EPISODES / WEEKLY COMMENTARY

A Whole Herd Of Bulls & Nary A Bear At All

EPISODES / WEEKLY COMMENTARY
Weekly Commentary • Jul 13 2021
A Whole Herd Of Bulls & Nary A Bear At All
David McAlvany Posted on July 13, 2021
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  • Bullish sentiment in stocks at second-highest level ever
  • Butterfly Effect: Inflation, then High Interest Rates, then Political Tyranny…
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The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

A Whole Herd Of Bulls & Nary A Bear At All
July 13, 2021

“Last week, we had the most positive reading on the COT report, that is the Commitment of Traders report, that we’ve had in years. So, while the siren is sounding for peak prices and valuations in US equities, with sentiment being red hot, the opposite is true for gold. We’re putting in a fresh floor, but no one seems to care. The siren that sounds in the gold market is similarly loud and it mirrors the equity market—negatively correlated of course—and ready for higher prices.”
— David McAlvany

Kevin: Welcome To the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.

Sometimes a number, Dave, says something completely opposite, I mean, counterintuitively opposite to what it means. And I’m thinking about bullish sentiment. When bullish sentiment is high, usually that is a warning that we’re going to have a collapse.

David: Yeah, it was Nouriel Roubini who years ago described the turkey’s best day as his last day. The day where he’s getting stuffed and fed and he can have everything that he or she wants. And next thing you know, it’s the oven. Well, Investors Intelligence Numbers, they pegged bullish sentiment the second highest level in the recording of the survey. And for some analysts, you look at the bulls and they’re saying, 60.8% of us find that it’s only up and away from here. Things are only going to get better. And we haven’t had that kind of bullish consensus since 1976, the early part of 1976. For others the magic is not in the big print. It’s in the difference between the bulls and the bears. So, the bears are at 15.5%, the bulls at 60.8%, with a greater than 45 point differential. And it’s astounding. There is an inherent warning given when the discrepancy passes 40 points. And 45 is thus something like an air raid siren.

Kevin: Well, and you wonder when greed turns to fear. I remember a story your dad used to tell us. He said, “If I were to throw a pile of Krugerrands on the floor and tell you, you can have as many as you can pick up.” He said, “Greed would make you just jump on that pile and start picking up as many as you can.” But he said, “If there was a 10 foot gorilla with a straight razor behind you, it would turn to fear very quickly.” And so what you’re talking about right now is the greed index, that speculative index, is at a high that we haven’t seen since 1976.

David: That’s right. One thing you forget is a potential cultural issue. You throw a bunch of Krugerrands on the ground, you may have someone in today’s culture say, oh, I’m sorry, I don’t eat chocolate. But yeah, you’re right. Sentiment swings between optimism and pessimism, between greed and fear, and this sort of helpful measure of market sentiment. The Investors Intelligence Numbers, it’s one significant piece in a financial market puzzle. And sometimes it makes me smile. The advisor sentiment report being called investors intelligence.

Kevin: It’s anything but that. But I think of a person who does have intelligence, that probably is one of the best persons to listen to about the everything bubble. I’m thinking of Doug Noland, and our listeners can listen in on that call coming up in a couple of days.

David: Yeah. This Thursday, Doug Noland will consider other significant pieces of the puzzle. And there are many opinions in the money management business, of course, but I think fewer as fully substantiated as Doug’s on what goes into the creation of an epic bubble and what happens once it bursts. It takes a numbers guy—he’s both a CPA and an MBA—but it takes a numbers guy to delight in the details and record for posterity the creation of the world’s greatest bubble environment.

So, this Thursday, we have our quarterly call. We’ll review the bubble thesis. You should register and listen in. It costs you only a thin slice of time on Thursday. And we’ll bring into high relief just how far this market has run towards insanity. And again, back to the Investors Intelligence, as the markets run towards insanity, we’re talking about testing the intelligence range.

