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The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

“If you’re stuck with an equity portfolio and are going to be long out the ears in a traditional allocation, you should be thinking about at least three things: liquidation and raising cash, getting some sort of a hedge àla the Tactical Short, owning gold as an offset to market chaos. You’ve been told over and over and over again, and if you haven’t taken action at this point, again, every opportunity has been given.”

– David McAlvany

Kevin:Dave, you had a business trip last week to California since the last time we have talked, and you had a chance to have a little lunch at a yacht club. Just tell us about your travels.

David:Marina del Rey Yacht Club, with one of our longstanding clients. We go back almost 40 years. Then after that went on a run from Venice Beach up to Santa Monica because Marina del Rey is right there.

Kevin:Because you could, right? And you’re training for this next half ironman.

David:That’s right. And then a friend of mine went to dinner and the story was that we were going to have the best steak in Southern California, so we went to a place called The Butcher’s Daughter.

Kevin:And you were looking forward to protein.

David:And that friend had forgotten that this was an all-vegetarian restaurant (laughs). So The Butcher’s Daughter is the girl who has seen it all and won’t touch a thing.

Kevin:She gets her protein from beans, I’m guessing.

David:That’s right. Chick peas and whatever.

Kevin:Dave, before we get too far in the Commentary, I want to mention that Forbes interviewed you and our listeners can tune in and listen to that interview. It was about an hour.

David:Yes, there is an audio that you might want to listen to, and then just a very short write-up by Jerry Boyer. You can follow the link at mcalvanyica.comand that will get you over to the Forbes site – a generous little write-up from Jerry, and then about an hour audio where we talk about legacy, the specific aspects of the book, we talk about how, both in the context of family, and at the level of national debt and fiscal policy, we are under-reserved, and how the issue is never really crisis. It is if you have enough resources to deal with crisis. That is where our conversation swirled a little bit. So if you want to have some more food for thought, join us for that hour interview on

Kevin:While we are putting invitations out to listen to something else, make sure that you also register for the Tactical Short Quarterly call. If you are listening on Wednesday morning or Thursday morning, there is still time to register for the Doug Noland Short Quarterly Call over at That’s one, whether you plan on ever investing in the short fund or not, just to listen to Doug Noland and have some interaction – that’s worth it all.

David:Our team continues to be built out with really top quality people, and so to get some of our perspectives on the market dynamics and the impact from trade tariffs, and the consequences that come from higher rates, that will be Thursday at 4:30 Eastern Standard Time, and you will want to register ahead of time. We have about four pages of questions already submitted, and feel free if you want us to address your questions to send them also as you register so we have some time to digest that and prepare to give you the best possible answer.

Kevin:It seems perfect timing to have this call because, of course, we’ve talked year after year after year that there is a time in the year, every year, that the stock market does well, and a time that it does poorly when you average everything out. November to April, typically, is when the stock market does its work, and then from April back on over to October is when it takes a lot of it away. So it’s good to listen to Doug and hear what to expect, especially if you own some stocks.

David:The November to April timeframe, even through the end of March, those six months tend to do well in large part because you have year-end contributions to retirement funds and then the April 15thdeadline which motivates people to get dollars in for their 401(K)s and IRAs and things like that. That funds a dumping of money into the markets. The other side of the coin is that there is not as much flow from April to October, typically less dollars flowing into the markets and a greater propensity for downside moves in the worst half of the year, or the not so good months, which again, from here to October is when it is considered to be.

Kevin:Sometimes we have a bias because Goldman-Sachs has a computer model that if it says that it’s bullish, of course it comes right out on the news, Bloomberg reports it, everyone is happy. A couple of weeks ago the model said that they had turned bearish. Well, the bias kicked in and they immediately covered up.

