EPISODES / WEEKLY COMMENTARY

Bullard: “Inflation could run hotter than expected…” Ya Think?

EPISODES / WEEKLY COMMENTARY
Weekly Commentary • Sep 22 2020
Bullard: “Inflation could run hotter than expected…” Ya Think?
David McAlvany Posted on September 22, 2020
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The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Bullard: “Inflation could run hotter than expected…” Ya Think?
September 23, 2020

“The markets are going to be on edge with November fast approaching. But there are real, tangible implications, if you’re talking about tax policy, which would shift with that president, impacting corporate profits and thus impacting prices. So you know, regardless of what the Fed does to suspend the sun, moon and stars, they’re going to have a lot more heavy lifting to do, given a certain outcome.”

– David McAlvany

Kevin: Well, a lot of things can change in a week, Dave, but I want to start with you talking a little bit about your 1st 100-mile ride. You’ve done a lot of endurance types of sports, but you’re training for this full iron man, and you told me about the 100-mile ride and what you were doing the last 20-25 miles? I think you were just white-lining.

David: Yes, it’s sobering when you think, “I’ve got to get off the bike at 112 miles and then run a marathon.” I did run two or three miles afterwards, and the first couple were downhill and felt great. And then it just flattened out and I thought I was going to die. So there was a point at which I was just staring at the white line, and just listening to the sound of the wheel as I was going down the road.

Kevin: We’ve talked about long rides. You have to sometimes just focus on making circles. You just make circles, because otherwise you’re just going to want to quit. With the run, you and I have talked about doing a little bit of an inventory of your body, and with the swim, what’s your form like? If you can turn your brain to focus on the simple things, especially when things get really, really painful. I think that’s really the key, isn’t it?

David: Yes, I think one of the ways that you manage volatility, whether it’s your own emotional volatility in something like this race I’m training for, or even in a portfolio as an individual investor, if you’re looking at technique and rules and guidelines, as opposed to focusing and fixating on a goal, you can create your own volatility by fixating on the goal. One day it seems to be moving away from you, and then the next day it’s moving back toward you, and you can drive yourself crazy that way.

Kevin: Look at the dollar. The dollar has been rallying, and gold and the stock market, some of these other assets that have been rising are going down. But really, if we look beyond that, if we’re looking at the longer term, we have to say, has anything changed? We have inflation expectations. Look at what Bullard had to say about inflation. Even the Fed is preparing us for higher inflation.

David: I thought his comments were edifying. There’s a good chance of an economic boom following the Covid-19 pandemic. That was one of his observations, which, of course, off of a very low base of economic activity that’s not difficult to predict. But his inflation comment that inflation would run hotter than expected is directly to my point in recent weeks. You adjust that inflation target. That’s a new policy regime. You put it to higher levels to allow for what is, in essence, a wider credibility band.

Kevin: Sometimes in politics we look for the October surprise. Everybody is holding their breath for the October surprise. But beyond that are we looking for an inflation surprise?

David: I think there is an inflation surprise coming, and I think we had the quote from the Goldman Sachs commodity man last week, Jeffrey Currie, basically saying the same thing. You’ve got the political temptation to alleviate the debt burdens which are being created today. So right now it’s about balance sheet expansion, accommodation of the market. And then there is in the final analysis what you do with all that debt. So we’re creating it today, that’s great. But how do you deal with it tomorrow? It’s actually a fairly straightforward playbook.

Kevin: You were talking about call options recently and writing call options. A lot of times when these options start to expire, when there’s an expiration date, you get volatility that’s predictable ahead of time. I’d like you to talk a little bit about the triple witching date, the expiration date, and why we see this kind of volatility when that happens.

David: This is kind of an odd comparison, but I have a hard time escaping the training patterns that I’m in right now. I did a swim earlier this week and decided I didn’t have much time so I was just going to bang it out as fast as I could. Technique went away and it was a terrible swim. I swallowed more water than I have in a long time. The whole experience was weird. But it was a little bit like options trading because my perspective in terms of time changed dramatically.

Kevin: You were in a rush.

David: I was in a rush. And what mattered was the next two minutes, the next five minutes, the next 20 minutes, and I was not taking a long view, which again comes back to this idea of, if you have a long-term view which is informing your approach, then technique and rules and disciplines all of a sudden become very important and you’re able to deal with the day-in, day-out, the minute-by-minute, in a very orderly in calm fashion.

