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- Fish & eggs up 10% & rent rises 15%
- Looking now for Mean Reversion of Asset Prices… Really Mean!
- Read Gold & Economic Freedom: Alan Greenspan – https://www.math.snu.ac.kr/~hichoi/finmath/AlanGreenspan-GoldEconomicFreedom.pdf
The Priesthood of Perpetual Growth Is Losing Credibility
November 2, 2021
“Yellen is convinced that not only can the government spend well and spend carefully, but that $1.75 trillion will have no inflationary effect. I don’t know if this is the inmates running the asylum or we’re talking about some mystical knowledge that you and I simply cannot appreciate or understand. The depth is too far beyond our simple minds. But we’re waiting for the evidence. Ignore what you want. Keep what supports your narrative. That’s where we are today. The facts are convenient at best.” — David McAlvany
Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
I’ll never forget Tomáš Sedláček, who wrote The Economics of Good and Evil. It really hit home when he was talking about how we have a new religion in this period of time, and that religion is the belief and almost the worship of perpetual growth. And the people who seem to provide that perpetual growth are the central bankers. No inflation, there’s no consequences to printing money, don’t worry about it, your assets will continue to grow. And we’ll be able to keep interest rates very, very low and continue to borrow further. That seems to be catching up. They talk about the king who had no clothes on, it seems at this point, we’re starting to see that the central bankers have no clothes on.
David: You know it’s perception management. The work of a central banker, when they start talking about needing to give “forward guidance,” and basically lead you to where they want to go. What they’re going to do next, it is perception management. And what they are operating on the basis of is a presumption of control, but also the projection of control, which is really how you experience them.
Kevin: You remember when Powell was saying we don’t really see inflation, and then he started saying it was transitory. Now, he’s starting to say, “Well, we are seeing inflation, but we’re not going to raise rates.”
David: It was fascinating. He said, “We will not raise interest rates preemptively because we fear the possible onset of inflation. We will wait for evidence of actual inflation or other imbalances.”
Kevin: So as long as you can control perception, you think you can control the market, but actually, there’s this thing called the market, Dave. Some people call it the bond vigilantes who are like, No, if inflation is high, I’m going to demand high interest if I’m going to give a loan.
David: Yeah. So we are waiting for evidence of actual inflation. And we’re waiting, and we’re waiting, and we’re waiting, and now the bond market will wait no longer.
Kevin: Right. So vigilantes, they’re like, “Wait? No.”
David: This last week we had the PCE up 4.4% year on year, that is the preferred measure of inflation by the Federal Reserve.
Kevin: They like it better when it’s low. They’ll use PCE when it’s lower than everything, but now it’s 4.4.
David: And we’re used to the CPI, which is up 5.4 year over a year with a cost of living adjustment, which we’ve spoken of earlier, 5.9.
Kevin: That’s for Social Security, they use the COLA for that.
David: And in the PPI, Producer Price Index, which is for wholesale prices, up 8.6. I mean, just look at any small thing. Fish, eggs, they’re up 10.5%. Rents, up 15. Home prices up 20, used cars up 24, Gasoline up 122%, heating oil up 123%. And again, look at the genius view from our Treasury Chief, this is Janet Yellen, that trillions more in federal spending will drive inflation rates down.
Kevin: That’s a quote. That’s a quote. She said, “All we need to do is spend trillions more to drive inflation down.”
David: So we’re waiting for evidence of actual inflation. We don’t want to worry, there is no fear here. We’re not going to act preemptively on the basis of fear, right? That’s all well and good, but for a full year, the Fed and Treasury have downplayed the rise in interest rates, and put themselves in a very awkward position now, with numbers that are higher than expected in terms of inflation, and more durable, that is longer, than projected. They are ridiculously behind the curve.
Kevin: Okay. So the old, who was it? William McChesney Martin said, “You need to remove the punchbowl before things get out of hand.” So they’re behind the curve. This is like a drunken party and it’s been a drunken party now for about two hours.
David: The fascinating thing about the last week is that central bankers are now being crushed by the yield curve. Tremendous flattening of the curve took place globally, with short-term interest rates rising and squeezing the spread of the difference between the short-term and the long-term rates. And so the difference is, again, between short and long rates. That difference is narrowing. In the US, the yield on 30-year bonds went below the 20-year yield. Again, and the short rates rose to create an almost completely flat line.
Kevin: Wow. Wow.
David: Where is the curve? That’s what we’re talking about.