David:Right, you have the quantitative model, which is warning of a bear market. There is the Goldman-Sachs bull/bear indicator registering north of 70%. But the firm’s analysts and strategists are telling investors not to worry. We’re getting a misread due to a lack of inflation, whatever the case may have been. But if the computer model tells you what you want to hear, you pay attention to it. If it tells you what you don’t want to hear, then you figure out how to justify ignoring it.

Kevin:(laughs) We all have that bias with things that we love, right?

David:And for Goldman-Sachs it’s a love of money above all things.

Kevin:There you go.

David:The Dow at 24,682, if you recall this is where it began to break down. It gapped lower and for anyone who is interested in technical analysis, filling gaps is an important thing, particularly if we are, in fact, heading lower. So, the price action broke down to 24,682, you have a huge gap, and this week here, even within the next day or so, we’re likely to fill that gap, which again, in my opinion, technically opens up for a much longer-term move lower thereafter.

Kevin:Let’s linger there just for a moment because for the person who doesn’t actually look at charts, what you are talking about is when you have a close, let’s say, in a market on a Friday, and then that next Monday it opens up dramatically lower or dramatically higher. It creates, or it can create, a gap in the chart that, usually, technicians at that point will say, “All right, no matter what the direction of the market is, that gap will come back in and get filled at some point. Charts usually have somewhat of a continuity, even if the gap gets filled weeks later.

David:That’s right. So radical volatility, which pushes prices from $3.00 to $7.00, that $4.00 difference between it on the way up, arguably, the price will come back down to the $4.00 gap between $3.00 and $7.00, and it will fill before it goes much higher. And the same sort of gap theory applies on the downside, too, so we’ve had a gap sitting there at 24,682 and it is in the process of filling.

Kevin:The market has been coming up trying to fill the gap. Once that gap gets filled, your thinking is that the Goldman-Sachs model might be accurate and we might be in a bear market.

David:This is something Doug and I have talked about. There is this incessant volatility, which for many investors begins to fray the nerves. You’re up 500 points, you’re down 500 points, you’re up 1,000, down a 1,000. We mentioned this last week in relation to Mr. Bogle from the Vanguard group who would say, “I’ve seen the market down 25%, I’ve seen the market down 50%, but I have never seen this kind of intra-day or intra-week volatility – not in my entire career.” So what does that volatility do to people? I think it wears them out.

Kevin:To contrast that with what we had for years, which was no volatility, to me, I actually prefer it right now. It’s nice to have some movement in the market. But aren’t we getting mixed messages right now from the economy? We have some things that are down and then some things that are clearly showing that we might be in a growth phase.

David:Sure. So if you look at housing and retail sales – a third month of declining retail sales from the commerce department, and at the same time almost 9.5 – 9.4% increase in credit card usage, with delinquencies and defaults in the credit card category rising this week with earnings out from J.P. Morgan, we also had a pretty big write-off of credit card loans. The consumer is maxed out.

Now, extracting home equity is not a part of the answer to this cycle. You might have seen that circa 2006 and 2007, but credit cards are standing in as sort of the last resort, and to some degree, we’re there. Then you have numerous other economic indicators that are not confirming that weakness in retail sales. Again, back to the volatility issue, I think this is where it stems from. On the one hand a positive number comes out, on the other a negative number, so on the negative side you have retail sales, and then you have new home sales, as well.

Again, three months in a row we’ve seen declining sales volumes even though you’ve had a rise in price. It tells you something is not real healthy. When you look at any market, a part of the variable is price. The other part is the quantity or throughput in that market. Talking to realtors in different places around the country it has been fascinating to hear them say, “Oh no, no, no – we’re not seeing that many transactions happen although prices are still on the rise.”

Kevin:That’s the point. We’ve talked so many times about prices not necessarily meaning economic strengthening. Just because prices rise, it doesn’t necessarily mean that we have economic growth.

