Hamas Attack Splits The World

Weekly Commentary • Oct 11 2023
Hamas Attack Splits The World
David McAlvany Posted on October 11, 2023
  • 50 Years Ago, Israel Declared War. It’s Happened Again
  • U.S. Sends $75 Million To Hamas Proxy Days Before Attack
  • Need A Reason For High, Long Inflation? Look No Further

“Even though wheat is down 28% year-to-date, that doesn’t mean your box of Wheaties is down 28%. It moved higher, and is stuck. It will stay. That means that the consumer has a point of anxiety that is not going away. It wears on social mood. When you begin to see housing affordability get out of reach, it has an effect on social mood. When you see the engagement between Russia and Ukraine and you either are for or against it, there’s a tension there which underscores this idea of social moo, and the negativity therein. Geopolitics is just one more, and again, it may be that thing which is the tipping point for social mood. Social mood ends up being very, very important in terms of the pricing dynamics within asset classes. It is tied together. What happens in Israel matters.” –David McAlvany

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

David, we have so many things we could be talking about. I have a very, very heavy heart though. I remember the Yom Kippur War and the last time Israel actually declared war. And I remember the rest of the 1970s as well. We’ve been talking a lot about the 1970s. We talked about the 50-year anniversary of the oil embargo. We also have a 50-year anniversary of Israel declaring war, and another war just was declared.

David McAlvany: Fifty years passed. One day after the anniversary of the Yom Kippur War in 1973. The death toll nears a thousand with four times as many injured, and already the conflict has reached the scale that exceeds anything going past the inception of the Jewish state in 1948. It’s the deadliest event in Jewish history since the Holocaust. Proportionate to our population, imagine 20 to 24 thousand deaths in a day. So for us, it would be the equivalent of six times the scale of 911.

Kevin: It’s very difficult right now watching these news stories. But the thing, too, when things like this occur, you want to know everything. You want to look at all the details. And I think sometimes you just have to step back and say, “Okay, what’s really happening in the big picture?”

David: Well, what’s happening in the big picture is the White House is hosting barbecues with live bands and has very little to say about the death of Americans and Americans taken as hostage, but with some issues and events, and I think this is why it’s hard, to gain perspective, it is a challenge. If there’s an emotional aspect to them, something that makes you extremely sad or angry or confused, trying to understand it becomes complicated. And it’s complicated by your own jumble of thoughts and emotions. And sometimes we have referred to that as the fog of war, you could call it that. And after this week’s attack by Hamas, and as you mentioned Netanyahu’s subsequent declaration of war, there are a number of places that I turned for detail and perspective.

Kevin: Now I can’t help but remember something that you said about a month ago, and I’ve repeated it over and over with clients and my family. You were asking the question, this anti-American axis that has occurred, the BRIC nations, the people who are anti-America, anti-Western values. You said they’re really not for anything. They just are unified in their anti. Well, this just adds fuel to that fire.

David: Yeah, a critical takeaway as this continues to develop, it’s the anti-US axis. They’ve found something to rally to. This is China and Russia and a longer list of discontents who are sympathetic to the Palestinian cause, and since Saturday have been out praising Hamas’s actions. And I think it echoes the phrase, “the enemy of my enemy is my friend.” We’ve said the challenge of the BRICS block of nations seeking a new global order, it doesn’t share much in terms of what they’re for, just what they’re against. So this adds a dimension of pathos to their discontentment. And I think the world is, on that basis, becoming more quickly divided.

Kevin: We look at war and, who was it that said, “we’re always fighting the last war.”? But that’s really true. We look at war, and our imagination is tied basically to the way war used to be fought. And then we get this new introduction to the way war is fought now.

David: For historical perspective, we’ve done a little work already in the archives of the Commentary, we’ve got interviews featuring Martin van Creveld, his books The Transformation of War, and after that The Changing Face of War are library staples. And if you’ve read Sun Tzu or von Clausewitz, then van Creveld is a must-read. You’re not done yet with your reading.

Kevin: You bring up Sun Tzu. I’ve got a very good friend here in Durango who was high level Air Force in the Philippines back in 2004—by the way, very successful as far as fighting terrorism in the Philippines in a not necessarily always kinetic, violent way. But he said he went with two books, Sun Tzu and the Bible, and he applied both.