Kevin: Okay, so let’s explain that for the listener who’s not familiar with the yield curve, all it basically says is, the longer you borrow money for, let’s say, 10, 20, 30 years, you should have to pay a higher interest rate. If the high interest rate is now, and the lower interest rates are later, there’s an inversion of the curve, or in this particular case, you’re saying there’s a flattening of the curve, right? And the expectation is that, short term, we’ve got an inflation problem.
David: Flattening the curve with the short end of the curve rising aggressively because short-term expectations of inflation are increasing.
Kevin: That’s not transitory anymore.
David: Well, and again, I mean, you can wait and not act preemptively, wait for evidence of actual inflation. But what is actual inflation?
Kevin: You know what? I came to work here back in the ’80s, I thought inflation was prices. I thought it was when prices rise. And I learned very quickly from several economists in the company, no, no, no, inflation occurs when you print money. Prices are just a natural aftereffect.
David: Because it takes more of the printed money to buy the same goods and services that you would have bought previously. So you’ve diluted the value of your money. And that is that the nature of devaluation, it takes more money to buy the same stuff.
Loews Corporation CEO James Tisch was echoing our sentiments on the transition to renewables. We talked about that a bit last week, and enter the high cost of fuel that we’re encountering today. Again, we mentioned 122% higher for gasoline, 123% for heating oil, a little bit different use and function, but he’s basically saying this is a project of moving towards renewables that is going to take decades, not years. And inflation is likely to be a long haul reality exaggerated by careless implementation of idealism. That’s my interpretation of what he was saying.
But essentially, this transition to renewables has been bungled. And his note was that last time in the United States we had inflation at 5.4%—again, going back to the CPI, 5.4%—the 10-year Treasury was at 8%, not 1.6, which it is today. So yes, that was a real return. Look at inflation of 5.4 and the Treasury yield of eight, you still had a positive real return of 2.6%. Versus today, again, factoring inflation to a low Treasury rate, we’ve got -3.8% in real terms today. -3.8% in a 10-year US Treasury. There is some comfort in not being solitary. I mean, we seem to prefer suffering together rather than alone. So we can look across the pond and the inflation rate in Germany touched 4.5%, a little bit below ours. But the last time they saw 4.5% inflation, rates were 6.75%. And this week, we’re still subterranean. I mean, as in negative nine basis points for an effective negative yield of 4.3, 4.4%.
Kevin: Isn’t that a perfect world, though? if you could capture that and package it, okay? If you could, as a central banker or a government, borrow money and not have to pay interest on it, and print money, and not have to worry about inflation. If you could devalue the currency just enough— this is what this plan’s been, Dave, for decades. You go into debt, you’re not going to pay the debt back, you just devalue the currency in a “controlled way,” and you keep interest rates artificially low. This is a fantasyland that cannot be maintained and has horrible end consequences.
David: Well, I mean, to your point, we’re talking about a strategy. This is a strategy, this is a choice. And Lenin said it best, “The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.” And what we have here is actually an iteration of that, where we have taxation coming, we have inflation present, but we’ve had, in this negative interest rate regime, what economists call financial repression.
Again, there’s no accident that we’re talking about -4.4%. This is the choosing of winners and losers. This is the restacking of the deck. This is the distribution of capital to interested parties within the global economy. And central bankers, at this point, if you look at inflation and you look at what is happening in the bond market, central bankers are way behind. And frankly, they’re fearful. They’re fearful of what it means to normalize interest rates, to play catch up.
We have Jens Weidemann, who announced his departure from the European Central Bank two weeks ago. Perhaps he would prefer the solitary life after so much collective insanity, both in the United States and in Europe. One of the last monetary conservatives in Europe is leaving, right? So the question would be, without any chaperones, what happens in the continent?
Kevin: It’s interesting to watch who leaves when, too, because remember, Greenspan came in back in the ’80s and created an enormous amount of money printing. And just before we had the global financial crisis, it was time for him to enjoy the solitary life. So he exited stage left. It created a mess. And he exited stage left, and he’s always been seen since then as a hero. He had changed so much. You’ve brought this up. He had changed so much since his days with Enron. And what was the name of the piece that he wrote back in the ’60s, Dave, about gold and financial freedom? When was that?
David: Yeah. I mean, we’re talking about a guy who left office with sort of a mystical stature, not only did he speak his own language, Greenspeak, and that was not an environmental— He was very different. The pragmatic practitioner was different than the idealist in the ’60s. He wrote “Gold and Economic Freedom” in 1966. I mentioned it on the Tactical Short call as required reading. And I’d suggest the same. Actually, I’ve got a few things to recommend today in that regard, but “Gold and Economic Freedom,” 1966, Alan Greenspan. It’s a healthy look at the role of sound money in an economy, and what makes for state abuse of the financial system and how much easier that is accomplished with a fiat system. So the bond market last week, it was a little bit like school being back in session.
