EPISODES / WEEKLY COMMENTARY

If Volcker Were Measuring, Inflation Would Be at 13%

EPISODES / WEEKLY COMMENTARY
Weekly Commentary • Nov 09 2021
If Volcker Were Measuring, Inflation Would Be at 13%
David McAlvany Posted on November 9, 2021
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  • West in ignorant bliss as China buys up the gold
  • What exactly does Powell mean by “Transitory Inflation”
  • Germans call Christine Lagarde “Madame Inflation”

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

If Volcker Was Measuring, Inflation Now At 13%
November 9, 2021

“Think about this, if credibility is lost amongst the central bank community, it calls into question the validity of the US dollar and the Treasury market. That’s what we’re talking about. When you see a repricing in the Treasury market, that is people saying, “Nope, I don’t like them. I don’t like their policies. I don’t think they’re going to work. I think this is a lie.” I think if you’re talking about risk, and reward, and balance, gold is probably the best risk adjusted Treasury short on the planet.” — David McAlvany

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

Giving, Dave, giving to people who need the money is something that we’re all encouraged to do. Charity is something that comes from the heart. I know oftentimes when we’re talking, we’re talking about who is the agent of the decision? Right now I think a lot of our listeners are feeling the pressure that the agency of decision is coming from the outside. Whether it’s forcing charity, which I think socialism believes that it is, or forcing compliance in other areas, you and I are very, very interested in free agency. 

We talked last night, reading the first few pages of Bastiat’s The Law. He lays out what the law really should be for, and that is to protect God-given rights, not man-given privileges. And that’s actually the basis of the law. What brought this up was you are getting back from Memphis, Tennessee. You sat in on a family meeting of a very, very charitable, generous family. Not because they had a gun to their head, but because that’s just the heart of the family.

David: There’s so much power in agency. So much power in the freedom to choose. I think there’s meaning and significance to an individual acting in a way that they think is the right way.

Kevin: Right.

David: That’s contrasted. And I think this stands out to me, we can see attacks and redistribution form of caring for those in our society, and that’s one way of institutionalizing giving. But it does strip away both a thoughtful process and really the heart. Of course, heartstrings are played on to justify it, but it creates a disconnect between the person and the actual gift. I was just curious to learn about how this particular family has used their agency for decades, and gives millions of dollars every year from a successful enterprise. And to see that it’s not compelled, it’s not coerced, there’s no gun to their head, this is what they want to do. This is how they define— I don’t even think that they’re thinking of it in terms of a legacy. They just see this as a natural extension of gratitude for having, frankly, more than they need.

Kevin: I would encourage all of our listeners, search your heart, and when you can be an agent of giving, be an agent of giving. Going back to the coercion side of things, a lot of times what you see is institutionalized charity and looking even at the last two years, Dave, you talk about taxation versus agency of giving yourself. But taxation comes in many forms, and one is actual taxation. The other is just the printing of money. I mean, you look at the spending initiatives right now, and if you look at most of the reasons for those spending initiatives, the justification would be, we need to help people.

David: We talked about this after we got back from Argentina, where everyone, it doesn’t matter who you are or what you do in the business community, everyone becomes a currency speculator at a certain point when inflation is being inflicted upon you. So it may be a policy choice. It may solve a larger problem, but it also transforms, transmogrifies an individual into being a speculator.

Kevin: It extracts wealth without you being the agent of that extraction.

David: It wasn’t that long ago that governments globally were launching spending initiatives, the scale of which had never been seen before—$10 trillion in promised spending within the first two months. And of course there was more to follow that. The initial amounts going back to 2020 were triple the interventionist measures that we saw 2008 and 2009. Again, this time around it was more directed towards the Main Street rather than Wall Street, which was certainly the case in 2008 and 2009. So we’re talking Main Street, London; Main Street, Beijing; Main Street, Madrid; Rio; Santiago; anywhere is that you had that expansion on a near universal basis. And that’s a really critical point that this debt expansion was global, and it was there to balance the radical decline in economic activity that fell off due to the Covid lockdowns.

Kevin: But the argument would be that we have a pandemic, Covid-laced world, and something had to be done.

David: So just leave that argument intact, and say: Okay. Under emergency circumstances, I guess emergency measures are needed. But that’s the same argument that was used in 2008 and 2009. Lo and behold, we’ve been accommodating with loose monetary policies and lower interest rates even once the global financial crisis was gone. So it’s not as if we did it once and then undid it as we went back to normal post GFC.

Kevin: Like you said, the Leviathan never shrinks, right? The Leviathan just grows.

David: Ratchets in size from one crisis to the next. So in the Covid, now endemic, world, now that we’re past the pandemic and this is just sort of, we have to deal with what it looks like for it to linger for a longer period of time. We have a larger quantity of debt to manage. And frankly, we have less capacity at present to deal with a significant downturn, either in the financial markets or the economy. As debt-to-GDP figures have risen in recent years—again, this is on a universal basis—globally, the sensitivity to interest rates and policy normalization has increased. Talking about a return to normal is challenged by the real implications of rates going to higher levels because we’re dealing with a significantly larger quantity of debt. So the debt has permeated the system and you can see it on the personal level, the corporate level, and government balance sheets as well.