Kevin: Right. And that’s why you have a team with your money management. That team helps each other with discipline.

David: I’ve noticed that folks that shift to trading call options don’t even care what tomorrow holds. It’s really how the market closes today and everything is tied to the nanosecond. And there really is no long view. There is no technique. There is no goal except how do I get rich as fast as possible? They’re looking to drive home a result that ultimately isn’t sustainable. You’ll notice that the people with real money in the options world are the writers of options, not the buyers or the purchasers.

Kevin: It’s like Vegas. We’ll sell you the gaming, so don’t game.

David: Because 96% of options, or it used to be, I haven’t looked at the numbers in the last year, but it used to be upwards of 96% of options expire worthless. So the folks who are writing those options are making a mint and the people who are speculating thinking that they’re going to make a vast fortune – 4% do, 96% don’t. It really is worse odds than Vegas.

Kevin: And you don’t get free drinks and a show.

David: No, that’s right. So this last week was fascinating, too, because you have September expiration last Friday, known as triple witching. That’s three different expirations occurring on the same day. You have index futures, you have index options, and you have stock options all expiring, and it sets up for targeted market volatility. Again, the writer of the call option would love to see those options trade lower or even become worthless.

Kevin: It’s like Vegas. They want to see you lose. They want you to have a good time, but they certainly don’t want you to walk away a winner.

David: Then they get to keep the money. You paid a premium for that option. So there’s typically quite a bit of volatility around those days, either expiration day or, in this case, triple witching where you’ve got all three happening at the same time. Monday of this week gave us kind of a first broad-based de-leveraging we’ve seen in a while. You have options expiration – that was a lingering factor from Friday. You have NASDAQ, which has borne the brunt of the correction at this point. But again, earlier this week, it covered all indices. And as we mentioned a few weeks ago from Doug Noland’s Credit Bubble Bulletin, this mania in call options from unseasoned investors has driven the call writer, the person who actually wins most of the time, in order to avoid unlimited up-side risk, or theoretically unlimited up-side risk, they’ve bought the underlying stocks, the underlying assets.

Kevin: Don’t they have to sell those assets? They buy them because they have the call option that they put out.

David: And they’re trying to hedge their losses, so that is added energy to the rally.

Kevin: But then they sell.

David: That’s right. Then you got expiration this Friday. The need to hold the underlying asset diminishes. Selling ensues. Here we are. So earlier this week selling ensued, and this week has been, I think, a good case in point. We also have, as we look toward the end of the week, what JP Morgan estimates as a $200 billion end-of-quarter re-balancing, institutions coming out of stocks and moving into bonds, and again, this follows the sort of March-to-date rally in equities. It would be no surprise if the selling intensified as the week went on, as we move toward Thursday and Friday of this week. Again, it’s a rebalance before we get to the end of the quarter out of stocks and bonds.

Kevin: And you’re going to keep watching the cost for ensuring default, right? That’s something we’ve been talking about in the past few weeks because the insurance for default really has not risen much. People right now are not worried about default. What’s your thought going forward?

David: You begin to see acute concern in some of those areas, like default insurance, credit default swaps, or if you see significant shifts in safe haven buying, or even in the gold market. And these are all areas where there are some clues as to where pressure may be increasing within the financial system.

Kevin: What about Europe, though? Europe seems to be what is also boosting the dollar. Europe seems to be throwing weakness out, themselves, and the dollar is rallying.

David: Yes, and this week in particular, it’s a huge issue with European banks, where all of a sudden there’s concern again about European banks owning too much government debt and actually, sort of being on the wrong side of the trade, loading up with something that they believe to be bulletproof. But again, what they’re doing is, in essence, trading bonds versus investing in a stream of future incomes.

So what does that mean? A Financial Times article titled “European Banks Load Up On Government Bonds,” raising concerns over a doom loop.

Kevin: A doom loop. I love that.

David: It shined a light on the potential weakness in the euro we’ve had in the last five to six weeks. Weakness in the dollar strengthened the euro. Then this question of stability in European banks sets a very different tone for the euro this week. And so the euro is weakening, dollar strengthening compared to the euro.

Kevin: Is that why gold showed just a correction? It’s not really a crash, but it’s a correction.

