EPISODES / WEEKLY COMMENTARY

Bank Lending Gets Choked

EPISODES / WEEKLY COMMENTARY
Weekly Commentary • Apr 12 2023
Bank Lending Gets Choked
David McAlvany Posted on April 12, 2023
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  • Bank lending in U.S. contracts “most on record” in the last 2 weeks
  • Apple execs and insiders offload over $40 million in their own Apple stocks
  • Study shows that inflation could be a major issue for the next 7-22 years

Bank Lending Gets Choked
April 12, 2023

“We’ve seen a removal of the restraints to growth in the post-World War and Cold War periods, which through increased trade and cooperation have reduced costs. They’ve increased the wealth of nations. Now, we have the opposite. Now, we have rising protectionism, we have geopolitical tensions, we’ve got economic frictions on the increase, which reverse the benefits of the past decades and, along with wage pressures, along with the OPEC oil production cuts, invite a higher-for-longer set of conditions propping up inflation.” —David McAlvany

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

Last night, we were meeting again as we have done for, what, 14, 15 years?

David: 16 years.

Kevin: Wow, 16 years! I love Monday nights, though. My wife knows I love Monday nights. But we have the greatest discussions. A lot of times, they never show up in the Commentary, but I guess the flavor does. I was bringing up one of many calls that I get from my clients thanking you for the book that you wrote, Dave, on legacy and just a different way of looking at what we do. There are a lot of financial companies. There are a lot of gold brokers. There’s a lot of people out there. But there’s a care involved with McAlvany family and the way we handle clients. I had just gotten off a call before I came over to the meeting with you, and they just said, “Yeah, would you please thank Dave for sending me the legacy book?” So, thank you, and I’d love to share with people what we were drinking afterwards and what that led to.

David: Yeah, the questions sometimes we ask as business operators is the path towards growth and what that should look like and what is big enough in terms of the client base that you’re working with and the number of employees that you have. There’s an article in the Wall Street Journal this last week about a liqueur that is made by a group of monks in France called Chartreuse. The shock in the marketplace was that, even though demand is through the roof, the monks have let the world know that they aren’t going to be increasing supply. They don’t need to provide for themselves in any different capacity than they already do. Their life is taken care of.

Kevin: What was their reasoning for that, though? Yeah, you brought that out.

David: The nature of the spiritual life for them is why they do what they do, and the business of Chartreuse is what enables them to engage in that spiritual life. And so to alter the production, increase supply, means that it’s taking more time and resources away from the reason that they do what they do—

Kevin: Right.

David: They lose focus.

Kevin: Well, it makes me think of the legacy side of things here. I mean, we’ve got clients, Dave, we’ve worked with for 20, 30, 40 years. You talked to a man yesterday before you came over to the meeting. You were a little late by the way, which was perfectly fine, but why?

David: He knew my father 50 years ago, and this is when my dad worked for a Wall Street firm, in the first company. John Van Eck had started a company that offered mutual funds in a variety of offerings, and one of them was a gold share mutual fund. It was the first of its kind in the world. My dad worked directly with John on that project, and he traveled around and talked about gold and talked a lot about South Africa, wrote a letter called the South African Intelligence Digest, which, if you were interested in gold, you needed to pay attention to what was going on in South Africa, responsible for 70% of the world supply at that point.

Kevin: He was very appreciative to be talking to the son of Don McAlvany. Let me just add, while you were doing that, your son, the son of David McAlvany, was helping here at the office. Our numismatist made a joke this morning in the meeting. He said, “I’ve gotten to be here long enough to corrupt three generations of McAlvany.”

David: There was a different perspective, I will say, in my conversations with my oldest son last night. There was a different perspective on what we do and why we do it. Sometimes, a light goes on at a point in our life, and things that were in front of us and obvious, but didn’t necessarily connect or make sense for us, all of a sudden it all makes sense, or some part of it makes sense. That was clear last night that the third generation, something snapped. They got it, and—

Kevin: Maybe, he’s getting a taste for that. So, I want to thank you for the little shot of Chartreuse last night because that helped actually bring a picture to mind and a memory to mind of what this all means. But let’s talk also about how you have been influenced by other people. For years, you were reading Doug Noland, the Credit Bubble Bulletin, and at this point, Doug is a big part of the Chartreuse that we make.

