EPISODES / WEEKLY COMMENTARY

China Turns BRICS to CRIBS

EPISODES / WEEKLY COMMENTARY
Weekly Commentary • Sep 06 2023
China Turns BRICS to CRIBS
David McAlvany Posted on September 6, 2023
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  • China Redraws Map & Claims New/Old Territory
  • Real Assets Will Outperform Financial Assets
  • Student Debt Repayment: 43 Million People Will Pay Average $413 Per Month.

Roughly 60% of Americans cannot afford a one-time out of pocket expense of 400 bucks or more. The Federal Reserve estimates that the number is 37%. I’ve seen samples of over 58%. This is of the U.S. population which cannot afford a one-time $400 “crisis”. What does it look like for millions of Americans, 43 million Americans to be exact, to now have to pay back an average of $413 per month? That’s to pay off the $1.6 trillion in student debt. –David McAlvany

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

Well, we just are coming off of a three-day weekend, and it was awesome because we live in the Four Corners Region and I love going and seeing the Anasazi Ruins, Mesa Verde, Chaco Canyon. My kids called on Sunday and they said, “Hey, let’s go on a hike. Let’s go down to Mesa Verde.” And we did. You can stand at a high point and you can look 80 miles any direction. What’s interesting now, Dave, is this, it’s divided arbitrarily into four states. It’s called the Four Corners: Utah, Arizona, New Mexico, Colorado. But when you stand on that high point and you look 80 miles every direction, and you think of the history of that land, it was Mexican a few hundred years ago, it was Native American before that, the Anasazis, you can go back to the Pueblo people. I mean, you can take this thing back thousands of years, and I just wonder, how much has the map changed and what does a map really mean?

David: It’s a great question. We’re here in Iceland and what it takes to buy property is a three to four year process and all kinds of hoops that you have to jump through. There is no mapping like we have in the U.S., where clear property lines are defined. Literally, you can go to this kissing stones and then up the hill. There’s all these landmarks that are supposed to be relevant, but makes it virtually impossible to figure out what’s what and what’s where and who owns what. It gives you an appreciation for how clean and neat and organized things are in the United States. If you want to turn around and transact on a piece of property in the U.S., you can do it in a matter of days. I have a friend who is four years into a process of buying land here in Iceland, and it’s not complete yet. Four years.

Kevin: Wow.

David: And I said, “Do you know what you own?” He’s like, “Roughly, but it’s not very defined.” What is in a map? If you ask the British or the continental Europeans in the colonial period, it would be a question of claims and, of course, the counterclaims. It would be a question of military viability. One view of a map includes the arbitrary lines created to express aspiration or belief about control. If you’re talking about those colonial days in which you would say, “Here’s where my kingdom ends or where the next step will be as I extend it,” the map maker from Oxford, for instance, would see blurred lines of politics, philosophy, economics, and it would be an expression of the claims of the colonizer. But not all mapmakers think that way. They’re not all strategists or politicians with a fluid sense of reality and of ownership. Some are just simple topographers with a sense of concrete structures, the mountains, the valleys, the rivers, and sometimes the limits that are set by those natural structures that you find in the natural world.

Kevin: And anyone who would come to visit you here, Dave, would see maps all over the walls of the office, because it’s something that you’re interested in. The map of the same place can look very different in a given time, and you even brought up Oxford—and you were thinking more the Oxford University. They think politics, philosophy, economics. That’s even a program where they combine the three. I’m thinking of maps that I saw that were drawn that have Oxford in them that actually were train lines, and the map looks very different than, let’s say, what we consider state line maps. And so, don’t you think time history and that sequence has a lot to do with what a map looks like?

David: For sure. Sir Halford Mackinder, in his famous article “The Geographical Pivot of History,” combines a sensibility like Cecil Rhodes and the British version of Manifest Destiny. We can probably forgive him for that, but Mackinder combines that with a cold level calculus common to the topography geek. Sometimes reading outside the present moment, in this case looking back at Mackinder, I think it reveals some blind spots for us today and ones that existed long ago. You can read him and see that he didn’t quite have it together either. He was Director of London’s School of Economics for five years between 1903 and 1908, but I think brings clear insights rooted in facts. He would be more of the topographer when all is said and done. Facts extending through time regardless of transitory political trends.