Kevin: But isn’t it getting harder to hide? I mean, as this Leviathan grows, I go back to 1987, my first year with your family’s company. When we had the stock market crash, there was an intervention that next Tuesday, $4 million was applied from the central banks into buying a particular index to save the market. Four million bucks. Now, we get to 2008, 2009, and it was just natural. The plunge protection team was expected to show up. Plunge protection at this time has grown far more than just to the stock market. How does the central bank hide what they’ve been doing? You can hide four million bucks. You can’t hide, what, trillions?

David: Trillions. There’s less latitude under these current circumstances for central bank sleight of hand. What we did in 2008, 2009 really was sleight of hand. We shifted liabilities into bad banks. We created special purpose vehicles. And the main point here, the main point here is that the stakes are increased proportional to the obligations created, with risks tilted towards a crisis of some sort. So the obligations have multiplied. Trillions upon trillions upon trillions, and the stakes have increased in lockstep.

Kevin: You certainly hope nothing else will occur that will cost money.

David: I mean, again, we’re talking about stakes being increased in the spheres of the economy and the financial world. We’re also talking about politics and geopolitics. Learning a lot about the word geopolitics from our friend who’s joining us here in a few weeks to talk about words and their importance: Harold James.

Kevin: Harold James, yeah.

David: The Atlantic Magazine entertains the possibility of hot war conflict between China and the US. I saw in compliment to that AP news covered the expansion of Chinese nuclear program. Thousand warheads. This is nuclear warheads. They’ll be at that level by the year 2030. Foreign Affairs magazine discusses the Cold War that already exists between the two superpowers. And of course, you’ve got the recent scholarship which has referenced Thucydides and the principles that, 24 centuries after they were first penned, are still relevant to people who were fixated on international relations, people who were living in that sphere—and of course those of us who just live with the implications of the policy choices that are made on our behalf. 

So there’s equally much to learn from the past as it relates to the accumulation of debt. If you want to look back in time, 24 centuries hasn’t changed much in terms of what is at stake with bad policy choices. And here we come into debt again. What we learn from thousands of years ago and what we can apply today as it relates to the debtor and the creditor. Default strategies are startlingly simple, and they’re very similar throughout the ages. Number one, you stop paying. That’s what we’re talking about. And I’ve been talking about as it relates to China and Evergrande, it’s a question of when, not if, they stop paying. Or two, you just pay off with a devalued currency. You can’t do that if you’re a corporation, but if you are a government, you can. You pay with devalued currency and alleviate the pressures of payment by running the printing press. And there is, of course, collateral damage to that.

Kevin: Well, and that’s the magic of financial repression. There’s a new name for just an old game. And you talked about two ways to handle debt. You either stop paying or it’s a little more subtle, but you slowly devalue the currency in which you owe that particular debt.

David: Yeah. We’ve pointed to the grinding destruction of the bourgeoisie between inflation and taxation. Lenin we mentioned last week. We’ve suggested also that there’s financial repression. That’s the third policy choice. Financial repression levels the saver and the investor, and encourages speculation as an expression of frustration. That’s what it shows up as first. And then you see it encouraging more speculation really as a form of survival.

Kevin: We saw that in Argentina.

David: Exactly.

Kevin: They couldn’t have survived unless they worked— They called it the blue market, but it was really what we would call a black market. That was the only way they could eat.

David: And everyone is speculating on the currency and in the foreign currency markets just to survive.

Kevin: Just to eat.

David: Yep. So in the progressive stages of inflation and financial repression, everyone becomes a currency speculator, becomes a black market operator, becomes a desperate gambler. And why not? I mean, what are your alternatives? It is a matter of survival. Are we in an age of desperate gambling? I mean, we see gambling, but is not there an element of desperation in it? You’ve got prices that are rising to record levels. Meaning the US stock market now has a greater value than the next 11 largest stock markets globally. Combine them all together.

Kevin: Wow.

David: Clearly we’re outpacing our GDP contribution, if you look at global GDP and look at our US stock market. I mean, we’re way ahead of ourselves. So polls suggest that there’s an increase in economic frustration. How is that possible when you’ve got asset prices booming?

Kevin: There’s a confusion out there though, Dave, because I talk to clients who have large stock positions right now, and they see that the handwriting is on the wall. They understand the Schiller PE. They listen to the commentary, but in some ways they’re like, “Well, how in the world am I going to keep up with inflation?” I mean, yes, they’ll buy gold, but the thought is, how am I going to get ahead unless I’m in a market that I know the Federal Reserve has their back.