David: That’s right. So as the euro came back under pressure, traders’ response has been to buy back dollars and, in turn, increase temporary pressure on gold. We’ll see if that continues. The dollar chart has been suggestive of a rally higher as our guys on Golden Rule Radio noted last week. And if you don’t tune into that, I think it’s a helpful couple of minutes midweek. Looking at the charts it suggested that you could see a rally for a number of weeks, three, to as many as six weeks.

Kevin: Which would be good for gold and silver as far as a correction on the downside. When I say good, for the person who’s waiting to put more money in, you like these dips.

David: The move from 1050 to, ultimately, what I think is about 5,000 as a target price, is not a straight line. And so, after each incremental move higher to see some form of consolidation, either moving sideways or down, it’s pretty normal.

Kevin: And healthy.

David: It’s pretty healthy, if you’re going to set the stage for something higher. There’s always the risk that at a critical point it can break down, and so that’s where, looking at a lot of macro factors are key. But right now it’s euro weakness, a dollar rally, gold retrenchment, all sort of knee-jerk trading patterns that have to hold. You can actually have a strong dollar and gold performing well to the upside simultaneously. But look, given the year to date gains in both the white and yellow metals, a further move lower is not a surprise.

So consolidation of gains is healthy, I think, for further gains to occur as we move towards 2021 we gave you some of the estimates from B of A, Goldman, and some banks last week. Very telling is the year-to-date gains in GLD, not just in the price, but also the inflows. The demand has been picking up, actually at this point in the year, the largest amount of demand since the inception, for that particular product, 900 tons of gold put into that program. That’s inflows, again, largest since inception.

And frankly, there’s enough hot money flowing into those exchange-traded products to flow right back out and maintain some pressure on the metals. But the fundamentals for gold and silver, I think, remain very much intact, and the benefit of doubt, if you’re talking about a longer-term bull market still is with the bullish side of the equation of bullish bias.

Kevin: We talked about how much can change in a week, and we don’t have to go into detail, we can talk later about everything from the Supreme Court to the riots that have been going on. But it seems that there is a pause right now. The government’s been stepping in and pretty much paying for the Covid situation, and right now, the Democrats and the Republicans are not getting along. I’m wondering, the fiscal initiatives – are we done for the year? The Democrats are not going to come to an agreement unless they get their, what is it, 2.2 trillion bucks?

David: You mentioned the riots. Before you move off of that, there’s the issue of if you have a revolving door as you bring the folks in who’ve been tearing the town apart and just book them and then let them go. They’re right back to the streets to do it again.

Kevin: Highly trained sometimes.

David: It was a Lancaster, PA, million-dollar bond for anyone who was rioting, and guess what? They had one night of riots. Surprise, surprise, incentives somehow align and people say to themselves, “I guess that doesn’t work for me.”

Kevin: Million dollar bond? Yes, I think that would change my mind.

David: Yes, so fiscal initiatives. We’re marching fast towards November, and so that that really does put a hold on the fiscal initiatives. You have Pelosi insisting on her version of a $2.2 trillion deal. You have the GOP sponsoring a $1.52 trillion package, which has already been shut down, and so it’s a stalemate. It’s a temporary hiatus in liquidity. That liquidity was flowing to individuals and businesses, a few hundred bucks to individuals still going.

But it was interesting. Yelp put a total number of business closures due to Covid now sort of in the permanent closure category at 60% – of the ones that they’re tracking anyways. And so the lingering effects of the government shutting down the economy, those effects are growing.

We feel it in our own community. There are shops that are closing for good. There are a few of our favorite restaurants unable to negotiate more accommodative terms. They’ve run out of their funding. And I think the reality is on the other side of the equation as a leveraged landlord that faces the music with a banker and is not willing to negotiate more accommodative terms with rent. And so it’s forcing a bit of a chicken match. So no accommodation, businesses close, and of course, they still have the issue of paying the mortgage.

Kevin: We went to dinner on Saturday night, my wife and I, at one of our favorite restaurants on Second Avenue here in Durango. The only reason the restaurant really can stay alive is because it has outdoor seating right now. The owner of the restaurant is going to be shutting the restaurant down in October and hoping to open next spring when they could do outdoor seating.

So it’s strange, the businesses here in Durango, the restaurants anyway, that have stayed in business, are the ones who can push out into the street and actually have outdoor seating. You just wonder what’s going to change as we move into winter again. A lot of these outdoor meetings, they’re not going to continue to work.