Kevin: I would imagine that the intelligence was saying that it was bullish back, go back to 1929 or some of the big tops that we’ve had. The year 2000 before the crash. I would imagine the bullish sentiment at that time was pretty close to where it is now. Maybe it’s not quite as high.

David: Yeah. Seeing as this top in the present tense, particularly in equities, may well surpass and significance the tops that we had in 1929 and then subsequently 1937 and ’68, fast forward to 2000 or 2008. But I think this top may pass those previous ones by a country mile.

You may want to sort out in your mind what the risks and opportunities are in the months ahead. I mean, months not years. And I would encourage you to register at mwealthm.com. Perhaps you have an interest in hedging risk in the assets that are held with other managers or that you personally invest, or you may be considering speculating on the short side of the market.

Perhaps you just want to listen to one of this generation’s clearest financial market thinkers review the current backdrop and of course apply a passion, which he has for understanding the details and the dynamics factoring into the largest global bubble of all time. You need to understand more than you do today, not only for your sake, but for others, those that you know and love. So, register, send us your questions, and Doug Noland and I will gather there, Thursday, 4:00 PM Eastern time.

Kevin: Sometimes we have to simplify things because when you’re talking about emotion and sentiment, that’s sort of an ethereal thing. But when you’re talking about the price of something, let’s say that I were buying a popcorn stand from you. And that popcorn stand earned, let’s say a $100,000 a year. If I offered you half a million, that’s five years of earnings. If I offered you $3 million for that hotdog stand, you’d laugh. You’d immediately sell that to me because that’s 30 years of earnings. The stock market right now is priced well beyond even that $3 million popcorn stand.

David: Yeah. Sentiment is one of those singular factors that suggest that the financial markets are at an emotional extreme. That’s the emotional measure, the sentiment indicators. Access is measurable in other ways as well. You’ve got price-to-sales figures, which are now 25% higher than they were in the year 2000. You’ve got, as you mentioned, the cyclical adjusted price earnings, multiple, which is just a 10-year rolling average of the price earnings multiple. And it was popularized by Robert Shiller back in the day. So sometimes it’s called the Shiller PE. It’s now at 37.

It’s been decades since, again, this is a fundamental metric versus the sentiment measures or technical measures, but this fundamental metric hasn’t been this high. Well, you have to go back to 1999 to 2000, where earnings had turned lower while prices continued in a manic phase to rise, and the CAPE, or cyclically adjusted price earnings, multiple blew out to a record number. We could replay that dynamic in a recessionary context. So again, sentiment is sky-high. Breadth, which is a technical measure, also confirms a market sitting in a very vulnerable place. You get a major fundamental metric, CAPE, I mentioned price-to-sales, all pointing to a tough road ahead for your average equity investor.

Kevin: I used the popcorn stand analogy earlier. Let’s say you’re earning a $100,000 a year, and I offer you 3.8 million. That’s what that cyclically adjusted price to earnings ratio would show right now. But what if I borrowed the 3.8 million? Now what we’re doing is we’re not just measuring how much I’m overpaying for a stock, but how much I’m borrowing to do it. Credit growth has to factor into this as well.

David: This is the big kahuna. Credit and credit growth. And you can look at the US markets. You can look at Europe, you can look at Japan and China, as you look at credit growth, this is a measure which is really important. And as an indication of economic expansion which is no longer justifiable. The economic engine’s power is inadequate for additional forward propulsion.

Kevin: One of the things that was added in our adult lifetime, Dave, that we really didn’t see before this, maybe going back into the 1800s you had more cooperation when everyone was on a gold standard. But you have this global cooperation called globalization that does allow quite a bit more credit growth than if you were just working on your own, each nation, national boundaries within say the United States or Europe or Japan or China. We have been cooperating, and that’s probably one of the things that’s kept us from realizing this crash earlier.