David: But this is a textbook top. I mean, the Schiller PE getting above 40, this is a textbook top. We’re not starting a new growth trend here. This is the end of the trend, my friend. Not everyone has those assets. And I think that’s probably where the frustration comes from. If you’re sort of polling the everyman. And those that do not have them desperately want to resolve their state of financial uncertainty. So we have the middle class and those who are desperately holding on to the bottom rung of the ladder. Then you’ve got those who are at the very top rung of the ladder, the old and smart money. And what’s fascinating is, again, symptomatic of a market top. They’re turning to speculation, too. They can’t resist Tesla, up 70% in a year. You pick your stock. They can’t resist gains of 50, or 70, or 200. I mean, Avis to $525 a share. 500% returns here and there. You begin to lose your mind, and that is actually indicative of a market top.

Kevin: We oftentimes talk about tulip bulb mania. But there’ve been little manias in the in-between time. I remember being a toy store manager at TY Bears. Remember those? The TY Bears. Some of those things got up into the thousands. I mean, it was a rage for a little while, but it went away. The thing is, though, there’s this fear of missing out. I hear it oftentimes with either crypto or what’s going on in the stock market. There is a point, though. You brought up the bond vigilantes last week. There is a point where you aren’t just working in a black market to keep up with inflation. If you are a bond owner, or if you’re going to buy any bonds, if you’re going to loan anybody money, you’re going to demand a higher interest rate, whether the Federal Reserve thinks that’s a good idea or not.

David: Well, this is why I mentioned the expansion of debt globally, and this pervasive issue, because this week was classic to watch. Just as the emergence of the bond investor demanding higher compensation in the context of higher and persistent inflation was a part of our commentary last week— And my apologies. When I prepare for these commentaries, it’s typically into the wee hours of a Tuesday, which leaves a lot of room for the markets to redefine price markers as the week progresses. And that’s exactly what happened last week. By the end of the week, central banks responded in a common expression, unified in action, and effectively volleyed back with force of word and deed driving rates back down.

Kevin: And the deed is just going and buying all the bonds to keep those interest rates out of there.

David: Yeah. Doug Noland commented in the Credit Bubble Bulletin. They’re in this mess together, created it together, and are now trapped together. As a group, they all dismiss rapidly mounting inflationary risks, choosing to remain locked in ultra-stimulative monetary policies. And together they will disregard manic markets and precarious financial imbalances.

Kevin: Do you think, though, Covid gave them a disguise? Something to hide behind to say, “Hey, look, we have to do this.” I mean, Covid really has been an excuse for a lot of things.

David: Well, we were already at the end of the line to begin with. Our first comment on Covid and C-19 is that C probably didn’t stand for Covid. But yeah, it did provide cover. Cover for the central banks to do what they had to do, and actually what they had already started to do. This was discussed in our weekly meeting for asset management group this week. The intervention started because the repo market was falling apart in September of 2019, not because we were addressing things relating to Covid in the first quarter of 2020. But the central banks were active, and they now had cover to do whatever was necessary to solve the problems that were already emergent. Again, cracks within the financial system already apparent in the fall, fourth quarter of 2019. So Covid provided cover for an unnatural expansion of debt. Now, we have central banks using every means necessary, both in the present tense and I think they’ll continue to do this in the future, to remove the consequence of policy choice.

Kevin: And sometimes small numbers can be deceptive, okay. Small numbers on interest rates, but many countries at this point, you probably have the number, but many countries have seen their interest rates more than double over the last few months.

David: But as we mentioned, Australia last week, it went from 11 basis points to 77 basis points. That’s a little bit more than doubling. I mean, over the last three months, you’ve had 35 countries that have had their interest rates rise by 65 basis points—.65 of 1%. It’s significant when you think that, for many, like Australia, that represents an increase in financing costs of 50%, 150%. We’re still in negative real yield territory, by and large. In other words, we have a lot further to go on the upside in terms of interest rates. Also significant, I think is its uniformity. Rates were pressed lower in concert via global QE, quantitative easing. And this was sort of a set menu that everyone was choosing from. If you’re talking about monetary and fiscal policy initiatives, everybody chose from the same menu. Nevertheless, as the rate of increase sped up just over a week ago, with rates on the rise early last week, what transformed was the tone among central bankers and their actions began to intensify.

Kevin: We’ve talked before about Germany going through massive inflations back in the 20th century. Klaus Bucher, somebody that we worked with as a company, he talked about his family going through the hyperinflations in the ‘20s, the hyperinflation after World War II. So if you’re a German, okay, you could, actually— If you called somebody an inflationist or you tied their name to inflation, in a way that’s almost calling them a dirty name. Lagarde right now is being called, what? Madame Inflation?

David: That’s right. By the Germans. That’s right. So Christine Lagarde, of course French, and she’s heading the ECB. And the ECB used to be a larger proxy for the German central bank. It wouldn’t exist if it weren’t for the strength of German influence within the institution. But that has shifted. Right? So we have Madame Inflation doubling down on her commitment to control inflation, but she’s not going to change tack on bond buying. She’s going to continue buying bonds. She was saying that she’s not going to be raising rates, likely, anytime next year—anytime next year, in 2022. So the markets looked at that and said, “Okay. Well, she’s serious.” And the Germans are upset because they’re experiencing inflation at multi-decade highs. And the head of the ECB says, in effect, “Don’t worry about it. We know something about inflation that you don’t know. I’m not worried about it and neither should you.”