David: I think one of the big differences is access to capital. In one sense, there’s a deformation occurring in the corporate landscape, which we talked about last week in terms of sort of zombification of certain companies. If you have access to capital you can continue to operate even if you’re not making any money. And then there’s the small business owner, 97,966 businesses that were closed and won’t reopen. And, 100,000 businesses – start attaching real lives and real stories and real dreams and aspirations to those numbers. And these are folks that did not have access to capital.

Kevin: Choosing winners. It goes back to choosing winners and losers.

David: It ends up consolidating a lot of the business community into the hands of a few very powerful, very connected, and away from the person who says, “I think I just want to work for myself. I think I want to define what my vacation schedule looks like, and I think I want to define blah, blah, blah.” And I’ll be interested to see what the social ramifications of this are in terms of risk-taking if there is a new generation of entrepreneurs and risk-takers, and this is just sort of a time-out for an entire generation, who say, “We were kind of thinking of retirement anyways, let’s just shut it down.” Or if this changes the way people approach business, and there is not a generation that says if you really want a guarantee you work for the government, and you’ve got a good, solid pension. Again, a pulling back of the risk-taking.

Kevin: Is this just one more element that’s formed when you have a Federal Reserve that can print money and lower rates? Those seem to be the two major tools that they use. Now they’re telling us that a little bit more inflation is going to be good for us.

David: Yes, you see malinvestment as a result. You see malformation in terms of the business landscape, and I think you have this disconnect intellectually between what the Fed wants and what is actually occurring in the marketplace.

Kevin: Some are still wanting more stimulus than they’ve already thrown out.

David: Correct. You have a Kashkari. You have a number who would encourage even more stimulus. And then there is a decent sized group that’s content to wait. They want to see fiscal policy initiatives. They don’t want to be in the crosshairs and fully responsible for what’s occurring socioeconomically. And they feel like they’ve done what they needed to do in terms of “forward guidance.” They’ve lowered rates. They’ve told you it’s going to be low until 2023. They have a new inflation regime. You know they’re going to buy bonds and maintain certain prices. They’re willing to use their balance sheet.

So look at the bond market. You’ve got the bluff of buying any quantity of mortgages and treasuries. It’s working. I come back to Bullard’s remarks. I think he’s realistic in seeing inflation creep higher and then run hotter than expected. And that reflects the nature of inflation and the consumers’ response to it, because by the time inflation is moving higher, expectations are either following it or just slightly leading it and it becomes a tailwind pushing it further than the Fed or any of the money mandarins would desire.

Kevin: I remember one time landing a Cessna. I hadn’t gotten my license yet, it was just after solo, and I bounced. I hit the nose wheel. It was a tricycle landing gear aircraft. I was trying to get it down, get it stopped. You were talking earlier about being in a hurry with the swim. Well, you don’t want to be in a hurry to get your plane down if you haven’t learned how to flare, pull back. And I hit the nose wheel. But here’s the problem. The problem was it wasn’t just one bounce. I bounced and then it came back down and hit again. And then it hit again, and it got worse and worse and worse. The end of the story was, I survived.

David: You walked away, it was a good landing.

Kevin: But it’s called ballooning – ballooning an aircraft. And in a way, inflation’s like that. Once you’ve hit that nose wheel, it’s too late. You’re going to balloon right off the runway. And that’s what I’m wondering. When we get that inflation surprise, will it already be too late?

David: Well, I think it will be too late in terms of the credibility of the Fed, and I suspect there are going to be a few uncomfortable months. Maybe it’s 2022 or 2023 where inflation is moving aggressively higher and the Fed is stuck between its verbal commitment to accommodate. And then you’ve got them between that and the market tell-all which is rates already moving higher, the market moving rates higher, the market taking them there, and the Fed being forced to get on board or lose all credibility. So I think the new inflation regime, in terms of that wider targeting, gives them some wiggle room because you just know that it’s two plus, so anything over two they could still claim, “We’re within our range. This is what we intended to do.

Kevin: Is Powell showing signs of squirming, though? When you listen to his speaking, is he saying what we are supposed to hear versus what he’s actually thinking could come out?

David: I couldn’t help but go back and listen to some of the interviews – Tour de France ended this last week. So I was just curious. The sport has changed a lot since the whole debacle with Lance Armstrong. I listened to some of his interviews and it seemed, in at least the interviews I was listening to, that he was incapable of telling the truth, even though what he would proceed with was, “Now, here’s the honest truth,” or here’s the gospel truth.” It was almost like, “You’re putting way too much emphasis on telling the truth.” But you’re not.