David:If you recall, the majority of the last nine years we had no economic improvement but we had a massive financial market improvement on the basis of central bank intervention. So prices were being driven higher on a sea of increased credit and expansion of liquidity. Now we have some economic improvement, kind of the other side of the equation, some economic improvement and central bankers are having to decide whether or not the liquidity provisions are going to stay, whether or not they are going to keep liquidity in the system. And it’s kind of a catch 22. If they pull the liquidity, prices drop. If they don’t pull the liquidity, it signals a disingenuous stance on the economy. So the last plausible reason to keep liquidity in the system has been…

Kevin:It was the inflation target.

David:That’s right.

Kevin:And we’re there, so why? If you’re Powell, at this point – I’m not going to say there is a gun to his head, but they have been using this lack of inflation as a reason to continue to stimulate the monetary process.

David:I think the discussion with Doug for the Tactical Short is going to be interesting for a number of reasons, but again, you’re kind of at the confluence of price action and liquidity ebbing and monetary policy, and throw into the mix a whole host of geopolitical concerns. It’s a real interesting backdrop as an investor to not have some sort of a hedge.

Kevin:And the central banks don’t seem to even be necessarily on the same page, because the European Central Bank still is very dovish.

David:Right. On the other hand you have the Fed minutes, the most recent which were somewhat hawkish. Powell is less likely to be a Wall Street doormat than his predecessors, which would suggest that the coming months are going to be a challenging environment for traditional equity investors and equity allocations. In point of fact, it’s not the economy which leads the securities market. It’s the other way around. It should not come as a surprise to see the stock and bond market top and the economy still improving on a sequential basis.

If you can put this in your mind, envisage a long line of rail cars. The engine of liquidity turns the corner long before the caboose of the economy does. Liquidity is the key, particularly in a world of fiat currencies. Economic leadership, that being in the equation, that was the driver of markets. But that was jettisoned once it became vogue to abuse Keynesian and monetarist theories.

Kevin:Let’s go back and look at a little bit of history, though. We’ve been taught, Dave, and I remember being taught this in economics class, that we really didn’t need to have the Great Depression of the 1930s. Gosh, if we would have just had Keynes or Freedman or the monetarist policies, they could have just printed money and kept us from a depression. I think that is a lie, personally. I think ultimately what happens is you have inflation, or what have you. But that is the history behind this thinking.

David:Right, and there is a mantra which is repeated by modern economists, and it is supposed to contain some sort of cosmic truth, and that is that the great crash was not an inevitability. The deflation of the 1930s could have been avoided. But greater liquidity was needed via Federal Reserve money printing, and if we had utilized that tool we would not have had the Great Depression. So now the central bank community errs on the side of too much, rather than too little. They run scared, but a part of it is based on, again, this mantra, assumed to contain some cosmic truth. But it may, in fact, be specious history.

Kevin:If we were to look at how things can change very, very quickly, and I love your train example because you’re right, the engine turns the corner long before the caboose. Federal Reserve policy has always been, at least on paper, to remove the punchbowl before that caboose shows up around the corner. Otherwise you have inflation.

But let’s look at the last three weeks. The tech darlings – Facebook, Google – these guys could do no wrong up until this point. What has happened, something that is relatively unpredictable, and not necessarily likened to the market at all, is public perception. Facebook and public perception is changing. Tesla and public perception may be changing. Those types of things you can’t predict ahead of time just looking at charts.

David:And one more thing, just in reference to a conversation that Dave Burgess, one of the guys on the Wealth Management Team, a conversation that we had last week – the perception that interest rates have been coming up in the last year. Again, the Fed follows the market, it does not lead the market, because interest rates have been moving up for nearly three years.

Kevin:So it’s reacting. It’s not proactive.

David:They are late, they are behind the curve, they are not setting the trend in rising interest rates, they are catching up to what the market is determining a proper rate of interest should be. So there is a multi-year gap here where the Feds sat on their hands and did nothing, and there was growing concern that, “Hey, maybe they’re late.” Well, no kidding. In that case, just look at a chart. The evidence is there.