Kevin: So what do they know? That’s what I want to know. What is it that they know? If you sat down and said, “Okay. Could you tell me if raising interest rates or cutting back on QE isn’t going to help, what are you going to do about inflation?

David: It depends if this is a closed-door conversation or an open-door conversation because what they know is that it is a necessary form of default for the over-indebted. Inflation is a necessary form of default for the over-indebted. Now, the world is there. The whole world. Not just one particular player. 

Number two, I think the other thing that they know is that very few people appreciate that default is a policy choice disguised as a natural market—and in this case transitory market—dynamic. So you look at it and you go, “Oh, it’s because of oil, or oh, it’s because of—” And you can try to shift blame and point it on one particular thing. Really the base of inflation is printing too much money. That’s the reality. But this is a form of default. It is a policy choice. And because it’s underappreciated as a policy choice, it’s a preferred policy choice because you can get away with it. 

I think the third thing is that inflation of assets is a boon to the wealthy, even as inflation of consumer prices eviscerates the middle class. Back to Lenin. There is a political reality in the evisceration of the middle class, and it is that you create a class of dependents, and in the context of creating dependency, you reinforce the importance of power at the top.

Kevin: Well, it goes back to agency. When you are dependent on the government, you are dependent on the government. I mean, it’s very obvious at that point. They become the agent. Now, looking at Britain, Britain has basically said, “Yeah. We’re going to control inflation by raising interest rates. Whoops. Maybe not.”

David: Well, this is what was so particularly important about last week. The most notable about-face came from the Bank of England. After weeks of projecting to the markets that an increase in rates was necessary, it was necessary and inevitable in the face of increasing inflation. I read in the Financial Times on November 4th—and then there was a whole host of other news outlets—even up to the minutes preceding the announcement from the Bank of England, rates are going higher following the market moves of recent weeks, so that the central banks are basically catching up with what the bond market has already done. So you’ve got the bond market, which has triggered this in light of inflation because inflation is not here in a small way, and it’s not short-lived. And investors, particularly bond investors, are not being adequately compensated.

Kevin: Bond investors have ignored this for years, thinking, well, they’ve got our back, so we’re safe.

David: Part of that is because there’s been some confusion amongst fixed-income investors that you’re not actually in it for the fixed income. You’re in it for the capital gains. And that’s what happens with malinvestment. That’s what happens with a distortion of pricing.

Kevin: Well, let’s explain this, okay? Because a bond has two ways of making money. One is the yield. The other is if you expect interest rates to go lower, the principle value of that bond will give you capital gains. It will rise. And so they were betting. There’s a point when you’re a point negative on rates.

David: Fixed income investors stop worrying about the income. And they’re saying, “Look, central banks are going to buy this crap.”

Kevin: And they’re going to keep going more negative.

David: And the more they buy it, rates go lower, prices go higher, we make money on the gain side. Who cares about the income if we’re walking away with handsome profits?

Kevin: And last week you were saying that gain may be starting to be up.

David: That’s right. You’ve got it here in the United States now that central banks are suggesting an end to bond buying. And that is artificially boosting prices and suppressing yields. At least Powell has committed to that. Again, the monthly reductions of mortgage backed securities and Treasury purchases. The bond investor has to now reconsider. Go back to the old fashioned way of approaching fixed income, and ask a few more questions about credit quality, about duration risk, about— oh, goodness gracious, what is this thing we haven’t seen in decades? Inflation?

Kevin: Yeah. But it doesn’t scare the Bank of England enough. Inflation was not enough of a motivator to stick with what they were talking about as far as raising rates.

David: Yeah. And what’s really intriguing here is that we’ve tapered, or tried to, here in the US a couple of times. And it was consequential.

Kevin: The taper tantrum?

David: Yeah. And we saw the market sell off in the following year between 12 and 18%. Never got bear market territory of a 20% or greater decline. But the market didn’t like the idea that financial conditions were going to tighten, that there was going to be less free money available. Do you think that tapering is consequential? When you initiate it, think about the context we’re in now with a market cap to GDP at all time highs.

Kevin: So what? Pick inflation on the left hand? Remember the Fiddler on the Roof? On one hand and then the other? We’ve got inflation on the one hand, or we’ve got a taper tantrum on the other hand. The Bank of England this week showed that they’re more fearful of a taper tantrum than they are inflation.

David: That’s right. The central bank community is accommodating the financial markets and ignoring the risk of inflation, which hits the man in the street squarely in the pocket book. Bank of England does the opposite of what it said it was going to do. This is really important to clue in on. They did the opposite of what they said were going to do. Keeping rates fixed at a near zero level for even longer still. They were expected to raise rates. The Financial Times headline Thursday, early Thursday, said this: “Bank of England Expected to Raise Rates on Thursday Amid Rising Inflation.” By the end of the day, Reuters reads, “Bank of England Confounds the Markets and Keeps Rates on Hold.” Confounds is right.