And so I wonder if there is not some sort of a psychological tell in that way. Doug referred to – Nolan, that is – referred to the Powell interview in the Credit Bubble Bulletin, noting that ten times Powell used the word “powerful” during his most recent press conference in talking about forward guidance. Powerful, and what we’re doing is powerful. And it just it gave me that same sense, it made me think that the unspoken concern was being shown. Does that make sense? That they’re really not in control, and so they have to really overplay their hand a little bit and say, “Oh, no, no, we’re very much in control, very, very, very much in control,” almost like the guy wearing a power tie. The guy who has to wear a power tie is not the guy in the room with the power.

Kevin: We have had central bankers on this commentary. It’s interesting, I think they let their guard down a little bit. It’s an Internet podcast, it’s not an international broadcast type of television program. And so what we found is when you interview these central bankers is their admittance of lack of control. Remember the statement, it’s an art, not a science?

Just talking about various failures in the past, when you read what bankers write to each other, I remember the IMF report last year about possibly needing to go negative on interest rates that you talked about. And the Bank of International Settlements has been throwing warnings out. The IMF has been throwing warnings out. So, Dave, I know you read that material. What are they saying? Bank of International Settlements just came out with a paper to themselves, right?

David: Yes, it’s a quarterly review, they get to look at the financial markets, they get to look at lending, and because they are a central bank to the central bankers…

Kevin: They’re writing to bankers.

David: They are. And it’s both to the central bankers as well as commercial bankers, and so it’s on a related note, we’ve gone through that quarterly bias paper this weekend, and the concerns that they highlighted, the group in Basel, is that monetary policy is creating distortions. None of this is new so you just have to think about who’s saying it, and that’s why it’s important.

Kevin: Right. And this is the Bank of International Settlements saying this.

David: Yes, so one of the things they pointed out was the valuations for both equities and corporate credit are historically high. And they also pointed out that credit quality is deteriorating even as credit spreads are shrinking, so that the benefit that you have of taking more risk is diminishing over time as people are seeking yield, buying higher risk and getting paid less for it. And it’s really in that environment of shrinking spreads, credit spreads, it’s not a healthy reflection of risk. It’s not risk being accurately priced.

Another thing they mentioned is that inflation is rising. You’ve got real yields which are moving lower. And they spent a good bit of time talking about dollar weakness and even more space given to the disconnect between what they called subdued expectations for the real economy compared with the current stock market patterns. So stock markets up, up, and away, and yet people are still very much concerned about the global economy. That disconnect.

Again, none of this is new. It’s just the Bank of International Settlements saying, “Yes, monetary policy is creating distortions, stocks are moving higher, we’ve got reason to keep our eye on this.” And one of the things that they pointed out is that $250 billion has moved into this category of Tier 3 or Level 3 assets.

Kevin: Those are hard to define, aren’t they? It’s hard to know what a Tier 3 asset is.

David: Not a lot of visibility in terms of the quality or the pricing. And so one of their conclusions, if they’re connecting the dots between Level 3 assets, or commercial banks jumping to $250 billion and the sell-off in bank stocks is that, in fact, not knowing what the risk is on the bank balance sheet is putting banks even further out of favor. So what’s the risk? What’s the reward? If you can’t quantify the risk, that’s a problem.

And then, of course, with interest rates continuing to move lower, net interest margin for your commercial banks is getting squeezed. So the reward side of the equation is also no longer making any sense. So what does a smart person do? Whether you are Warren Buffet or anyone else, you sell the asset.

And so, in essence, they’re saying banks are being squeezed by monetary policy. The final big take away is that monetary policy, specifically lower rates, are responsible for the rise in stock prices and asset prices. And again, no surprise.

Kevin: They’re admitting this wealth disparity that we talked about when you’re seeing riots in the street. This wealth disparity was caused by the central banks in many ways.

David: Again, it’s not a surprise to you and I, but to hear the conclusion slip from the central bankers’ central bank is somewhat damning, because from that you can also conclude that monetary policy is related, is responsible, is encouraging the income and wealth disparities that are one of the defining factors in terms of social unrest and a soft form of class warfare.

Kevin: And the question would be, where does it end? Does a central bank ever reverse something like that? We talked about McChesney Martin saying, “Take away the punch bowl before it gets too bad.” They haven’t taken away the punch bowl. They’ve just brought many more in.

