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The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Trillions Anew: If The Fed “Wins” This Battle We All Lose
April 8, 2020

“We’re talking about instinctive preservation. We’re talking about a desire to avoid pain. And these are things which, although we cannot see the future, as you rightly say, we don’t have a crystal ball, we do know some of the more predictable aspects of human behavior in light of the pressure points created by monetary and fiscal policy. So what are we looking at for market outcomes? These again, are the predictable aspects of human behavior, and where Dalio thinks, we do agree, gold makes a tremendous amount of sense. “

– David McAlvany

Kevin: You and I were talking last night, Dave, about how this is such a strange period of time because it is not normal, what we have considered normal, and even our sleep patterns – you’re not going to be running that Ironman that you thought you were going to be running because that was cancelled. And your body is now catching up. You are actually sleeping more hours than you probably were. But you mentioned to me something last night that I really related to, and that is, I’m sleeping harder when I sleep, but I’m waking up 3:00 or 4:00 in the morning and my mind is just continually processing. And I’m wondering it is it not rewiring for a new normal, trying to figure out its future memories of something it has never really encountered before.

David: There is a lot of processing going on, and there are times that sleep is actually not an easy thing for me, I’m just processing so much. You remember when we went to the conference in Austin and we met Doc Parsley, ex-navy seal doctor who came up with sort of a concoction of tryptophan and melatonin and all natural stuff to be a sleep aid? On my goodness (laughs).

Kevin: Yes, I do.

David: Well, right now I don’t even need Doc Parsley, I’m just crashing at the end of the day. And as you said not because I’m over training here, but yes, I think there is a process of figuring out a new normal. And when the future is not crystalized I think fear is something people deal with that all too common. And Covid-19 is, we would all like to acknowledge, is a temporary concern. You have stress that exists, and to a great degree, it is here because we really don’t know just how temporary it is. And so that is the point, we really don’t have an end to it.

So the future remains clouded. We have the stay at home orders that are temporary. But again, what does that mean exactly? Is it another few weeks? Is it months? And the economy – we have a full stop for the economy. This was never a factor, even during a World War when consumption might have been curtailed and redirected and certainly production was redirected, geared toward the war effort. Employment was very robust, even in the context of a national crisis like that. Marc Faber in his most recent letter quotes Joseph Schumpeter, and Schumpeter says, “Our analysis leads us to believe that recovery is sound only if it does come of itself, for any revival which is merely due to artificial stimulus leaves part of the work of depressions undone, and adds to an indigested remnant of maladjustments, new maladjustments of its own.”

Kevin: What it really reminds me of, Dave, we’re talking about sleep cycles. If you cheat the sleep cycle for long enough, it will kill you. In a way, we have cheated, if you count these adjustments of the economy down as a sleep cycle, we have tried to shorten them with a form of caffeine, central bank caffeine. Look at the stock market – somebody says that’s the new normal, and gosh, we have never seen a 30% decline. Actually, that’s not true. In the last 90 years I think there have been 15, maybe 17 of these, where we have a 30% decline or more. What we don’t have, however, and what we have never seen before, is the robots doing the trading.

David: Yes, we like to think in terms of thresholds and where do we pass into a bear market, and when do we go back to a bull market? And we want to keep the world as safe and as understandable as possible. But you are right, in nearly 100 years, 17 declines to at least the 30% threshold. It doesn’t always stop there. That wasn’t always the extent of the decline. But what we saw March 2020, just this last month, the decline was the fastest of those declines on record – 22 days. We got to a 30% decline in 22 days, the fastest ever. Even the declines, if you go back to 1929, 1931, 1932, took longer, they were more gradual, and this is partly a function of never having a globalized world instantly affected by a pandemic in this way. We have the ability to move people around, air travel, very different than what we had in 1918 and that period of time. So really, there is no historical precedent that exists. But add to that, the algorithms and this high-frequency trading systems also make this a different kind of decline.

