EPISODES / WEEKLY COMMENTARY

Bill King Part 2 “The Everything Bubble Will Pop”

EPISODES / WEEKLY COMMENTARY
Weekly Commentary • Jun 26 2018
Bill King Part 2 “The Everything Bubble Will Pop”
David McAlvany Posted on June 26, 2018
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Despite the quiet price on gold: there are current serious gold buyers bidding this market. Wall Street is now automated – fewer humans & more robots. Russia didn’t need to hack Hillary – they had her password! We discuss new stewardship of monetary policy as well as the impact of automation within Wall Street. Algorithmic based trading has massive implications for the markets moving forward. To subscribe to The King Report and receive Bill King’s updates go to http://thekingreport.com Thanks for listening to this week’s McAlvany Commentary, if you enjoyed please subscribe for more.

 

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

The fact that these guys are out almost on a daily basis in the mainstream media screaming about Trump tells you where the biggest part of the scandal is, and it goes how far up? So that’s why this is so large. That’s why they’re fighting this so hard. That’s why you’re seeing all this delay in Congress. And we’ll see how it plays out. When you starting thinking about how far this can go, it could go to the biggest players. It could go to Clinton, it could go to Obama, it could go to W. Bush. You just don’t know.
            –Bill King

Kevin:I’m Kevin Orrick, along with David McAlvany and our returning guest, Bill King.

David:When we look at the markets we look at them from multiple perspectives, and we care about foreign policy, we care about domestic policy. And when we talk about domestic policy it is both fiscal and monetary. The fact that last week we spent some time looking at the change of regime, or if you will, a different kind of stewardship in terms of monetary policy, and the potential for that shifting in Europe, as well, as we move toward year-end, Draghi retiring, and someone coming in, Jens Weidmann probably being that person to fill those shoes.

We really are talking about a change in the backdrop to the last ten years, and as we continue to explore with Bill today, there are other factors that stretch to 40 and 50 years, in terms of there being significant market dynamics which will be different. And this is not different in five years, or different in ten years, but different in two, three, four months, which makes this an absolutely critical and pivotal time to be paying attention.

I realize we’re in the middle of summer and people are probably more concerned about the number of SPF on their sunscreen than they are the tick-by-tick on their stock and equity accounts, but the reality is if you’re not engaged with some of the backdrop issues here you will be surprised when we get into September, October, and November of 2018.

Kevin:Getting to the backdrop issues, one thing that people seem to be concerned about right now is all these investigations that are in Washington, so I hope you get to that by the end of the conversation.

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David:It appears that for the first time in several decades if we have a grand strategy, it’s going to run in conflict with the grand strategy of the Chinese, the Germans, or just about everybody else. So there is less of a – let’s transition the word from globalization to globalism – there is less of a friendly one-world community when America says, “America first.” And I think that plays into some of the market dynamics that we may see coming up here, but we have the micro market dynamics passing our ninth year of growth in the equity markets. You have the Buffet indicator, which shows equity values compared to GDP now north of 140%, only higher one other time – 151%. Do valuation metrics play a role, again, and do they become front and center because some of these political things and geopolitical things remind people that risk does exist, and it’s not just about infinite quantities of credit in the marketplace?

Bill:Yes, I think you’re absolutely right, and that’s part of this adjustment. Some people don’t get it, because problems would show up here in the U.S., whether it was the VIX crash, or even when you had the impeachment talk. You would get a one or two-day reaction and it would pop right back up. Well, the VIX situation was real. That was very reminiscent of 1987 with the portfolio insurance and the arbitrage that was going on that had perverted the market, just like the VIX did, and so you had some kind of purging. But that wasn’t the real economy, it wasn’t actually the real stock market, the organic stock market.

What the market has understood all along is that Trump wasn’t going to be impeached because there was nothing here, which is kind of funny. But you can see it. It had the big boom on the tax, and we had it into January, and you could just walk back all the way from November of 2016 to January 2018. And now it’s consolidating. We see it in the big picture, the weekly picture, you can see it in the daily picture. You get play overnight.