Kevin: Was that a last minute decision?

David: The futures market priced in a hundred percent chance of the Bank of England raising rates. And then you see, again, a jump in prices, a decline in yields. Everyone says to themselves, “The Bank of England is going to tell us one thing and do the opposite. We know what the central bank community has already discussed and decided. They are not ready for rates to move, and they will do anything and everything to keep them lower.” Which is, again, it’s a message which the market understood very clearly. We’re in a battle. This is a fight. And you saw the first round in the conflict, where, again, rates start marching higher. And then you see the central banks come out on a universal basis, “Here’s what we’re not going to do. We’re not going to let this happen. We’re not going to let this happen.”

Kevin: This is a another agency question because what you’re seeing is you’re seeing the agents, the free agents of the bond market, raising rates. We talked about it last week.

David: Investors in the free market.

Kevin: Exactly. Then you have the central bankers. They are the agents from the top side down.

David: They’re committed to the status quo, and they’re concerned that rise in rates and the global complex of debt, which we talked about earlier.

Kevin: Did they end the fight?

David: It’s too consequential. They won’t let rates go higher. So don’t fight the Fed. Don’t fight the ECB. Don’t fight the Bank of England or any other central bank. Does the fight end there?

Kevin: Right. That’s what I’m asking.

David: I don’t think so. I don’t think so. I mean, the line to higher rates is not a straight one. If you could imagine looking at this as a chart, we have higher rates for a week and they come back down. That’s on the basis of pronouncements. We still have to see the taking off of the gloves and the bare-knuckle tactics. It’s going to keep this thing very interesting for a long time to come. 

Kevin: One of the funny things about manipulation though, because we get calls all the time saying, “Hey, is gold manipulated?” Well, of course it is. Are interest rates manipulated? Well, of course they are. Stock market. But the thing about manipulation is, it doesn’t affect the long-term trend. Go back. You step away from the chart. Let’s say you walk back eight feet from the chart and you go, “Wow, those manipulations were meaningless in the long run.

David: In the day that they’re occurring, they can be painful.

Kevin: Yeah. 

David: On the week that they occur, they may be the end of your financial world.

Kevin: Right. 

David: But in the long term— and that’s the way interest rates operate. I mean, if history is a guide, then we’re talking about a decades-long saga of rates. Should they actually be shifting into a rising trend? They’ll do that for decades. Not years to come. The Bank of England events and the uniform reaction across global bond markets suggest that there was some back-channel chatter amongst the central bankers, talking to their colleagues, and it suggests that the days of central bank credibility have already come and gone. They’ve come to an end, which translates interestingly this way: It translates to the market practitioner as a once-in-a-lifetime trade. I mean, so you swung first, the central banks swing back, but you’re seeing revealed the weaknesses in your opponent. And the fact that the Bank of England says, “absolutely we’re raising rates, too. Ah, we’re not raising rates. Sorry.” And it’s not a question of, “you misunderstood us.”

Kevin: That’s a display of weakness.

David: It can’t be done. If it is done, there is a price too high to be paid.

Kevin: So if you’re going to try to talk the markets, you’re going to have to actually have credibility.

David: But the big reveal here is that the credibility is already lost. So the way this fight gets played is going to be very intriguing. And again, it sets up for once-in-a-lifetime trade. You may not wish to bet against the Fed any more than you would have bet against, say, the engineers of the Titanic. Right? Amazing feat of engineering. But hubris and the projection of confidence—it ends up meaning nothing. Nothing in the context of cataclysm, because engineering is insufficient in both of these cases.

Kevin: Yeah. We talk about the Titanic, and of course the iceberg is very telling too. It’s a physical thing sitting out there in the water. No amount of engineering necessarily can overcome it. I’m going to move that. That may be a terrible analogy to the gold market, but gold actually paid attention to what was going on.

David: Well, message noted. Yeah. The message was noted. The gold market investors got the message. Inflation will be running hot for some time. Anybody who’s watching the markets last week saw this clearly. Inflation’s going to be running hot for some time despite the attempts of central banks to minimize concerns on that front. If the market calls your bluff on inflation, it’s no longer an effective means of quietly defaulting. Inflation is not on your obligations. And that is not going to be tolerated. This is a very effective tool by the central planning community. They need to use inflation. They just need to lower your temperature and your reactions to it. So, critical tool it remains. We have redirection. We have, as Reuters described it, it’s confounding. It’s confounding, and it remains a preferred course.

Kevin: So would you say the gold move this last week had something to do with real rates of inflation?

David: Sure. It moved higher for a very good reason. You’ve got 38 OECD member countries that have year-over-year inflation increases of nearly 5%. So again, we’re talking about debt, which has expanded on a fairly broad basis. And inflation, which is being experienced, not just in one country, this is 38 countries in the universe of the Organization of Economic Cooperation and Development, the OECD, which are all feeling the pinch. You’ve got some countries which are above that 5% threshold, exceeding 10%. Notably it’s places where energy and food are not extracted from the statistics.