Kevin: Yes, we have talked about this for years, Dave. How does a robot, or an algorithm, respond to something that we, even as humans, can look back at all of world history, and never see happen before. If you’re an algorithm, you’re only as smart as the programmer who made you.

David: And the role of the market-maker – that’s really one of the things we’re talking about – has changed dramatically. You have black boxes that are clearing trades in nanoseconds, and digitally matching buys and sells, the high speed is a complicating factor. The world can change in an instant, and in fact, as we see change occurring it is happening at a pace that the mind can’t quickly adjust to. So we are tempted to think that just as fast as the decline occurred, so too a recovery will follow.

I would say, “Not so fast. Not so fast.” The first decline in a market cycle is always the most startling, but in terms of psychological damage, it is minor when compared to the market sort of ringing out of the excesses, what Schumpeter was talking about, kind of what has to happen, what normally happens in the context of a serious recession or depression. You have overshoot, both on the upside and the downside. Markets overshoot in both directions. They can go too high, and they can also go too low.

I think over the next 18 months we will find that the 30% decline that we saw in March was just the warmup. The encore performance is still ahead of us. Marc Faber notes that even Jesse Livermore, the famed short seller, famed speculator and market trader, thought that the worst moves had passed by November of 1929. And he was right, for about three months. You had a profitable trade for about three months, and then the market declined again March of 1930, took out the lows, and Livermore was bankrupted. And he, like many high-strung traders, did not end his life on a high note.

A few weeks back I mentioned the common 20% rebound off the first major decline, what we would consider a counter-trend. A major trend is, in our opinion, down, so now you have a counter-trend to that in the rally. And we have it now. And perhaps this rally extends higher, but the recent lows, we think, are going to be tested in the months ahead, and if those lows, when they are tested, if they hold, then of course we can argue at that point, perhaps, that the worst is behind us. But if they don’t hold, we’re talking about the Dow trading between 14,000 and 15,000.

Kevin: Yes, it is amazing, with the infusion of Fed funds and a lot of the talk, of course we have always talked about perception management from the top. In a way, that has become what we talked about, the new norm until now. But you were on a radio show yesterday and you were asked, was it a good idea to re-enter the S&P 500 last week. I liked your response.

David: (laughs) Well, the host said, “Here’s what I did last week. Do you think it was a good idea?” That made it a little awkward because the host was looking for affirmation of a choice she had made. And so, she asked me if it was a right decision to invest in the S&P 500 last week, and I asked her if she knew which of the companies in the index had an idea of what their quarterly sales were going to be, if they had any idea what their revenues were going to be. And if they did, did the executives then translate that into what their earnings for 2020 were likely to be? That’s where you would derive if this is a fair price to be paying for a company right now. Are you buying blind? And essentially, she had to admit, yes, she is buying blind because no one has any idea what their sales or revenues or earning are going to be, for the second quarter, third quarter, or for the full year of 2020.

We have hope, but hope is not an investment strategy.

Ironically, we are trying to price assets as if the future is known. And we know that central bank assets are on the increase. So what do we know? We know that interventions are in play. We know that those things will help buoy prices, but we do not know what any of those companies in the Fortune 500 are going to actually be able to book in terms of sales revenue or ultimately report in terms of earnings.

Kevin: Last night we were talking also about how dairy farmers had a glut of milk, yet stores can’t keep the cartons on the shelf. You were reading to me a story that Bloomberg had put out about how what we are missing is the demand that came from the schools in those little small milk cartons. And so, there is not demand in the little small milk cartons and then in the stores, there is the large carton demand. There are these things that you can’t predict ahead of time. The question that I would ask you, Dave, because this is an economic question. What is the cost of the unknown? What spread do you pay between bid and ask, the cost of the unknown?

David: It’s fascinating, because as you describe, milk being poured down the drain, it is not as if there is not demand for the milk. There is demand. There is a lot of demand. But there is not a willingness at this point within the market to pivot and restructure and provide the supplies in a different format. So yes, there has been an expectation that it would go delivered to schools and it is not going there, and so on a temporary basis, supply and demand are out of whack. We see the same things in the metals markets, to some degree today. There is supply. We haven’t run out of supply. And yet, there are strange anomalies in the market. And all these things, I think, do get sorted out.