David: Exactly, it’s a careful recipe and it’s limited in supply and it’s very valued and what we do has a quality all of its own. With compliments of Doug Noland in Friday’s CBB talked about the H.8 report. This is the Fed looking at the assets and liabilities of commercial banks. Reuters gave some commentary on the report. US bank lending contracted by the most on record in the last two weeks of March, indicating a substantial tightening of credit conditions in the wake of several high-profile bank collapses. Commercial bank lending dropped nearly 105 billion in the two weeks ended March 29th, the most in Federal Reserve data back to 1973.

Kevin: Wow.

David: Set your calendar. We’ve got our Tactical Short quarterly call next Thursday, the 20th, titled, “From Big Squeeze to Banking Crisis.” It was quite a quarter, and Doug and I will unpack some of that. Of course, you’ll do a lot of the heavy lifting.

Kevin: A lot of people have been scratching their heads and saying, “Well, what does this mean for the economy? I mean, does the economy now move into recession? What are the chances?”

David: Well, as we’ve been saying for weeks: As goes 2023 bank lending, so goes the economy. Recession in the second half is not a wild guess. It’s the implication of last year’s record bank lending of $1.4 trillion coming to a grinding halt.

Kevin: Wow.

David: With no other source or substitute for it in the private sector, again, the final two weeks of March, bank lending drops $105 billion, the most recorded by the Fed on record going back to ’73, that’s a significant shift in tone and volume, and it’s not the only place that we see that evidenced.

Kevin: When looking at the Guinness Book of World Records, this would be a record. You bring up the Fed. The Fed always just expands its balance sheet and tries to bail things out. Won’t they do that now?

David: They have, and we’re back to 8.7, just shy of the $8.9 trillion record.

Kevin: So, forget QT?

David: Yeah, I mean, it’s unlikely to push liquidity into the economy via a return to lending. Perhaps what’s different about this version of QE is it doesn’t have as easy a route to the marketplace. Perhaps the financial markets, but certainly the consumer markets and the individual, whether it’s the individual talking about a consumer loan or even a commercial loan. So, bank lending standards, they’re on the increase, and businesses are growing more cautious by the day on what they spend money on. 

The Dallas Fed Banking Conditions Survey—this is another one of those pieces of evidence that points to tightening of lending standards—it was out last week, and it highlighted a slowing in business activity. It highlighted a drop in loan volumes, particularly consumer loans, tighter credit standards and, in different terms, bank industry expectations in this report remain dim, with the next six months expected to bring even slower loan growth and an increase in non-performing loans. 

To echo that, you have the American Bankers Association, which surveyed the chief economists from 15 of the top US banks. This is also last week. Again, you get all this stuff at the end of the quarter looking back and then anticipating what’s next. From this collective, 15 economists, they conclude that credit conditions for consumers and businesses are expected to deteriorate over the next six months to their worst levels since the pandemic.

Kevin: When credit contracts, I mean, ask Morgan, one of the guys who does your analysis here. Morgan says, “As credit goes, so goes the economy.”

David: As my colleague Morgan has said, “To be clear, in our modern economy, if you choke off credit, you choke off the economy.” This quarter’s earnings calls should give some light into the boardroom perspective, the executive perspective amongst your publicly traded companies, as to what 2023 holds, not only in performance to date, but the forward guidance numbers, I’m going to be very interested to hear those. I would expect forward guidance to be pitched pretty low. A part of that is you get year-end performance gaming, you lower the bar enough that it’s easier to get over and you provide for a positive surprise. So, here in the first quarter, this is a great time to lower the hammer in terms of bad news coming because then from that point forward, it only gets better.

Kevin: As a business owner and you’re a multiple business owner, Dave, from the precious metals business to the money management firm to Vaulted, you own businesses where you have to look ahead and say, “Gosh, is this a good time to maybe change all the computers out? Maybe put new carpet in?” I’m wondering what the business owners right now are thinking, looking forward.