David: It’s a challenge. I sat with the kids last night and asked, “What would you do? Someone marches through the door, what’s my obligation to you as my children?” I’d love to sit and have a peaceful cup of tea, but my first obligation is to protect my children. And there may be a subsequent phase, a subsequent period of time, where it makes sense to engage in diplomacy. But this is an incredibly tough moment in Israeli history.

Kevin: We’ve talked to some amazing guests. I remember Bernard Lewis, he’s passed since our interview, but Bernard Lewis wrote a number of books on the Islamic nations and Islam in particular, in a way that would help a Western mind or an American mind to understand it. And then you interviewed him. Remember Yehuda Avner?

David: Yeah.

Kevin: Who actually, five prime ministers he served with.

David: So between van Creveld and Bernard Lewis and Yehuda Avner, these are people that we go to for perspective. Lewis and Avner, both brilliant. One is a strategist and counselor to five prime ministers, and the other is one of the foremost scholars on the Middle East anywhere in the world. I grant you, Lewis was probably one of our toughest interviews, maybe the most edited of any we’ve done.

Kevin: He was getting pretty old by then. He was in his nineties.

David: Died at 101 after 50 years as a professor at Princeton. But I felt like I knew his mind already. I’d read his books, The Assassins and The Crisis of Islam, Islam and the West, and The Arabs in History. As you go through them, there’s a bit of repetition.

Kevin: Well, and you don’t just read the books, Dave, the times that you get when you’re traveling, you try to meet these people. Van Creveld, you met, I think you also met Avner.

David: Yeah, I’m glad to have known two of those men. Met van Creveld at his home outside Jerusalem, and Avner at a dinner party in Tel Aviv. Yehuda Avner was perhaps the most intriguing read, getting firsthand insight into each of the five prime ministers that he served and counseled. That book is like no other. So for an eyewitness history of Israeli politics and the battle for survival as a fledgling state, there is no equal. The Prime Ministers is one of the best books I’ve ever read.

Kevin: When I went to school at North Texas, 1981 was when I went to college there. And I walked into the dorm one day and there were people from the Middle East all over the downstairs celebrating the assassination of Anwar Sadat. And I had never seen anything quite like it. It wasn’t just a celebration, a quiet celebration, it was just an incredibly raucous situation. And I realize the world is very, very divided. I can’t live in my little world thinking about my thoughts and thinking that the rest of the world sees them the way I do.

David: For more granular insight and detail, Aaron Stein has this bevy of contributors at War on the Rocks, and that’s very helpful. There are different kinds of geeks in the world, and these guys bring a very unique perspective to the battlefield and to global conflict. And it’s very gritty. It’s much more sort of your tank columns and troop movements, very detailed. There’s a level of interest that goes well beyond journalism. At their site, over the weekend, was an interview with Bruce Hoffman. He’s the Senior Fellow of Counter-Terrorism and Homeland Security at the Council on Foreign Relations. And he made some interesting observations. I’d say if you’re unfamiliar with War on the Rocks, it’s a personal favorite.

Kevin: Well, and that’s why I say, we sometimes can get caught off guard because we think in a different paradigm. We’re thinking in the last war. We don’t really think much about things we haven’t experienced ourselves.

David: And Hoffman reflects on the 911 Commission Report, which criticized our intelligence groups for a failure of imagination. And it applies here, too, with Israel and not being able to see what Hamas was capable of. Never before has a terror organization, a non-state actor, coordinated three dimensions of attack at once, that’s on the ground, in the air, and from the sea at once. His comments recalled van Creveld’s thesis that large state forces have struggled to effectively fight insurgent, guerrilla, and non-traditional conflicts. So fighting terrorism is something that has not been perfected, in part because to do so challenges individual autonomy and personal rights with sort of blanket solutions. The wall is an example. A lot of confidence was put into that structure between Gaza and Israel, and it didn’t prevent bulldozers from destroying it. Not just the wall, but they also destroyed any sense of security that it provided.