Kevin: Well, that’s the old way. The old way of measuring inflation actually measured things that I and my wife buy and use.

David: Yeah. So if you measure using our antiquated inflation models, the official model from 1980, Volker would’ve thought this is completely legitimate. This is how inflation is gauged, our present day inflation, on that measurement, is between 13 and 14%.

Kevin: Wow.

David: So again, we can play with the official CPI numbers of 5%. We can have a refresh on PPI and CPI this week. People feel something more intense than a nickel tax on every dollar. It’s becoming an irritation. It’s becoming more like the damn dime. I mean, we’re edging towards a quarter. What is being extracted from them via inflation is agitating, politically. Biden knows this is a risk to him. Politicians recognize inflation as a real risk. Yes, you have to talk it down. Yes, you have to address it. Yes, you have to talk to OPEC and try to convince them to be on your side of the political equation.

Kevin: We talked earlier about tensions with China. There’s also just a division in the way we think. If you think about how the East looks at gold—whether it’s India, China, what have you, Russia—and how the West looks at gold, the West ignores gold until it’s almost too late. The East has been accumulating gold massively for the last 10 years, but especially the last few months.

David: Yeah. Gold’s been neglected in the west once again. And I think that’s part of the expression of faith in the monetary priesthood. It remains intact. We talk about the king has no clothes and that sort of reference of a social— It’s an epiphanal moment, where all of a sudden people realize, “Oh, this is a game. This is a sham. What was being presented isn’t what—” I remember a girl I knew in college, and she loved to wear leopard everything.

Kevin: Leopard, leopard?

David: Yeah. So leopard tights and leopard— whatever. Green Doc Martin boots and her signature, a clear rain jacket. Frankly, it didn’t even matter if it was a sunny day. She liked the clear rain jacket.

Kevin: You’ve got to comfortable in your own skin to wear— Okay. Now, I wear white and khaki every day. And I’m comfortable with that. But leopard?

David: Kevin, if you were wearing leopard tights, Doc Martin boots, and a clear rain jacket—

Kevin: Yeah, I don’t think we’d be doing the Commentary.

David: It’d be a little awkward.

Kevin: It would be very awkward.

David: This was the brightest girl I knew in college. I mean, musical genius. Competed internationally playing the organ. Brilliant, musically. Went onto medical school. She’s the only person I ever knew who never drank a cup of coffee through medical school. I mean, just had—

Kevin: She just knew it.

David: She had a knack. She would read something once and have it for life. While functional, the rain jacket kept her wardrobe eccentricities on display. Right? And Western investors seem to have turned a blind eye to what the rest of the world sees is on display. So we’re kind of pretending. Never mind the leopard spots.

Kevin: Wait a second. Are you saying that Powell is wearing leopard skin right now with what type of—

David: Powell’s loud and proud inflation spots. Yes. Our monetary policy is as free as that girl’s wardrobe choice.

Kevin: So he must be feeling very comfortable in his own skin.

David: Yet we pretend it’s some sort of cotillion formal. No, no, no. It’s different than that. It’s not the see-through raincoat. It’s not that at all. US households have jumped in. They are on the speculation side of the trade. They love the meme stocks and the cryptos and everything that is in bubble territory. Meanwhile, you’ve got the Chinese people who see, again, not that the king is without clothes, but—

Kevin: You don’t think the Chinese are buying million dollar virtual rocks? They’re buying gold, I think.

David: I think they see that the attire is absurd, and it’s obvious. Again, the China Gold Association reports the first three quarters of gold consumption for this year at 813 tons. 813.6 tons. It’s an increase of 48% year-over-year.

Kevin: Yeah. And they were buying a lot of gold last year. So 40? What was that? Almost a 50% rise.

David: It’s 6% above pre-Covid 2019 levels. Thanks, Fred Hickey, for the insights. The largest consumer is still consuming. That is China. And at that run rate, they’ll eclipse a thousand tons by the end of the year. Again, it’s our inflation spots. We pretend that they’re not there and we’re actually wearing attire that makes it obvious. No, this is exactly what we’re doing. This is exactly what the consequences are. This is money printing on a grand scale. It’s on a global basis. And you can pretend that those aren’t green Doc Martin boots. But it is what it is.

Kevin: Okay. So China is not impressed. How about India?

David: India, number two, also buying 256 tons for the third quarter, approaching 700 tons year-to-date. This is in the context of supply being flat for the year. Minor uptick in gold production from mines, minor downtick in gold recycling. So your total supply to the market is basically flat. Demand is increasing for central banks. I’m really not surprised by that because they know what’s going on. They know about the leopard and the spots. 

Consumers in India and China, they’re going bonkers. They love the stuff. But we still have total demand which is down for the year due to significant ETF outflows in both the US and Europe. I think investors are enthralled by the latest fashionable ideas. This is back to this notion that we can have endless growth. And secondly, an abiding faith in consequence-free policy choices.