What you are suggesting with these tech darlings, the reality is that the general public can decide that they don’t love them anymore very quickly – very, very quickly. Firms like Google and Facebook sort of caught aiding and abetting the deep state and spying on Americans and others around the globe, and all of a sudden your users have a shift in perception from, “I thought you were helping me connect with family. Now I discover that you are harming me with the data I provided.” Again, we’re talking about a psychological shift in perception from, “I like using this venue,” to “this venue is taking advantage of me.”

Kevin:Yes, and why does it say NSA right before Facebook? That’s what I’m wondering. Why does my screen now say, “This is a product of the NSA?”


Kevin:“Or am I the product of the NSA?”

David:Domestic spying abuses actually go way back, starting under George W. And if you’re looking at NSA abuses, a lot of this stuff has come out as a result of Julian Assange and Mr. Snowden. We know more about the domestic spying program under George W. It continued through the Obama Administration. In recent months, it has become clear that the FBI plays by its own rules, just as the NSA has for a long time. Now you have these two data collectors, aggregators and storers, the tech giants. Are you telling me that what they have in storage is not readily accessible to the intelligence community?

Kevin:Ask Polverini, the last couple of weeks of our show.


Kevin:Of course it is.

David:You must assume that it is. The Facebook congressional hearings introduced many here in the U.S. in the general public to what the actual business model is. And I think it was a little bit surprising. Rather than it being, “Let’s connect the world and be a relational nexus,” the business model is what? You’re selling what? Data on customers? What? To advertisers?

Again, you’re the product. You’ve been monetized. Your personal information is the best way of getting in front of an advertiser and saying, “We’ve got this many people who are frequenting these pages and your ads are going to be seen.” It’s the same thing that you used to have, or still have, in print media and on television. You have to prove your viewership, and if you can prove your viewership, then you can charge higher rates for your advertisers.

Kevin:This is not just human analysis. If you look at some of these predicted algorithms, some of these genetic algorithms that are artificial-intelligence oriented, where you have computers that are actually taking this data and thinking things before you’ve thought them, or at least they’re trying to.

David:Right, because what you’ve provided is narrative, what you’ve provided is habits, pictures…


David:And buying patterns, all of which – exactly – data – which reveals how you think. And if you had a predictive algorithm, which, as you said, there are many of them out there, it would and can reveal a high probability of what you are likely to do next. So what we have is a voluntary submission to a big brother data gathering. And this goes back to what Julian Assange said back in 2011. For those of you who don’t remember, he is the founder of WikiLeaks, and he said that Facebook was a spy machine for U.S. intelligence. I quote his exact words: “The most appalling spy machine ever invented. Users are creating the most comprehensive database for U.S. intelligence.” Just an interesting insight.

Kevin:War is fought on many levels. We’ve talked about how war over the last couple of decades has been fought in the currency realm, with currencies, the U.S. dollar, of course, being the largest military force in the world. Not with carriers and bombers, but just with the Treasury Department, and the Federal Reserve and the Reserve Currency Status. But what we are seeing right now is actual military action. What went on in Syria – I’ve got some questions about what went on in Syria, Dave. Let’s look at some of the angles. Why did it happen?

David:Yes, I think there are more questions than answers. One thing that history teaches us is that the facts provided for public consumption are always narrow in scope, and, by design, they are to bring the public into a desired disposition or conclusion. You can go years or decades after historical events and you then have a more exhaustive set of facts that becomes available. And when you have those, then it reframes the decisions made in the past.

Kevin:So, you’re thinking the Lusitania, or Pearl Harbor. You have the smoking gun where you look back and say, “Now, wait a second.”

David:You’re told what you need to be told so that there is political support for the actions that were taken.

Kevin:So tell me about the grassy knoll. That type of thing, right?

