EPISODES / WEEKLY COMMENTARY

Invest In Scarcity, Avoid The Overproduced

EPISODES / WEEKLY COMMENTARY
Weekly Commentary • Nov 22 2023
Invest In Scarcity, Avoid The Overproduced
David McAlvany Posted on November 22, 2023
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  • CPI Number Is A Blatant Lie, Markets Love The Lie
  • BLS Says We All Experienced A 34% Decline In Insurance Premiums
  • Gold Under Lock & Key Is Your Defence From The Goldilocks Delusion

“As we get ready for 2024 and an additional $2 trillion in budget deficit, it’s worth considering tax receipts. Will they be a dud two years in a row? Between 8 and 9% in 2023, that’s what we’re missing. And this is not tax avoidance. This is just people aren’t making as much money. It’s so inconsistent when you think about lower income tax receipts with rising incomes and a labor force that is full throttle. How can you have a super healthy labor force and rising incomes and yet your tax receipts are down, call it the better part of 10%? The decline in receipt supports the notion that recession is in fact the likely outcome.” –David McAlvany

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

It seems, Dave, that the things that are most important to us are the things that are rare, the things that you can’t just duplicate easily. I’m thinking scarcity here.

David: It’s interesting. If you can get a lot of something, it’s probably not worth a lot, whether it’s a home-cooked meal, which takes time and effort and preparation, and is not easy to duplicate. You compare that to a bag of chips. You may love Doritos, but it’s really not that great for you. When we look at investing, invest in scarcity, avoid what is overproduced. And I think this week, what is scarce? Time with family, time shooting clays with my boys, racing across an open field with my wife and daughter. What may not be scarce, quality food. At least this week, it’s not scarce because everybody’s getting together. Right? What is overproduced? Oh, my goodness. Television, junk fruit, noise with no purpose.

Kevin: Yeah, this is a good week, Dave, to actually appreciate and be thankful for that which is scarce. I was just reading this morning in the book of Exodus about manna, and manna was something that the Lord provided every day, but he said, “You can’t put it aside for tomorrow.” And they had no idea where it would come from, but it was very, very scarce. It only came enough for that day, but it was so valuable. I mean, you’re talking 40 years of being fed in the wilderness. So Thanksgiving, I even think about this week. This is a week where we can say thank you for the things that are scarce.

David: Well, beyond the Thanksgiving holidays, the long list of what’s overproduced. Debt, US dollars, political personas, overproduced, cryptocurrencies. Although some would argue that’s not the case. I can create one out of my back pocket. Collateralized loan obligations, private equity and credit offerings, options that expire in a single day, dopamine. I mean, these are things that are very overproduced in today’s culture.

Kevin: Well, what do you think about the CPI [Consumer Price Index] number though? Because what they’re trying to tell us now is that money is scarce. Remember, CPI, inflation shows that money is way too abundant. We all know that we have high inflation, yet they alter the CPI number to make it look like money itself is scarce.

David: Well, exactly. I mean, this is really symptomatic of too much debt in dollars. So when we think of what’s overproduced, we’re at the opposite end of the spectrum from the home cooked meal, the cigar, the extended conversation with a friend, throwing a line in the river. Invest in scarcity, avoid what is overproduced. The CPI reminds us of what is overproduced. First point to be made, the CPI, it is a total load of garbage.

Kevin: This week’s. Yeah, yeah, it was crazy.

David: The CPI number last week was one of the more consequential numbers, not because it was particularly impressive, but because it was impressively fabricated. And I’m talking about more than most CPI numbers. We often talk about, we even bemoan the fact, that the Bureau of Labor Statistics operates a franchise in HeiferDust. And last week, in my mind, took the cake. Maybe it took the patty. Headline CPI was flat for the month versus expectations of a tenth of 1% increase. Core, which is where you take out food and energy inflation, that was up 2/10 percent versus the forecast of 3/10 percent.

Kevin: Well, yeah, but they told me that my healthcare declined. That’s one of the ways that they made the CPI look the way it did. And yesterday, of all things, at the end of every year, we have to pick our healthcare plan, we have to sign up. It’s called onboarding. I went through all that yesterday. And Dave, not only did it not cost less, but that was the same day that I got a crown on my tooth and paid another 700 and some odd dollars, and that insurance paid the other half. So I’m not getting any break on healthcare. Who got this 34% decline in insurance? Who got that?