Kevin: Are you talking about when Australia’s bonds doubled in yield in a matter of minutes?
David: Yeah. Yeah. There was clear communication, call it— Let’s say it was the class on Intro to Anglosphere Lending. Things went nuts in Australia and Canada and New Zealand. But this is a large part of the central bank community, which has adopted yield curve control, and they got blown out of the water. Yield curve control is where you basically say, here’s the line in the sand, 10 basis points is where we want rates to be, that’s where they’ll stay, we’ll spend to get what we want. And next thing you know, there’s the embarrassing moment of the Australians not being in control of the bond market anymore. The Canadians not being in control of the bond market anymore. The Central Bank of New Zealand, one of the most progressive central banks on the planet, most experimental going back to the early 90s, and they’re not in control of the bond market anymore.
Kevin: Do you think the bond market as a whole is realizing they’ve been lied to? Because the lie was that central bankers will act on evidence of inflation? Are they going to act on evidence of inflation or not?
David: Well, I think it’s now clear that that idea of the global central bank community waiting and acting on the evidence of real inflation, the answer’s no. That’s been the position so far. So the first consideration for the central bank community remains accommodating financial markets with ultra cheap finance, and in several segments of the debt market, continuing to monetize everyone in a position of leadership. And I think it would be inaccurate to describe them as in control. They are in a position of leadership, but they’re no longer in a position of control. They appreciate what comes with the end of this era of ultra loose monetary policy. We’re talking about mean reversion in asset classes. And the asset classes that matter most for household net worth, let’s start with real estate, move on to the bond market, and of course can’t leave out stocks. So with mean reversion in your three primary asset classes, given a change in the nature of ultra loose monetary policy—
Kevin: Well, okay. So prices are always too high or too low. There’s very little in the market where something is priced exactly right. But when you have artificial manipulation, like with the interest rates, which you were talking about these amazingly negative rates, mean reversion, we’re talking about really, really mean reversion. We’re talking about painfully mean reversion.
David: M-E-A-N versus…
David: Oh, they’re both spelled the same.
Kevin: Yup, but one’s meaner than the other. They may be spelled the same.
David: You’re right. There’s this trending in valuations towards undervaluation or towards overvaluation, there is no stasis. So the listener, or the investor, more broadly, has to be asking the question, what is the trend? If you’re moving towards overvaluation, if you’re moving towards undervaluation and how far into that trend, are you? How much momentum does the trend have? Has momentum shifted?
There are traders that are asking these questions and it’s particularly relevant for people who are interested in not just market dynamics and investing, but for those who have a pension for reading economics, Hyman Minsky had his instability thesis. And he basically argued the better things get, the more fragile they have already become. And so that’s where, again, momentum shifts and knowing where you’re at in a trend in overvaluation, or moving towards undervaluation is absolutely critical. Many market participants, sort of extrapolating from the immediate past into the foreseeable future, neglect the cyclicality and may soon pay a high price for that neglect.
Kevin: It reminds me of— Okay. Richard Russell used to say there is a time when everyone loses money, you’re the winner if you lose less than everybody else.
David: Well, that’s what we talked about last week with David Tepper, the Appaloosa hedge fund manager, that it’s now time to not lose money. And that time has arrived. Even the PhDs in the central bank community were surprised last week by the ferocity of the shift in the bond markets. Last week, the bond market carried an unmistakable message: Act, or we will.
Kevin: That seems like an angry audience. Okay. If you think about it, when Lagarde stands up and says, “Oh, everything’s going to be fine. We’ve got your back.” The bond market used to cheer and say, Okay, we’re fine. But now it seems to me like they’re throwing old turkey bones at her, and booing, because that’s what happened.
David: Yeah, the bond market has been front running central bank policy for a long time now, but they do have to care. They have to care about inflation at a certain point. So this belief that inflation is transitory is really critical. If it is not transitory, they have to recalibrate and it comes back to act, or we will. So the ECB kept the pet program going. That’s 1.85 trillion euro bond-buying program. And she talked about that. Lagarde talked about that last week. And in spite of the promises to engage with inflation and begin normalizing down the line. She really offered nothing. Nothing of substance from a policy—
Kevin: And that’s when they started throwing turkey bones. Oh, I mean, rates, all of a sudden yields jumped.
David: Bonds moved against Lagarde in an embarrassing revelation that her words are no longer sufficient to assuage the concerns of bondholders. Now, the reality of inflation, what everyone at the central bank community is waiting for. But everybody in the real world is already experiencing knee or neck deep in. Doing nothing invited the backlash of the bond vigilantes.