Kevin: Well, and talk about security. I mean, when you say Iron Dome in Israel, that has been the provider of security. You talked about land, sea, and air. That has been the security for the air, but this time not.

David: Yeah, it’s the IDF’s protection from rockets. And it has in the past been highly effective at shooting down barrages of projectiles. Go back to 2006 and the war against Hezbollah, 4,000 rockets were fired. The duration of the conflict was about 36 days, roughly 100 rockets per day. But the Iron Dome failed to adequately protect the population this time. You had thousands of rockets, missiles, and other ordinance fired in a day. So the scale was shocking. And again, it goes back to that 9/11 Commission comment, “We start with a lack of imagination.”

It was the attack that surprised, dismantled command and control, they took a base, they actually overran two military bases. Border defenses were neutralized, as I mentioned, by bulldozers knocking down the barriers and allowing for a ground attack and the taking of dozens of hostages. Criticisms have centered on Israel’s over-reliance on sophisticated technology. And this is where the new world and being in love with tech, you realize that strategy, tactics, and warfare can be ancient as well as modern, and they were ready for the modern, but not ready for the ancient. So too much confidence in the Iron Dome, misplaced reliance on technology, but a more basic error, a misread of pressure points.

Kevin: In 2017, I was at the King David Hotel in Jerusalem, and it was evening and there were two young ladies, they probably were 19 years old, 20 years old, that walked onto the elevator with us. And just from the front, it looked like they had purses on, they just had a strap across their front, and then when they turned around, they were AR-15s or M16s. So just for perspective, in Israel, I mean these ladies were going out for a night on the town, but they still were IDF soldiers. Where were the IDF soldiers? I think a lot of them were disproportionately in different areas?

David: Seventy percent of all troop deployments were to the West Bank. And if you look at a map, which I’m sure at this point just about all of our listeners have looked at a map. The West Bank includes Hebron, it includes Jericho, it includes Bethlehem, and it’s a larger block. It’s a significant border to keep secure. So 70% of all troop deployments were there. And the IDF and intelligence was focused on the West Bank, focused on recent unrest at the Al-Aqsa Mosque. They left Gaza open. Even the Gaza troops normally deployed there were moved to the West Bank. So there was a degree of opportunism and perfect timing on the part of Hamas. It was really a brilliant maneuver.

Kevin: Well, and I can’t help but look at what we have here in America right now, the polarized nature of our politics. That’s going on in Israel as well. So when we talk about Israel, we’re not talking about a unified state right now, we’re talking about people who are really arguing internally.

David: Yeah. On top of the highly effective diversion, where all of a sudden the incursion from Gaza was even possible, there in Israel you’ve got the internal political distraction, an intense focus on judicial reforms that has had the Jewish people protesting. They don’t like Netanyahu’s projection of power, they don’t like the idea that they could be moving from a democracy to something much more strong-armed. So you had a large number of reservists who’ve basically said, “Don’t call us, we’ll call you.” And that’s been the case leading up to this issue.

So internal polarization and divisiveness was something that Hamas has, in this case, used to their advantage. It was interesting because Hoffman’s comment was that, “Here in the US, our enemies are watching.” As in US domestic discord is something that can be taken advantage of, and the US should keep it in mind. It’s a reminder that in our election cycle that chaos is easier to sow when attention and energy is internally and dysfunctionally focused on the party that you oppose. In this sense, you see that rage is blinding. So again, we go back to a misread of the pressure points. We need to see more, not less, clearly.

Kevin: I think of the game Jenga, where you can pull one of the pieces out this tower built of wood blocks. Each person has to pull a piece out and it creates a gap, you just have to make sure that that gap doesn’t tumble the whole tower. And remember, back early years, the first Persian Gulf War, we left Saddam Hussein in place, we did not continue to pursue him. The second Persian Gulf War, ultimately Saddam was removed. And remember George Friedman, who looks at the world like a chessboard, and you interviewed him, and he said, “The removal of Saddam and the vacuum that that left, as horrible a guy as he was, there was some stability that was being maintained by that tyranny. You remove him, and of course, Iran or Turkey was to fill that gap.” I’m just wondering if that doesn’t play a big role right now in what’s coming next.