Kevin: Well, and he looks clearly at natural resources, and I know we bring this up often, but it’s interesting. Argentina is a beautiful, interesting country, but it certainly has not had the progress that the United States has. Even though it’s natural resource rich, politics has played a big role in that as well. And so I look at other countries—Russia has a lot of natural resources, yet political systems can sometimes mute that.

David: And has been relatively landlocked. That’s the contrast Mackinder brings out in this article. Mackinder, by the way, I think is must reading for the student of geopolitics, in part because his prognostications and predictions aren’t colored by modern history. But, yeah, he points out that Russia has the advantages of vast natural resources and its history is that of a great land power, but it is locked away. Limited access to the sea, its ability to project power is limited, blocked by the Arctic Sea on the north end, and as we’ve talked about in the Commentary before, it’s what makes those Ukrainian ports so vital. When you think about Ukraine and Crimea, that is the only sea access that Russia has.

Kevin: You only have to go to the United States and see either coastline to see how easy it is for us to move things. You can go down to New Orleans in the Gulf, you can look at, of course, New York on the Upper East Side, basically, and then San Francisco. You’ve got Long Beach. We have the ability to move things based on ocean. I think of China. I mean, look how much coastline China has.

David: And like the U.S., China has navigable rivers. You’ve got rivers as large as the Mississippi in Africa, but the elevation change is such that they’re not navigable. So the inlands of Africa simply can’t be gotten to, and a lot of the resources have been there and have been dormant through the years. China maintains a 9,000-mile coastline with a plethora of natural harbors, and it’s in a very temperate zone going as far north as the 50th degree latitude line and as far south as our version of the Florida Keys. Again, it’s in a temperate zone. North to south, they’re like Maine to the Florida Keys, and that’s meant agricultural sustainability for a mass of people with the largest population in the world, neck and neck with India. And that matters a lot. Without food reliability, you’re either starving or you’re attacking. 

All of this connects in, Kevin, because we’re talking really about the 10-dash line and the redefinition of the map for the Chinese, what they believe is theirs and what the justifications are about what they are making claim to today.

Kevin: Just look at the book of Daniel. If we were to look at Israel for a second—because back in 2009 I remember we recorded a Commentary where you were in Jerusalem and I was here—and you go back to the book of Daniel and Nebuchadnezzar’s dream in Daniel Two, it just talks about these empires. He dreamt first of the Babylonian Empire. That was the head of gold. Then after that it was replaced by the Medo-Persian Empire, the chest of silver. And then after that it was Greece, the midsection of bronze or brass. And then, finally, the iron mixed with clay, which was the Roman Empire. That really very well predicted the next 500 years. But that map changed over and over. You ask a Babylonian about Jerusalem, they’d say, “Well, it’s ours.” Or then after that, the Medo-Persians. Or after that, the Greeks. Or after that, the Romans. The Palestinians, right now, you’ve got that fight going on. You remember that interview?

David: Absolutely. Because it’s Jerusalem, and I remember the tour of the Eastern Wall, subterranean, and you can see the Roman architecture and the remains that are still there under the “old city”. But, yeah, these onion layers of complexity in a place that has overlapping ethnic interests, each with their own distinct view of history. It’s the oppressed and the oppressor. It’s the landowner or it’s the disenfranchised landless. And when you’re talking about one versus the other, it just depends on a timeframe.

Kevin: Right.

David: Which slice of history? Whose legitimate claim or grievance? And the competing claims often relate to the timeframe being referenced.

Kevin: China today is no different, but it’s an ancient, ancient empire, isn’t it?

David: Of course, with a variety of maps. In some of those maps, it was a struggling and small estate. In others, it’s the largest empire in the world. In more recent iterations, you’ve got the “old empire” that’s been carved up. Nepal and Burma were carved out by the British, Indochina by the French. Taiwan and the Sakhalin Islands were taken by the Japanese. Many inland plateaus and mountains were absorbed by Russia. But prior to that there was prior to that, and then there was prior to that. So as they often say, “To the victor go the spoils,” but also the writing of the history. And so the history that we know is that of those who have most recently possessed the land, and many dispossessed people from the last 2,000 to 3,000 years are not given the same voice as the existing holders of power. 