David: That famous book Dress for Success was a take on the power tie and the nice pinstriped suit. I’m glad we’re not caught up in that frivolous take to what it means to be successful.

Kevin: Right.

David: But you do invest for success, and how a corporation invests defines its course. You tend to be very clammed up and tight when you don’t think it’s going to be worth it, and you spend freely when you think there’s going to be a benefit to those dollars spent. So, speaking of economic activity from business investment, Fred Hickey looks at the earnings calls of a couple of the big tech companies here in recent weeks. Are companies increasing their spend on enterprise software and hardware? He does a deep dive into Dell and Oracle, and numbers from Q1 suggest that is not the case. Businesses versus consumers can make a far bigger splash when it comes to spending, and particularly in technology spending. These two companies are really the bellwether for hardware, software, and specifically for corporate investment, and they’re showing the exact opposite. Businesses are not opening the checkbooks and writing big checks. There’s a real sense of caution here in the early stages of 2023.

Kevin: There’s another bellwether. Everybody watches Apple, and I noticed in the news, 41 million shares were sold by either Tim Cook or insiders at Apple. So, is that a bellwether? Are they looking ahead and saying, “No new carpet right now”?

David: Well, $41 million in shares. And so, it was a good number of shares all the same, but Apple is more of the consumer-oriented company, and they are holding off on replacing the carpet. They pushed out their bonuses from April to October. The significance of that is October is a different fiscal year for them. So, what would be a compensation expense now gets pushed off into another year. Any surprise that in recent weeks Tim Cook, it wasn’t just the executives, it was the CEO, offloaded $40 million of Apple stock? I would note that in terms of insider buying, there has been a decent uptick in the precious metals mining space. Insiders, you can tell what they’re feeling about the prospects of their business, their career, the environment that their businesses are going into, on the basis of how they spend their money. Insiders strive to increase economic benefit, decrease economic pain. They’re humans just like us. And so, watching what an executive does is often more compelling than listening to what they say.

Kevin: To repeat, you’ve got executives at Apple selling their shares. You’ve got executives at gold mining companies buying shares.

David: That’s right.

Kevin: Well, last year, bank lending was at a high. I mean, there were a lot of loans that were given out. Now, what you’re saying is there’s a rapid reversal.

David: Yeah, bottom line is that bank lending propelled economic growth last year in spite of a selloff in the financial markets. So, you’ve got the financial markets and the economy. In 2022, they seemed to drift apart, and sometimes we forget there’s a contrast between the economy and the financial markets, but I think it’s worth keeping in mind. 2023 doesn’t have the free flow of bank liquidity to grease the gears of the economy, and we may very well have a combined economic slowdown and financial market decline coinciding in the second half of the year. 

In the Credit Bubble Bulletin, Doug notes that one of the key differences in this period versus 2008 is that securitization has played a smaller role in financing the current bubble, while the banking system has financed a larger share. So, it would only be natural to see progressive deterioration in bank credit quality at this point, as the year progresses, and the implications are that maybe the world financial system and a potential financial crisis just has a different tone, a different texture to it than it did back in 2008. More concentrated risk in banks, perhaps less in the shadows. To save banks pain, as we get into the credit stage, bank credit quality coming into question as the year progresses, I think only a radical drop in rates would alleviate concern there.

Kevin: Barring a radical drop, you talk about how sometimes the financial markets and the economic markets don’t sequence together. You can have a stock market rise while you’re slipping in the economy, or vice versa. You can have the stock market crashing while the economy is still doing fine, what we saw last year with bank lending. So, what do you think the odds are that we’re going to have a financial crash that would match maybe this downturn in the economic cycle?

David: The reality is, we recalibrated the financial markets to zero rates—or near zero rates.

Kevin: Right.