Like today, the whole plan Thursday with the ECB mayhem, there was a 22 [unclear] S&P rally, overnight, and most of the rally occurred before the ECB communiqué and Draghi, and they were both more dovish than expected, which one could then assume that it leaked out – people knew that ahead of time. And what we do is, because it’s expiration, you should have more volatility, we’re just doing nothing. The only things going up are the trading sardines, the FANG stocks. They’re rallying sharply. Nothing else is rallying. That means you have a handful of people who come in – the lemmings, the day traders, the guys sitting in their basements. They know to buy the Apples, the Googles, the Facebooks, whatever. They come in and they play those things every day. And that is, by and large, the game.

Every now and then we’ll see an asset allocation. We saw those a couple of times where when the ten-year got up 3% above it people would come in and buy ten-year sell stocks. You could see that a couple of times and then the ten-year fell below that and they stopped doing it. You see that in there, but by and large, we’re treading water because, and you’re making great points here, the easy rally in the U.S. was done, on the tax benefit, the North Korea situation. And your questions all alluded to this. Now we have this trade situation that the U.S. has been on the wrong end since the late 1960s, but the U.S. peaked. The average worker’s compensation, real earnings, especially in the blue collar, peaked around 1973.

So you have five decades of these guys getting hammered, and we’re at the end of something because it can’t be sustained. We see it in our debt numbers, we see it culturally, we see it in a lot of things, and now we’re going to try to address the situation. And you’re right, it’s not going to be pleasant. And that’s what the stocks are trying to figure out, here and in Europe. China has a different situation because of their debt. Japan has this really horrible demographic situation, and of course, there is Germany. And again, we’re watching this thing play out.

And it’s not just this big boost we got from Trump. As you mentioned, we had ten years of this historic easy money. Nobody is going through this transition of after ten years of this easy money that all of a sudden the Fed has been out of that game for a good year-and-a-half. You’re right, the ECB looks like they’re moving out of this within the next six months. China has played a game where they take money out, they put it in. They’re trying to be cute so they don’ have a collapse, and on the same hand they know they have to stop the big speculation they had, so they’re doing what they can in their methodology.

So all we’re looking at now is really the Bank of Japan. And they are cutting back a little on their QE. We’ll wait and see what they do as far as their monetization of ETFs and some of this other stuff. But you’re absolutely asking the right questions. We’re transitioning out of something that is absolutely unprecedented. Ten years of not just easy credit, but negative interest rates, massive QE, of monetizing stocks in Japan – on and on and on. It’s not going to be easy to make that transition.

And I think what we are all watching for is, what is the event? Because it is confidence. What event destroys the confidence? And I think it is going to be Europe. It possibly could be Japan or maybe even China, something extreme. But what the real game for the U.S. is going to be is, when that happens, how well positioned are our banks and our citizens, their liquidity, to weather that storm? Because if you can, it will be similar to Britain. When you had the Great Depression Britain did very well in the 1930s. They were positioned. They were able to come out of it better than we were because we had more excesses. We had more things going on.

And that’s what I’m thinking with the dollar, you’re seeing this, people are saying when the next thing hits the fan, and it’s about to, in the next few months something is going to happen. The U.S. looks like they are better positioned. They’re banks are better. We do have a big debt situation this is pointing to, but the banks don’t own that debt, where it’s the reverse in Europe. The big banks own all that bad sovereign debt. We have corporations that, even though they have been buying back stocks like crazy, still have a lot of cash.

And that is where I think you’re seeing on that basis, internationally, that people are starting to slowly move. And the reason this is moving slowly is that’s the serious-minded, big private money. We all know that the hedge funds and the traders are violent, and they do a lot of it without thinking. But the meticulous, well thought out money – if you look hard enough you can see what is going on. You’re right. The intriguing thing to me is gold. Gold is sitting here and it’s really caught, because on the one hand you have the dollar strength, you have the Fed, and that normally should be hitting gold and forcing it lower. And it has a few times, you can see the way it would break down. But there is a serious bid in gold.