David: There certainly is a sentiment that the global elite are kind of coordinating this and that, and globalization is not so great a thing. Well, in fact, globalization is just an expansion of free trade and cooperation, and a lowering of barriers for capital to flow, and ideas, and of course products to flow across borders. And there’s been various periods of time where globalization has opened up, it’s blossomed, and then has closed up again. And so the global economy has delivered significant benefits in its open format with trade and activity unhindered by capital controls.

And if you look back in history, there were certainly more egregious tariffs in the past. But economic nationalism is one version of what a devolving global cooperation system looks like. The excessive controls that come as a part of any socialist regime. That would be another version of anti-globalization with a centralized alternative replacing a free and open society. And I think that’s what we’re swinging towards now. We’re swinging away from the fears of a Trump-born economic nationalism directly into a socialist dream, or nightmare if you will.

Kevin: Yeah. So, for the person who thinks, oh, well, socialism is good for global cooperation. It’s just the opposite. I remember, Dave, in the mid ’90s going to visit Germany and staying in Berlin, right where the wall used to be. And you could see mile after mile of huge sky cranes that were rebuilding the Eastern side, because the wall had fallen. Now, what you saw was the amazing prosperity and growth that comes from free trade. But the socialism/communism, actually, that represented the east side of that wall, that kept everything repressed.

David: Well, the world was divided in two prior to that period of time. And we think of the Berlin wall, and it’s sort of symbolic for what changed. As the Berlin wall fell, this was 32 years ago, and gave way to open borders and the free flow of goods and services, there was a tremendous amount of prosperity unleashed. And one of the significant changes was harnessing the advantages of a global labor pool, and that allowed for the costs of goods and services to be far more in reach for a far larger audience.

You had wages in the developed world which stagnated. So it’s not an all-good story, clearly. But wages in the developed world stagnated. In the developing world, however, they improved markedly, bringing millions out of poverty and into what history would record as the first global middle class. So, the developed world has seen a mixed bag of advantages and disadvantages—one of the advantages: cheaper goods and services. And that has certainly been like a disinflationary import, balancing out the inflationist monetary policies of the past four decades. And again, after the fall of the Berlin Wall, alleviating some of the pressures from wage stagnation, which have been one of the issues plaguing the developed world.

Kevin: We’re not talking about globalism, which would be rule from the top of the world. That’s obviously not something that we would be behind. But global cooperation really only exists in free market environments.

David: Yeah. Globalization is moving towards a period of contraction in the current chapter. And I think that’s one of the things that many economists are now coming to terms with. And recent Wall Street Journal article: “Reversal of Long-Term Forces May Add to Inflation Threat.” And what they talk about is globalization and demographics and e-commerce and things that are upsetting what has been the trend-making things over the last 30, 40 years. So, globalization is moving towards this period of contraction.

Domestic political interests are now sort of more important. They’re exceeding the market-driven calculus and the cost of goods and services. No surprise here. They’re increasing in part due to the constraining of flows of capital and goods. We hope that some of the supply chain bottlenecks go away. But one of the things that it’s shifting is this emphasis on domestic political interests, which, unfortunately, history would say is inherently inflationary. The more the markets are losing their freeness and are reverting to dynamics of demand and control. And there’s a high cost to this. The inflation statistics register just one dimension of the cost.

Kevin: One of the best books that I’ve ever read actually was a book called The Perfect Storm. They made that into a movie, but actually I would recommend to anyone who wants to read a really good analysis of a storm that occurred in the East a few decades ago, it was well put together.

But one of the things that’s interesting, too, is you can see the Perfect Storm was a number of events coming together all at once. But they were all somewhat predictable ahead of time. Some of them were predictable weeks or months ahead of the storm. And I think of inflation, Dave, because oftentimes we say, well, do we think we have inflation? And we’ll go to the grocery store and say, well, things are up 5% or what have you. That’s actually something that’s been a long, long time coming. It’s a little bit like the caboose of a train. The engine of the train passes you first, the caboose is coming after that. And in this case, the inflation caboose, the perfect storm, would be if we print a lot of money and then we start seeing inflation, but then, also, we stop getting the low-cost goods from overseas. You put those two together, and you could have the perfect storm.