Kevin: So the Bluff is up. The bluff is up. I mean, the central bankers have no clothes on.
David: It was the first flash of market discipline being applied by the market. And I think you’re right, the bluff is gone. So we had volatility in Europe last week. That was a low light compared to what we saw in Australia, New Zealand and Canada, the bond market created this uncomfortable juxtaposition between a repricing of debt—so we had rapid declines in price, corresponding increase in yields—and the stubbornness of the monetary priesthood who still claimed to be action figures inspired by the evidence. So central bank spokesman, yeah, they were in front of cameras and microphones last week, and they will be this week too. And they’re going to provide us the opportunity to listen to what may be the last symphonic coordinated cooing of the doves. So what was once beautiful tonality to the markets is today seemingly off key, out of tone, out of touch. Inflation is redefining the investment landscape.
Kevin: When you have leverage which— When you know somebody’s got your back, you’re going to go out and borrow money and bet that direction, more and more and more and more. Problem is you can’t go asleep at the wheel. It’s a little like driving 100 miles an hour with leverage, and then falling asleep. And how is it that they have stayed so just completely comatose?
David: It’s been surprising to me that it’s taken the bond market this long. And I think a part of it is that they’ve become speculators like everyone else. When you can front run central bank policy, and you stop buying bonds for yield and start buying them for capital gains and appreciation, you’ve shifted your mindset. And so the vast majority of investors buying low to negative yield bonds— Obviously, there’s not a lot of yield on offer. Why buy them? Because you think yields are going lower, because you’ve heard the promises, because you’ve heard. Again, you’ve heard the coordinated cooing of the doves, and they’ve spoken to you. They whispered in your dreams, saying, “We will make you more money than you can imagine,” right? And so faith in the priesthood has actively kept bondholders thinking that some special knowledge existed within the central bank community, and within that special knowledge, a very good reason not to fear inflation. To see it as manageable, to trust that it is transitory, to know that it’s temporary, to have nothing to fear. But I think what you find in the bond market coming out of that comatose state is that faith in the wrong things leads to real disappointment. And we’re dealing with disappointment with policy actions, but also with this reality that inflation is biting us in the derriere.
Kevin: Sometimes when you hear an expert say something that you just don’t understand, doesn’t sound like it even make sense. You trust them because you feel like you don’t really understand the market. I’m going back to what Yellen said, “All we need to do is print trillions more and spend trillions more and that’ll control inflation.” That doesn’t make any sense. And if you’re telling your kids that, it’s like what we were talking before, would you teach your kids that they should go into debt that they never intended to pay back? Or that money grows on trees? That’s really what these guys have been trying to convince us. And you talked about mean reversion. If those are wrong concepts, the mean reversion in pricing will probably be unlike anything we’ve ever seen before. It’s never been this big.
David: Yeah. It’s expectations. Expectations that the central bank community is leading and guiding an unfolding narrative. That begins to look more naive by the day. And the violent repricing we saw last week is a version of the markets catching up to reality. And by the way, we’re talking about Australian yields going from 11 basis points to 77 basis points, we’re not talking about normalizing to 3% or 4% or 5%. We’re talking about radical moves and hemorrhaging within the leveraged speculative community as a result of a half a point move. Right?
So official rates still remain out of touch with reality. I mean, in some sense, they are virtual rates. They’re almost nonexistent. Negative rates, how can you call that real? And frankly, I’m just playing on words with real and—
The market leads. That’s what we’re seeing today. The market leads, and it puts the central bank community in the position to follow. And as they do, they’re essentially acknowledging their powerlessness in the face of mass dissent. The markets are in control, ultimately. And we saw a flash of that last week. So being behind the curve has a high price. Number one, it has a high price for the Fed’s reputation, or frankly for all the central bank communities’ reputation, but also a high price in terms of market repricing of assets for less accommodative circumstances.
Kevin: You know what it reminds me? Okay, there’s a story in the Bible in the book of Daniel, it’s the second chapter. Nebuchadnezzar, the great leader has a dream and he wants an interpretation. If you recall, he calls the wise men in, these were the people who had the perception of control. And they said, “Yeah, tell us the dream. And we’ll tell you the interpretation.” And he calls their bluff, Dave. He says, “No, if you guys really are who you say you are, and you have the control, you tell me the dream. And if you don’t, I’m going to kill you.”
David: The dream with the interpretation?