David: And so now, we have a system which is working out of step with its calibration. That’s where we’re getting this notion of a financial market hiccup later in the year, maybe even an echo of the 2022, perhaps in order of magnitude. I’d put the odds at 85%. The other side of this number, the IMF guesstimate is 15% chance of a major financial shock later in this year. I’d say more like 85%. I’d take the other side of that bet. 

Economic data late last week was not encouraging. Jobless claims on the increase, pending home sales off 21% year over year also suggests a soft housing market, and frankly, a soft housing market that’s consistent with recessionary periods. So, let’s see if that continues through a typically hot selling season for real estate. But keep in mind, this notion of a soft patch in the economy, the typical moves that the Fed has at its disposal, the typical playbook, is in itself inherently inflationary. And so, we’ve got this check. What we’ve had as the classic playbook over the last four decades, it’s tougher to execute on because inflation’s in the backdrop.

Kevin: You quoted Morgan, though, earlier, and Morgan would also point out that if you watch the bond market, the short, mid, and long rates, the bond market tells you what the expectations are. We’ve got high interest rates on the low side, or the short side, but we’ve got interest rates dropping on the long side. What’s that say?

David: Well, the inverted yield curve is telling you something. In our meetings last week, the comment was made, “The bond market is already telling you something bad is going to happen in the second half of the year.” The way the bond market prices that out is that we see, in pricing, the peak for yields by mid-year and then a sharp decline into December, as much as a hundred basis point decline by December 14th.

Kevin: Whether the IMF sees this or not, the bond market sees a shock because that would require a reversal in rates, right? Isn’t that what the bond market is telling us?

David: Of course, there’s different ways to interpret this, but why would the bond market see as much as a hundred basis point decline in rates? In response to what? What would trigger the Fed’s reversal of tightening by a hundred basis points? Is it market chaos? Is it policy panic to resolve existential issues in the financial market?

Kevin: Can they even care about inflation at that point, if that happens?

David: There’s a certain set of circumstances where inflation be damned, they must save the ship. Hard Asset Insights expanded on this over the weekend: “HAI’s thesis remains the same, the US appears headed for a recessionary hard landing and we continue to carry the high risk of market crisis eruptions along the way. The bond market, seeing the pivot coming, despite what Powell and the Fed have said about not cutting rates in 2023, is now pricing in multiple rate cuts from the Fed in the second half of the year. Recession and market accidents are the likely triggers for such cuts. The nature of the recession, severity of accidents, and the speed and degree of the Federal Reserve policy response will likely dictate the exact fate of the stock market. But make no mistake, the risk of considerable stock market downside is extremely high.”

Kevin: There are ways of looking at recessionary trends. I remember reading an article about Greenspan. Remember when Greenspan was the Federal Reserve Chairman? Every morning, from what I understood, he took a two-hour-long bath, Dave, and he would read things that were not normally thought of as economic indicators. One of them had to do with dry cleaning receipts. How much are people paying for dry cleaning? There are other things to look at. You can look at electrical usage, what have you.

David: I mentioned the softening in pending home sales. My biggest concern with real estate, both commercial and residential, is the institutional footprint that came into those spaces late in the cycle. Institutional investors, ever in a search for yield, crowded into real estate. You had inflows, which frankly, everybody loves inflows. It helps reprice the market to higher levels.

Kevin: It’s just getting out.

David: It’s the outflows, like so many other examples of hot money, which can be destabilizing. To be frank, institutional outflows are price insensitive. You get a corporate decision made, “We’re going to cut this part of the portfolio,” and it really is not a question of getting the last dollar on the asset. It’s just, blow it out. So, a decision is made and the hammer falls. What kinds of price discounts could we see from peak to trough? 50%? That may sound extreme, but we’re already seeing, according to some analysts, in the apartment space, from peaks, a decline of 21% or more. The value of office space, one version of commercial, which is down 25%. So, we’re already that far. Today, in terms of residential properties, we have a supply problem. But I think tomorrow, we may not. Again, this is where the institutional buyer just says, “We’re selling 10,000 homes in this particular state. We’re selling 25,000 homes in this particular state.” What happens when that kind of rush of supply hits the market? When an institution sells, it’s fairly price insensitive. What’s encouraging to me in that is that the cash buyer does reign supreme in that environment.