David: Exactly. And we have June CPI and PPI reports this week. The consumer price index has already been reported. And over the last 12 months, ending in June, the CPI is now up 5.4%, continues to rise. And it would to some seem less than transitory. So, Reuters spoke with Larry Summers this week, while he was at the G20. This was actually before the CPI report had been released, and he remains concerned with inflation as one of those non-transitory economic factors. We tend to agree, non transitory.

He says that at times when inflation has accelerated in the past, such as in the 1960s, markets have lagged rather than anticipated developments. And yeah, he believes investors are underestimating the risk of inflation. Again, we agree. The Wall Street Journal also ran a survey of economists, and there is a broadening of concern that inflation will run at high levels for longer than originally anticipated. So, it will be a bigger number, and will last longer. And again, this kind of flies in the face of the transitory language that we keep on hearing about from the Fed.

Kevin: Well, when we talk inflation, we’re also talking about higher rates. I mean, that affects the bond market. If interest rates— right now, we’re operating— I talked about the pretend borrowing for the popcorn stand, $3.8 million to buy a $100,000 hot dog stand. Well, I could probably even pull that off these days with almost zero interest rates. But interest rates go up when inflation goes up.

David: Right. And in fact last week was fascinating because we had bond rates moving down, and moving down in a pretty aggressive fashion. And I’d say the question of, are the markets factoring in higher rates of inflation and potentially higher interest rates? I can’t find many that are. You look at the flows into corporate bonds, and they continue to be very strong, both into the investment grade and high yield, what we used to call junk bonds. And people just have an appetite for it. Regardless of what is on the horizon, it’s as if, we need to meet our cash flow needs today, with those things out in the future being less of a concern.

So, you’re right. Higher inflation ultimately leads to higher rates. And of course the exception is where a treasury department or a central bank designs policies used for suppression of a particular rate. We might see that continue in the mortgage backed securities market even if Treasury rates go higher, for instance. But higher rates deliver strangulation in an overleveraged financial system. So, this is where, under normal circumstances, perhaps higher rates are healthy. They’re a signal of a change in price, and the system can handle it. But you’re talking about a very, very complicated and overleveraged system. Tempting fate with inflation is thus really tempting fate with a system collapse, not because the system is inherently frail, but because the burdens of debt we’ve built into the system increase its vulnerability.

Kevin: A lot of times we look back at the 1970s because we had high rates at that time. In fact, you brought up the sentiment index. The bullish sentiment was this high back in 1976, actually just a little bit higher. And the stock market still had further to fall, but actually we’re not in the 1970s right now. I mean, we had stagflation and higher inflation in the 1970s. What makes it different this time, Dave? I mean, we survived the ’70s. Would we survive something like the ’70s now? And what would we add to the equation this time?

David: Well, certainly policy choices are a little bit different. You could not see a Volcker step in and raise rates to the degree that he did. Not only would it be the death of the existing bond holder, with huge capital losses, but you’d also have just a hemorrhaging as a result of that, a hemorrhaging within the financial markets. I think it would be irreparable damage.

Nouriel Roubini, on a similar point, considers the increased risk of a stagflationary debt crisis. This is in his most recent Project Syndicate post. I’ll summarize his comment. He says, “We’re left with the worst of the stagflationary 1970s and the 2007 to 2010 period.” Of course, that was the global financial crisis. “Debt ratios are much higher than in the 1970s, and a mix of loose economic policies and negative supply shocks threatens to fuel inflation rather than deflation, setting the stage for the mother of stagflationary debt crises over the next few years.”

And what he points out is that central banks are in a real predicament because if they eliminate unconventional monetary policies, Kevin, they’re at risk. They’re risking a debt crisis in a recession. But if they remain accommodative, you move towards double-digit inflation and deep stagflation. There are policy concerns. There’s also a turning of the tide on that great disinflationary input that we’ve had. Again, 1989, you can stretch that back even further if you want, globalization transformed the global labor pool and created a disinflation which is going away.