But one of the things that disturbs the market normal is what the central banks have done. We have central bank assets which are up four-fold since 2009, 20 trillion dollars if you are looking at it on a global basis. 10 trillion is the next destination, the next stopping point for the Fed. They have increased over 1.6 trillion dollars in just the last five weeks. It is astounding. So it is going vertical. So you the question, what is the cost of the unknown?

I think there is a variety of ways of look at that – the cost of the unknown – because you could frame that in terms of the unknowns that we deal with on an internal basis, on a personal basis, and what are the costs of dealing with unknowns. And you could be talking about stress and strain that we, again, are dealing with an uncertain future. What is on the horizon? You have the system-wide unknowns as it relates to inflation or to market stability. What about the cost of the unknown as it relates to terrorism or Covid-19?

It is fascinating what we are willing to spend to give ourselves a sense of the things to come. We want certainties, we want a sense of comfort, we want a sense of security, and we are willing to pay a very high cost. Nobody thinks twice about the whole state apparatus, homeland security, which didn’t exist prior to September, 2001. And yet, the unknown is really what we are trying to deal with. And the cost has been trillions. It’s been trillions of dollars.

So thinking about Covid-19, we have the past, which is partly prologue. We know what the future may be, and I think this is where, again, central banks are inserting themselves into the equation. They can’t tell us what will be, and yet, that is what the market desire is for. We want to know what is in our future.

Kevin: And a couple of things, Dave, because you said something that really needs repeating. You said that it is fascinating what we are willing to spend to give ourselves a sense of things to come. I’m going to say it again. It is fascinating what we are willing to spend to give ourselves a sense of things to come. Now, we’re spending money that we are actually borrowing. It is not money that we have earned.

Dave, you and I both read a book years ago called Deep Survival by Gonzales. It is a fabulous, fabulous book. One of his chapters, I can’t remember which one it was, maybe chapter five, he talks about something called building future memories and how when a person is lost in the woods – of course, this is a survival book – it is because their future memories don’t match what is actually going on, and they can panic. In a way, since we have never really gone through something quite like this, like you pointed out earlier in the program, our future memories, maybe that is why we are having such a hard time getting enough sleep, because our brain is rewiring a future memory that we have never seen before.

David: Right. So in a context where what we have known is turned upside-down, where what we have known is turned upside-down, you are right, it is harder to create those future memories, and it would appear that the global response to not seeing the future is to invite governments to be involved in recovery, to help determine the future to the degree that they are able. And as we have noted in the financial markets, we have now at the end of the 1st quarter, 257 trillion dollars in debt. That has to be managed effectively. Covid-19 is just small potatoes by comparison. Yet, by focusing on Covid and begging the Fed and the Treasury to intervene, we leave what Schumpeter described as the maladjustments, undigested, and we are creating more on top of them. So the basis of financial instability in the early part of the 21stcentury is the central planners’ desire to resolve the tensions of the unknown and to do that regardless of the cost. At any cost, they are going to resolve our tensions for us. That is the basis of financial instability in the 21st century.

Kevin: That brings us to last week’s program because I have to ask myself every day what my assumptions are. Are my assumptions correct? If I’m building a base of decision-making and my assumptions are wrong, then the decisions are going to be wrong.

David: I thoroughly enjoyed last week’s discussion with Peter Zeihan. I think Disunited Nations is the best of his books, but I did have a few problems with assumptions he leans on, and frankly, what the book did not offer.

Kevin: I remember you telling me what the book didn’t offer because your reading program, Dave – you’ve told everyone this week after week, but the way you get the books that you read is from the bibliography of the book you just read. And there really wasn’t a bibliography.