Kevin: Keep your powder dry.

David: Office space, I think that’s going to remain toxic, but somewhere in the real estate space will be tremendous opportunities, whether it’s coming from bank portfolios or from an institutional dump of inventory. You mentioned Greenspan and dry cleaning receipts. It’s one of the things that you and I both enjoy about that book, Memoir From Antproof Case. Mark Helprin writes a heck of a story, and whether it’s A Soldier of the Great War or Memoir from Antproof Case, you’ve got this guy, in that particular story, who’s an economist. Works for a Wall Street firm, but he’s an unconventional economist. He’s paid to travel, and he’s paid to take notes on the things that he learns in the bakery, in the cafe. He actually learned some really interesting things in one particular bakery. But then, there’s the taxi cab ride and the small observations.

Kevin: Well, and even Jim Rogers—

David: Absolutely.

Kevin: Investment Biker, right?

David: Yeah.

Kevin: Just bike around the world and learn what you can.

David: Right. Coming back to the economy, we’ve discussed electricity usage as a gauge of economic activity in places like China, where sometimes economic growth numbers can be creatively concocted.

Kevin: Oh, you think?

David: But that only happens in China, of course.

Kevin: Oh, yeah.

David: So too, you’ve got things like freight volumes. They tell you a lot about economic activity, like what is actually being bought and moved and delivered. The Association of American Railroads has year-to-date rail volumes through mid-March down 5% year over year, with comparable or even worse pressures being reflected in the trucking space if you want to look at the Cass Freight Index—again, marking a much lower level than we were in the first quarter of 2022.

Kevin: Something that’s interesting, that’s changed this year from last year with these higher rates, most people don’t pay attention honestly to what they’re getting in the bank if it’s close. If you’ve got one bank paying one and a half percent, one bank paying two, most people don’t really do anything. But people are moving money right now because the difference between what they’re getting in their checking account and what they can go get in a savings account or a money market. If they’re not going to get it in the bank that they’re in, they’re going to take their money out and move it somewhere else. Habit is hard to break, but sometimes there’s enough of an interest difference that it has to break.

David: Yeah, and I just want to make sure I’m clear on this, that the contraction in bank credit is one of these reinforcing factors that makes it tougher to do business. We already have the indications of economic activity contracting. And so these indications of economic slowing alongside credit contraction within banks, this becomes a very important narrative as we get to the end of the year, and it’s how we would buttress the argument for a strong recession, even a hard landing recession, as we get to the end of the year. 

The rate story remains an interesting one, and just as we mentioned, Tim Cook and the insiders seeking pleasure and avoiding pain, portfolio pleasure and portfolio pain, selling and buying shares opportunistically, the average bank depositor is equally motivated by rewards and punishment. The three-year/10-year spread at 1.67% represents the most inverted yield curve in history. What I’m talking about is the difference between the three-month T-bill yield and the 10-year Treasury note yield. When I say spread, I’m talking about the difference between those two numbers, the three-month yield and the 10-year yield. That gap shouldn’t be there. Quite frankly, it should be the other way around, where the farther you go out in terms of the timeframe, the higher the interest rate. Thus, we talk about yield curve inversion. It’s upside down right now. It’s not supposed to be that way.

Kevin: So, we have two records that we need to take note of. One is a record contraction of bank credit, and now what you’re saying is we also have a record inversion of the yield curve.

David: How this can be anything but devastating to commercial banks, I just can’t fathom because you’ve got depositors continuing the flight to yield and flight to quality in one step. Think about it. Keep a cash balance paying well under 4% as option one, or keep a money market balance paying well over 4%. It’s your choice, option A or option B.

Kevin: There is a migration.

David: Yeah, the migration of savings is opportunistic, and ironically, the destabilization of bank deposits is in lockstep with the Fed’s forward guidance on rates. We wouldn’t have the problem if they weren’t raising interest rates. So, which comes first, the chicken or the egg? The higher fed funds goes, the greater the increase in pressure on depositors to weigh both risk and reward, risk in the form of continued impairment of bank portfolios, and reward in the form of higher rates on offer in short-term Treasurys.