And I think I mentioned this last time I was on, to me it is the big private money, the serious money, are careful buyers of gold. And we know Russia is buying it and China. Every now and then you’ll see the hedge funds will push it up when it looks like it’s breaking out. Then they’ll whack it down. But to me there is a serious underlying bid in the gold because I think anybody that is reasonable that looks at it, even including the U.S., is that at some point there has to be a reckoning with the debt. Now, that’s why we have done this thing for ten years with the easy money because nobody wanted to have debt deflation.

So now because the Fed is starting to move away they think the U.S. banks and corporations are okay, the problem would be the government, if anything, but as long as the economy can produce enough receipts we can pay it. Not that we’re going to pay it down but we can keep making the payments on it. The real crisis is going to be once we have the unwind occur, and I’ve used this analogy before, you’re teaching a child how to ride a bike. You put the training wheels on, and now all of a sudden you say, and that’s what we’ve done with the global markets and economy. Now you take the training wheels off and you’re holding the bike. We’ve all done this with the kids, you hold the seat and the kids pedal and you trot next to it, and every now and then you let it go, and the kid wobbles a little and you grab it back.

So the Fed is letting the bike go but they’re still holding on, they’re close by, they’re just letting go a little bit. Once you let this thing go, I think most people are saying because of the debt this thing is going to fall over. And when that happens, what do the central banks do? I think the big private money is looking at this and saying, “Yes, we know the central banks have got to start moving away, and when they do, in whatever period of time, everybody is guessing – six months, a year-and-a-half, two years – there is going to be a huge debt crisis.

And then we’re going to get the panic from the central banks. They’re going to pour back in. And that’s why we want to own gold. It’s not for what’s happening now, it’s not for what’s going to happen in the next six months, maybe even the next year-and-a-half. It’s just that the next time we have a crisis, how is this thing going to play out? So to me, that’s what I’m doing. I’m looking to stay liquid. I’m looking to keep an eye on the interest rates and stay short because the rates are moving up. And have some gold and some silver as insurance in case things happen faster than you think. And wait and watch because the real key is when the next slowdown and crisis hits, what do the central banks and government do?

That’s what I think, in the long-term, the big private money is preparing for. I think that’s why you see the FANG stocks go up because you see Buffet and these guys are buying the Apples, buying these stocks, they have huge amounts of cash, because they really have become de facto convertible bonds. If this market keeps going up you’re going to get equity participation, if it goes down they have an enormous amount of cash that should give you some floor like a bond would. But you can see that, if you really look hard you see the big private money is positioning themselves for something that is going to happen, then we’ll make the big bets once we see how the governments and central banks react to that. I think that is the big picture going forward.

David:Going from the big picture to the daily moves, we have seen something of an evolution here in the last ten years where, frankly, algorithms and high-frequency traders were few and far between a decade ago and today they are 80-90% of New York Stock Exchange volume. If you combine the algorithm and media cycle together, we started out our conversation by talking about technical analysis and what the charts are showing and everything else. Can we assume that there has been some sort of evolutionary process, not necessarily a positive evolutionary, we could think of this as almost like a cancer or something like that, but where the markets have changed somewhat and because of this algorithm-media cycle, behavior in pricing has changed. Or is that just a temporary anomaly?

Bill:This is a terrific question because it is creating change. You can see it. I think I’ve mentioned this before on here, because of all this computerization, the algorithms, these patterns are becoming more and more ingrained. We used to see the overnight rallies and you would see the last dollar, and you would see the rally into the European close, and then after Europe – that’s what we had Thursday. You had a rally, and then we got hit after Draghi spoke, and then you get a rally into the close, and then right after close you’re all over again.