David: Yeah. Onboarding on an annual basis in the insurance program that we have is more akin to waterboarding once a year. It’s not very pleasant. Healthcare inflation was expected to jump by 1%, and instead, it declined by 2% year over year. So I know at least a skeptic or two who are looking for that single person in the United States that had that experience of a decline in healthcare expenses. But dig a little deeper, and I suggest you be donning a pair of Wellies here. What dragged the healthcare component down was a 34% decline in healthcare insurance premiums.

Kevin: Where did that happen?

David: Really. I mean, this is how the sausage is made. There is a growing few of us who are perhaps incredulous. 34% decline in healthcare premiums.

Kevin: Okay. So if that’s happened with anyone, I probably should just open this up for anyone listening. Yeah, go ahead and make a comment on YouTube or send us an email if your insurance declined 34% this last year. Let’s just see if we can find a single person, Dave.

David: I’d like to find you. But with that factoid, the number of skeptics looking for the experience of a 34% decline in insurance premiums grows to approximately 100% of the US population. With the exception, I would admit, of the Bureau of Labor Statistics employees subject to believing in their own BS.

Kevin: Yeah. Well, but you know, we can call it BS, but why do the markets love it so much? In other words, the markets don’t care if it’s a true number or not. I mean, how much money went into the overall everything bubble last week when we saw the CPI number?

David: Well, I don’t know how much went into stocks and bonds particularly, but you’ve got trillions of dollars sloshing around. And the minor shift in CPI figures to levels which, or shifting and sloshing those dollars around is highly consequential. It reminds us that data is very impactful and that some traders do in fact prefer the impact on volatility from that data more than they do the veracity of the data. There’s no question about CPI. In support of the narrative, this 34% reduction in health insurance by some estimates took 18 basis points off the CPI figure, and it underscores the preferred narrative, this of reduced inflation.

The tabulation is interesting because when you think of insurance premiums, it’s not exactly what you think it is. There is an indirect method. I’m going to just read from the Bureau of Labor Statistics website because this really does get a little convoluted. So reduced inflation is the preferred narrative. The tabulation of insurance company retained earnings is what they use as a proxy for premiums. And this is how they describe the “indirect method.” This gets convoluted. “Rather than pricing the full premium of health insurance plans, the CPI prices the services provided by the health insurer measured by the portion of the total premium that isn’t used to indirectly purchase medical goods and services. The premiums minus benefit spending is known as the retained earnings.”

Kevin: Well, so that’s the quote. So what they basically told you is if you want to be a magician, be an accountant.

David: There is your health insurance methodology, which delivered a 34% decline. There is your healthcare inflation cost, down 2% versus up 1% as expected. There is your headline CPI, flat for the month versus expectations of a tenth of percent increase. Or core (ex food and energy), up 2/10 versus the forecast of 3/10 percent increase.

Kevin: Okay, so I want to give you a picture this week, then, Dave, of a person who has a 401(k) or a stock portfolio, and also has to pay for the Thanksgiving meal. So at home, he and the wife are complaining about how much more the Thanksgiving meal costs. At the same time, he’s investing in more stocks based on the fact that they tell us that CPI is falling. Expectations, real live expectations, Dave, are for higher inflation, yet people are trading right now as if it’s going lower.

David: Well, and this is where I think the man in the street, the Main Street guy and gal are dealing with a different reality than the speculator, the leveraged speculator, even maybe they have this split personality between family who’s paying bills versus family who’s speculating and hoping for a better tomorrow. Consumer expectations of inflation are rising. And of course, that runs contrary to the narrative that inflation is dropping. You would think, if the narrative was well understood, that the narrative would fall apart. Yet we’ve got the Cleveland Fed who reports CEOs’ expectations of inflation are right in line with the consumer.

So not only the working class guy and gal, but also the CEO of a Fortune 500 company, this is where we have higher expectations next year. The survey that the Cleveland Fed does is the Survey of Firms’ Inflation Expectations—the SoFIE. It places the expectation at 4.2% over the next year. And again, that runs contrary to the narrative. Investors relish this experience. They relish the experience of cognitive dissonance, where the official narrative is out of step with the direct experience because they like the net gain to the portfolio, which is overwhelmingly positive.