Kevin: Yeah, the dream with the interpretation. You tell me, we’re not going to play this game anymore. So the only thing they could really do was find somebody who could interpret the dream or lose their heads. I’m wondering what these guys would do at this point. When the central bankers start to look like it’s not working anymore. I’m not saying they’re going to lose their heads.
David: I’ve got an idea. Maybe a reset is the solution.
Kevin: Well, they’ve been talking about a reset.
David: Facebook offers the ultimate fix. Plug me into the metaverse where property values and grocery prices are modest by comparison to the brash moves higher in the real world.
Kevin: This is virtual?
David: Your virtual reality provides some comfort from the harsh and hard realities of daily existence. So it’s a new world with new rules—better prices, by the way. A place where the Zuck buck is never devalued. And all you have to forfeit are some human contact, a few real sunsets, the smell of coffee in the morning, real bourbon, real bacon—
Kevin: Wow. A real Hotel California.
David: —real, actual bike rides. I mean, my list is limited, but you can make your own.
Kevin: You just give up everything that has to do with what we call real life.
David: Reality forfeiture. Zuck is in annexation mode, controlling the development landscape of the 21st century and wanting to stretch beyond possession and monetization of your profile to the colonization of the horizons of your mind.
Kevin: Wow. And well, okay. Dave, okay. Through the winter, you train because you do triathlons and you sit on a bike, looking at a TV screen, right?
Kevin: In your virtual world. And granted, I can’t see it. I can tell you right now, sitting on a bike even when the real world is beautiful around me, two, three, four-hour bike rides. That’s a long time. How in the world do you do it in your virtual world on, what is it? Zwift?
David: Yeah. My record is about six and a half hours on the indoor trainer. And to say I was worse for the wear is an understatement.
Kevin: I wouldn’t need three pillows for a seat. I’m sorry, maybe I shouldn’t have said that in the commentary but—
David: Yeah, I tolerate an avatar on Zwift and I race as a bearded bicycler with no fear of getting hit by a vehicle with Texas plates. And I say that because my father-in-law, probably the most vocal critic of sharing the road, is out there.
Kevin: It is safer. It is safer in your living room.
David: That’s right. But the difference between a fan blowing in the basement and the airflow of passing through space and time, outdoors, down County Road 250 or past Lake Nighthorse, it makes meta seem silly and as out of touch as it truly is.
Kevin: So you’re talking about the virtual world does not match the real world?
Kevin: Even if you’re Zuckerberg?
David: Even if you could hit the reset button and say, how do we take the harshness of this reality, tone it down, and create an experience which is just different? It’s fascinating to me having read a bit on postmodern philosophy. In fact, I met my wife when she was giving a lecture on the influence of postmodern philosophy and contemporary dance. So we’ve had long conversations—
Kevin: She is an unusual girl. She’s beautiful, but she’s intelligent. I have to tell you, you did okay.
David: Yeah. It’s a postmodern reality, is the Metaverse. The Metaverse is postmodern. It’s a mirrored labyrinth of idealized choose-your-own-adventure stories with the flexibility to distort reality as it’s created, in real time, to match a series of subjective obsessions and semi-falsehoods.
Kevin: Okay. So that doesn’t sound like our central bankers or the Bureau of Labor Statistics.
David: Well, I mean, but leave it to the BLS. I mean, coming back to a meta reset, leave it to the BLS to factor in new human experiences and virtual consumption into the hedonics. Again, the virtual world into this fresh inflation series, just you wait, we have a way of deflating the numbers. Look, if this a perfect world, Powell is going to be vindicated, Zuckerberg is going to be elevated into the priesthood. I mean, if there was any confusion, have you ever gone to a bookstore? And you see the metaphysics section?
Kevin: It’s not physics, for sure.
David: It’s not physics and it’s not metaphysics as in philosophy. It’s a whole bunch of things. It’s everything. It’s a free for all. Now that we have confusion on offer in all things, not just the metaphysics in the bookstore, but it’s meta everything.
Kevin: You had brought up doves, and the opposite of doves in that discussion is hawks.
Kevin: Okay. And a dove is going to say, You know what? Don’t worry about inflation. We can continue to print money, we’re going to continue to— It’s called soft or loose monetary policy.
David: That’s fine. But rates rose without permission last week.
David: Rates rose without permission. The priesthood did not say this could happen or it was allowed. And last week, to quote the artist formerly known as Prince, “This is what it sounds like When Doves Cry.” Maybe we get a hawkish tone from the Fed. They’re speaking this week. The Bank of England is speaking this week. Maybe we’ll get some noncommittal cooing.
Kevin: Yeah, but it’s from Powell. We’re going into an election cycle, how in the world can Powell get through this without continuing to be a dove?