David: I know. The first thing, I picked it up, I noticed that there was no bibliography. Not like a thin one or skinny one, there was bibliography. And there were no end notes. To me, that is the mark of a book which is trying to offer a broad interpretation of an issue. But it is not rigorously sourced, it is not academically supported. Where you find books like that, typically, are quickly written opinion pieces on topics that are making headline news and are going to be on the New York Times best seller list for about a week. And that is the way the book was paced, sort of a lack of source materials. And in that sense I thought from the start it was a dead end. And this kind of came up indirectly at dinner this week, and I’m sure this is just a personal frustration, but I love bibliographies, so that was my first point of disappointment was there was none.

Kevin: You have taught your family to love books. That is something that I love about your family because not only do you have table discussions on things that most families don’t, but these are readers. Your kids, your wife. You guys have got to have many differing tastes, but you certainly do love to read, all of you.

David: Sometimes my daughter will draw an interesting question from a jar and ask the question at dinnertime. Earlier this week the question on the table was, “What is your favorite book, and why?” It could be fiction, could non-fiction. For my wife it was anything Ian Forester, where he is writing about relational disconnect. There is drama, there is tragedy of missing each other, the main characters in his books. And so what he is doing is underscoring the importance of knowing and of being known.

One of my sons – you mentioned a book called, Tuck Everlasting, which kind of introduces some of life’s big questions, has them in play. Then came an insistence on two books. He refused to choose one. Animal Farm and Jane Eyre. And I thought, “Yep, this is a young teenager.” And I had to ask the question, was there a connection between crazy animals and a crazy lady. And no, but we did, instead, get a lecture on the world wars, and commentary on communism as he sort of dove into some of the Orwellian themes.

Kevin: I do have a question. It was your daughter who pulled the question out of the jar, so what are her favorite books?

David: As we went down the list and we got to younger ages, it was not really the most important book or their favorite book, it was really the book that they had just finished reading. That was kind of the common theme, because that is what was fresh on their mind. So Black Beauty was important to her because it was about caring for animals and seeing things from an animal’s perspective. Kind of the first story ever told from the animal’s perspective. I remember reading Black Beauty when I was her age and I loved it. Then I had my five-year-old who said Mr. Butter and Tabby was his vote.

And then everything was turned over to me, and they said, “Dad, what is your favorite?” And I had been sitting there for 20 minutes waiting for my turn without an answer. And I said I didn’t know because each book that I read feeds a sense of wonder and curiosity for me and almost always, one leads to another, and another. There are new questions which raised and there is sort of a complex of paths which opens, and adds to the overall landscape.

Kevin: This goes back to what are my assumptions, and what are my questions? You and I have often discussed that the answers are far less important than good questions. Even with last week’s program, you and I talked about it afterward and said, “Okay, what were Peter’s assumptions, and do we agree with them?”

David: Yes, and I think this is again where I had to mention Peter’s book in the context of this family discussion because there were many things that I enjoyed about it and appreciated about it, but there was also something that, by contrast to what I really value in a book that was missing. The conversation with Zeihan was helpful in setting a frame for thinking about the world and where we are in history, but it also seemed conceited, because in the beginning it all threw out, it was sort of posed as the end of the matter. The voice of the author was firm, and very established, but he didn’t really give the basis for his authoritative perspective.

More importantly, to me, he didn’t support his perspective with references. So there is virtually no reference to influences, to a larger intellectual tradition, or to sources that supported his ideas. And in that sense I think he over-reached. That doesn’t make him wrong, per se. I found it offered a helpful frame through which current events could be juxtaposed with past and possible future, again, kind of going back to that idea of future memories, can we imagine the future in a certain way in light of where the current events are, how transpiring, and in light of what we know from history.

So, not a lot of academic value that I was getting from his book, but it was, again, helpful in the juxtaposition of past and future. I enjoy the exercise in imagination, which I think is incredibly important in any analysis, but I explained to my kids why I found the book to be a dead end, and how it is impossible in my case to choose one particular favorite book because I feel like I’m in debt to so many different authors.