Kevin: Do you think it’s why the central bankers are so confident, because they haven’t really factored in that we had that huge disinflationary opportunity, basically, where goods can get cheaper and cheaper because we are cooperating with other nations. It’s allowed them to print an awful lot of money without it turning to inflation.

David: Yes. Some are more confident than others. And I think a part of the confidence is a bit of show. You remember the scene in the Wizard of Oz, where he knows he’s being discovered and someone has just looked behind the curtain and they see a man pulling levers and pushing buttons and creating the flames and loud voice and the drama, which is out front, all show.

Kevin: I think it was Toto who pulled that curtain back originally. The little dog.

David: That’s right.

Kevin: Yeah.

David: That’s right. But I think that’s really where the show must go on. The continuation of a confidence ploy has to be on display because, again, the consequences are too great otherwise. Claudio Borio wrote earlier this year in a piece called, “Is Inflation Dead or Hibernating?” And you might recall, he’s the lead economist at the Bank of International Settlements in Basel. So this is the bank to the central banks.

“It is possible,” he says, “that inflation could re-emerge as a policy problem if the legacy of the pandemic accelerates previous trends. Imagine a world with much higher private, and above all, public sector debt. Debt had been growing before the pandemic. The pandemic has exacerbated the rise. And so might the further spread of easy monetary policy from the core to the rest of the world as central banks respond to appreciation pressures on their currencies. Imagine a world with globalization in full retreat. Such signs have already emerged. Imagine a world with a greater role of the state in the economy. The pandemic is working in that direction. And so has the progressive erosion of the room for policy maneuver.”

Kevin: So, what you’re talking about is a central banker who is saying what you’re saying, in a way. It’s basically backing away and saying, you know what, this whole bit about us getting Chinese goods for the last few decades, that’s caused disinflation. Imagine if that stopped.

David: And he doesn’t have the same audience, of course. I mean, Claudio Borio, very few people take the time to go to the BIS website and read various papers and blog posts and what have you. It’s different if you’re the president of the Federal Reserve, where everyone on Wall Street hangs on every word that you say. And today’s volatility is defined by the verbs and nouns and adjectives that you choose. The parting shot from Borio was this, and he said, “The winter of hibernation will have been quite long, but just a winter, nonetheless.”

Kevin: Yes. So, with the printing of trillions since globalization started, and now with globalization in full retreat—or imagine a world, is what Claudio Borio said, in full retreat. What it points out is inflationary pressures. And you and I have talked about this before. We can talk about inflation. We can say, yeah, everybody’s paying higher prices. But worldwide we’ve seen in the past inflation actually leads to starvation. I mean, it has huge impact.

David: When we’ve been contemplating the end of globalization or the shrinking of globalization since our conversation with Harold James and his book by the title, The End of Globalization. It’s a must read. And it points to a lot of these trends that are just now becoming more popular in the minds of the central bank community. At a macro level, reflecting on the past several decades of expanded globalization, the importation, the importation of disinflation gave the developed world middle-class the sense of prosperity that frankly wasn’t reflected in wages. You didn’t see wages marching higher. That’s not what made us more prosperous. It was cheap goods. It was cheap Chinese goods that were playing through. And that was enough to placate and satisfy in that particular timeframe.

Rising costs of goods and services places that relative contentment at risk, right? So, fast forward to the present, if this continues and we can no longer buy cheap Chinese goods or the equivalent from Vietnam or Bangladesh, the rising cost of goods and services really begins to play havoc with our sense of contentment. We come back to reactionary and potentially binary outcomes—strong-form economic nationalism that we talked about a minute ago or overbearing socialist control. Trump was a caricature of the former, and the Harris/Biden administration is the latter. So, de-globalization comes at a high cost. If prices remain elevated, you begin to see political shifts on the horizon that are likely to be unpleasant. And the commensurate with household dissatisfaction and economic frustration. What causes economic frustration for your average household, other than not being able to make ends meet? So, inflation remains front and center.