Kevin: And sometimes we get the question then why is— If China is buying all this gold and India is buying all this gold, why don’t we see the price rise quicker? But there is a disconnect between the paper markets, which watch the technical numbers that— support and resistance levels. Those markets are mainly paper markets. Those are futures markets. So oftentimes you can see large physical buying of gold and not necessarily a price increase right away.

David: And again, I mean, on balance, if you’re looking at supply and demand, you’ve got huge central bank buying and you’ve got significant consumer buying in the form of jewelry and consumer demand as well. It’s on the investor side that you just don’t see a lot of interest. I think that changes pretty radically. And that is because the faith in endless growth and the abiding faith in consequence-free policy choices gets challenged at some point in here. 

The technical hurdles we’ve talked about, they still exist for gold. I like to see it—and it needs to get—above the 200-day moving average. But assuming that those levels can be overcome, we’ve been above 1835, 1840. The years, the years of high inflation ahead are going to migrate more investors towards hard assets. Gold and silver will be front and center beneficiaries of that migration. I’m reminded of policy buffoonery and the perpetuation of inflationary pressures. Again, this is one area of inflationary pressures. We talk about inflation being a result of increased monetary expansion. Yes, that’s right. And yes, it can be exaggerated or buttressed by things like an increase in the oil market. So the branded administration proposes more rules and regulations for the oil and gas sector. They’re considering closing the Line 5 pipeline in Michigan. At the same time, they’re telling OPEC that they must increase oil output to take the pressure off of crude prices. 

Kevin: Well, there’s sanity. 

David: It’s insane.

Kevin: No, that’s sanity. That’s sanity. That’s giving the ball back to the Middle East. Why in the world would we actually try to be energy independent in the first place?

David: Right. I’m also remembering the Germans. Yes, they’re frustrated with Madame Lagarde, Madame Inflation. And the Germans’ last experience of inflation was 2008. The inflation of 2008 in Germany was under the current levels. Less than the current levels. Oil was $140 a barrel. So think about that. Think about that. We now have higher inflation rates today in Germany and higher inflation rates today in the US than we had in 2008.

Kevin: And oil is not nearly as high.

David: Oil is 42% lower. Right? So this inflation is pervasive, this inflation is global, and it’s not merely attributable to oil. But oil adds to the pressure. And we can’t help but hurt ourselves from a policy perspective.

Kevin: Do you remember when we had Steve Hanke on the Commentary, and he would be probably the number one expert on hyperinflation alive right now? I mean, he’s written extensively on it. Hanke is talking about long-term inflation at this point. This would be a guy who you could ask any country, anytime over the last hundred years what their inflation rate. You could ask him that, and he’d be able to tell you.

David: I think another one of our guests, Adam Ferguson, who wrote the book Death of Money would be even a greater expert on hyperinflation.

Kevin: Well, that’s true.

David: Looking at the nuance and the complications that it creates for families and nations. He’s digging into the human experience.

Kevin: He understood the emotional human physical experience.

David: Hanke is good on the math side. So Steve, again, call him a hyperinflation expert. Previous guest on the Commentary. In recent days, he says, “Look, the jump in M2 money supply—our now-broadest measure of money supply—that set in motion an inflationary effect that will last multiple years and will be in a range, judging by the official CPI, it’ll be in a range of 5–6% annual inflation.” In his analysis, the lag time from the expansion of the monetary base, M2, to real inflationary evidence sits around two years. I mean, we’re complaining about inflation now.

Kevin: But there’s a delay. There’s a delay before it really hits.

David: We began the 35% rise in M2 in February of 2020.

Kevin: Oh, boy. So that’s a wave coming.

David: It puts 2022 as an appropriate timeframe to see inflation effects on full display. As if we haven’t seen them take a bite out of income and savings already. But his critical point is: Once inflation rates are there, based on massive money supply expansion, they stay elevated for years.

Kevin: Okay. So we’re going to have Harold James on in a couple of weeks. And like you said, he wrote a book on how to define, or actually think about, the words we use, whether it’s capitalism, socialism, communism, progressivism. But I’m going to ask him, or I’m going to ask you to ask him, what his definition of transitory is, because that’s the word that we’ve heard over and over and over. I’m wondering if we even know what transitory means.

David: I guess that’s pretty critical. We had Powell dancing all around it last week, and the Wall Street Journal was making fun of him—well, Nick Timiraos was engaged in Powell’s comments, saying transitory can be a confusing word, right? Some people think that it means short-lived, but absent any timing component it can also mean something that should fade on its own, a condition that will not persist. Bill King jumped all over that in his daily comments. He said, “This is nothing but Jerome Jabberwocky.”

Kevin: So Jerome Jabberwocky probably doesn’t take into account, with the word transitory, the workforce reduction based on this vaccine. You talk about the agency. Again, there is coercion right now, but there are a lot of people who are pushing back. That can’t help but create inflation because the cost of getting things manufactured, if those people are not there, you’re going to have to pay workers to do that.