Kevin: That brings us to what happened about five weeks ago with Silicon Valley Bank, because it’s easy to buy things. It’s hard to sell them sometimes. That was the problem with Silicon Valley Bank and a couple of others. They had depositors who wanted to move funds, and move them to a higher paying rate, maybe another bank, what have you. They wanted their money back, and unfortunately those banks had long-term bonds that they couldn’t sell without taking a loss.

David: Well, and I think that’s an important clarification. It’s not that it was hard to sell. It was just they had to sell at the market price, which represented a loss, which wiped out all of the equity capital of the bank. So, when they were forced to sell because of depositors moving their money, then it became an issue. 

The securities portfolio concern is like a self-fulfilling prophecy. The more money that moves, the greater the mark-to-market losses for banks. That is not going to be the primary focus later in the year. Now, I think later in the year, it’s going to be loan performance and credit quality concerns that buffet bank balance sheets and reinforce this depositor flight. We may not be done with the pressure from the securities portfolios, but I think that the reality is, with the slowing economy comes loan performance concerns and credit issues which have to this point been completely absent. Meanwhile, the Fed will still be fighting an uphill battle on inflation.

Kevin: Yeah, and that inflation was thought to be transitory. I mean, think about the last year and a half of commentaries, where we continue to hear about inflation being transitory. But the higher inflation goes, doesn’t the transitory portion get longer and longer and longer?

David: Well, from April’s Journal of Portfolio Management comes Rob Arnott’s answer to the question of how transitory is inflation. We’ve been told it’s transitory. We’ve mocked it mercilessly for two years that it’s actually transitory. Arnott puts numbers to it and answers the question, how transitory is inflation? “An inflation jump to 4%,” he says, “is often temporary. But when inflation crosses 6%, it proceeds to higher levels over 80% of the time. When inflation crosses 8%, reverting to 2% usually takes seven to 22 years with the median of over 13 years.”

Kevin: That’s transitory. That’s a long time.

David: There you have it. Inflation is indeed transitory. It will end sometime between 2027 and 2034. If we’re historically unlucky, maybe we’re still dealing with this inflation in 2043, going at that 22 years. This is based on a study of 14 developed economies over the past 50 years.

Kevin: I want to go back to your eldest son’s—the light going off yesterday, because he was opening up a tube of coins and looking at British sovereigns, and it hit him, there’s something about that. This is a tube of 15,000 to $20,000 worth of gold in something the size of a small magic marker pin, and it rang a bell. Hard assets are hardwired into your family, but each one of you, whether it was Don, your dad, you probably remember when you started getting it, and then now, your eldest son is getting it. So, there is a bias toward hard assets. Is that something that’s always going to play?

David: Yeah, I think there is, and I’ve talked about this on a Commentary. My dad and I had a conversation. We were sitting in the castle in Germany, this is the Burg Eltz castle, and we talked to the historian and he said, “The family has gone the distance, 35 generations, 950 years.”

Kevin: Oh, I love that story. Unbelievable.

David: He said the three factors that held the family together were diplomacy—they recognized the external threats which could destroy them and they very deftly handled them; sentimentality—from one generation to the next, as he explained, they recognized what they had, that it was of value and they owned it—and it takes that point in a family, in a generation, to say, “Oh, that’s what it’s about. Okay, I like this.”

Kevin: Skin in the game.

David: “I like this.” Unless there is that notion of sentimentality, like, “This is special and should be maintained. It’s my turn to steward this through the next generation,” it doesn’t happen. So, diplomacy, sentimentality, and kindness. They had another word for it, but essentially it was kindness in the way that they were going to deal with internal conflict. If diplomacy is the external protective barriers and the knowledge of how the world works such that you don’t get taken out by the enemy, kindness is how you don’t implode and self-destruct because of relational difficulties at home.

Kevin: So, diplomacy, sentimentality, kindness. I guess, we could take those three things out of the Commentary and into our world right now, and it would be very helpful.

