind us, just like they knew that inflation was going to be short-lived.

Kevin: Okay, okay. You have to find new ways of bringing good news. It’s like you’ve talked about, prettying up a pig. The new good news is we’re not always going to have peak inflation. We’re going to have little intervals of breaks before the next peak inflation.

David: Well, and I think that’s more to the point. I tend to think that waves of inflation separated by lower numbers will be a multi-year reality that we have, so we’ll be celebrating the end of inflation and then be surprised by something else.

Kevin: Right.

David: Right? The current wave is not finished. I don’t think that for a second, in part because the rent component. 33% of the calculation, it moves slower and it stays elevated longer than other more volatile components.

Kevin: Yeah. When does rent ever actually fall?

David: Lest we forget, on the rent side, it’s not an accurate measure on rent’s inflation. The current number is calculated to be less than 6%. 5.8, I think. While the national average for rent increases is 14%. Talk to any realty group, and you’re double digit. In some instances, like San Francisco, New York, as high as 25%, but 5.8 is what’s being imputed into the 9.1 number. So, sorry. 9.1%, while bad, doesn’t accurately reflect the consumer’s plight or the renters’ frustration with ever-increasing housing costs.

Kevin: Sounds a little like China. They just stopped paying. You said there was a strike on paying. Do you think that could happen here?

David: Yeah, I had a conversation with my wife about that this morning. She said there’s been a number of real estate transactions that she knows of where the logic was, “We’re backing out of the contract,” and the justification was, “We don’t think prices are going to go up this year.” Really? You mean prices go up and down? This is a really strange new world we live in. I thought prices only went up. At some point, does the U.S. renter respond the way the Chinese buyer is today? “We’re not going to take it.” Can you imagine, then, a political concession to the masses?

Kevin: Do you remember, politically, that’s been tried in the past where politicians just say, “You can’t raise rights anymore if you own a rental property”?

David: Yeah, yeah, yeah, yeah. Well, so go back to rent caps. Real estate investor today might have forgotten what rent controls look like. California’s Prop 21 is maybe a recent example of what caps and controls might look like elsewhere in the country. If we remember that federal policies as well as local municipal policies are a reflection of prioritized constituencies, whose vote are you gathering in? There is a growing risk that rent caps and controls become a part of the response to household economic stress.

Kevin: Yeah. Well, and you wonder if a politician doesn’t have to do that to stay in. Because we’ve talked about the credibility of the Federal Reserve and the credibility of politicians being able to solve the problem. That’s the real market right now. That’s been the real market for the last 10 years is for them to maintain the perception that they’re in control.

David: Right.

Kevin: There’s got to be a credibility gap when you can’t afford rent anymore and you’re being told that rent’s not going up.

David: Yeah. Well, nobody cares about the constituent parts of CPI, but this is where aggravation comes from. 5.8% is insulting to anyone who just has seen, over a two-year period, their rent double.

Kevin: Right.

David: They’re like, “What are you talking about?” Back to CPI—

Kevin: They’re running out of money halfway through the month.

David: Yeah. Back to CPI, you had this broad-based increase across components, milk up 16.4. Margarine, fascinating. “Parkay? Butter, butter? Parkay?”

Kevin: If you think it’s butter, but it’s not. Yeah.

David: 34.5%. Eggs up 33%. Chicken up 18.6. Flour up 19.2. Coffee up 15.8. Right?

Kevin: Wow.

David: Reconciliation of the official statistics is becoming harder and harder for Wall Street analysts and Main Street citizens alike. This comes back to skepticism. Skepticism over the foundations of those statistics. That’s becoming commonplace. What’s being lost, when you abuse this notion of credibility, you may also lose your opportunity to remain a technocrat. Your role may be scrubbed down to nothing or all but eliminated. Understating the reality merely shines a brighter light on the plight of the lower- to middle-income consumer paying out everything, and more than everything, for eggs and chicken and rent and cereal. Credibility is lost when official stats are referenced, and you think, “Oh, no. This is what it is.” No. Just because you call something something doesn’t make it that. So, “We have no inflation. It’s going to be transitory. Inflation is 9.1%.” Okay. Well, what part of eggs up 33 fits into— It just doesn’t make any sense.

Kevin: Do you remember? Okay. We had Pippa Malmgren on. She wrote a book called Signals, where you start looking for other things outside of what’s reported in the Wall Street Journal for signals. As you know, I run in the mornings. I run the neighborhood. I live in a neighborhood that really doesn’t allow a lot of livestock, but what I’ve noticed over the last few months, Dave, is I hear sheep and cattle. I know at least three properties. I also see several chicken coops that are being started.

David: They’re raising their own.

Kevin: Yeah. The point is, these people are starting to see that either they can’t afford what’s coming or it’s not going to be available. Just running the neighborhood, that’s the signal. Pippa Malmgren, she said, “Look for that type of thing.”