David: Yeah, the key concept with Saddam and this conflict between Iran and Iraq was, there was a balance of power in the Middle East. And Hoffman also acknowledged what George Friedman has long argued, as voiced on our Commentary. The removal of Saddam Hussein changed the balance of power in the Middle East, and we are continuing to pay a price for that. So US foreign policy, whether it was well-intentioned or not, that’s a different conversation. It’s had lasting negative impacts throughout the Middle East. You go back 20 years ago and it was Saudi Arabia that was funding Hamas, and they’ve cut that. Iran has filled the void. And Iran has long funded, really over the last 20 years, they’ve been one of the primary funders of Hamas in that terror organization.

Kevin: Yeah, but what about Hezbollah and to the north?

David: They funded them, too. So it’s not clear that there’s really much of a difference between Shia and Sunni. Again, the enemy of my enemy is my friend. You find that you can set aside theological differences, who will run the show in the Middle East? That’s less important when you’re trying to oust an incumbent power.

Kevin: You know what? Money is important, too. You’ve got to have millions, maybe even billions. And the big talk right now is the $6 billion that we gave to Iran in August.

David: And of course the argument against that being a pass-through to Hamas is that that’s not why we sent the money. And if you look at who the check was to, the check was not written out to Hamas, the check was written out to the Ayatollah. Okay, fine, that’s a fair point. But it misses the point, which is liquidity that flows into a system and liquidity that flows out of a system, the US is supporting the Iranian regime, and the Iranian regime, with whatever funds they choose to spend, are then in turn funding Hamas.

Then we have Blinken, you’ve probably seen this, our Secretary of State, he releases $75 million to the UNRWA, which operates as a Hamas front. And this is just days before the attack. No, we didn’t directly fund it, but it’s really curious that we do support Hamas fronts, and we do support the primary backer of Hamas in the Middle East, Iran. So whatever kind of support, we know that dollars have flowed to the Palestinian cause from Iran for years. Anthony Blinken even acknowledged the possibility that that last US gift could find its way to Hamas. That’s what he said weeks ago. It’s a sobering thought because on the one hand we’ve got dollars flowing, on the other hand we’ve got the USS Gerald R. Ford sailing to the Mediterranean, bringing a check to additional entrants into the conflict.

Kevin: And it’s a different kind of check. Yeah.

David: Exactly. The other kind. So we sent $6 billion to Iran in August. I mean, if you’re looking for the high bar of morality, you could blink ’n’ miss it. But again, there’s plenty of debate on that. And Iran a few weeks later assists in an operation that places Israeli Arab and Israeli Saudi normalization on indefinite hold.

Kevin: Well, I think you’ve got to talk about that because—

David: That’s the most important point.

Kevin: —this is the Jenga right now.

David: The most important point, is the reason why and the timing of this. I mean, sure, there’s some opportunism in terms of where the troops were placed and that Gaza was left largely undefended. But the key point here is that, in recent weeks, we’ve been in the final stages of negotiating a peace between the Arab world and Israel, between Saudi Arabia and Israel. And now you’re talking about a really critical change in the balance of power. Progress in the Middle East, this started with Trump, and we saw Bahrain and we saw the United Arab Emirates, we’ve seen Egypt, we’ve seen other countries very positive in their moves towards peace.

Kevin: Iran did not like one bit of it, though, because it kept pushing them outside.

David: Yeah. And it’s continued under Biden. Again, to normalize relations, and that’s meant that Iran is further marginalized. So Saudi just last week was ready to engage the US in a security pact. Think about this, last week they were engaged with the US in a security pact with normalized relations to Israel being a precondition. In other words, we will back them, the US will back Saudi, and if there’s ever another attack like we had in the oil fields in 2019, we will back them as unconditionally as we back Israel.

Kevin: And now Iran is basically behind Hamas, which is also to intimidate us out of those types of agreements.

David: Well, it changes the feel within the populace throughout the Arab world. Today, you have Israel and you have Palestine paying a price in human lives so that Iranian ambition can be realized. The anger and the resentment that has been between ancient brothers, which is a reality and goes back a long, long time, it’s being leveraged for other purposes. You’ve got Iranian ambitions, which are central in the equation. And Saudi stability, again, through further alignments with the US and Israel. They’re a large part of what was deconstructed—deconstructed—through the weekend in the Saudi US Defense Pact. 