And these things used to happen, we to call them decades ago the specialist openings. You would open a stock, and especially if you open strong, depending on how strong, you would look to see when it starts rolling over. It typically rolled over 15 to 45 minutes after the opening, and we have been seeing this regularly that after a really strong opening we tend to peak 30-40 minutes after. That’s because this is all programmed. Before it was just guys paying attention. Now this is all programs.

And these programs are also now, with all the major institutions, the really big guys, the organic, this is programmed so when they execute orders they’re not executing them, they just put this stuff in computers and it spits this stuff out. And if it’s going up, the computer knows that we’re going to accelerate. If we have something to sell we’re going to accelerate it into that, and that’s what tends then to roll it over. And if they’re buying something they’re going to pull away and wait for it to roll over, and vice versa. It’s all programmed and it goes on all day.

So now we get these days where in between there are very long periods of nothing going on. You get the ETF guys at the end of the day, you’ve got the VIX guys at the end of the day. You also get the institutions guys play. They play heavy the first 45 minutes and the last hour to an hour-and-a-half because that’s what the computer tells them, that’s when you should play. And the rest of the way you should just be piecing in a couple of hundred every few seconds into the market. So you’re right.

Now, the problem has become that the more this is occurring, the more the computers are taking control, the more people are getting fired. If you look at Wall Street, the size of the trading desk in just the different departments are just dwindling. And that’s why I think you’re starting to see Connecticut is having tax problems, and New York City, because the amount of people in financially related jobs is diminishing greatly. Stocks this year had made record highs, and you’re still seeing job cuts. You’re seeing now where Citi is talking about cutting 10,000 due to automation.

But you’re taking judgment out. Before that was the thing. You hired good traders that had good judgment. Now you’re doing more and more of getting computer programs to do the stuff and you’re taking judgment out. So things become more and more uniform. It would just be like if you program your computer to be a pitcher. It tells you that 2 and 0, 90% of the time you throw a fastball. That just gets more and more ingrained. And the batters understand that, instead of the guy that might throw you a breaking ball or something, or changeup on 2 and 0.

But that’s the way it’s becoming. Things are becoming more predictable around the times of the year, certain things, you’re taking judgment away. Now, at what point do you get to where everything is a computer talking to a computer and you would be at this war games thing where something comes into the market, like the VIX fix thing, and it just destroys things because you don’t have judgment. The liquidity disappears. And that, I think, is the point you’re making. If you’re just talking to machines and high-frequency guys, they all go the same way.

Guess what happened in 1987? That was exactly the problem. You had the portfolio insurance guys who would sell futures, and you had the index arbitrage guys who were buying futures and selling stocks, and it just got totally out of control. The specialists used to control the game. They lost control of the game in 1986, and I know because I was in [unclear] for these guys and they all realized around 1986, they said, “We either have to get enough capital that when these program guys come in we stop them, or we have to just get out of the way and let them take the stocks where they want to go.” And they fought them for 1986, but then by 1987 they got out of the way. So what happened is you had that incredible 27% down rally in the summer of 1987 because the specialists just got out of the way. “You come in here in these waves? Go ahead.” And then when they came to sell them they got out of the way and you had the crash.

That’s what is happening with this high frequency. Anybody with half a brain knows, people say, “Oh, we provide liquidity.” No you don’t. You don’t provide liquidity. You don’t do anything. You exacerbate liquidity. If you see buyers, you buy. You’re not specialists. You’re programmed; you see buyers, you buy. If you see sellers, you sell. If more and more computers are doing that, then you get what you saw with the VIX. And don’t forget, with that VIX, that was largely derivative guys, and traders. That wasn’t where you get real sellers like we saw in 2008 where organic institutions and even retail people say, “Sell. Sell my ETFs, sell whatever.”

When you get that real selling, when those high-frequency guys figure that out, then it gets like you saw with the mini-crash that they attributed to Waddell and Reed years ago. And they weren’t actually selling stock, they were just trying to sell some futures to try to hedge their stock position. But that’s what happened. The computers picked up that there is a real seller in the market and they all tried to front run him. So you can imagine what would happen if big institutions said, “We have to start selling some stocks.” And the computers will pick that up. It might not be the first hour, but eventually it does, and then once that gets into the computers everybody has it.