Kevin: Yeah, so you can complain about inflation on your Turkey, but you can show everybody your statement that when CPI dropped, you made a bunch of money. The thing that concerns me, though, Dave, and you’ve talked about this so often, is that when everything’s rising, that means everybody’s in. Which, what does that look like when everything’s falling? I mean, you have to have buyers, don’t you, to actually be able to sell your stock or your bond or whatever the commodity is? You have to sell it to somebody at some time. Right now, it seems to be a single trade.

David: Yeah. So if my first point was that CPI—that this is the biggest load of garbage perhaps the BLS has ever put out, then my second point would be quite simple. It’s all one trade. The unified moves across asset classes have been remarkable for the better part of two years. And that trend continues. It’s stretching beyond asset classes domestically to a global synchronicity across borders and throughout currency blocks. So the proliferation of options trading, the extreme forms of leverage just make small volatility even bigger. The uniformity of trends across asset classes is clear.

It’s terrifying to me because it eliminates the benefits of diversification within a portfolio. And I guess if we’re honest, this should not be a surprise coming as we are at the end of a credit cycle. Is it a surprise that we have interest rates up or interest rates down? This is the cost of borrowing. And here at the end of a cycle, everything is moved by this one variable. Not a surprise. If everything trends together, when it comes back to diversification, there’s no moderating volatility by diversifying across asset classes. The cause of a move up is uniform, the cause of a move down is uniform. And so the shock surprise in 2021 and 2022 that you can actually lose money in stocks and bonds simultaneously, now that anomaly appears to be a new uniform reality, a new trend.

Kevin: Yeah. So just for clarity, Dave, for years and years we heard that if you felt like you were bearish on stocks, move over to bonds for a while because that was a good balance. And then if you were bearish on bonds, move over to the equities market. And that doesn’t seem to be the case anymore. At this point, they uniformly go up and down. Like you said, we saw that a couple of years ago. People feel trapped if they don’t actually understand that there are other options.

David: Yeah, the anomaly is the new uniform reality. A new trend. Except today—right now, for instance—the uniformity is on the upside. Bond prices move higher, stocks move higher, call options move higher, commodity prices move higher, currencies move higher. That’s today. And then there’s always tomorrow. We can see the exact opposite happen. There’s some fascinating implications to consider in the months ahead because where do you sort of duck and cover when everything is back in contraction mode again. Gold, of course, comes to mind. But this is the first time in generations that government debt isn’t the obvious safe haven asset. It’s the first time in ages that gold may well be the preferred and perhaps only safe haven not possibly correlated to a debt burden system.

Kevin: Wouldn’t that be something? Because really, we have thousands of years of record of gold being the place to go as a safe haven. Yet, for a period of time people relaxed and said, “No. I think debt and the dollar and currencies, that is a safe haven.” What we’re seeing is the cracks are becoming actually huge fissures. What I would ask though, for the person who’s saying, “All right, I get what you’re saying. I’m going to short all the weak stocks out there.” Boy, they can have their head handed to them, can’t they, if they don’t have good management? Because when you have a market moving up, those short stocks have to be covered.

David: Well, and we saw the Goldman Sachs short index last Tuesday when we had the CPI announcement, up 7%. And the next day, up almost close to 5%. 12% in two days. The idea of shorting stocks, no surprise at all. Jim Chanos, who has been since 1985 selectively shorting stocks and shorting the stock market is giving money back to his investors. He’s hanging up the cleats, calling it good. This is an environment where it’s incredibly, incredibly difficult. 

And so, yeah, short stocks soared more on the CPI data than any other factor, frankly, last week. Market stress indicators that we look at multiple times throughout the week, all reversed. All reversed to an extreme risk-on, that is to say return on capital and sort of the speculative frenzy to make money took center stage. Bonds continued to rally very hard. Stocks rallied very hard. Even, as we’ve been talking about for months now, the RMB and the yen, or the Chinese currency and the Japanese currency, they both rallied hard. It’s all one trade. Synchronized global pricing is a modern phenomenon. You have to search hard for non-correlation.