Kevin: Sometimes we are asked, “Why do you have guests on your show that you don’t agree with. There are plenty of podcasts out there, honestly, and plenty of programs out there that are really just cheerleading the same cause over and over and over without really talking about new ideas. One of the things I have really loved, Dave, about this last dozen years or so with the Weekly Commentary, is because you dig into those bibliographies and because you bring on guests that you may not necessarily agree with. They bring ideas that we didn’t have before. I mentioned last week in the program that is everybody is agreeing on something, someone is not thinking. That was an Einstein quote, and that is really the truth. You want to try to have some disagreement and maybe a new idea so that you can formulate new ideas yourself.

David: I think anyone who is a student of history and sees what has happened in the context of the 20th century would acknowledge that there is a degree of American exceptionalism and what I think we cannot assume is that that American exceptionalism is projected forward into the future. And so, looking at Zeihan’s book – again, it is a helpful theme, but it is missing something.

By contrast, this weekend I started re-reading Albert Hirschman’s book, Passions and Interests, it is an early defense of capitalism. This was written, I think, in 1976, before communism fell on its face, and sort of in the midst of the intellectual tug of war for an explanatory theory, a theory which would give an understanding of the past, present and future. And I think it is brilliantly argued, it is well supported, and there are, again, sort of in line with my preference for being able to go other places from that starting point, there are a dozen jumping off points, into the next reeds. So I felt an outsized gratitude for a bibliography, and also, I felt gratitude for an insight into Hirschman’s process of idea generation.

Kevin: When we talk about what our assumptions are, I think one of the things that we have assumed is a dollar that can support itself, even though, as we talk to Zeihan, he is talking about America being able to come in and maybe consolidate. But we really have needed the rest of the world to support the dollar and continue to allow that debt bubble to grow for the dollar to have value. One of the assumptions that I had growing up was that I would never have to defend capitalism, the American system, the American way. Doug Noland right now is lamenting the fact that possibly that is what he is going to be arguing for the rest of his life.

David: And through the commentary we have discussed the difference between capitalism, crony capitalism, what we have on display today which is, as our friend Richard Duncan would describe, creditism. It is a very different brand of market dynamic. Capitalism was on my mind this weekend. One of the reasons I was going back to Hirschman’s book was following up on Doug Noland’s Credit Bubble Bulletin from a week ago where he assumed he would spend a good bit of his life defending the metis of capitalism, and a lot of that is in light of being at a social and economic inflection point. We have the Federal Reserve’s five-week balance sheet expansion of 1.653 trillion dollars. It’s massive. But it is symptomatic of our times and it is predictive of what lies ahead which is a tussle over legitimacy of a guided versus an unguided system.

Kevin: I have question for you, Dave. We have talked often how the dollar, when we went off the gold standard, became a representation of world oil, the petro dollar, the agreement worldwide that countries would buy their oil in dollars, and ten recycle those dollars back to debt, or what have you. So my question is, Peter’s assumption that shale and U.S. independence, energy-wise, was going to be the magic wand, I’m just wondering what your thought is, and how that ultimately will apply to our overall system.

David: A couple of things that stood out is, first, we are producing 13 million barrels a day. No energy analyst is willing to conflate oil with natural gas production and that is what he was arguing. No, it’s not 13, it’s 18, – no, I’m sorry, there are supply and demand fundamentals which are distinct and you cannot aggregate production. There are separate commodities, separate applications. So that was one issue that I had with our discussion last week. The assumption that we can crank up shale it will, and that process will then deliver the same benefits into the future as the benefits that we have seen between 2016 and the present.

I think what that fails to appreciate is the critical role of credit in the current energy bonanza, and it is a bonanza on the edge of a bust. It is in the middle of a bust, right? So bank lending and junk bond financing have driven the shale boom as an enabling function, and obviously, going along with improved drilling techniques, which you can’t really have without the former. In other words, credit is the key here, and I don’t know that the credit markets are necessarily going to be as responsive, as available, when we want to flip the switch again.