Kevin: Another consequence of inflation, higher interest rates, more economic instability, is the insertion of political control. Command and control, we’ve been told by guests in the past, get used to the thought of running more like an Eastern European economy. Command and control is on the way in.

David: Well, and this is what I was getting at earlier is sentiment swings from optimism to pessimism. As markets swing from greed to fear, like the oscillations from greed to fear over longer periods of time, you find a similar oscillation from freedom to repression. Political interests become more desperate to maintain incumbency and organize the body politic for favorable personal and party advantage.

The state moving to the center of the economy, as Borio discusses— at the end of the cycle, there’s repression. There’s a requirement for compliance. There’s obedience expected to the caprice of leaders, and it’s expressed every day. Even Sunday, this week, this weekend was one of the most flabbergasting things I’ve seen in a long time. The FBI communicates this, and I’ll quote this directly, “Family members and peers are often best positioned to witness signs of mobilization to violence. Help prevent homegrown violent extremism. Visit go.usa.gov/” blah-blah-blah, bunch of numbers and whatever, “to learn how to spot suspicious behaviors and report them to the FBI and national security.”

Kevin: Wow. Dave, you know what this reminds me of? I mean, we could talk about any totalitarian regime, but I’ve got a good friend here, actually, in Durango, who is with an organization that helps with missions into North Korea. And he told me, he says, anyone who becomes a Christian in North Korea, they will die. They will go to the concentration camp.

And he said, the way they do this is this, every third door down in North Korea, you are responsible for the house three doors down. So, in other words, your family could go to prison if you don’t report the house three doors down, if they’re doing anything suspicious. And of course that is the firm grip, that iron grip, that North Korea has. That the FBI sounds like they’re asking you to turn your neighbor in.

David: You know, in the UK, they’ve got this concept of the 10th man. And the 10th man is the person who’s supposed to be the contrarian. If there is a univocal voice and everyone is in agreement on a particular policy course, the 10th man should be willing to say, yes, but, what about? So, there’s a standout. There is not a compliance. In fact, the role of the 10th man is to be the opposite, to bring a voice of difference, and hopefully clarity, to the decisions being made.

What you’re talking about is not the 10th man, but the third door, every third door. And I might be reading too much into the FBI request on Sunday. Is this our domestic intelligence service soliciting intel from children and family members. If it is, you can visit China or Cuba for similar social dynamics. Or you can roll the clock back to the Stasi in East Germany. But this is not healthy. And this is what it appears on the face of things. It certainly is not about national healing. And in a minimum, it suggests where we are at on the continuum of political desperation, corruption, and control.

Kevin: It seems that monetary policy and economic decisions can turn very quickly into oppressive political decisions.

David: And again, we’re talking about pendulums that swing from one extreme to the other. In 1994, Amnesty International published the Biderman’s Chart of Coercion. You should look it up. Biderman’s Chart of Coercion. It’s fascinating to see the parallels and similarities in psychological conditioning used by brainwashing of prisoners of war. They also draw parallels to domestic abuse cases, and I even—at least it crosses the back of my mind—think there’s similarities to the global response to pandemic. Power plays are the common denominator.

Kevin: When we think of power play, you can’t help but think of China. We talked about global cooperation and China’s been sort of an anomaly because it was a free market in some respects and very much command and control in others. And so what you have is you’ve got China, the debt markets, the trillions and trillions that have been produced. And then you also have a lot of the controls that are starting to come in. So, it’s strange, a simple change in the reserve requirement can just fuel speculation at the same time that you’re seeing draconian control come down in the same country.

David: Yeah. Back to the markets. It’s this interesting growth of credit in China, which stands out as one of the greatest risks we have in the financial markets today. And it— just like we had the implicit guarantee for mortgage backed securities through 2005, ’6 and ’7, leading us into the global financial crisis, where obviously we had issues in the asset-backed and mortgage-backed security world, which spread to being its own version of a global pandemic.