Kevin: I can’t help but think about Big Brother in the form of data. George Orwell talked about Big Brother. But Big Brother in the form of data. When you have real expectations of inflation going up, the man in the street—and you even said the guys in the corporate heads, they believe inflation’s going to go up. Yet, the data is saying no, inflation’s going down. So the trading is actually on the data. In a way, it’s like trading on a continual lie. That’s like Big Brother. And I’m wondering if it’s not for people control, Dave, are we being controlled by the data instead of the facts?

David: I think it’s worth considering what the trend is in terms of this uniformity and how important it is that our information flows are not that uniform. There’s a danger in becoming data dependent. There is a danger in creating algorithms which trend off of increasingly correlated data. Just as news feeds and information tend to flow more uniformly in a feedback loop informed by an artificial form of intelligence. We talked about this with Dr. McBrayer some time ago, where we have our preferences read by an AI system and then we are fed back exactly what we want and are looking for. And we assume that the data that is put in front of us is objective and helpful when in fact we’re looking at very limited scope. And I just wonder if over time we’re not looking in an increase in curated information,

Market reactions are more uniform, and this I believe is on a similar basis. It makes me think of Richard Bookstaber’s The End of Theory. Maybe this is critical or even cynical in terms of a read on his work. I loved reading it. Very helpful. But it’s this dystopian notion that instead of having a theory of economic behavior and a description of what makes people do what they do, that we can guide economic growth by harnessing big data, by using predictive analytics, and creating essentially what is the fallacy of false alternative. You, the consumer, have a choice to do A or to do B. And we know that your consumer preferences as expressed on the internet have been towards B. We encourage B, we encourage B, we encourage B. And that’s the nature of it, right? Consumers do as they ought to do—and that’s kind of from the “management’s view,” and less of what they think they want. Their desires are shifted and shaped by information flow.

Investors, consumers, they’re the same. Preferences can be guided. They can be informed, they can be directed with the appropriate presentation of data. This last week it was the CPI data. No? I mean, what other data is rigged? Not all data is as blatantly rigged as last week’s CPI. Utter balderdash. But even when they see that it’s blatantly rigged, does the consumer care? Does the investor even care? The right data, the right framing, and you get the preferred outcomes. Stocks and bonds go up, economic activity improves. And this is Bookstaber’s point. We don’t ever have to have a recession again. We could have a Goldilocks economy forever, forever, if we form the appropriate beliefs and actions. And again, that’s what to me feels dystopian is you’re limiting the scope of information in order to manipulate behavior to get to an optimal outcome. It’s optimized according to someone’s perspective. That to me is dystopian because just like someone’s trash is someone else’s treasure, there is an ideal out there which to someone may be the dream come true and to someone else may be a total nightmare.

Kevin: There are several movies that have played off of this. Think of The Matrix where the comfort of the beings that were in the matrix basically was all that mattered. You had the red pill and the blue pill. But you remember The Truman Show?

David: Of course.

Kevin: You remember Jim Carrey in The Truman Show?

David: Yeah. So when I think of that framing and think about Bookstaber’s very, very informative work The End of Theory, if my framing of those outcomes sounds too dystopian, sounds harsh, try to appreciate that my frame of reference is really rooted in the importance of individual freedom, individual manifestation, personal choice. Not controlled, not co-opted, not coerced, and sometimes even that coercion is subtle. But The Truman Show showcases a lot of that, right? It’s the perfect community. There is a designed outcome. It’s a smart community. Everything works well. Ed Harris plays Christof, sort of the master curator and the writer of the script. The creator of a reality so engrossing, so believable that this television show, The Truman Show, gains a global audience. People love it, people live for it. We want to believe it’s true. We’re invested in the right outcomes, the preferred outcomes as they’re playing out.

And there in The Truman Show, lines between truth and fiction are blurred. There’s suspension of disbelief, and that rolls forward in perpetuity from one event to the next because you want to see what happens next. You want it to have a positive outcome. And again, I can’t help but think we have similar data inputs where of course we want a preferred outcome. We want the best possible scenario in terms of our world, the global economy. And you give me a little bit of hope—and the CPI number does it, and I’m off and running. I’m off and speculating.