David: Right. I go back to Neil Howe’s program when he was on as a guest, he mentioned, I think the second time because he mentioned it years ago, Walter Scheidel’s book The Great Leveler, superb research on how these disparities and wealth are actually resolved. And it’s not the tax man. It comes down to four things in Scheidel’s book: Plague, war, revolution and financial collapse. Those are the only ones that meaningfully shift the Gini coefficient.

The Gini coefficient is how academics measure wealth disparities across time so that you could be talking about the robber barons in period X, or those in ancient Greece or Rome. And because we’re talking about different monetary systems and everything else, it’s a way of measuring wealth inequality across all time.

But, that’s it. You got plague – ironically, we’ve got a little bit of that now – war, revolution, financial collapse. Those are the only ways that it gets resolved in terms of extreme wealth disparity. The cause? Uniquely, in our time, the biggest cause of wealth disparity is monetary policy.

Kevin: So the reversal, the leveler, like what you’re talking about, plague, war, revolution, financial collapse, just overall disparity, that seems to have started. Let’s play a game for a second. Let’s go back and say we didn’t have Covid this year. Let’s just pretend. We’re going into an election, and there is no Covid. There is no worldwide shutdown. What would it look like? What would it look like if we hadn’t had Covid this year?

David: Prior to Covid, Trump was the incumbent with a strong economy coming into a re-election where the primaries didn’t reveal any strong opposition. Covid has been a gift from the gods of chaos to the Democrats, even if it has not been a leveler, if it has not been to the extreme of solving the inequalities and wealth. But before the virus, Bloomberg reported that poverty was at a six-year low.

Kevin: Now this is Bloomberg.

David: Yes. This is Michael, sponsored and owned by Michael, who’s promised to spend $100 million in Florida to defeat Trump. But still, there’s some reporting here that’s worth noting. Poverty was at a 60-year low with income surging, and this is to quote from a Bloomberg article: “Median inflation-adjusted household income increased 6.8% last year to 68,703, among the fastest gains on record, as more Americans got jobs and wages rose.” And this is all information according to an annual data release by the U. S. Census Bureau. The poverty rate fell 1.3 percentage points to 10.5%, the lowest in data back to 1959.

Kevin: I just want to stress again, you’re quoting Bloomberg. This isn’t you, this is not an ad for Trump, you’re just quoting Bloomberg.

David: No, and this is information gathered from the U.S. Census Bureau. So, best data since 1959, 5th straight decline – again, we’re talking about poverty rates, average household income. In other words, go back prior to Covid. You’ve got an incumbent advantage, you’ve got a strong economy, you’ve got the primaries where they’re eating each other alive. To look back at Kamala Harris’s comments about Joe Biden, it’s actually very telling. He’s a racist, he’s all these things.

Kevin: Now he’s good old Joe. He’s just good old Joe. But something changed, Dave. Something changed on September 18th.

David: You’re right. And that marked a key transition in the election because September 18th – you might have had Covid being a gift from the gods of chaos to the Democrats. But some other gods must like political volatility because whether you like Trump or hate him, last Friday the transition in the race shifted from being about a man, Trump, to being about a woman that is the replacement of Ruth Bader Ginsburg.

Kevin: The Supreme Court.

David: It was, up to that point, cast as an election voting against Trump. I don’t think there are very many people lining up to vote for Biden.

Kevin: If Biden were voting, I don’t know if he would know who to vote for.

David: You’ve got a national referendum on what we value most. Again, because it’s about a Supreme Court nomination, it’s choice versus life, it’s gun rights versus gun control, it’s 1,000 other issues which the Supreme Court abides and interprets, obviously, through a lens, and it’s that lens which is so critical. This is where all of a sudden the perspective that you have if we are going to end up with a more conservative or more liberal Supreme Court. And if Trump gets what he wants this would be the most conservative Supreme Court since the 1930s.

So it is a whopper of a reason for both parties, and tragically, it’s a two-party system, but both of these parties are going to whip up their bases with an amazing amount of fear, an amazing amount of hatred and loathing. I’m not recommending this, that’s what is already occurring, because you need people to feel so strongly that they don’t sit at home and not vote.

Kevin: It’s nice to have an election, though, that has now become about issues. Because personalities – if you’re voting against a person you’re still not really addressing an issue, whatever that is. At this point, it is issues.