David:(laughs) Right, but politicians never make choices without that sensitivity to public perception, and yes, guiding the course for perception management. In this case you have the U.K., you have France, you have the U.S., all of them involved, and for any of them, it brings them together. They’re sharing intelligence, a number of them. I think Macron was the most vocal in terms of his red line commitments, and Trump as well. “You crossed this line, and this is what we’re going to do.” But the fact that they did it altogether and no one acted unilaterally opens up the possibility of political deflection later on.

Kevin:If you recall last year, Trump was having dinner with the Chinese president at the same time that the Tomahawks were flying into Syria. Now, I have a couple of questions. One of them we’ll just leave off to the side, but it is interesting, those who did not participate. Germany stepped aside, they had no interest in this. But why didn’t we use Tomahawks? Why were we using B1 bombers? Are we sending a message that is larger than Syria, itself?

David:When it comes to Germany, keep in mind that if your audience isn’t really Assad and Syria, in fact it’s the Russians or the Chinese. You have your tradable goods sector in Germany which is very sensitive to the product that can flow to China, and you’ve got an energy dependence on Russia. So you want to be careful.

Kevin:So forget Syria. You just don’t want to make Russia or China mad.

David:That’s right. And so the real appraisal is, did this have as much to do with Assad as it did with a larger chess game afoot? The use of the B1 bombers – if you look at the firepower used by the B1 bombers in Syria, they had the capability of 40 times that.

Kevin:So we used a small, small version of it. It was more to send a signal.

David:Yes, exactly. Think of playing marbles. We just flipped a little marble. And then imagine that giant stone that chases down Indiana Jones as he is trying to escape.

Kevin:(laughs) That’s the difference.

David:Right. It’s, “We could have done more here, just so you know.”

Kevin:But were we talking to Syria or were we talking to Russia?

David:I think with the B1 bombers you make that pretty clear that a broader audience was key. Delivery of said explosives using B1s versus cruise or Tomahawk missiles – that sends a strong message to Russia and to China and to North Korea. So yes, we blew something to smithereens but it still communicated restraint. There is a lot more where that came from. Again, the message was not to Assad. Even Trump’s Friday comments included Russia and Iran, and don’t forget China and North Korea. What do you have after Friday, Saturday and the weekend? The ruble has plunged, Russian equities are in retreat. The Iranian currency is also in freefall. The action taken was, in fact, multi-purposed.

Kevin: But wouldn’t you be nervous right now if you were Syria, or you were Bashar Assad, and not because you’re a bad guy, but because you are like, “Wait a second, wait a second. I’m being used as a pawn here in a much larger game.”

David:Yes, exactly. Somebody will suggest, if they haven’t already, that this whole thing is a false flag, and I think the evidence is scant. Maybe it ends up stacking up in favor of that. But the chemical weapons use was a justification for actions desired to be taken anyway.

Kevin:So when the elephants are fighting, are at least talking to each other, you don’t want to be a mouse.

David:And the Syrians are, really, I fear, something of a sacrificial pawn in a much larger geopolitical gambit. China has completed here in the last week their communication jamming devices and installed them on the Spratly Islands. And the same, call it one-week to two-week period, has given its largest ever show of naval force in the Taiwan straits, having five live fire military drills, with Mr. Xi being present for that. So the chessboard and the players are, indeed, I think, beyond Assad and Syria.

And the comments from the Russian ambassador to Washington, I think, again, support that. And they are chilling, for me, for a guy who grew up with the Cold War threat being more of a reality, and with higher odds. A Russian invasion of the United States was a greater likelihood than the White Sox winning the World Series (laughs). That’s the house I grew up in.

Kevin:We were talking about types of warfare, and it is compelling to me, we’ve talked in other commentaries about how I like to do celestial navigation. I like to look at the stars, to know where I am, and actually, we talked about how the Naval Academy has reintroduced celestial navigation, just for this type of thing. You talked about the Chinese setting up an anti-communication site. What that really means is GPS doesn’t work.