You’re right, it’s about what this is doing to the markets. It’s a problem. There’s no question. And it gives you an illusion of a liquidity complacency right now. If our thesis is right, then you’re going to make an adjustment that at some point enough people are going to figure that adjustment out and then you’re going to have a problem.

David:Some of the big themes we’ve talked about is new stewardship in terms of monetary policy and that happening, if not on a global basis, at least with some of your biggest players globally. We’ve also talked about there being a reprioritization around national interests in a diminishment of globalism with a priority to some of the fundamental things that drive real economic growth here in America. But this changes the dynamics within the financial markets. Many people have assumed that if we have a stronger economy here in the United States the financial markets are just going to rip, the stock markets are going to do great.

And yet we’re talking about some implications, actually, that could eviscerate the U.S. stock market. In the context where everyone is doing the same thing on the basis of algorithms and that positive media feedback loop. Anymore, Bloomberg has a computer that generates an article headline and algorithms and other computers trading off of a computer generated headline. It’s almost absurd, almost laughable, and having that move in reverse is a serious thing. I don’t think people understand how frail our financial markets actually are with some of these dynamics in play.

Bill:You know, this is another great point you’re bringing up. Historically, the reason you had a stock market, the altruistic rationale is that it allows for capital formation so that you can have companies that will mature, come to market, raise capital. And if they didn’t do it they fell apart, but the companies were good, you could keep, you want to innovate, you raise more money for new plant equipment, you go to market. And it got crazy in the ’20s because of the pools and they perverted it and it became a speculation. And then you’ve run that out. And then of course you always get the pockets where speculation – the ’60s and whatever.

Of course the ’80s got ridiculous. We really got into financial engineering – [unclear], derivatives, computerization. I don’t want to get too much on that because that’s a two-week discussion, but you increased the employees in financial-related services starting in the ’80s, starting with mortgage-backed securities and derivatives and on and on. It just blew up and blew up, until the computers took over and then you just start contracting, again. Now, the other thing that has happened is that in that period you brought the LBO guys into play and that became such a dirty word, now they call themselves private equity.

And then you had hedge funds, which used to be a horrible name on Wall Street. They were the scum, they were the leeches. And they were. They were the guys that just were front-running orders, and dealing on inside information and screwing people over. And they were just nuisances. They were parasites. Then they became so big they started commanding the market, just like Icahn is a private equity guy, but he’s by himself. He comes in, takes a stake, and the stock goes up. If KKR reports a stake in something, it goes up. If Soros reports a stake in something, it goes up.

Now what has happened over 30 years is because of private equity and because it became a success, and because of the big hedge funds, all of a sudden more and more money went to these guys because they were playing a different game than the average money managers, and they did well, and the guys that did well got more and more money. The more money they got, the more situations they did. So what happened is, and I wrote this up not too long ago, these are really smart guys, and they really have better information about what’s really going on in companies than what the public statements that the companies file with the FCC.

So by and large, as these guys and Warren Buffet were taking the best deals, you’re getting the less attractive equities are what remains in the pool for the average guys. So as that got more and more risky, you have the ETFs jump in. Now the ETFs are in here and the indexers, and they’re buying up all this stuff. So back to your point about liquidity. The real pool of liquidity and stocks is shrinking. We know this now as when you look up and you see the Russell 2000, there aren’t 2000 stocks anymore in that. Even the S&P, I can’t remember how many there are, it’s not 500 stocks anymore. And you would think with a great boom in the equity market that you would see more and more companies issuing stock. We know they’re buying stock back. So when you all of a sudden see companies repurchasing stock, the LBO guys, the big hedge funds or big private investors, plus the ETFs, you shrink in this pool, and you’re leaving the lower quality items for the public.