The Arab world’s leaders, they can’t—they can’t—align with Israel for a long, long time without creating an overwhelming amount of political unrest for themselves. And again, this is in the wake of what we think is going to be Israel’s response to Hamas. Iran knew it. Hamas gets to play the pawn, but what they’ve done is upset what was a change of that balance of power back in the direction of the Saudi royal family, the US, and Israel.

Kevin: Yeah. And you look at the people who are part of this anti-US axis that you’ve talked about, whether it’s China, Russia, North Korea.

David: Chief of staff at the Pentagon. Oh, wait.

Kevin: Oh yeah, that’s right.

David: The Counter-Terrorism Office.

Kevin: Well, why don’t you explain that?

David: Yeah. This is the chief of staff of Pentagon counter-terrorism office. I think she’s still there, Ariane Tabatabai. It’s unbelievable that we have people in our administration who are so entirely sympathetic to Iran. I don’t understand it. I don’t understand why they have security clearance. It’s mind-boggling. But the fact is, there’s more than meets the eye here. There’s a lot going on that won’t be explained. And again, explain away the six billion. Okay, fine. Probably have a harder time explaining away the 75 million. That’s small potatoes. Small potatoes.

Kevin: Yeah, but explain why we have the people that we have in these counter-terrorism positions in the Pentagon and in the State Department. Why?

David: Well, big picture, the anti-US axis can work off this conflict as a cause for unity. China, Russia, North Korea, they may very well applaud from the shadows. You’ve got Columbia, you’ve got a host of other BRIC-inclined developing nations, again, applauding Hamas. Tell me what part of this you can— And I know there’s a group of students at Harvard, God bless their souls, that somehow thinks that taking young children, raping women, killing innocent civilians, execution style is somehow justifiable. I don’t understand.

If you’re going to be a leader of any country and applaud Hamas in these gross, heinous, inhuman acts, I don’t know how you expect to keep your reputation intact. What it clearly states to me is that you know what side you are on, and your morality is more in keeping with the regimes of North Korea, Russia, and China. That should come as no surprise. But if there’s those who are plotting from the shadows, Iran is not hidden. Their agenda is clear, upset the Saudi progress. Upset the reestablishment of a balance of power in the Middle East where the US military remains ready to support the Israeli-Saudi Alliance.

Kevin: So we have to look, Dave, because sometimes we have news events that come and then they go. This one, probably, that’s not going to be the case. So looking forward, what should we expect? I mean, is the war going to intensify from here?

David: This isn’t boots-on-the-ground occupation. There’s little doubt that a ground war is coming. You get 300,000 reservists called up. You have an official declaration of war. It’s one thing to respond and then seek a ceasefire. An official declaration of war against Hamas means that there are military options not usually on the menu, and they’re now at the ready. And I think that is up to and including connecting the dots to the funders and the backers of Hamas. To see this conflict expand to Iran, nothing’s off the table.

Kevin: Right.

David: Nothing’s off the table. Siege is in place. What do we expect of the global community? Likely they’ll turn against Israel for their response to Hamas. And you’ve already seen it in the press. How can you possibly do this? How can you cut off water and gas and fuel to the people of Palestine? The anti-US axis will seize on the opportunity to criticize, to further deconstruct what was this generation’s greatest progress towards peace in the Middle East. Iran was being marginalized and so were the Chinese efforts to displace the US regionally from the Middle East in terms of its importance there. So who wins in the Hamas-Israel conflict? So far, it’s Iran and it’s China. And I think the timing was absolutely crucial.

Kevin: Boy, you’re talking about it. I mean, not only was it the 50-year anniversary, but you’re talking about these normalizations and the security agreements that were just about to be put into place. But I think about it, Dave, because Thursday, Friday, and Saturday were the McAlvany Wealth Management meetings. And we had clients come out. I love getting together with our clients. There was a concern because the news had hit by Saturday morning of what had happened in Israel. And I remember the private meetings that you were having with people. That was an issue of concern. It was just beginning, so we didn’t have a lot of detail. But I think about the presentations that Morgan and Philip and Robert and Doug Noland and you had given on the Friday before we knew that there was going to be a war that was breaking out in the Middle East. And China—China was a big issue even then, even with everything going on in the Middle East as far as the politics and the geopolitics.