David: Absolutely.

Kevin: Maybe, we could go out of the Commentary and take those things back out into the world.

David: It’s a crazy world that we live in, and with that in mind, I think you can appreciate our bias for real assets versus financial assets in the years ahead. Are hard assets the only answer for an investor forever? Clearly not, but crafting a portfolio that can better perform in an extended period of above average inflation rates, that’s sensible. Again, we look at these things. The increased economic frictions from a deteriorating global order are certainly a part of our outlook, even if this is not a factor in Arnott’s inflation study. 

Key difference between now and the last 50 years is that we’ve seen a removal of the restraints to growth in the post-World War and Cold War periods, which through increased trade and cooperation have reduced costs. They’ve increased the wealth of nations. Now, we have the opposite. Now, we have rising protectionism, we have geopolitical tensions, we’ve got economic frictions on the increase, which reverse the benefits of the past decades, and, along with wage pressures, along with the OPEC oil production cuts here in recent days, invite a higher-for-longer set of conditions propping up inflation.

Kevin: Yeah, and the longer and higher that the inflation goes, the more reality sets in.

David: The IMF Financial Stability Report, out this week, is only concerned about a global economic hard landing if inflation persists.

Kevin: If. If.

David: In the simple syllogism of if inflation persists, then we get a hard landing. Arnott’s historical study moves up the likelihood to a hundred percent. Let’s be conservative and say 98. It is safe to assume that global growth and the US domestic growth story is now under duress and will find statistical expression throughout the remainder of 2023.

Kevin: When someone asks, if they’ve never heard of the Commentary and they ask me, “So, what do you guys talk about?” Sometimes, we’ll be in a restaurant, Dave, and they’ll say, “So, what do you guys talk about?” The answer always incorporates something where it goes from the financial to the economic, from the economic to the political, from the political to the strategic or the geostrategic. That seems to be the chain that you have followed since we started this commentary back in 2008. If inflation does persist, if we do have this hard landing, what do the politicians do, Dave? They’re going to become desperate.

David: Part of the reason we connect these dots is, not unlike Quine’s Web of Belief, we see the interconnections between things. The first person to bring this to my attention was a man by the name of Dr. Noble, who wrote a book on worldviews and showed the categorization of beliefs in the context of a particular and each individual worldview. You begin to see how these things interact and interconnect. And so, when you’re talking about one aspect of politics, just adjacent to it is an aspect of economics, is an aspect of geopolitics, is an aspect of metaphysical belief. These things are never far off from each other. 

For me, the most disconcerting aspect of what is taking shape within the markets, it’s actually not the financial market chaos or an increase in unemployment or the likelihood of recession. It is that desperate politicians are likely to migrate or redirect ire sourced from economic pressure and pain—which obviously has a clear political consequence, one of the reasons why they need to redirect—and direct that instead to domestic political crisis or perhaps even an international geopolitical crisis. 

Think of these things, and this is perhaps the cynic in me, but the Treasury gets $45 billion to fortify its tax collecting ability through the Inflation Reduction Act. Apparently, inflation reduction is a confusing term to politicians. It’s taken to mean wealth redistribution or poverty equalization or something along those lines. But I swear, there are in the political class today an abundance of self-loathing people who hate America and what America represents in the 20th and 21st centuries. The decisions that are being made that compromise our standing on the world scene is absolutely staggering, and I’d like to think that it’s an accident. I would like to think that it’s a coincidence of stupidity and not of evil.

Kevin: Someone always has to take the blame, and it’s rarely the person who really should take the blame.

David: Yeah, if it’s not a domestic political crisis, in this iteration solved by the Treasury-financed 21st century Gestapo, perhaps, it’s the unsettled state of foreign affairs where you have the ground for this current recession to go and die. How do we solve this recession? Well, perhaps, it’s war finance. What is it about war finance that is so compelling in this environment? You get to blame your neighbor for your personal problems, and then you get to improve economic activity or the impression of economic activity because you’ve got to increase manufacturing for tanks—

Kevin: Well—

David: —and bombs and guns.