Lest you think that sounds like a modern screed on contemporary North American politics, it’s not racism—systemic, historical, or any other kind. It’s not what has been described there in the United States. That is the victor guarding the spoils of war. This extends throughout all time, regardless of race, regardless of creed, regardless of timeframe. And, yes, it is the privilege of the victor to control the narrative.

Kevin: I just wonder too, let’s say they have authors that write alternate histories. Let me play with this one for a second. China, with its gigantic coast land, its amazing amount of resources, what if China, for the last several hundred years, like the United States, had a constitutional government? Had free markets? Had the rights and the privileges that we have here in America? It seems that the communists have really created— I brought up the word mute. That would be an understatement. It has really muted and mutated what they could have been.

David: There’s no doubt. If you look at the sea lanes which they have direct access to, and at different points in history have influenced or controlled, they are perfectly positioned for growth in much of the world. If you look at the most recent little period of time, because of the modern disasters of communist-induced poverty and starvation, China was basically put in a half-century penalty box in terms of growth. Maoism was a form of Chinese nationalism that responded to a variety of colonial encroachments and brought dignity back in some sense to the Chinese, but his vision was of the old maps, right? Since the ’70s and even more powerfully since the turn of the century, and with membership to the World Trade Organization, China’s growth from developing economy, kind of a young aged concept in terms of economic development from a developing to a developed economy, now number two in the world, that kind of ignores the multi-millennial perspective on the mainland.

In our lens, I think when we think of developed and developing really is too economic in nature and distracted by the development language like infancy, and adolescence, and middle-aged, and mature, and old aged. I think the reality, what I’m trying to say, Kevin, is that Mao and Xi alike see in China a resurgence of power. This is a comeback story. It’s not a development story. So when we think of the 10-dash line, what just even months ago was the nine-dash line and may seem like an encroachment on other people’s rights, on other people’s territory, in the Chinese view of things, which does not necessarily have to be the legitimate view, but it is the one that they carry forward nonetheless, this is a return of the old power. This is a reestablishment of the old borderlands.

Kevin: I think I told you this, about a year and a half or two years ago, I had some neighbors. We’ve got five acres and they have acreage, but they figured out that there is a shortcut to the main road across our property, and so they started taking it without asking. They had a nine-dash line and they made it a 10-dash line. They redrew the map, and I actually had to put some fencing up. I had to put some signs up because it was destroying the property and there were some other complications. I’m not trying to not be a good neighbor, but they had decided to redraw the map and it wasn’t really their property. I’m wondering who told China that they could turn the nine-dash to a 10-dash?

David: Good fences make good neighbors. What’s really interesting is in the West, there is a precedent which is set by where a fence line is, and it may not actually be a property line, but a fence line, if left established for long enough, can in some sense rewrite the property line, and so the conveniences of topography and where you may choose to put a fence because there’s too many rocks or it was better to put it to the left or the right of that particular obstruction, you may in future generations be claiming someone else’s or giving up your own territory. It’s very fascinating. But the Chinese, they took the land from others, they kept it awhile, they built a Great Wall, and then had some of their land taken away.

Now, Xi wants back what he sees on the old maps, and I realize that’s a very cheap history of several thousand years, but the return to the old maps is exactly what we got with another dash added here in the last few months, and it’s not really old. Not really old. This one was created in 1947. What was a nine-dash line is now a 10-dash line, and actually was 11 dashes from the 1950s, but it became nine because Mao wanted to concede the Gulf of Tonkin in 1952 to the Vietnamese so as not to offend fellow communists, so Mao’s map is now Xi’s map and the lines are coming back into play. The 10-dash line is in play. Does it surprise you that a resurgent Chinese nationalism is being cultivated in a time of deteriorating economic growth? Doesn’t surprise me.