David: And this is at the heart of one of the things the Fed has argued is in fact transitory, which is supply chain bottlenecks. Once supply chain bottlenecks are alleviated, you will find many of these things just disappear. No, I mean, I think Hanke has got a point. You expand money supply 35% and you’re going to see an implication from that consequence.

Kevin: And you cut the workforce down.

David: This is the next point, is, if you have people responding, and Reuters said this best. Reuters says Boeing to Mercedes, a US worker rebellion swells over the vaccine mandate. And you’ve got Powell. Of course, that suggests that there’s going to be further problems with supply chain bottlenecks. Why? Because if you don’t have manufacturers or people in the service industry who are available to work, then things get canceled. Look at American Airlines. I mean, last week alone, a thousand flights canceled. The week before, 460 flights canceled.

Kevin: I’m sure it’s all mechanical. I’m sure it was all weather, mechanical.

David: Between 20 and 30% of all of their flights in jeopardy because of staffing issues. And yeah, they do drag out the weather here and there, but the weather was rough and staffing issues. I mean, it’s like the reality is a reality. We know. 

How will Powell adjust the knot in the labor force numbers as people continue to quit? I mean, look, they’re flexing their muscle and mocking the power play through OSHA, mocking the White House. You now have a coalition of 11 attorney generals who are suing Joe over the vaccine mandate. 

And again, this is company after company where, even if it’s a marginal number, we’re dealing with an employment situation which is fairly tight. Four million people leave the labor force. You’ve got Powell saying, “I need to remain accommodative and I’m not going to raise rates until we move towards full employment as if 4.6 to 4.8 is not pretty near full employment anyways. But his notion is everyone who’s left the labor force, we’d like to get those people back. And yet, because of the vaccine mandate, we’re actually seeing people leave the labor force, adding to the number that Powell wants to bring back in, which suggests that he’s going to overstay his welcome even further when it comes to keeping rates lower for longer and longer and longer and longer. 

So I read about two defense contractors in Kansas. About half their employees are refusing the vaccine mandate. So combined between these two organizations, 5,000 people. Out of 10,000 people, 5,000 employees, out of 10,000, they’re ready to move on.

Kevin: These are defense contractors. Dave, these are not just easily replaceable people.

David: This turns ugly in the context of a scarcity of qualified replacements. It’s not like you just say, “Yeah. Okay, goodbye. We’re going to go find another 5,000 employees.” And if you could find qualified replacements, you’re talking about bringing them in at higher wages. So here again, we circle back around to: How quickly does inflation go away? I mean, this truly is one of the most epic financial battles in all financial history. Will we push—

Kevin: We’ve got this huge wave coming in 2022 of all this new printed money, M2. You’ve got the shutdown of pipelines in a period of time where oil and gas is rising already.

David: Well, I think it’s fair to say that the money is in the system. The wave is in the system in terms of M2, but the impact in terms of consumer prices, that’s becoming more and more obvious by the day.

Kevin: And then you have this workforce reduction based on the fact that not everybody’s going to get the vaccine.

David: Right. And at the margins, this keeps wage pressure in play. It’s just a fascinating setup. It’s a fascinating setup all around. And as I suggested earlier, maybe it does set up for one of the greatest trades—shorting Treasurys—on the planet. It’s a dangerous trade. It’s not for the faint of heart. And yes, you could reference that the Japanese—what seemed like a no brainer became what they call the widow-maker trade. I mean, it’s not one I’m putting on at this point, but it is absolutely fascinating. This battle between free agency, choice, the free markets, and an idea of what reality should be from a top-down perspective. It’s getting played out in multiple spheres. And in some sense, they’re complementary.

Kevin: Dave, you talk about the trade of the century, to short the Treasury market. I’m going to tell you, I’m not going to do that because to short something, you have to know the timing to some degree, or you have to be able to stay there and pay for it until you get the timing right. But the thing is, it’s not that it won’t happen. That’s the thing. What you’re talking about is a trade of a century that not maybe will happen. It will happen. Okay? There will be a dramatic repricing. You talked about that last week. We don’t know the timing on it, and we probably don’t want to bet on the timing on it.

David: No, but I think the simplest way—

Kevin: But it has to happen.

David: I think the simplest way to short the Treasury market and the safest way to short the Treasury market is to establish a reserve in ounces.

Kevin: That’s true.

David: I mean, think about this. If credibility is lost amongst the central bank community, it calls into question the validity of the US dollar and the Treasury market. That’s what we’re talking about. When you see a repricing in the Treasury market, that is people saying, “Nope, I don’t like them. I don’t like their policies. I don’t think they’re going to work. I think this is a lie.”

Kevin: And the beauty is, you don’t have to time. If you’re compounding your ounces or you’re building your ounces up, you don’t have to try to time anything. You just sit on those ounces until the trade occurs.

David: If you’re talking about risk and reward and balance, gold is probably the best risk-adjusted Treasury short on the planet.

Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany. You can find us at mcalvany.comm. M-C-A-L-V-A-N-Y .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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