So to get to your point, you are killing the equity market, even though it’s going to record highs. And we know that at one point this year two-thirds of the Dow and the gain was Boeing and I forget, I can’t remember if it was Disney or whatever it was, but you remember those days you come in and Boeing was carrying the market. We’re seeing this more and more as a handful of stocks producing the gains for the indexes. So if this thing keeps playing out and you’re seeing money managers go out of business because people are indexing or going to ETFs, and on and on. So we hit a downturn in the economy, who gets shaken out? If you’re in the wrong side of this stuff, again, you’re going to contract the players in the street and it’s going to make the market smaller.

But to your point about the equity market. This equity market is not what it used to be. It is fragile in more ways than people understand because you see people like Buffet sitting on a record amount of cash. You see Icahn – he’s just nibbling. If he sees something undervalued, he goes in there, buys it, but he’s not trying to take it over. It looks to me like he’s just trying to see something undervalued, buy it, if it goes up he’ll get rid of it. And you are seeing this more and more, so the structure of the equity market is really dangerous. Your big players aren’t tied to it. So you get some of these really big players, Buffet, even Icahn, your big private equity guys, they will use the market so if it really tumbles they’ll buy something.

But they’re not going to have as much exposure as ETFs, your institutions, and your retail people. That does create a problem because they play a different game. Most people understand now why the housing crisis was bad is because you took mortgage securities, you bundled them together, but the wise guys started doing derivatives where they had the bundle and they would just pick out the worst parts of the bundle whether it was the subprime, the B, the double B. And then they would keep the triple A and the double A. And everybody said that was a huge problem, that’s why when the subprime starting going to hell then the B, and everything, and eventually they worked their way up into the A and double A.

But that’s what you’ve done to the stock market. If you think about it, the Buffets, the big private equities, the big hedge fund guys, they’re taking the A, the double A and the triple A. What’s left? What’s left is – I wrote this up in the reports. The thing about that, what the ETFs are doing, and the indexers, they are essentially the guys that are bundling up what’s left. They’re bundling up the subprime to be the double B and the triple B, and they’re putting it out there and saying, “This is less risky.” Then you’re just picking stocks. And they’re right to some degree. But what is in your bundle? And at some point when, as you mentioned, this ten-year free ride from the central banks is over, it could be not as nasty as 2008, but it’s going to have some serious ramifications for people.

David:We could spend the next two hours talking about Mueller and Rosenstein and Russia-gate and whatever, the FBI. I know you have some interesting insights in that. What’s the best way for our listeners to be in tune with you on a routine basis? I know a good 20% of your letter, sometimes more, sometimes less, deals with stuff like that and we haven’t even scratched the surface on that today.

Bill:Well, we’re getting a lot of innuendo and we’re getting a lot of – I hate to use the term, but it’s true – the fake news. And now you’re starting to see the IG report, the first phase. You’re going to get the FISA abuse, and then that also is going to roll into the Trump investigation. This stuff is all coming out. You have, supposedly there are grand juries in Utah. Most people believe there have been sealed indictments, and this stuff is going to play out. And this, again, is also part and parcel of the readjustment, of taking this corrupted, distorted, perverted system of deep state, and you could talk about deep state on Wall Street, talking about a similar type thing where people became above the law. They thought they were the law, there was no accountability.

And then you had this horrible crash and situation in 2008 and a lot of people argue you didn’t really do anything because nobody got punished for it. The only people who got punished were the average guys. That’s true. The difference for the politicians is, people will punish politicians. People can’t punish J.P. Morgan and Goldman-Sachs. Can they? How? But they can punish politicians. And that’s what is going to be fascinating as the real story.

And as you know, I have a really good source who in July of 2016 laid out everything that is happening now. The IG report saying that the foreigners did get Hillary’s emails. And that’s what we were told. And we were told that the reason they know that is because the NSA was watching Russia watch Hillary. It’s really kind of Maxwell Smartish because there were reports out that Hillary on her first trip over to Russia, Vietnam and China took her blackberry and the state players got her password. They didn’t have to hack it, that was the big fallacy, and we told you this a long time ago, we were told. They had the password, they didn’t have to hack her or the DNC. They were watching her in real time. And of course the NSA was watching them in real time. And it was also reported that the NSA offered Comey the emails and he said, no, he didn’t want them. And the IG report is saying that foreigners had her emails.