Kevin: One of the guests that we have on on a pretty regular basis is Dr. George Friedman, and he wrote a book called The Next 100 Years where he’s predicting maps. He’s basically doing what Mackinder was doing, and he’s saying, “This is what I see it looking like over the next 100 years.” Now, he knows he’s not going to be exactly right, but my question would be, we can now look back a little over 100 years from Mackinder’s writing, and you’ve been reading it, how has it played out? Is his prediction or his predictions, are they coming true?

David: Yeah, some of his writings, published posthumously, 1919, truly insightful, and I like that they’re apolitical in terms of the current context. As you said, he’s been dead for over 100 years. He was a geographer first, then a historian and academic, and a politician third. I don’t know what role he played at London School of Economics, if it was the geography insight that put him in that role or if it was his ability to be an administrator as well, but he oriented his analysis by starting with a map. The map of China, in his view, with its many geographical advantages, would allow it alongside the US and the UK—he was a good imperialist through and through, always considering king and country or queen and country—these three would rule the world, the US, the UK, and China. 

Now, obviously, things have shifted through the ’40s and ’50s for the UK, but for the US and China it is interesting. Russia would ultimately be absorbed by China—that was his view. I think when you study a map it is important to recognize that maps are not deterministic, but there are limiting factors. Maps do limit in some cases, or even promote opportunities in others, and that is back to the difference between a topographical map and an aspirational geopolitical map.

Kevin: So a map could be in the minds of the people in power and the people not in power. We’ve talked about the lady who owns the wonderful Chinese food restaurant down here in Durango. She has for the last 30 years. Her family’s from Taiwan, and they’re very fearful of a Chinese takeover, yet she told me about half the populace in Taiwan sort of considers themselves part of China already, and so maps oftentimes have to do with hopes and fears in the minds of the people. I guess the person empowers the one who draws.

David: Well, that’s exactly right. We went to meet with Madame Chiang Kai-shek in Taiwan when we were there in 1992. The story of Chiang Kai-shek and what he did to fight communism was an interesting story in and of itself, but this little enclave, which became sort of the hideout for the anti-communists, Taiwan, it really does matter what part of history you tie yourself to in terms of a national identity. But along with the 10-dash line map, which the Chinese released this year, it includes Taiwan back in the fold. They’re solidly claiming that as their territory.

They’ve done it verbally and said this is sort of the wayward stepchild of the mainland, but they released another aspirational map in late August, which I thought was also fascinating. This relates specifically to my thinking on the BRICS meeting that was in South Africa just a week or so ago, but this map released August 28th with the Eastern Indian state of Arunachal Pradesh inside the Chinese territorial borders is fascinating. How does this work exactly? You have a BRICS convention of unity where one member is making claims to another member’s land, and where violent confrontation has occurred at least three times in the last 10 years. Are these really good bedfellows, Modi and Xi?

Kevin: Well, and I wonder, because you talk about unity, they’re coming together in unity, but what are they unified about, Dave? Are they unified about something positive going forward, the BRICS, or are they just angry? I think of a water cooler discussion with disgruntled employees at a company. They might be unified at the water cooler, and in a way, I sort of see the BRICS as disgruntled countries standing at the water cooler going, “Anything’s better than the US dollar.” What do you think?

David: No doubt. When I think of the BRICS meeting in South Africa, I first think that a gathering of nations that is primarily formed to express what they’re against and not what they’re for will have difficulty getting very much done. It’s just the difference between critics and creators. To critique is not to create, and if you want something new, criticism is not a sufficient condition for what is next. It’s a lot easier to find fault than create harmony. 

I think the kitchen comes to mind. It’s a decent example. You don’t like what’s being cooked? Fine. Lay out your grievances. They may be true. You may think there was too much salt, not enough pepper. Can you do better? Culinary harmony is a process. It’s delicate, it’s detailed, with the results very different than, say, you mentioned a can of Dinty Moore stew, and you were on your road trip last week, right? The results are very different. Okay, so it’s calories, right? But a can of Dinty Moore stew versus culinary harmony with somebody who knows how to do this and that and the other, certainly different than a list of things that you don’t like. 