David: Well, I think that’s the point. He’s not secured his post for another term. And so it’s an appointment cycle for him. Biden, we’ve got the midterms, but that’s a secondary factor. For Biden to get his appointment for another term, he’s got to play ball. Biden would blast Powell from flight if his words or actions had a negative impact on the markets. And I think you can now officially describe Biden as being in a desperate situation, his own version of a political bear market. He’s lost 20 points, he’s in a technical bear market. His approval ratings these days share something in common with the clockwise swirl of the toilet.
Kevin: Yeah. You don’t think about this, but back in 1994— Yeah, it’s 1994, Clinton was having a terrible time in the press. Okay, if you remember the summer of ’94, that was an election year. And I read an article in Worth magazine that said, “No, he’s going to win. It doesn’t matter because Clinton represents a bull market in politics.” And the article was written by a financial expert, but he showed that bull markets have— They just can bounce from anything. Biden is looking like he’s in a bear market right now.
David: I mean, certainly his last showing. Did you see him at the environmental meeting in Scotland?
Kevin: I tried not to.
Kevin: Did you watch?
David: Well, I mean, this is where we’re projecting forward our image of leadership into environmental concerns for the 21st century and he’s asleep. A little bit disappointing. I mean, actually, who brought that to public light was MSNBC, they’re like, Yeah, a little bit disappointing. Again, you get criticism on the left from CNN or—
Kevin: I think he was concentrating. He might have been concentrating deeply, Dave. Okay. I want to go back, though, to leverage because if you’re a guy who’s out there going, “All right. Interest rates are virtually nothing, but if I borrow on my borrowing, on my borrowing, on my borrowing, you can take a little bit of a move in the market and you can make it very, very lucrative for yourself.”
David: Betting on the spread between the two-year and the 10-year, looking at how the difference between those two interest rates are priced. Believing that you can tell us where those rates are going to go and betting accordingly. Understand, we’re talking about very small interest rates, right? So it takes very big leverage to make any money on it. So you get bets out there of 10 to 1, 20 to 1, as much as 50 to 1 leverage—
Kevin: But you’re betting that no one’s asleep at the wheel. Okay, you’re betting that no one’s asleep at the wheel and things are going to continue to go your way. Biden’s falling asleep is almost like a metaphor for the bond markets sort of falling asleep last week.
David: They woke up.
David: Yeah. Anybody who watches financial news has probably seen Charlie Gasparino, and he was commenting on the tears of others—not just the doves, but the tears of others. It was a truly consequential week for the leveraged speculator, he said, we’re hearing 10 to 20 different asset managers across the industry are being liquidated, or under review for liquidation due to interest rate derivatives. He said, “When you don’t allow business cycles to function, and you don’t allow price discovery in global capitalism for long periods of time, and then academics who don’t understand anything about risk all of a sudden unleash price discovery too fast, they destroy things.” And that’s what’s happening.
Kevin: And I love what he said. But he’s talking about 10 to 20 different— You’re talking about giant hedge funds, asset managers, and it says being liquidated, that’s going out of business.
David: Yeah. That’s October negative performance of between 10 and 20%. We’re talking about enough that you get redemptions, if you’re not going to gate and keep the money captive, it’s game-over time.
Kevin: Yeah. But what about the stock market? They’re not paying attention.
David: No. They’re really not. And I think one thing on Gasparino’s comment, he’s right about controlling the business cycle. They have controlled the business cycle. But my only comment for Charlie is they didn’t unleash prices, markets are moving in spite of the Fed academics and other central bankers, not because of them. So the drama—
Kevin: The equity market. I mean, the equity market is still just playing their own tune.
David: Yeah, the drama last week was broad-based geographically, but narrowly focused in the bond and currency markets. Equity jocks and traders were still sporting the prescience and ego of a high schooler, pushing equity indices to all time highs, ignoring the signals of concern within the bond market and the currency market.
Kevin: How long will that disconnect last? I mean, the disconnect between equities and everything else that’s going on.
David: Doesn’t last long. Doesn’t last long. I mean, number one, you have inflation, which is more solidly established as fact, and only the foolish now ignore it as fiction. And next to the latest PCE jump, again, it’s the Fed’s favorite metric for inflation that jumped to 4.4%, the highest print in 30 years. You have number two, 3rd quarter GDP, which disappointed 2%. 2% was well below the 2.6% expected, and equities yawned. The yawned. They still have the belief that central banks will forever have their back.