David: And for the all the attention that Black Lives Matter has had, it today is a sideshow. The left is going to have to focus all its energy on preventing a nomination and selection for Supreme Court of the United States. If you look at the cast of characters who are curiously in bed together, and liberals and many GOP have been apoplectic – I’m talking about politicians here – just because of Trump’s personality, because of his policies, because of his non-Beltway pressures.

Kevin: Now they’re being forced. Now the issues are being forced.

David: Yes. So the GOP voter base has something to rally around that’s bigger than the man, and the Democrats, too, have something to rally around other than the man whose ability to articulate anything seems to have an observable half-life. I think Democrats are in a tough spot after September 18th post Ruth Bader Ginsburg because suburban women could define the election.

Kevin: Were you were talking about security?

David: That’s one aspect that has already been in play. There is some appeal for law and order in the context of looting and arson and a spike in crime in the context of Black Lives Matter. The New York Post ran an article intriguingly titled, “Minneapolis City Council Is Alarmed by the Crime Surge After De-funding Police.”

Kevin: Huh. Go figure.

David: But again, back to suburban women, this is critical. They may define the election. And here’s how it relates to the Supreme Court of the United States. You have to be careful how harshly you excoriate a Catholic mother of seven, when you include in that seven two adopted Children from Haiti. You have to be very careful what you say negative about a Cuban mother with three daughters. This is not a Kavanaugh scorched-earth campaign. It can’t be. You have to be more respectful.

You have to play to certain other fears, issue-driven fears, like what are we going to lose here? Are we going to lose Roe v. Wade? What are we going to lose here? So again, what criticisms will be legitimate, what criticisms will come across as misogynistic? The Democrats have to run a very fine line.

Kevin: Did you see Cortez’s comments? You were talking about scorched earth. It almost looked to me like she was trying to inspire rioting when she talked about fighting from the streets to the Senate to keep any kind of nomination going through for the Republicans for the SCOTUS.

David: Yes, and we’ll see how we could interpret that or should interpret that, if it’s a Weather Underground moment, or if it is more just rhetorical. But yes, AOC’s comments, “fighting from the streets to the Senate.” If it’s more than rhetoric, then the question is how hard to fight. That’s a key question because if it gets too dramatic in terms of pushing back a Supreme Court confirmation, the Democrats face the risk of rallying the silent majority, in which case Trump would have all the time he needs to nominate and confirm, four solid years to get that done.

Kevin: I know they’re sitting around in the war room right now trying to figure out what is the best strategy. What would you think would be the best strategy? Get it done before the election or after the election?

David: In terms of the Democratic strategy, you’ve got lawsuits already announced. You’ve got a re-launch of an impeachment. It’s going to be 1,000 distractions. If I were Trump, I would let the clock run out on the confirmation and run it down to the wire there in early November, let the Democrats abuse the most qualified nominees, and what that would do is draw out the GOP’s ire.

You’d have so many people across America coming back to, “Wait a minute. This is a Catholic mother of seven, teaching law at Notre Dame. She’s no dope. She’s a smart woman, is a woman of character. Wait a minute. This is a Cuban mother with three daughters. The more you attack, the more you’re going to anger the GOP voter base and get them to come out. Which is what I think Trump needs, a base that says no more. No more. This is nonsense.

Kevin: Do you remember George Friedman? You interview him often. He wrote in one of his books that some of the most effective presidents are not necessarily the most likable presidents. I thought that was interesting because there are a lot of people who don’t like Trump. But issues matter in this election, probably more than any time in American history.

David: Yes, I’ve said this before, just how much I hate politics. It’s interesting from an investment standpoint, to say, these are the possibilities. If this happens, then that happens. So the if/then scenarios, probabilities, outcomes, implications, these are all sort of curious things to try to figure out from a puzzle, riddle perspective. But the human aspect of it – I just don’t like it at all. We sat around the table last night talking about how effective presidents or not particularly likable, whether it’s FDR or Lincoln or Reagan, even someone like Bush who was generally agreeable. I certainly didn’t like 2006 when he suspended habeas corpus, same thing done by Lincoln back in, I think, 1861. Again, the like most likable president, somebody like Jimmy Carter, not very effective.

Kevin: Not very effective. One of the arguments I think we’re going to hear is that we don’t have enough time to confirm a Supreme Court justice. But that’s actually that’s not even close, is it?