Kevin: —we do poke the bear.

David: Literally. I mean, what is brewing? Finland joins NATO and doubles the Russian borderlands connected to the security alliance. This year, we migrate from Ukrainian/Crimean borderland insecurity with Russia to another level of Russian insecurity and unpredictability. Move further around the world, you’ve got the US and Philippines in their joint exercises, these are the most extensive military exercises in three decades, reversing Duterte’s move towards China, much to the Chinese chagrin. South China Sea, it’s today a conflict pressure cooker. We’ve got the US naval vessels looking like an accident waiting to happen, floating here and there throughout the South China Sea. You’ve got cooperation between the US and South Korea, exasperating the North Koreans.

Kevin: Dave, I just read that the South Koreans and the North Koreans have two phone calls a day. They have two phone calls a day every day, and the last three or four days, the North Koreans have not been answering the phone.

David: That’s right. So, you’ve got your diplomatic hotline, which is just to say, “We okay?” “We’re okay.” “You okay?” “We’re okay.” You do that twice a day, and we’ve gone three days with no calls. There’s grievances. There’s exasperation.

Kevin: France is saying, “Don’t get in between these guys. Don’t try to connect yourself between China and America. You don’t want to be in the middle.”

David: Well, is it that you don’t want to be in the middle, or you just want to be on the right side of a potential conflict in history? I think Macron is sucking up to Xi Jinping and distancing himself from the US and Taiwan as best he can for economic benefits. Xi is pressing for advantage in and around Taiwan, and over the last several months has very skillfully displaced the US from a position of Middle East influence.

Kevin: You’ve got the oil, the Middle East influence, but you also have One Belt, One Road.

David: China is going around and reminding all of its One Belt, One Road partners of what they owe, and all of those development projects essentially have strings attached to them, in case you didn’t know it on the front end, you do now, which roughly translates into, “You will support our brand of geopolitical reordering or your bill comes due immediately.” There are cross currents in the realm of geopolitics that are like dry tinder on a breezy day.

Kevin: This just reinforces the financial to the economic, to the political, to the strategic now.

David: Or geopolitical.

Kevin: Or geopolitical. Okay, so let’s just try this for a second, because there are times when you can say all four of those separately, slowly. The financial to the economic, to the political, I’m just going to say strategic because this works for what I’m about to get you to do. I came up with a word because it’s all mushing together right now. It’s finecopolistrat. Fin for financial, eco for economy, political or poli for political, and strat. So, I want all of our listeners to learn this new word because as things speed up, finecopolistrat is going to be the term for the Weekly Commentary.

David: Well, what it reminds me of is a guest that we have on the Commentary for perspective at least once a year, George Friedman. His most recent book, or the most recent book that I’ve read of his, is The Storm Before The Calm and the finecopolistrat is this blending of crises that look to be getting worse and worse. His argument is that it is going to get worse and worse, but before it gets substantially better. That’s an echo of the Fourth Turning theme.

Kevin: Yeah, Strauss and Howe.

David: You get to the end of a cycle, and it’s not the end of the world. You get to the end of the cycle and it’s the beginning of a new cycle. We lack the imagination to see beyond, and all we see or perceive is terminus rather than the recurrent nature of things. The line between economic crisis and political or geopolitical upheaval is today almost non-existent.

Kevin: Finecopolistrat.

David: So, in this volatile world, you watch what people are doing, not just what they’re saying. In this volatile world, you’ve got the Apple CEO selling shares of a company which is mispriced at $2.6 trillion in market cap. You’ve got the Chinese who’re reducing their US Treasury assets and boosting their gold reserves—another 18 tons, by the way, in the month of March. That brings them to a four-month total of 102 tons. Actions, what do they suggest? Nations are building gold stockpiles amidst a global inflation and rising geopolitical tensions. Actions speak louder than words. What are your actions going to be?

Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. You can find us at mcalvany.com, M-C-A-L-V-A-N-Y.com, and you can call us at (800) 525-9556.

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

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