But inflation is changing the prospects of a hasty intervention, it changes the latitude that central bankers have to step in quickly. And bonds are getting it. For the first time in the cycle, bonds are getting it, but stocks are still dangerously and delusionally oblivious. Back to the 2% GDP figure, it was partially propped up by business investment. And specifically, you look at the component of intellectual property. That accounted for the entire 12.2% increase in the business investment GDP component. We can laugh about this because this is the area of pure statistical creativity. When you’ve accounted for intellectual property, basically, you’ve completed the task of putting BS into the BLS.
Kevin: So when you have a rock that’s worth $1.3 million, and it’s not really a rock, it’s on a screen, and it’s created out of blockchain technology, that’s intellectual property as well, isn’t it?
David: The basic point on GDP is that while 2% was disappointing, it wasn’t even 2% because the business investment component was completely bogus. Was completely—
Kevin: Was made up. Yeah, intellectual property, you can just make that up. It is like a pet rock.
But to get back to reality, you had mentioned on the tactical short call two reading recommendations. And really what this commentary is about is the love of truth. Now, not everybody’s going to agree with what we think is truth on a weekly basis. But that’s okay, we are going to continue to pursue truth. And really, that is your only defense against deception, is the love of truth. And so when we read something, one of the things I love, David, you said, “Hey, Kev, did you read this?” A couple of weeks ago, you said did you read the Cognitive Warfare piece? That 45-page piece. Man I did, and I hadn’t read it when we did the Commentary. But I did afterwards. And I’m like, gosh, I need to be doing this as often as you do. And so what would you say? I mean, on the Tactical Short call, you said—
David: Yeah. I mentioned one on the Tactical Short call. And it was a question that related to gold, that you can go back and listen to that if you didn’t get a chance to, it’s replayable on the Wealth Management website. And in the Q&A, I gave a bit of the essence as to why we do what we do in our sister company, ICA, the precious metals brokerage business. Celebrate our 50th anniversary next year, 5-0, very proud of that. And we do what we do because we think human autonomy and freedom is important. We think that it makes sense for an individual to be able to practice their agency. And so believe it or not, there’s a bit of a philosophical bias, maybe this is very easy to believe. But there’s a philosophical bias for the gold owner who understands really what it has represented through time, and how it has represented a sort of obstacle for the statists.
Kevin: And it has nothing to do with price speculation. It has everything to do with freedom.
David: That’s right. That’s right. So appreciating things that are far more important, far more important than asset prices going up or down. Greenspan’s essay, 1966, “Gold and Economic Freedom,” he’s pointing to the fact that not only is a system better based in gold, but the freedom of the individual, in some respects, is contingent on having resources that put you outside of a system of control, or what he describes as a statist’s system of control. And so we look at this as a tool. A tool for preserving individual autonomy and freedom, and yeah, like anybody else, I don’t mind the price going up. And it’s not really fun to have the price go down. But why I own gold and will always own it has far more to do with reading history, and seeing as Greenspan did in ’66, that gold is vital to economic freedom. So if you haven’t read the essay, read it.
Kevin: And this is why statists have always hated gold in the hands of their people.
David: It’s a limiting factor. It’s a limiting factor for the imposition of their will on other people. And again, we come back to presumption of control, projection of power. And you see natural limits in certain places. Blow out those limitations when you’re talking about statists control.
Kevin: So let’s talk about control because what we’ve seen over the last almost two years now is a fear of death. And that fear of death in whatever form, okay, Covid, or vaccines, whatever, that fear is how the statists can control the people. Now, people can argue about whether a mask is effective or whether they should take the vaccine or not.
David: And those are all reasonable conversations to have.
Kevin: Exactly. But when you start feeling like you’re being coerced based on fear, you know that something’s wrong.
David: Right. And Franklin D. Roosevelt, a whole host of quotes today from Marc Faber, he does a fantastic job in this most recent missive, picking some significant quotes. One of them is for Franklin D. Roosevelt, “In politics, nothing happens by accident. If it happens, you can bet it was planned that way.”
Again, actually what I wanted to mention was Eric Hoffer’s book The True Believer. Hoffer was a longshoreman. Nice to think about the folks that are trying to get things unloaded over in Long Beach and Los Angeles and having a hard time getting it done. But I love this guy. He’s a longshoreman. And in his free time, he writes social and political philosophy. He’s not a trained philosopher. So if you’re looking for sort of careful, super meticulous thought, no. He’s a thoughtful human being musing on social order, and he gets a lot of things wrong and he gets enough things right to say I appreciate having learned something from him. So he says, “It’s when power is wedded to chronic fear that it becomes formidable.” One of the quotes from Marc Faber’s recent missive.
Kevin: Yeah. Coercion by fear.