I have no defense for the US Treasury and State Department’s operations around the world. In fact, I too could critique. I agree, in that sense, the cooking is terrible, but positive change is driven by capable and creative humans. I have limited tolerance for the gathering of gripers.

While I have limited tolerance for griping, I have zero tolerance for griping with guilt trips and with there being an expectation that all that is wrong with the world needs to be made right by those the critics are assigning blame to. That was my impression of the BRICS. You’ve got a gathering of gripers who are willing to say, “You know what is wrong with the world, these guys need to pay for.” How convenient. It really just feels like another version of a power grab, and it’s not very clear at what point the negative energy of critique becomes the positive designs that the Chinese have of becoming top dog and being the next hegemon themselves.

Kevin: Like you said, unity is hard. Right now, they can be unified on one thing. They can say, “We just don’t want to have dollar dominion anymore,” but you look country by country and the demographics are so different. Dave, China, how long did China just allow people to have one child, and how in the world can they compete with some of the other countries that never had that policy?

David: Yeah, that’s right, so the second thing that comes to mind with the BRICS is that you have as the two most significant members, India and China, and a power rivalry which is only in its early stages. India’s demographics are far superior to China’s. China is on the edge a demographic cliff, while India has the more youthful population. 

It’s fascinating to watch studies and look at studies of GDP growth back to the ’90s. And you can see China has been the real growth story from the ’90s to the early 2010s, even up until today. If you’re looking at the BRICS members, there is one story of growth. It’s the Chinese story, only slightly followed by India, and everyone else is a footnote. It doesn’t even matter. It doesn’t even matter. 

So there is this trend of increasing growth, but based on what? The Chinese now have one of the most significant issues that a country can have, too much debt and not enough engine to drive growth and pay it off. So the financial markets and the economy within China are under a tremendous amount of strain. And again, if you want to say: Yes, but the Chinese are growing. Yes, but the Chinese growth was artificial. It was based on debt.

Meanwhile if you look at the growth within India, it has not been based on debt. Indian integration with Western European and US trade has been critical. They continue to buy defense and sign major defense contracts with France, major defense contracts with the US. These are considerable tie-ups, if you will. Software and services to the US and Europe with India, very considerable. Remittances out of predominantly US and US allied countries, total on an annual basis $100 billion a year. Again, these are the ties that bind. Indian student visas, they’re to the US, they’re to Australia. What’s the commonality? It’s the anglosphere. It’s not the sinosphere.

You don’t have Indian students going to Beijing to get their educations. No. They are coming to the West. The orientation to the US and the positive relationship, and again, it just makes me look at the BRICS and I’m like, “Wait a minute, what is this?” Yes, there’s some griping, and I’m not saying it’s all illegitimate. Some of it is legitimate, but this is not the remaking of the world order. One of the primary members has this huge connection to us, to the US.

So I don’t know. The orientation of the US, the positive relationships here, it supports the notion that the BRICS are unified in an unfairness theme, but are not unified in how any further pie dividing is going to be evenly apportioned to members.

Kevin: I’ve sometimes wondered if, granted, we use the word BRICS because it’s convenient. It sounds like you can spell a word out of it. But I think probably if you were to look at the chief driver of the BRICS is China, so I would call it the CRIBS, C-R-I-B-S. Just rearrange the letters a little bit. Now I would still leave China there, honestly, because of the military and some of the other things, the resources, what have you, even if the demographics are not keeping up.

But you, I think, are saying you almost have to come up with a word possibly where the I is in front of the C, ultimately. Is that what you’re saying?

David: Yeah, because I mean, one of the reasons why Jim O’Neill picked this cadre of countries was because there was similar growth themes within their economies at the time. But when you have countries that are all experiencing fast growth, it’s important to see why are they growing all in lockstep? Well, as it turns out, a tremendous amount of debt in the Chinese economy—we’re talking about a banking system which 15 years ago was less than 10 trillion and is now close to $60 trillion in size. The banking system in China is double that of the United States, and I’m not saying that because it’s strong. I’m saying there’s twice the amount of debt that’s been pushed out into the economy by Chinese banks. So they have a “larger” banking system than we do only because there’s that many more IOUs attached to the economy, which is an economy which is smaller than ours.