Look, the PBOC has put themselves in a similar position, where they have communicated through years and years of credit growth that, and again, this is implicit, not explicit, that they’ve got it covered. And so credit has expanded, Chinese credit markets exceed $12 trillion today. They have the second-largest credit markets in the world behind the US. And what happens in those markets is consequential for all of us.

But again, it’s this game of chicken, if you will. The market is saying, yes, you told us you had it covered. And the PBOC, the People’s Bank of China, is saying, well, not exactly covered. And so they’re trying to feather that midpoint between command and control dynamics and a free market. And the free market would say, no, you’re not necessarily covered, and there may be hell to pay, and you have capital at risk. And the command and control side of the equation would say, we’ve got it covered. Don’t worry about it. And so this is a very interesting place to be.

We had last week, as we talked about earlier, the shrinkage in yields globally. That was worth paying attention to last week. The standout in the credit market, though, last week, clearly, was China. Despite publicly stating, and the PBOC proactively moving to bring discipline to the Chinese credit markets, we still had a shift in reserve requirements last week, which revived speculative energies throughout the region. And you saw China next and the Shanghai composite move considerably higher. This was a ¥1 trillion unleash of liquidity into the system—which is the equivalent of $154 billion—long-term liquidity, coming into the economy, effective July 15th.

Kevin: Was that done, though, for perception management? Are they behind the curve at this point? That’s what I’m wondering.

David: No, the change in reserve requirement ratios by a half a percent for these banks. The move in the opposite direction from their preferred policy course is because they have real concerns over the structures of debt in the Chinese system. And you can see evidence of it in the junk bond market. Junk bonds are trading at north of 10% yields. You have to double, and then more, our junk bond yields to get anywhere close. Your largest property developers have short-term paper trading hands at between 55 and 60 cents on the dollar, with yields between 25 and 35%. Credit defaults in this area, in Chinese credit. If you have defaults of a significant nature on a massive scale, you’ve got contagion that is global in nature. And these are probabilities that grow by the day. So here the PBOC is re-liquefying not because they want to, but because they have to.

Kevin: You can imagine, then, possibly someday when we look back in history, they would blame the triggering event to China.

David: And in turn, the Chinese may blame the triggering event on our sailing a ship past the Paracel Islands. I mean, who knows what would be blamed for a major upset in the financial markets.

But let’s end where we started, with sentiment indicators, which tell a different story. We talked about the siren going off in the equities’ market. And valuations as reflected in fundamental figures, being excessive. With sentiment indicators for gold, you might recall, it was almost a month ago, several weeks ago, we suggested the price would move lower. Not because of major long-term issues or concerns, but because it had moved too far, too fast and needed to digest the move. And it’s doing that. We’ve moved about 7% lower since the time we talked about that.

Sentiment for gold was, if you go back before that major move in gold, again, we put in the lows in March, sentiment for gold was right there with the lows and the price in March at 12% bullish. Your investors are looking and saying, nah, 88% of us say we don’t want it in March. 12% say, maybe I’ll take some. That was at the price lows. And then, as the price moves higher, you see bullish sentiment get to 70%. That was by the end of May. That was by the end of May. Well, Kevin we’ve returned now to the teens. There’s not many bulls left. The bears are back in force. Not many people interested in gold.

Last week—I would say this was very, very significant—we had the most positive reading on the COT report, that is the Commitment of Traders report, that we’ve had in years. So, while the siren is sounding for peak prices and valuations in US equities, with sentiment being red hot, the opposite is true for gold. We’re putting in a fresh floor, but no one seems to care. The siren that sounds in the gold market is similarly loud, and it mirrors the equity market—negatively correlated of course—and ready for higher prices.

Kevin: You’ve been listening to the McAlvany Weekly Commentary. Now 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 in investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.

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