Kevin: And Dave, your family is very theater oriented, and I think of when we go to a live performance, we grant ourselves say an hour and a half or two hours, maybe two and a half hours of what they call the suspension of disbelief, where it’s like, you know what? I am going to allow myself the comfort of believing that this story is true for the next two hours. The suspension of disbelief. 

Yet, what you’re saying is, through the data, whether it’s like The Truman Show, whether it’s like The Matrix—which, by the way, I saw The Matrix. We were on a conference tour with your dad back in the late ’90s. I saw it with your dad and your brother and a couple of other guys here from the office. I’ll never forget it. I went home and I could not stop processing the message of The Matrix. And the thing is, bringing The Matrix into that— All right, if you don’t suspend disbelief and you say, “No, I’m going to actually act on the environment as it is, not as I wish it to be,” it’s very uncomfortable. The matrix brings that out. There were some—there’s one guy in particular in The Matrix that was willing to go back into that suspension of disbelief even knowing the reality because the discomfort was too much.

David: If I remember correctly, and this goes back a few years, there was a little monologue in there where Agent Smith says, “We did this once before, and we had it too perfect. We had everything that was designed so well that the human mind could not handle it. Ultimately, we had to start all over again. We scrapped the first matrix and created the second one. It needed more tension. It needed more problems. It needed to be dirtier.”

Kevin: Some friction.

David: It needed friction. It’s almost like, if you look at the financial markets today, one of the last remaining elements of the unscripted surprise—and this is not something that can be controlled, it’s in geopolitics.

Kevin: Good point.

David: In that domain, you can’t play with the numbers. You just have brute realities. In that domain, the actors—some of them are state actors, some of them are not—they operate with a mind of their own. Sometimes it’s rational. Sometimes it’s not. Often, it’s unpredictable. Whether it’s power politics, which run through a decidedly non-optimized economic grid— I mean, set aside Bookstaber’s ideal of how we can create this optimized economic world, you don’t get that in geopolitics because you’re up against things like religious zealotry. It’s tough for an AI program to break into understandable chunks of data, something that— it doesn’t tie to data. It’s a veil through which the preferred stability feedback loop simply cannot see.

It reminds me that this is the area of surprise. If you can control and curate and manipulate data, this is an area where if you’re inadequately hedged, you’re going to be surprised. If you’re not hedging geopolitical tail risk today, you’re brain-dead. Do me a favor, talk to your friends, talk to your family members about doing this. Hedge your tail risk. Geopolitics is something that is a growing danger, and it’s out of step, it’s out of sync, with the curated perfect economic world. We’ve been doing this for 52 years, and I can’t think of a timeframe where surprise is right there, right there.

Kevin: Dave, one of the things that I’ve really enjoyed about working with the McAlvany’s since the ’80s is, whether it was your dad’s newsletter, whether it’s reading the stuff that’s on the current website, Doug Noland and the information that we provide, it’s not in step with the masses. It sounds out of step. And one of my favorite theories to study, Claude Shannon talked about information theory. He worked with Bell Labs back in the 1950s, and Claude Shannon said basically, “Information is a surprise. Everything else is noise.” And when Bell was working on this, they were getting him to actually see, how much information can you get through a particular type of conduit, whether it’s fiber optic or whether it’s copper or whether it’s just speaking through the air?

And the only real information is a surprise, and he likened it to a clap or a cough in a quiet library. That’s new. That’s something different. Otherwise, the silence is just like noise. And I think about the trade that you’ve been talking about. Everyone right now trading data, in a way that’s noise. There’s no surprise. They tell you that CPI is dropping and you go out and buy stock. They tell you that CPI is rising, you go out and you sell stock. But you’re being manipulated by an environment very much like the Matrix or the Truman Show, and in a way that’s just noise. You’re talking about surprise versus noise, Dave.