We live in a day of communication. If you can disrupt communication, or you can confuse communication, you can literally shut down the world’s largest military. So who knows what the unknown is? I’m not trying to be a fear-monger here, but we talked about currencies being used as warfare, and we’re talking about some of the statements that are being made with Tomahawk missiles to countries that are long distances away from Syria.

But I want to go back to the equity markets because I guess in an idealistic world if people were afraid of what the outcome was going to be, the stock market would go down, a little like it did when Napoleon was fighting at Waterloo, or it would go up if people thought things were going well. But the equity markets right now don’t seem to really be reacting to any of the clear dangers geostrategically.

David:Yes, and I think a part of it is, you have so many signals and a confusion between signal and noise, which we have spoken of before. You have tweets from Donald Trump that we need a weak dollar. And yes, in fact, so far we’re winning on the race to the bottom, at least in the last 12-18 months since he took office. But then as soon as he says something, Mnuchin steps in and says, “No, no, no. Dollar weakness? No, absolutely not. We believe in dollar strength.”

So what is it? If we want dollar weakness and we want dollar strength, are we saying we want the average of the two? Or are we just basically confusing market participants such that they can’t really make decisions? You have the equity markets today which are rallying – rallying – in the face of extreme geopolitical pressures, as if the tension late last week and the downside volatility that we saw, was because we didn’t know what was going to happen, and so we were concerned. And now that we know the missiles have flown and it’s a past tense thing and we’ve settled that, it’s so much better now. We’re going to have peace in our day. Macron and Trump have delivered on their promises. They said the red line thing and they’ve acted.

It is interesting, the markets are acting – and again, we go back to that issue of volatility – they’re acting like they don’t know what the hell is going on, because they will go up 1,000 points, and they will go down 1,000 points, and they will go up 1,000 points. And they are reacting to data but the data doesn’t have real meaning when half of it says one thing and half of it says the other, and you’re left to, on a day-to-day basis, make a decision. What signals are the market giving us? How should we be responding and reacting? Again, I think that volatility is ultimately going to cause people to say, “Can’t make sense of it. The risks are not worth it.”

Kevin:We’ve talked about that volatility. A lot of the decisions, 70% or more, are made by algorithms anyway, so it’s hard for them to factor in things that we maybe don’t even see, like the wag the dog scenario. You remember during the Clinton years, the Monica Lewinsky thing? Sure enough, Clinton launched an attack looking for Osama bin Laden at the same time that, literally, the press corps, waiting for the Monica Lewinsky news, were sitting in a tent watching a movie called Wag the Dog. Now, public perception right now – I’m not saying necessarily that Trump launched this because of what is going on with Mueller.

David:No, but he benefits. He benefits from show of strength. You have Mueller who is challenging the oval office via the Cohen file grab, and he definitely benefits from saying, “Look, you don’t mess with the best, or you die like the rest.” He’s messaging everybody. He’s messaging Putin, and he’s messaging North Korea, and he’s messaging Mueller, and he’s messaging his base.

Kevin:Let’s talk about Mueller. How in the world do you get 35 blank subpoenas? Is that even constitutional?

David:I don’t honestly know. This is where I wish I had a law degree and could tell you what was upside-down and right-side up, but yes, the most recent request was for 35 subpoenas. That was for the Manafort trial. And it seems odd to me that, according to Bloomberg, you leave all the names blank so that you can fill them out later. I don’t know if that’s normal. It doesn’t sound normal. I’d love to get some comments on it.

Kevin:(laughs) It doesn’t sound constitutional to me. What if I’m one of the blank spaces? I thought a subpoena had to be approved.

David:Right, so then you have the Syrian missile strike, and what does he get? Trump gets public distraction points (laughs), and affirmation from his base that he’s a doer, not just a talker, and that in the context of so many of the things that he sort backed out of. And now he’s talking about re-engaging the TransPacific Partnership, the TPP, which was one of the first things that he dumped when he came into office. So how do you balance out, again, information which is communicating one thing with information that you now need to communicate the opposite thing to create some sort of balanced perspective.