David: Another one from Carl Jung, “It’s not famine, not earthquakes, not microbes, not cancer, but man himself who is man’s greatest danger to man, for the simple reason that there is no adequate protection against psychic epidemics, which are infinitely more devastating than the worst of natural catastrophes.”
Kevin: Well, you remember, a couple of weeks ago, we were talking about the cognitive warfare thing. And trust is the main issue. You’ve got to control the trust of the people. I look at what’s going on right now, Dave, and kids from five to 11, getting a vaccine when the likelihood of them passing away from Covid is lower than getting the vaccine. How is that not child abuse?
David: In practical terms, what you’ve done is you’ve given Pfizer the opportunity to print money at the expense of your children. The emergency use authorization specifically for that age group gives them legal immunity forever. So we have no idea if there’s long-term consequences. Maybe there’s none. May it be no consequences from the jab for five to 11 year olds, but we don’t know that. But we are willing to risk and willing to give up any accountability, again, on the basis of the emergency use authorization. And yeah, I look at this, and I think this is really telling. There have to be some lines drawn.
And I think actually of what’s happening in Virginia this week, if Youngkin/McAuliffe race, doesn’t send a strong message that our kids are sort of redline, I think he got to wait to the midterms. McAuliffe is as well connected as any Democrat politician on the planet. And the fact that Youngkin came back, I mean, he was down significantly relative to McAuliffe. And he closed the gap on the basis of, we’re going to teach our kids reasonable things. And if it’s unreasonable, it’s right for us as parents to care, to be involved, to voice a concern. We get that right, call it first amendment, call it what you want. But we are going to let you know if there’s a problem with a six or seven year old coming home and saying, “Dad, why are you a racist?” “Mom, why was I born evil?” I mean, this is an issue. Right? And Youngkin brought it out. And the kids were the bottom line in closing the gap in the Virginia Governor race. They were the bottom line. So I look at that and say, wait for the midterms. We’ve lost our flipping minds if we think vaccines for children that have a survival rate of 99.9997 makes sense for everyone but Pfizer.
Kevin: Yeah. It makes sense for Pfizer. In fact, the guys who are on the FDA Board, who are determining whether it’s safe Youngkin/McAuliffe
David: The majority of them have previous connections to Pfizer.
Kevin: Or current connections to Pfizer.
David: Yeah. So when science ignores math, you are clearly veering into Jim Jones territory. We got so much Kool-Aid flowing here. It’s ridiculous.
Kevin: Isn’t it strange, though, that you’re made to feel like a minority if you don’t take the crowds, what we’re being presented as the overall opinion of the masses?
David: Right. Well, for an obscure reference, again from Faber. Thank you, Marc. The Romanian French playwright Eugène Ionesco, “The supreme trick of mass insanity is that it persuades you that the only abnormal person is the one who refuses to join in the madness of others. The one who tries vainly resist. People rarely have the strength to be uncommon.”
Kevin: Well, you had said earlier, Franklin Roosevelt said, “In politics, nothing happens by accident.” Now, keep in mind, he said, if it happens, you can bet it was planned that way. This is the president that was in control when Pearl Harbor occurred. We won’t go into that, but he knew what he was talking about.
David: I think when you come back to inflation, and what is driving chaos, just a little bit of chaos, but very intriguing chaos within the bond markets, you’re talking about one of those things that is not an accident. It’s not an accident. If Lenin’s to say the best way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation, we already know how to orchestrate taxation. And of course, we’re orchestrating inflation.
So we study the proposed architecture for the $1.75 trillion bill. And perhaps you wait till it’s finalized, and then read it for the first time, like your representatives, right? Pass the legislation, then read it. Now, actually, that’s too generous. How many representatives will read the legislation before or after? No, it’s just their job to pass this stuff. But I think we should remember Milton Friedman’s observation that nobody spends somebody else’s money as carefully as he spends his own. Nobody uses somebody else’s resources as carefully as he uses his own. So you want efficiency and effectiveness, if you want knowledge to be properly utilized, you have to do it through the means of private property.
And yet we come back to this $1.75 trillion bill. Yellen’s convinced that not only can the government spend well and spend carefully, but that $1.75 trillion will have no inflationary effect. I don’t know if this is the inmates running the asylum or we’re talking about some mystical knowledge that you and I simply cannot appreciate or understand. The depth is too far beyond our simple minds. But we’re waiting for the evidence. Ignore what you want. Keep what supports your narrative. That’s where we are today. The facts are convenient at best.
Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. You can find us at mcalvany.com. M-C-A-L-V-A-N-Y.com. And you can call us at 800-525-9556.
This has been the McAlvany Weekly Commentary, the views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.