David: Well, again, it shouldn’t come as a surprise that credit and being at the end of a credit cycle has this common factor. As the cost of credit goes higher or lower, everything shifts. Today, the trade’s bullish. It’s all one trade. Hedges are unwound. Shorts are covered. The energy of the upside is powerful. But tomorrow it’s bearish. I mean, preferably not, but sooner or later it will be. And uniformity is what I find disturbing. What it suggests is that asset classes are not trading on their own merits, but are being driven by common factors, and I think that is debt and the credit cycle now ending. That’s the common factor across asset classes. Portfolio diversity is debt. Diversification benefits across asset classes—debt. As we discussed last week, you’ve got private equity trades which are moving in lockstep with debt, which are moving in lockstep with public equities. Everything is moving in one direction.

Now, this is a rabbit trail, but speaking of private equity and private debt, the proliferation of shadow banking in private credit, it has to be a centerpiece in the next leg of our financial crisis. Private credit markets have increased in scale from $280 billion prior to the global financial crisis to over $1.5 trillion today. Classic case of regulatory arbitrage. You got commercial banks, which since the global financial crisis have come under incredible scrutiny, Dodd-Frank and all the rest. Then, this year, first quarter, we’ve got the seizing of Silicon Valley Bank, Signature, First Republic. And who is making hay? The shadow banks. This is BlackRock, Blackstone, KKR, Apollo, Ares, Oaktree, Goldman Sachs, and they’ve continued to go crazy.

Credit growth, even in a higher interest rate environment, has been facilitated in the shadows by these groups, and it’s into the trillions of dollars. The frailty there is that, again, they’ve allowed a regulatory arbitrage. Nobody is telling them what they can and cannot do, and when Wall Street is given the license and the latitude to do what they want, when they want, and how they want to do it, that is where you can expect to see crisis emerge. So if I had to pick one place that may come as a surprise to the financial markets, the crisis is front and center, private equity, private credit. It’s a place to blow up because nobody’s telling them they can’t, so they will, and they’ll take it too far. They always do

Kevin: Well, and if it’s not CPI, it’ll be something else. I remember I was in New York when I heard a news story, oh, this was 15 years ago or so, about Bloomberg. And Bloomberg, of course, is a news service, but they also produce a trading program that, like artificial intelligence, it keys off of keywords. And so you’ve got the people producing the news, writing the stories, and then you also have a trading program that keys off of whether it’s a positive word or a negative word, and these automatic programs are trading. I have a question for you though, Dave, because if a CPI, if the expectations for inflation are higher and higher, which is what you’ve pointed out, and the reality of inflation is higher, then, if that doesn’t happen, I don’t know how long the data will hold up.

I want to go back to the 1960s and ’70s, Dave, because that was the last time that we as Americans really experienced high inflation. I remember there was an ebb and flow to it. It wasn’t always just up more and more each month. I’m wondering if we’re going to see those same kinds of cycles now.

David: Well, Doug covered some of that in the weekend’s Credit Bubble Bulletin, and we’ve got a CPI print last week. It’s all you needed for a mega rally. And what Doug reminds us is that there’s ebb and flow to inflation and there’s an unavoidable ebb and flow to interest rates. He says “CPI year over year began in 1968 at 3.6%, traded as high as 6.2 during December of ’69. CPI had dropped back down to 2.7 by June of ’72 only to shoot to 12.3% at the end of 1974. Inflation then reversed sharply lower with a reading of 4.9% during November ’76. Despite market and policymaker optimism, the inflation fight was anything but ‘mission accomplished.’ CPI reached 9% in ’78, 12.2 and ’79, peaked at 14.7% in April of 1980.” And Kevin, I guess what I’m saying is, in recounting this volatility in CPI, it’s low, it goes higher, it comes back down again, it goes high again, it comes back down again, and it looks like a veritable roller coaster.

And if you are going to try to do a victory lap on inflation on the first dip lower, you have no idea the wild ride you’re on. It goes on to say “the fed funds rate began in 1968 at 4.6, only to reach 9.2 in August of ’69, back to 3.5 by February of ’71.” Think about that for a moment, Kevin.

Kevin: Wow.