David: No, in theory, it could all happen prior to the election. Ruth Bader Ginsburg was confirmed in 42 days. Sandra Day O’Connor was confirmed in 33 days. John Paul Stevens was confirmed in 19 days. There are still, as of this Wednesday, 44 days until the election. 70% of all justices have been confirmed in that kind of a timeframe. There’s actually one instance of a Chief Justice, John Marshall, being nominated after the election by the loser, and confirmed by the lame duck, before the baton pass from John Adams to Thomas Jefferson.

Kevin: We thought we were actually voting for four more years, if a person’s voting for Trump, or a different four years if they were voting for Biden. But when you’re talking about the Supreme Court, you’re not talking that short timeframe. You’re talking about decades possibly.

David: Yes, and I think that’s the reason why this election season may be even more divisive than what we’ve seen for generations, assuming that conservatives aren’t asleep at the wheel. But appreciate that Trump is just there for four years. If he is reelected, that’s 2021 to – the Supreme Court justice replacing Ruth Bader Ginsburg would influence U.S. culture for decades to come, so even if you don’t like him, do you want Democrats determining the next Supreme Court of the United States?

And the same is true, I could say that the opposite way. Even if you don’t like Biden, that fact alone will bring out a lot of voters from both sides of the aisle. I would bet participation is off the charts. I would bet participation even surpasses 2008.

Kevin: I know you, Dave. You don’t like politics. You don’t like talking about politics on this show. But we do look at the markets and politics can influence the market. What are the implications? Biden? Trump? What are the implications in the market at this point?

David: I think one of the reasons I don’t like politics is because it doesn’t put the best of humanity on display, and it doesn’t draw the best out of those in leadership. It is a cutthroat world of very sophisticated chess-playing.

Kevin: And the truth doesn’t matter.

David: Truth does not matter. Being disingenuous is a part of the role that you play. If I ever need to go to be disappointed in humanity, I just think about Washington, D.C. And there are exceptions to that, but they are notable exceptions. They stand out.

Kevin: We have listeners that are exceptions to that.

David: Yes, that’s right.

Kevin: Thank you, by the way.

David: Over the weekend we covered our views. We tried to do that charitably in our Hard Asset Insights. We do that every week on Friday. We looked at the implications. What are the implications of a Biden victory? What are the implications of a Trump victory?

The markets are going to be on edge with November fast approaching. There are real, tangible implications. Tax policy would shift with each president, impacting corporate profits and thus impacting prices. Regardless of what the Fed does to suspend the sun, moon and stars, they’re going to have a lot more heavy lifting to do, given a certain outcome.

Kevin: Dave, once a year we have a question and answer program where we ask our listeners to send in questions. Each time, every year, the questions seem to get more and more interesting. Sometimes we just get comments from listeners. Last week you were talking about Tesla and one of our listeners who happens to be very close to the automotive industry as far as the mechanical side made a comment that Tesla reminds him a whole lot of the DeLorean 30 years ago. I thought that was an interesting comment.

David: John DeLorean was quite a personality, and some would have said he was a genius. He could have run General Motors and he didn’t. He wanted to do his own thing.

Kevin: And they were really interesting looking cars, the DeLoreans. Back to the future.

David: Last week we talked about Tesla versus the automotive universe. It was, by the end of the week, last Friday, GM announced the Ultium Drive family of electric motors. You have five electric drive trains, you have three motors. That was one of the points, that was one of the takeaways. When there is sufficient demand, when it’s profitable to produce and sell, you have the auto companies producing and selling 50 million units. They’re not going to miss the boat on electric vehicles.

So at this point, Teslas are going to need a little bit more than fancy software upgrades and that sleek body style. They look nice, but they’re going to need a little bit more than that to keep them going down the road.

Kevin: I just wonder, last week you talked about these other companies like GM, Toyota, what have you, succeeding probably more than Tesla, ultimately. I just wonder if it’ll be a Tesla, not a DeLorean in the Back To the Future movie that maybe is going to be filmed in 2050. It will be like, “What’s that?” “Oh, yeah, kids, that was a Tesla.”

David: Well, we know history is written by the victors, and DeLorean did not actually get to write his own book about the success story of the DeLorean motor company. Maybe Tesla will be different. Time will tell if a lot of the shenanigans that are financed by today’s credit system are pure genius, or pure lunacy.

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