That facilitation of growth in the debt markets in China is what drove property development, drove commodity demand, and drove economic activity in Brazil, drove some economic activity in a variety of other commodity producing countries. But broadly speaking, it was the massive expansion of Chinese debt over the last two decades which has caused there to be an interesting story with the BRICS and with other countries that are not in that mix as well. Vietnam, Malaysia, the Philippines, and by the way, these are countries which if you’re looking for alignment or misalignment, Vietnam is implicated in this 10-dash line. India is affected by it. Malaysia has some real skin in the game. The Philippines— When you look at the South China Sea and the claims that are made by the Chinese with this 10-dash line, if I’m Vietnam, I’m offended. If I’m India, I’m offended. If I’m Malaysia, I’m offended.

The largest Muslim nation in the world has some skin in the game. When you start thinking about Indonesia, the Philippines, all of them are going to be affected by this 10-dash line. So it seems like an excuse, the BRICS and the rise of the “rest.” It seems like an excuse to displace the US just in time to hand power to a new hegemon.

Kevin: Right. Right.

David: Ask all those countries if they prefer, with grumbling, US hegemony, or would like to try Xi Jinping’s version of hegemony instead. Capital and human resources want out of China, not in. Let that sink in.

Kevin: Yeah. I’m going to go back to what I was saying before, then. I think the wake-up call for the BRICS is that it isn’t the BRICS, it’s the CRIBS. China’s basically saying, “Look, here’s our map. China first.” Then you’ve got the R, then you’ve got the I, then you’ve got the B, then the S, and then of course the smaller countries. But that is a shock when it’s like, “Yeah, we’re mad at the United States. All of us, we’re mad at the United States. We’re equal on this.” And it’s like, “Oh, no. No, you’re not equal here. Here’s your map. Here’s your sign.” Remember that?

David: Yeah. And I think of going back to what happened with Newt Gingrich in 1994. It was the first time that we had had a group of politicians in the United States in many decades boldly proclaim what they were for instead of what they were against. And there was something of a political revolution that occurred in the US in ’94. As a result of that, there’s power in stating what you’re for. That’s not happening with the BRICS. And I think the Chinese are more than happy to facilitate and throw a big party for everyone who’s against the US in some form or fashion. But that does not mean that you have the upsetting of the apple cart. A change in dollar hegemony, I think it’s pretty laughable.

Kevin: How many people are moving to China purposely? The students are coming here.

David: No, but that’s my point. You’ve got human capital, you’ve got financial capital, which is doing everything it can to get out of China. Do you want them to be the next global hegemon? No. But think about where the world sends their children to be educated. If you’re in Africa, many times if you’re in Europe, even though you’ve got great educational opportunities in Europe, if you’re in Asia. On that student visa front, there was a friend’s daughter who recently turned down her acceptance to MIT because there’s no diversity in the student body. It’s predominantly Indian and Asian, specifically Chinese.

Kevin: And she wouldn’t go for that reason.

David: Well, she just thought she wanted a different college experience, and so she’s going to another Ivy League. She also got into another Ivy League as well. I think that’s great, and I’m not being critical of the disproportional student body at MIT. Work harder. Your opportunities are bigger. That is an American story. The world gets it. That’s why their children come to school here.

Meanwhile, Xi Jinping wants to fight the Western capitalist model, criticizes wasteful consumption, doesn’t like the way we orient our economy, and champions prosperity for all—which is just another way of saying, “From each according to his ability, to each according to his need.” Now, let’s see how that works out the second time. You think it’s going to be any different than the first? I don’t think so.

Kevin: Yeah, we’ve got more than a century of seeing that communism doesn’t work. But it just comes right back, doesn’t it?

David: Yeah. I would suggest that Xi consider Santayana’s warning [those who cannot remember the past are condemned to repeat it] and reconsider the project that he’s putting in motion—again, in light of the failures of the Maoist system which preceded. Chinese success in the 1976-to-the-present period has been about reconnecting with global markets. These are very inviting terms. These are very beneficial terms. They went from being insulated from the world to being engaged and plugged in to the global markets, to capitalism, after being disconnected for a long time. I look at the Indian mindset, one that embraces the market, one that embraces business dynamism. Not only do they have demographic superiority to the Chinese, but they have a mindset which is more open to, a philosophy which is more open to, what I think is ultimately going to drive economic development and success in their country.