So the bigger thing to watch is where does this lead, because serious people, the people that were ex-intel people, understand that what happened is that in the wake of 9-11, just like this country tends to do, the people at the top don’t waste a good crisis, used that to take power, and in this case it was surveillance power. You saw the different movies show up, you saw these different things show up about how absolutely astounding NSA – they can monitor, I forget how many millions of phone calls a second. And they’re snooping and listening, and on and on.

And then you have Clapper lying, the former head lied twice to Congress. “No, we’re not doing that.” And then Snowden and these other guys leaked out, “Yes, you are.” And that’s why these guys leaked it, is the scope of the surveillance. Then we got into this unmasking where Obama’s Secretary to the UN is unmasking people. Well, why the heck is that? Why? And then when Admiral Rogers stopped people from accessing the raw intelligence they circumvented him, and that’s where this stuff is likely to head.

I don’t know if it’s going to get there, but the big, big scandal, and again it dwarfs Watergate, is the scope and politicization of the surveillance, that they are surveilling far more people, and they were doing it on a political basis, and in cooperation with the Five I’s, the other anglo countries, Canada, New Zealand, Australia and Great Britain, and how they were using each other to circumvent the law. We have a law that you can’t spy on Americans. Well, you know what? “Hey, Brits. Come here and spy on these people in the Trump campaign, and then give us the data.”

It’s unprecedented. Think about it. You have an ex-head of the CIA, ex-head of national intelligence, who have taken gigs with the media and they are on TV every day screaming about this. Are you kidding me? Doesn’t that tell you what these guys are scared of? You don’t see these guys. Most of the time you don’t even know these guys’ names. And then they’re done they go deep underground. They don’t want to be around. The fact that these guys are out almost on a daily basis on Twitter or in the mainstream media screaming about Trump tells you where the biggest part of the scandal is, and it goes how far up?

People said that’s what happened with Mueller when he ran the FBI. After 9-11 he turned it into an intelligence organization, corrupting what the FBI is supposed to be, a domestic investigative body. And that’s why this all gets twisted and distorted with them and the CIA, the NSA, the whole thing. When this happens, just like in a war, everybody is grabbing for more power, more influence, more money, more staffing, and they’re building fiefdoms. So that’s why this is so large. That’s why they’re fighting this so hard.

That’s why you’re seeing all this delay in Congress. And we’ll see how it plays out. When you starting thinking about how far this can go, it could go to the biggest players. It could go to Clinton, it could go to Obama, it could go to W. Bush. You just don’t know. But if anybody looks at it and sees what’s going on and, look at people’s behavior, you can see that’s where they are afraid of going.

David:As we wrap up and we look at one of the core issues here when we’re talking about market-related things, what is the event, and we relate it back to the markets being held together by sentiment, by confidence. You could have something that dwarfs Watergate represent an event that destabilizes confidence in the system as it is. You can have a trade war with China represent a destabilizing event. You can have an algorithm send the wrong message and begin a meltdown as we’ve talked about earlier, reminiscent of the ’87 purge.

There are a number of things that can crack confidence and it can happen very quickly. With that in mind, just in a brief summary, how do you position domestic equities, commodities, oil, gold, silver, cash, if you just said, “Dave, I’m hanging up the cleats for two years. I’ll check back with you in two years, between here and there, this is what you’ve got to do.”

Bill:I think where you want to be is, right now the Fed is paying you to wait. Before they penalized you so you had to do something. Right now, if you’re an American, you’re being paid to wait. The first thing you should do, especially the average retail guy – my wife and I have talked about this, for all these years we just let our money sit in the bank, most of it in money market funds and whatever. And you knew you weren’t getting much interest, whatever you were getting.