Kevin: One of the things about the perspective that Zeihan brought that I thought was really helpful was our geopolitical relations, however, and how critical a role the United States’ military has played in keeping peace so that you can have many allies that are all participating. And his thesis is that those many allies at this point are going to be reduced to just 4 or 5, and that the United States is going to consolidate.

David: Right. And I think in that sense I would refer back to, not the thesis in an earlier book, but maybe borrow just from the title of one of his earlier books. When he describes us as an accidental superpower, I think we might remain the accidental hegemon. This is why I think Zeihan does a great job of highlighting the shift in geopolitical relations as a result of domestic oil production, and that is really critical because we have left our allies behind, and we have left them somewhat bewildered. And it remains to be seen if that shift is temporary, and the degree to which our loss of allies becomes a negative constraint.

So considering the economic and political consequences of losing market share in the oil markets, I think there are some really interesting themes to reflect on. I’m thinking here about Saudi Arabia and about Russia, OPEC Plus if you will. When you think about what it means to be put to the wall financially, these guys can light a thousand brush fires. They can ignite something bigger, namely war. This is a part of what I think Zeihan maybe misses, because everything changes in the context of war, and the results are entirely up for grabs – unknown, truly unknown.

Kevin: One of our past guests, and a friend of yours, Dave, Richard Mayberry, has an interesting model. If you think of the world in the form of a pie chart, he basically says there are three pieces of pie. There is tyranny, there is the rule of law, and there is chaos. He says those pie pieces can displace the other two, so the more tyranny you have, the more you may displace chaos, but it’s not a great thing. Or the more rule of law you have, the more you may displace chaos or tyranny. My question would be, because he was talking about this disorder coming in, what does chaos look like? What does that look like, and is that pie chart actually a relevant way of looking at it?

David: Exactly, and I wonder if chaos is used as a tool by us, it has a certain set of outcomes, but if it is chaos, again, in the form of a brush fire, or something worse, ignited and controlled by someone else, as the implications as universally positive, or unidirectionally positive for the U.S.? I think not. So think about, again, going back to Saudi Arabia, Mohammed bin Salman. Look at him. If he is considering Saudi Arabia, if he is considering the resource that they have in oil, which is about a 50-year supply, he may see the risks in play as existential and he may want to say how current events unfold in the present.

How do you maximize as much value from a limited resource, this fossil fuel resource which will ultimately go away? How do you reshape Saudi Arabia and maximize the value of Saudi oil today? And do you need to orchestrate current events, have them unfold in a way that complements what is best for you? What does a world of chaos look like? U.S. foreign policy analysts might be comfortable if chaos is generated, and to a degree, controlled by us. But what if it is created by someone else?

Kevin: Just look at terrorism. Look at the last 20 years how we have addressed terrorism.

David: Exactly, the trillions of dollars which we have spent on the war on terror – you remember the Bush administration, there was a gentleman who proposed – I forget what role he had, budget advisor or something, and he was suggesting several hundred billions of dollars that it would cost us to engage in Iraq. And he was fired because it was such a high estimate. Well, it turns out it wasn’t hundreds of billions, it was many trillions of dollars. Doesn’t Covid-19 remind us as well, remind us of the high costs we are willing to bear to try to control the unknown, and to create a safe world?

So here is the fascinating thing that we see and have talked about in past weeks. Fear is more powerful than the marginal price of oil. And if supplies in the Middle East have an uncertain future, then do not underestimated the mendacity of a Vladimir Putin or a Mohammed bin Salman or others who follow in their footsteps to create an imbalanced world, or out of balance, off-balance world where the U.S. is focused on something, or perhaps otherwise distracted. It’s like the chessboard. Control of the chessboard is not merely driven off of naval supremacy. Again, I appreciate the point that Zeihan made about that being a critical input, but control of the chessboard is not merely driven off of one particular dominant piece. Pressure on the board matters, and any player can change the pressure and end up creating a multi-trillion dollar distraction for us to deal with.