David: Yeah. We went camping this weekend and one of the families that we were with had a bucket. All of the scrap foods and the melon rinds and things like that went into the bucket, and they’d take it home to feed the pigs, but nothing goes to waste.

Kevin: Right.

David: It’s such a different expression of frugality and economic engagement today than there was even a year or two ago.

Kevin: Is it a credibility loss with the central banks who have really been the granddaddy? They’ve just been— Sugar daddy, I guess, is probably even a better term for it.

David: Sugar daddy.

Kevin: They’ve been a sugar daddy for all of us, in a way, and now it’s catching back up. Is there a credibility loss?

David: Well, it was a July 8th Financial Times article that seemed to contrast so glaringly with the Fed’s own self-assessment. The article was titled, “Markets Are Losing Faith in Central Banks.” Then the subtitle included, “As investors are unconvinced that monetary policy contains inflation.” What the article pointed to was the multi-decade benefit of bringing China into the global economy as a source of inexpensive consumer goods. Between imports, the reconfiguration of the global supply chain, and now imports from cheap places, and technology advancement—so again, we’ve got labor arbitrage and technology advancement allowing for really remarkable changes—inflation had an extra long reprieve.

Kevin: That’s the dream I was talking about when we first started. Have we been in a dream, getting things that we really didn’t deserve with printed money that we didn’t really have, and it didn’t cost us anything till now?

David: What the article was suggesting is those inputs may not be as significant in the decades ahead. Recognizing the need to onshore production of various products. That’s happening now. In fact, we’ve got legislation right now dealing with semiconductors pending that would fund $52 billion to private companies in the semiconductor trade to build foundries here in the U.S.

Kevin: Well, thanks to Pelosi, I’m glad that they took a very large share position before that was pushed through.

David: You had to bring it up.

Kevin: I’m sorry.

David: I think the only disgusting thing to note here is that politicians have zero accountability when it comes to trading their own accounts on the basis of legislative changes. Pelosis took a $3 million position in NVIDIA. 20,000 shares in the last couple of weeks as the legislation moved past resistance points and hurdles.

Kevin: Right.

David: That’s galling to me.

Kevin: Never enter politics rich. Never leave politics poor, right?

David: Oh, Paul, what a sweet guy. Cheers. That’s a sidebar. 

The amazing comments from the St. Louis Fed president last week were unbelievable. That’s, to me, what contrasts with that Financial Times article. Markets are losing faith in central banks. Yep, that is happening. Okay. We have a credibility issue. You have the St. Louis Fed president— This is unbelievable. The current Fed, in his estimation, in his studied opinion has more credibility than Paul Volcker—

Kevin: I saw that, yeah.

David: —and Alan Greenspan.

Kevin: Yeah, yeah. Wow.

David: I’ve never heard more institutional narcissism in my life. The conceit necessary to make that comment, and the disconnect from the current inflationary environment—

Kevin: It’s scary.

David: It’s dangerous.

Kevin: Yeah.

David: It’s dangerous. They are losing the last vestiges of credibility, and somehow think that projecting an image is sufficient to carry the day. If you say it, therefore it becomes reality. It brings me back to a significant reason to own gold in any period of time. That is stupidity insurance because here you have a recreation, a regeneration of Plato’s cave sequence. Back to, I forget which book it is in The Republic, but the cave sequence, where you’ve got shadows cast against the wall and that is supposed to be reality. Bullard has the guts to say that the current Fed holds sway in the market, is defining reality. The shadows cast are reality. Are you the only person that understands that we’re dealing with reflections, that this is not true?

Kevin: Yeah, but that same story, they kill the guy who says it’s not a shadow. You remember? If you read further, you end up getting killed for telling the truth, so I don’t know how this whole thing turns out.

David: Podcast for 15 years, and there we had it.

Kevin: I hope not. I hope not. Dave, in these uncertain times when we’re saying, “Hey, these illusions, these shadows on the wall, pay attention to what’s real.” What you have to do in uncertain times is you have to move to the things that are always certain, and gold’s one of those, isn’t it?

David: Absolutely. Speaking of uncertainty brings us back to the call that we’ve got, Tactical Short, Nowhere to Hide. We’ll look at, I think, some of the basics as to why that kind of positioning, a cautious positioning, cash, metals, hard assets, a short position to cover market exposures, even an opportunistic short position makes so much sense in this environment. Great summary piece in this week’s Hard Assets Insights looking at Hyman Minsky and how finances move from hedge finance to speculative finance to Ponzi finance. Again, we come back to the nature of Ponzi—Ponzi being the operative method that the Fed is now using, central banks are now using, to buoy support and enthusiasm for the road ahead. A colleague made mention of that in a meeting earlier today, that in uncertain times, gold is always certain.

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

This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.

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