Now all of a sudden the banks, with their CDs, and let alone their depository rates, are nowhere near what the market rates are. So you can go out there and get six-month T-bills that are over 2%. You started looking up here, you are starting to look at five years, and some of these are getting 2.5% or more. Now all of a sudden you’re getting paid. You had better get out there and check. You’re getting paid to watch but make sure you’re not leaving money on the table.

And I got caught in this thing, too. Rates were so low you didn’t really care. You didn’t look around. But now you’d better look and see what you’re being paid from banks. And I think that’s another reason why the banks are under pressure now because there is some disintermediation going on. People say, “Oh, the rates are going up so banks could charge more for loans.” Yes, but you know what? People start taking the disintermediation which we saw in the 1970s when rates starting going up. That was a big term, disintermediation of the banks. People took money out, went to money market funds and everywhere else where they were getting higher rates.

And I think that’s the first thing you have to do to protect yourself is make sure you’re paying attention to where the market is on interest rates. Position yourself to be cautious because rates are going up. Depending on your situation you can look to extend out to five years. I don’t think I would go to ten years yet. Especially as you can see the seven years are at 2.9, because the curve is inverting and flattening they’re not paying you right now to extend out. So you want to be shorter term until the curve starts steepening again.

And you have to have some hedge, some type of hedge against a sudden spasm in the market, whether that is gold or oil or something like that. But right now the Fed is paying you to build liquidity. And then you need a hedge on that in case something happens very quickly. And I think that is prudent. That’s what I’m doing with my own money, and I think that’s where you have to be right now watching this thing. That doesn’t mean if you see a situation and you have good information that you don’t go out and do something, but you had better do that in small measured careful way, just like Buffet is doing, just like Icahn, just like the smart guys are doing.

But they’re waiting. And it’s coming their way. And that’s what they know. The more cash they have, they’re getting paid more for their cash, and they also understand that means eventually someone is going to have to disgorge assets. And that’s what they’re waiting for, when people have to disgorge assets at beneficial prices. That’s how people have to be thinking right now.

David:So liquidity, and a hedge against that liquidity, and be patient.

Bill:Yes, insurance. Right. It’s insurance. And then be patient for when there is some kind of adjustment, purge, whatever. And then you have to be careful and watch and see how that plays out. Because the one thing that is sitting out here that troubles me the most is over the last ten years, we’ve gotten the mini crash, the flash crash, we’ve had the VIX crash. We’ve have 2011-2012 was Europe, whenever it was, we had the summers where in Europe we had the little things, and everything just keeps bouncing back to new highs.

So you have people that are 35 or under that are in the business that are used to just buying, always thinking of going to new highs. You’re going to get a situation, and this is the one where if you’re bullish, and that’s fine, technicals are such that you can be in stocks, but you have to be careful. When we get a good downward reaction, and then we get a bounce, if you take out that secondary reaction, look out. That’s where we’ve been all along. We had that VIX fix low there in February. If that thing ever got taken out it was going to be trouble.

That’s what really happened in ’87. You peaked in late August and then you went up, and then you started rolling over, then you went up again, and then when you took out the September low, it crashed. [Unclear.] There is a level there, the reaction low, and that’s where the Dow Theory comes from, that when you get that first significant decline after a high, and then you go up, and you rally, and you don’t make a new high, and then when you take that reaction low out it gets ugly.

And that’s what I would look for here if you want to own stocks, you had better know, you had better have a plan when you’re going to get out because when it becomes apparent to most people you should be out, you’re going to have a very difficult time getting out.

David:As we talked about earlier, there is an impression or an illusion of liquidity in the marketplace.

Bill:Oh yes, absolutely.

David:Bill, thanks for joining us on the Commentary.

Bill:Sure.

David:You always bring fresh insight and historical perspective. Great to have you back. Hope you enjoy your summer, and look forward to visiting again soon.

Bill:Oh, anytime. Thank you guys very much.

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