Kevin: And that takes us to the dollar. Really, our dominance has been based on the fact that the world has used the dollar as the reserve currency. That is still an agreement, is it not? The dollar reserve currency status – there could be disagreement, and I just wonder if some of these countries that will be possibly orphaned by this new system that Ziehan is talking about – why would they use the dollar after that?

David: Right. This is a good point you raise. What is the value of the dollar in a world where we are isolationist, whereas Ziehan argues, global trade is vastly curtailed, our old friends have no motivation to use the dollar in the process of trade settlement. We are benefitting now from an enormous float of U.S. dollars and having the largest capital markets, the deepest capital pool, of anyone on the planet. If you assume an end to reserve currency status which has been sort of the de facto mode of operation in the world of money and finance, de facto since 1944, that might, in fact, create a few challenges for us.

How do you project power in a different world? We have mentioned this before. The U.S. Treasury is probably more important to the projection of U.S. power internationally than the State Department. That is because credit has become so much a part of what we do. But it implies this underlying assumption which is the U.S. dollar still has a reason to be ubiquitous all over the place. Ray Dalio is the founder of Bridgewater, the largest hedge fund in the world, and by the way, his risk parity strategy blew up in March.

He has done well for years and years, but in the context of March, there was a big oops factor. Regardless of his principles and the way he has managed money it didn’t work out. Not last month. But he has asked the question, and was actually quoted recently in Reuters, sort of predicting the beginning of the end of the dollar as the world’s reserve currency, and with it, of the United States’ economic dominance. And a quote from that Reuter’s article was, “I believe that we are seeing the archetypal big shift in relative wealth and power, a profound shift in the world order that will affect all countries.”

Kevin: To be fair, none of us really knows what the world looks like going forward. It is good to see what the trajectories are and talk to different people who are watching that, maybe who are lecturing on that, writing books on that, just to say, “How do we prepare for the unknown?”

I asked this question yesterday, Dave, of Lila Murphy at McAlvany Wealth Management. “What do you do when the dollar, itself, is no longer the place you go when you are indecisive?” I thought her answer was good.

David: This is one of the reasons we have emphasized four categories of real things on the Wealth Management platform. We are interested in real things in an age of monetary madness. We are interested in real things where the value is basic and intrinsic. Of course, today, we are interested in cash because the markets are turned upside-down and inside-out and we see a very attractive entry points in the months immediately in front of us. But I am partial to the conclusion, the advice, in that Reuters article from Ray Dalio, and it is consistent with our approach to money management, and of course, what you do, too, Kevin, on the sort of defensive side of the equation.

Dalio’s conclusion is that he recommends owning gold, in anticipation that investors shift their preferences in the context of negative-yielding bonds and devaluated cash. The devaluation process for cash is a slow one. We anticipate being able to diversify into those four buckets that we have of real things on our Wealth Management platform long before that is an issue. But he is talking about context change. He is talking about not a six-month change, or a six-week change, but a six-year change, a decade change – decades! A context shift where we are no longer the greatest empire. Again, why would he recommend owning gold? Because, again, you don’t want to be in negative-yielding bonds. This is the course ahead.

We are talking about instinctive preservation. We are talking about a desire to avoid pain. And these are things which, although we cannot see the future, as you rightly say, we don’t have a crystal ball, we do know some of the more predictable aspects of human behavior in light of the pressure points created by monetary and fiscal policy. So what are we looking at for market outcomes? These, again, are the predictable aspects of human behavior, and where Dalio thinks, we do agree, gold makes a tremendous amount of sense.

Kevin: This would be a good time to possibly talk about the distinction between the financial markets, which is the price of things, and the economy, because Ziehan had said that, yes, there is a recession ahead, but that he really believed there would be a quick bounce back. I wonder about that, Dave. We have never seen the world just completely shut down for weeks, maybe months. What was your thought on his bounce-back thought?

