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Ignore the Siren Song

MARKET NEWS / MCALVANY RECAP / MARKET NEWS
McAlvany Recap • Oct 30 2023
Ignore the Siren Song
MPM Posted on October 30, 2023

The problem with sirens is that they always sound so good. Not the sirens on emergency vehicles, rather the kind that Odysseus had to deal with. With their beautiful voices, they lure us to destruction on the rocks and reefs of their islands. To be safe, we have to somehow ignore them and sail on.

It’s a common theme. Any good physician can tell you that the secret to health is to eat right and exercise. It’s simple advice, but far from easy to do. Much easier to eat junk food and vegetate in front of the TV, then have the doctor prescribe drugs to mitigate the effects of such folly.

Likewise, it’s far easier to vote for redistributionist politicians than to work hard or start a business and deal with its risks and demands. When the bills come due for such foolishness, adherents just act surprised, say that no one saw it coming, and demand new largess from the government.

The easier wrong is almost always more attractive than the harder right—in the short term. The problem is seeing the long term.

In the economic and financial realms, we’ve been told for over a century now that fiat money is real money, the Fed’s in control and has our best interests at heart, and debt doesn’t matter. It’s a siren song, and its beauty has captivated the hearts of most Americans and most people throughout the world.

The only problem is, none of it is true. The rocks and reefs are coming into sight, and our course toward them is becoming clear. So the Fed, the Administration, the talking heads, and the nattering nabobs of negative rates amp up their speakers and croon anew their dulcet tones.

The world might not turn away, but you can. Put some beeswax in your ears like Odysseus’s crew did, and head for the open sea. In financial terms—and you might get tired of us saying this; it probably sounds like “eat right and exercise”—this means putting some portion of your portfolio into hard assets.

We might not sound like sirens. We try instead to sound like opportunity and safety.

Key Takeaways:

  • Safe haven or certificate of confiscation?
  • Leveraged speculation is a troublemaker with a long history
  • The Fed’s losing control is ominous
  • Keep your eye on the gold/silver ratio

The McAlvany Weekly Commentary: David and Kevin emphasize this week the need to counter uncertainty with certainty. In the economic realm, that means that when long-trusted institutions, practices, and investments start changing for the worse, it’s necessary to have something in your portfolio that doesn’t change. This investment’s price vis-à-vis dollars might change—which is the point—but its nature and intrinsic value don’t change. They’re talking about hard assets, of course, and they point listeners to the Zoom call on hard assets for these hard times that they conducted this week, and which is available for listening on this page. From there they discuss long-term economic cycles and what happens when they end, what happens when bonds become certificates of confiscation, and how hard it is to be right while appearing to be wrong for a very long time.

Credit Bubble Bulletin: Archimedes asserted, “Give me a lever long enough…and I shall move the world.” Doug writes this week about the very long lever of borrowed money for speculation in financial markets. That lever very definitely does move the economic world, and Doug notes that, “Leveraged speculation poses a clear and immediate threat to system stability. It has for years.” He then recaps its dismal record episode by episode. In fact, he traces the problem back to the Roaring Twenties and subsequent Great Depression—directly refuting the historical revisionism of such recent analysts as Milton Friedman and Ben Bernanke. Then he concludes that, “In a world of unfettered ‘money’ and credit, speculative leverage has been a leading source of boom-time liquidity excess and monetary disorder.” This analysis sheds light on a very poorly understood but crucially important topic. Don’t miss it.

Hard Asset Insights: Morgan’s condensed post this week surrenders nothing in impact. “The accrued negative consequences of decades of radical policy make further can-kick, business as usual, extend and pretend policy measures untenable. Signs of the end of the road are most obviously on display right now in what HAI sees as the breakdown of the Fed’s effective use of interest rates as a monetary policy brake.” He repeats a Peter Bernholz statement that, “When a confidence bubble finally breaks, it tends to break abruptly.” In short, Morgan’s comments focus on the increasing signs that the end is near for the confidence bubble, and that the fallout is likely to be adverse and extensive. But he doesn’t leave things there. Investors can find refuge in a time-tested safe harbor.

Golden Rule Radio: Miles and Rob discuss government spending versus revenue this week. The situation is bad enough now. If interest rates continue to rise—thus increasing the cost of borrowing for the government, and we enter a recession—which will negatively impact revenue, the situation will likely get much worse. Bond buying is beginning to react to the extreme level of government spending, as the most recent auction went poorly. The Treasury’s response will be to offer more bonds in the next auction. The hosts mention that today’s realities are being reflected in gold and equities, but not in other precious metals. So the hosts compare charts for gold and silver, and discuss likely future action for each—where buying opportunities might appear and what could happen with the gold/silver ratio.

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