Let’s talk about the markets a little bit because we now have a new impetus for interest rates, gold, inflation. We’ve got to look at that because that’s what we do.

David: Well, we’ve talked about this turning, this turning of interest rates into a new cycle, a cycle of higher rates for longer. It’s not just a function of central banks, it’s not just a function of Jay Powell saying, “Hey, I think we’re going to raise rates another 25 basis points.” You have interest rates which are the price of risk. Interest rates are the price of risk, and we are moving into a period of time—

Kevin: A high risk environment, yeah.

David: —of higher risk, of less cohesion, less cooperation. You can look at these things from the big picture, and yes, rates are going higher for longer. And then you can look at things sort of in the nanosecond, and there’s a slightly different story. After a recent meltdown in global bonds, the other side of that is the melt up in yields.

Conflict in Israel has safe haven buyers temporarily reversing that trend, moving to government debt. And this is global in nature. We’ve seen a shift from Friday to Monday in terms of bond yields around the world and in US Treasurys as well. The carnage in bonds across all countries and geographies, it’s been intense. Now we’ve got a little bit of reprieve in the bond market as people go to buy bonds as a safe haven. Gold’s benefited from safe haven buying. Bonds have benefited. This is perhaps a punctuation mark in that larger repricing of risk.

And the repricing of risk, as we talked about with Robert Prechter last week, is really a reflection of mood. When you’re positive, you generally think, “Well, there’s not a lot of risk. I should be taking it. I’m going to be rewarded for it.” And the mood is to speculate. The mood is to buy stocks. The mood is to allow interest rates to drift lower. And what we’re saying is that there are multiple reasons for interest rates to move higher for longer. Government debt clearly is one of them. There’s just too much. The supply of debt and the need to finance deficits will continue to drive interest rates higher. But if interest rates are the price of risk and the world is a riskier place, don’t be surprised that this was a significant turning point. And we have these things which sort of solidify a turn and establish the new trend.

Kevin: Yeah, I think back when I was a kid, most of us had— Remember the mood ring? The mood ring, if you were relaxed, your mood ring was blue. And if you were stressed, your mood ring was red. Prechter, when I was listening to Prechter this last week, I was thinking that’s the way he looks at things. “Is the ring blue or is it red?” And I think, just maybe not to oversimplify things, I don’t think the ring is blue right now, do you?

David: I had about a year where my youngest son, he was eight then, he’s nine now, he loved that mood ring. And he would sort of announce every five minutes, “I think I’m feeling stressed.” And he’d look down at the ring, and he’s like, “No, it’s turning pink. I must be happy.” But it is that way in the equity markets where the mood determines the next set of decisions.

Another guest of ours, Alan Newman, points to seasonality. He loves technical analysis as well. Not the Elliot Wave theory, but seasonality where if you looked at 20 years, 30 years, 40 years, 100 years, there are periods of ebb and flow within the equities markets. We’re now entering a period of negative seasonality. And it happens to be coming at a time when geopolitical concerns are more and more in the backdrop. Not just what happened over the weekend, but we still have unresolved conflict between Ukraine and Russia. And we wonder if mood hasn’t reached a tipping point. Certainly, investors can look at equities and say, “Well, I don’t have to be there.” In fact, Jeffrey Gundlach’s comment, “T-bill and chill.” You can buy T-bills and sit there and collect 5%. That’s better than a kick in the shins.

Kevin: Yes, and “gold and hold” is mine. He may be “T-bill and chill.” I’m gold and hold. Yeah.

David: I like that. I like that. Last week’s conversation with Bob Prechter. It did shine a light on the importance of mood. So, when it shifts, good news is bad news, and bad news is bad news. But until that shift occurs, bad news is good news. Good news is good news. And so, that’s the reality, is, the mood allows you to simply ignore the news or play off of it in more dramatic terms. The S&P here recently touched down to 4,200, and that’s our mood line of demarcation.