David: I think it is a fascinating perspective. One time I talked about a client who is in the Pacific Northwest and their family is in real estate development. And one of the ways that they have developed, very successfully, throughout the Pacific Northwest is owning helicopter and seeing things from a different vantage point, seeing the geographical and topographical choke points, see where traffic is flowing, where opportunities lie. And literally, from a 1000-foot perspective, being able to say, “That hillside should be bought and developed, not the one on the other side of the freeway, because we can see there are limitations, and the flow just won’t go that way.”

You sent me something similar. It was that sort of bird’s-eye perspective. A client of ours who is a pilot was commenting on the FedEx flights back and forth overseas, FedEx packed full. They are taking over the cargo duties that are normally fulfilled by an American Airlines or United Airlines where there is excess cargo capacity and the airlines take on the cargo. Now the airlines are not flying and so FedEx is taking on this overwhelming amount.

Kevin: So FedEx isn’t suffering at all. There are some businesses that aren’t really suffering right now, in fact, they are getting an increase in business. But the comment about American Airlines, the few flights that actually are occurring, he says that the skies are just empty. The runways are empty. In fact, speaking of Lila Murphy again, she said she rode her bike at Dallas Love Field yesterday. She would never do that, but there is just no traffic. And so the ominous feeling, like you said, the 1000-foot perspective. In this case it would be the 30,000-foot or 40,000-foot perspective. But not seeing other air traffic in the sky, that tells us the sign of the time.

David: (laughs) I’ll tell you, just hit on one of the sort of implicit blessings of Covid-19. The stay at home orders means that roads are a cyclist’s dream. There is no one out. And so to go on a long 20, 30, 40-mile ride, or even longer, you just don’t see anybody. It’s probably the safest environment for cyclists that we have had in decades.

But Zeihan, while he is conceding that recession is immediately ahead, he is saying that there is not going to be a depression, there is going to be a bounce-back which is very swift, a V-shaped recovery. And I think the insight from that 30,000-foot perspective from the pilots is, no, there are actually huge consequences, lingering consequences, global economic consequences to having shut the global economy down. And so, yes, you might have a recovery in economic terms as you restart, but it is not necessarily the case that financial assets follow suit. And this is where I seriously doubt we have a V-shaped recovery in terms of the financial markets. I would assume nothing in that respect, because we are in uncharted territory.

Kevin: The other thing, again – questioning our assumptions. If we were actually talking about an economy in the 1930s that had a gold-backed standard – we couldn’t print trillions of dollars back in the 1930s. Ben Bernanke’s whole thought when he wrote his paper for Princeton was, “We don’t ever have to go through a depression again, we’ll just print our way out.” That’s where the helicopter money statement came from. But the financial markets are built on layers of leverage on top of mountains of credit. Where is the reality beneath it?

David: Well, that’s a key point. This is what has become destabilized in the context of Covid-19. The math involved with roughly 257 trillion dollars in global debt requires interest rate suppression. It requires it if we are going to remain on the path of debt-driven growth. And with that comes a radically different market environment. Here we go back to the foundations of market economics, and I appreciate Hirschman’s defense of capitalism. It was Jim Grant, commenting in the Wall Street Journal this past week, and I quote from Jim, “It took a viral invasion to unmask the weakness of American finance.” And we agree with that observation whole-heartedly. He goes on that say, “No pandemic explains the central banks’ massive infusions into the so-called repo market that followed last September’s unscripted spike in borrowing costs.”

Kevin: Again, that takes me to the commentaries that we have had since September when we started to see the repo markets being infused with emergency levels of cash, when we started seeing, in October, quantitative easing. So people ought not to fool themselves that this was caused by a virus. It was actually caused by credit, and fueled by the central banks.

David: Kevin, a part of my adjustment to this new normal is still wrapping my mind around both the cause of the problem and the resolution, or the cure, for the problem. This, again, is something that almost creates some cognitive dissonance for me, and it relates to what Jim Grant has often said. “The Federal Reserve stands at the ready with its gushing liquidity hoses, ironically, as both the fireman, and the arsonist.”

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