I’ve never been to India, so there’s a part of this that I’m stating this rather blindly. But Indian entrepreneurship is a global phenomenon. Go anywhere in the world and where there is a strong Indian community, you have a strong business class. I’ve been and seen that in South Africa, in Tanzania, in Malaysia, in Indonesia, in Britain, in the United States. Again, though I’ve never been in India, by reputation, the ethic of working hard, taking entrepreneurial risk, is I believe the second buttress to Indian economic growth in the decades ahead.

And believe you me, to the degree that you see an eclipsing of Chinese growth by the Indian economy, do you know what you have? An adversarial relationship. This is not friends getting together in the BRICS. This is everyone with their own silos of self-interest working themselves out. Ultimately just an excuse for a power grab.

Kevin: It’s amazing to me, Dave, I just realized just now in this conversation. Because you’re very well traveled and your mom and dad are in India all the time because of the orphanages that they help volunteer at. I didn’t realize you hadn’t been to India before, so that’s surprise number one.

Surprise number two is we haven’t talked economics hardly at all, and I’m thinking about maps for a minute. Just go with me here. Let’s see if this works. Because you can look at the stock market right now, and it is a completely different mindset map than the bond market. You’ve got jittery people in the bond market, volatility. There’s nervousness. What do the bond people know that the stock people don’t? Or vice versa, what do the stock people know? The maps don’t match. There’s no unity there.

David: Well, looking at charts, charts are not maps in the sense that they’re referencing a physical reality or a political or geopolitical aspiration, but they do signify limits insofar as you’re talking about boundaries and access, we’ve discussed the exponential function and how at a certain point all charts that point to infinity and beyond collapse on themselves. Reversals are key from both the extreme lows and extreme highs of a market, and they reflect the full cycle or asset price cycle dynamic.

Again, charts are not maps, but they do tell you about the journey of an asset. And of note, once again, is the incredibly low level of volatility in the US equity markets. VIX as a measure of that remains virtually penned to the floor. The MOVE Index, which is a similar measure, but in the bond market, not so much. The bond market has the equivalent measure of volatility, and it has stayed on the move. It has stayed very volatile.

Kevin: If you’re at a cocktail party, okay, this is just a little bit of wisdom here. If you’re at a cocktail party and you’ve got some guy talking about his stocks, and you hear over in the other part of the room, some guy talking about bonds, move over to the other part of the room. Listen to the bond guy. The debt markets seem to know a whole lot more than the equity markets.

David: Yeah, I’ll be honest, that conversation at the cocktail party will be three times, five times, 10 times more boring.

Kevin: Yeah, the bond guy.

David: But three times, five times, 10 times more consequential, which is more important. It is the insights that come from the person who’s discussing basis points in the interest rate market. What is the bond market anticipating that the stock market is not? Speaking of extremes, we’ve got U3, finally bumps higher, right? Still not at 4%, but is there more to come? Will we see the 5, 6, 7, 8% unemployment rates of earlier periods? Is that what the bond market is guessing at? Slowing economic activity, weaker jobs numbers, fewer people looking for work. And the markets, again, we’re talking about the stock markets here. By contrast, we are moving into the seasonal week period for equities. This sort of September, October timeframe is as bad as it gets, not as good as it gets. We’re past the as-good-as-it-gets moment. We are moving into the seasonal weak period for the equity markets.

Traders are coming back from summer holidays, they’re reengaging with the world of asset pricing—or perhaps you could think of it as asset mispricing. We’re also on the cusp of, again, going back to the economy, student loan repayment begins within weeks, 60%.

Kevin: Disappointed. There’s a lot of disappointed students. They thought they were going to get that all handed back to them. Now they have to pay. How much is that per person?