Kevin: That’s your son going, I think I’m stressed or I think I’m calm.

David: Yeah, we’re rallying off that. It’s a very well defended territory, but to watch that area will be important. Watching a retest of 4,200 on the S&P, that’s key. Just below it is the 200-day moving average. So, as we linger here for another couple of weeks in rally mode, guess what? Well, that number will come up, or the 200-day moving average will come up, and if we do break the 200 day, it won’t take much for me to be convinced that we’ve entered the next leg of a bear market.

Kevin: Yeah, and I wonder, when you say S&P 500, we think of 500 stocks. What we’re really talking about is seven or eight stocks, right?

David: Well, that’s right, and it’s the cap-weighted S&P which is still the double-digit winner for the year. It’s positive for the year, and it’s earned back some of its losses, not all of its losses, from 2022, but it’s held there by seven to eight names.

Kevin: Mm-hmm.

David: The equal weighted S&P is already flirting with negative territory.

Kevin: Mm-hmm.

David: If you look at where it was at the end of the quarter, it had already slipped into negative territory. What that suggests to me is that the broader market has already begun a significant distribution. It’s already selling off, and all we are waiting for is this cycle’s leaders to flip and move lower.

Kevin: So Dave, again, I go back 50 years, 1973, I was 10 years old. We had the oil embargo. Of course, the lines at the gas pumps. I still remember some of the jokes from Johnny Carson because it was clear in everyone’s mind that there was a problem in the Middle East, and then the Yom Kippur war. That was the last time Israel has officially declared war, except for, we now have more casualties this time than any other time.

So, I also think about the rest of the seventies, Dave. There was the invasion of Afghanistan. There was the Iranian hostage crisis. There were the political problems that we had here and the economic problems. We had high inflation. I know we’ve been tying back to the seventies over and over and over, but as Prechter was talking about, we do have cycles. So, let’s just look forward here and say, what was the saying? T-bills, what was—

David: T-bill and chill.

Kevin: T-bill and chill. I came up with gold and hold. I don’t know whether that works or not, but, yeah, politics, geopolitics, finance, and economics, they all affect each other.

David: Well, again, if you’re talking about social mood, we’ve commented for months about inflation. In fact, when the Fed was talking about, this is not going to be a problem for long, the word was transitory. And it’s not transitory. It’s been quite sticky.

Why do these things matter? Well, goods inflation is, in fact, a fixture. It’s a fixture. I was on a call earlier today with a group of investors and the comment was, “Yeah, but if inflation’s coming down, that doesn’t mean the cost of things is coming down. It just means the rate of increase has diminished to some degree.” And that’s right. Even though wheat is down 28% year to date, it doesn’t mean your box of Wheaties is down 28%. It moved higher and has stuck. It will stay. That means that the consumer has a point of anxiety in terms of their cash flow, what they spend their money on, that is not going away. Why is that important? Because from a domestic economic perspective, the anxieties remain. It wears on social mood.

When you begin to see housing affordability get out of reach, it has an effect on social mood. When you see the engagement between Russia and Ukraine, and you either are for or against it, you either want to support the Ukrainians or you want to think in very nationalist terms. “No, don’t spend our money someplace else, only on our own people.” Again, there’s a tension there which underscores this idea of social mood and the negativity they’re in. Geopolitics is just one more, and again, it may be that thing which is the tipping point. The tipping point for social mood. Social mood ends up being very, very important in terms of the pricing dynamics within asset classes.

It is tied together to your point. What happens in Israel matters. Does it add upward pressure ultimately on interest rates? Yes, because what we’re really talking about is an increase in financial into economic frictions, globally diminished trade and capital flows, deteriorating political relationships. These are all things that underscore the permanence, not the transience, the permanent nature of inflation and the upward bias of interest rates.

That requires, ultimately, a repricing of asset classes, particularly the ones that have been overpriced—your growth stocks even more than your value stocks.

So how does this all fit together? We may have, on our hearts and on our minds, the desperate times in the Middle East today, but this notion of social mood, it is one more thing that sours the feel within the marketplace and creates that downward bias in price.

*     *     *

You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. You can find us at mcalvany.com or 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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