Kevin:And Trump is not the only guy talking and tweeting. Look at how the information just immediately leaked out after the Cohen raid.

David:Oh, amazing! It took less than 24 hours for leaked information from Cohen’s office to hit the Wall Street Journal.

Kevin:Yes, this is not the National Inquirer, it’s the Wall Street Journal.

David:That’s the 1.6 million dollar settlement for another one of Cohen’s clients, right? My question is, how does this not negatively impact Mueller, where he has let the dogs loose to go on a tear? Where’s the leash? Because at a certain point you’re breaking the law if you take information, and then all of sudden it’s being leaked, who leaked it? Because it’s either coming from the Department of Justice, or it’s coming from the U.S. Attorney’s office for the Southern District of New York, who he employed to get his work done.

So Mueller has an issue emerging in that more information that gets leaked from Cohen’s office that was never supposed to be out, or that at least was to be held in official channels, when it gets to unofficial channels somebody is breaking the law.

Kevin:A few years ago when were in the depths of our recession, you and I were walking the streets of Washington D.C. It was during cherry blossom time. It was really, really beautiful. But we commented that you could go to almost any city in the United States and they were really oppressed at the time because business was tough. This was after the financial crash. Washington D.C. looked just fine, and really, I hate to be mean, but it’s a town full of talkers. So this talk that comes out, these guys get paid to talk, and that’s really what they get paid to do all the time.

David:Bill King is a good friend of ours and he occasionally in his missives will include a famous quote, and it reminds me of one from Thomas Jefferson. “If Congressmen talk too much, how can it be otherwise in a body to which the people send 150 lawyers whose trade is to question everything, yield nothing, and talk by the hour.”

Kevin:(laughs) And this is Thomas Jefferson. So there’s nothing new under the sun.

David:No. You have the spending bill, which came through several weeks ago. It flew through congressional hands.

Kevin:It looks like it was written by the Democrats to me, Dave.

David:2300 pages, and they were given 24 hours to read it once they were in receipt of it. This is just FYI, for your information. My brother-in-law was a state legislator in Idaho, and he complained to a number of his colleagues that there was so much to read to keep up with all of the things that they had to vote on. Every colleague that he commented to that, “This is full time job, this is taking everything I have just to read it, let alone time to sit and reflect and look at the pros and cons.” Colleague after colleague said, “Are you kidding me?”

Kevin:“You really read this?”

David:“You actually read it? You’ve got to understand.”

Kevin:But without reading the 2300 pages let’s talk about some of the key points because it sounds like exactly the opposite of what Trump campaigned on.

David:And it creates vulnerability when you come into November, and I think the Trump voter base is going to wonder about record spending levels, they are going to wonder about a very minimal amount of funding for a wall. 400 billion, or more, of the dollars allocated is actually going to go to just repairing existing fences.

Kevin:And there is no reversal of Obamacare.

David:No, Obamacare is in place, Planned Parenthood is funded, sanctuary cities are funded. Now you have the re-engagement, at least verbally, on the TransPacific Partnership.

Kevin:Which is what he threw out. He threw TPP out right off the bat.

David:Right, so I don’t see how you don’t have a massive loss of seats in the House, a growing likelihood, which I guess would really be no different than past administrations at this point in the cycle. You’ve had massive turnover. Maybe the one exception to that was George Bush. Because of 911 there were a lot of seats that were held and not a lot of turnover. But November enthusiasm amongst the GOP? (laughs) I don’t think it’s going to be very high.

Look at Paul Ryan’s exit. I think that is indicative, not only of dysfunction in the House, but what is perceived to be a major tidal shift. The only thing I can think of that would balance out that tidal shift toward the Democrats is if Mueller’s probe is seen more and more between now and then to be a partisan witch hunt, which would certainly alter the tone amongst Trump supporters. And even though he is not delivering on the points that he said he was going to, persecution of some sort is sort of a rallying point.