David: Roughly 60% of Americans cannot afford a one-time out of pocket expense of 400 bucks or more, and actually there’s two ways. The Federal Reserve calculates this differently. The Federal Reserve estimates that the number is 37%. I’ve seen samples of over 58%. This is of the US population which cannot afford a one-time $400 “crisis.” What does it look like for millions of Americans—43 million Americans to be exact—to now have to pay back an average of $413 per month? Per month! That’s to pay off the $1.6 trillion in student debt—debt, by the way, which cannot be extinguished in bankruptcy. I was explaining this to my son the other day. He said, what do you think about this idea of canceling student debt? I said, well, it’s unmistakable. It’s a ploy to capture votes. It is a way of paying people for their vote. And he said, well, I can see that.

I said, why wouldn’t you just make this kind of debt cancelable in bankruptcy? He’s like, it’s not? I said, nope, not that debt. You can’t walk away from it. You can never walk away from student loan debt. And the reality is, that would be a generous gift, and it would not be a redistribution of assets broadly from one group of people to another, but it doesn’t buy you votes. It doesn’t buy you votes. So 43 million, an average of $413 a month on $1.6 trillion in debt. I think we’ve got a surprise. The economy has been remarkably strong, I grant you that. But I think that’s getting ready to change because at the margins you’ve got Americans who cannot afford any increase in expense, and 43 million Americans are about to get slapped upside the head.

Kevin: So back to the cocktail party. Okay, so the bond guy, he’s nervous, and the bond guy is basically saying, nope, I’m not going to go where the stock market is. You got the guy over across the room, he’s had two gin martinis, right? And he’s like, yeah, we’ve made back almost everything we lost last year. I mean, that’s the truth. The stock market, we’ve almost made back the losses from what was a pretty cruddy year on the stock market last year.

David: Absolutely. Stocks have recovered 80 to 90% of last year’s losses, not quite to break even for the 20-month period so far. Does consumer stress change speculative behavior in the months ahead? We’ll have to see. Maybe. What we know for sure is that speculators are still content speculating. There is a high degree of concentration in that speculation, which is noteworthy. We’ve mentioned this before, but I thought it was interesting. The largest positions held by hedge funds today are in the top seven to eight names, which are over-owned by mutual funds, over-owned by direct ownership of individual investors, and that makes it really interesting. If there is a reason for a wobble here or there within the stock markets, it’s the seven to eight names that get dumped by hedge funds. They get dumped by mutual funds. They get dumped by individuals. This is the danger of an over-owned space. Again, if for any reason hedge funds have to lighten long positions in those tech names, we have a trap door moment for the investing public.

Kevin: Yeah, everybody wants out at the same time. Everybody wants in at the same time. That is just very pleasant if you own that stock right when everybody’s just piling in. But when they’re all piling out at the same time, sometimes you don’t even have a buyer.

David: I think it’s worth talking a little bit about gold just because it’s had such an interesting two decades, and we have not seen radical dollar declines for that to be sort of the propellant for gold ownership. We mentioned this last week, three or four reasons why I thought gold would buck the trend in terms of the Summers-Barsky thesis. But there is this reality that as the world of financial assets has increased from 1980 to the present, and we sit just a stone throw away from all time highs for the S&P, for Nasdaq, for Dow, one of the least owned and least impressive areas where probably the greatest opportunity lies is in real things: commodities, real estate, collectibles, precious metals. That is absolutely remarkable.

Bank of America, their global investment strategy group, put together an amazing chart going back to 1925 where it contrasts the performance of real assets versus financial assets. And they make a very compelling case that we are at an inflection point with Covid and the war on inequality, as they describe it, being the driver of growth in hard assets, in real things, in commodities, in real estate, in collectibles, in precious metals.

And what that signifies is a true bear market in financial assets. Over-owned, over-owned, very much over-owned, as we mentioned, and concentrated in just a few names. We’ve seen little to no performance year to date in, call it 492 stocks within the S&P 500. Modest returns, and certainly it has not put back the losses of last year. The outperformance of seven to eight names has been what has painted the tape in a positive light for the S&P 500. My point is, being at what may be a very significant inflection point, one that extends asset repricing over the next 5, 10, 15 years, what side of that line of demarcation, if you will, do you want to be on?

*     *     *

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-A-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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