Kevin:Don’t you think, though, that everything would change if the debt actually caught up with us? The big picture is, we’re talking hundreds of trillions of dollars of global debt, and that has really been allowing us to do just silly little things. Let’s put it that way. Let’s face it, we’re dealing with silly little things because we’re basically borrowing our kids’ money.

David:The big picture realities are still in place. They remain. And while they sometimes are sort of obscured and out of sight, and to some degree out of mind, global debt levels have exceeded 237 trillion dollars.

Kevin:How do you get away with that forever?

David:That’s 3 to 3½ times global GDP. The question you always have to ask with debt is, can you keep up with the payments. So scale, the size of debt, is certainly one variable. The interest component is another. And you could argue that at 3 to 3½ times global GDP, the scale issue is becoming a real issue. Now all of a sudden we’re beginning to see interest rate creep, and guess what? That’s the kind of thing where you say, “All right, well, the system is going to reveal all its frailties on the basis of a tightening of credit.

Kevin:Which you said will probably have to happen only because the Federal Reserve is already two years behind its curve.

David:Interest rates have already been rising. The Fed is just pretending to catch up. But domestically, a fascinating tweet from Eric Pomboy this last week – 21.1 trillion in public debt, 15 trillion in mortgage debt, 9 trillion in corporate debt, 4 trillion in consumer debt, 6 trillion unfunded pension liabilities. Fed raising rates? Reducing balance sheet interest rates? Interest rate expense exploding? But everyone is concerned about 100 billion dollar trade war. Lots of laughs. Again, 100 billion compared to tens of trillions of dollars.

It’s a fascinating thing, Kevin. Look at CNBC’s report this last week with Neel Kashkari, part of the Fed there in Minnesota. He said, “The national debt is not a factor that the Fed weighs for the direction of interest rates.” Neel, Neel – higher rates? Are you saying that they don’t impact in a material way the 65 trillion dollars in interest-bearing instruments here in the United States? No impact to household debt? No impact to corporate debt? No impact to the Federal line item? At what point can we conclude that even though these are things they don’t factor in, they are things that wehave to factor in because they are realities?

Kevin:And whether they pay any attention at all to what the debt is, the annual deficit, as we know, there are times when, 200, 300, 400 billion dollars – we’re talking about a trillion plus from this point forward.

David:And the CBO reconfirmed that here in just the last few days, looked at the math all over again. The Congressional Budget Office says that their official estimates are now going to be one trillion dollars in annual deficits hitting by 2020. So the one thing that is implicit to that is that to this point they have underestimated what it was going to be. And I think, quite frankly, it is fair to assume that they continue to underestimate, not only the time frame, but the total quantities.

Because are they factoring in the liquidations of treasuries from the Fed as the Fed reduces its balance sheet? Are they factoring in the net liquidations from foreign sources? Those were our current financiers of our debt – the Chinese, just as one example, the Saudis as another, the Japanese as another. These kinds of liquidations, all of a sudden you end up with a trillion, a trillion-and-a-half very, very quickly. I think that’s what we’re on tap for this year is a trillion-and-a-half, not one trillion by 2020.

What are the implications into the financial markets? Join us for the Tactical Short Conference Call this Thursday. If you’re stuck with an equity portfolio and are going to be long out the ears in a traditional allocation, you should be thinking about reducing risk. You should be thinking about at least three things: liquidation and raising cash, getting some sort of a hedge àla the Tactical Short, owning gold as an offset to market chaos. You’ve been told over and over and over again that the facts are lining up for a very sour patch in the stock and bond market, and if you haven’t taken action at this point, again, every opportunity has been given. Everyopportunity has been given.

It will be a fascinating conversation. We look forward to your questions. And of course, we’ll see you next week on the Weekly Commentary.

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