David: The extreme bond market volatility with fed funds rate doubling from basically 4.5 to 9, and then losing close to two-thirds by February. This is massive volatility. Imagine someone trying to say, “Hey, we’ve won. Rates are lower. Inflation is past us. No worries,” February 1971. You’d seem like a genius, and this is one of the reasons why we’ve suggested, be careful of the trend and be aware of what is merely a trade. Doug goes on to say, “We surpassed 10% by July ’73 and began 1976 below 5, jumping back to 10 in late ’78, reaching 15.5 in October of ’79, only to peak at 20% in the first quarter of 1980.” Fed officials are well aware of inflation’s resilient and cyclical nature along with the danger of the stop-start policy tightening.

Kevin: Something to keep in mind too is even the low numbers on those cycles are considered high inflation. So it’s not like inflation was going into a deflationary trend where actually the dollar bought more. It just was rising at a slower pace. Whether it’s 3% or 5% or 10%, it’s still rising. It’s still costing more and more and more. So going back to this relief rally that we had with the CPI numbers last week, if everyone is buying—I want to go back to what we were talking about before—if everyone is buying and it’s an everything rally, there is a day that has to be sold, and that will be an everything crash or at least bear market.

David: Exactly. Today’s relief rally in everything is tomorrow’s bear market in everything. And, again, this comes back to, we’re in an over leveraged financial system. There’s too much debt in the system. It should come as no surprise that the cost of capital is the key factor in driving asset prices.

Kevin: Yeah, Dave, I almost feel like the boy who cried wolf. I know the index of leading economic indicators has told us for many months now that a recession is looming. Yet we haven’t really felt the recession yet. And I’m wondering, the boy who cried wolf. If everyone knows the story, it’s like recession, recession, recession, LEI recession. This is the boy who cried wolf. Well, there is a day where the boy is right and nobody listens. Is that coming?

David: We’ll see. 19 months in a row, the leading economic indicators have marked an ebb in anticipation of recession. And a streak like this has never occurred without a recession to follow. True, it could be different this time, and if it is, we can disregard the LEI as infallible, but until the leading economic indicators can be discounted, they should be respected.

Kevin: So we should be watching GDP, is that what we’re looking for?

David: We should be looking for recession to unfold. Maybe that’s first quarter this next year. We’ll have to see, but you’ve got the data from Refinitiv and Capital Economics that shows the majority of sectors in the US economy have three months in a row of negative GDP growth rates. So this is the vast majority of US economic sectors are under pressure. It was worse in 2008, and it was worse during COVID, but those are the only other two timeframes that reflect what we see taking place now.

Kevin: I remember when we did the interview on GDP a few years ago, and just how nebulous GDP is. But something that’s not nebulous is tax receipts. You can look at tax receipts and see whether they’re rising or whether they’re falling, and that’s often a great indicator for growth.

David: Yeah, it was a month or two ago that we started talking about not only $2 trillion in deficit spending, which was going to be a reality, but the interest component would be close to half of that. And a part of the reason why the deficit was growing was because tax receipts were down. I think they were down 9% at that point. I think the most recent measure with a few more dollars trickling in, 8%. So as we get ready for 2024 and an additional $2 trillion in budget deficit, it’s worth considering tax receipts. Will they be a dud two years in a row? Between 8% and 9% in 2023, that’s what we’re missing.

The missing tax receipts, and this is not tax avoidance. This is just people aren’t making as much money, which again, it’s so inconsistent when you think about lower income tax receipts with rising incomes and the labor force that is full throttle. This is about the healthiest labor force we’ve ever had. How can you have a super healthy labor force and rising incomes and yet your tax receipts are down, call it the better part of 10%. The decline in receipt supports the notion that recession is in fact a likely outcome. And if you’re thinking about the Goldilocks outcome, I think you’re looking at more of a three-bear mauling than the Goldilocks outcome.

Kevin: When you say Goldilocks outcome, again, I’m thinking suspension of disbelief, but when I walk out of the theater, reality hits. I’ve got to make sure that I’m looking both directions as I cross the street. The show is no longer on. So I think the opposite of the Goldilocks economy—if you don’t think that it really is going to be the outcome—is the locked-up gold economy. I think I want to have locked-up gold just in case the Goldilocks economy doesn’t work.

David: When we mentioned consumers earlier, but consumer sentiment measured by the University of Michigan report falling even as asset prices move higher. Maybe statistics are taking their time catching up to the reality experienced by most Americans, but the sentiment numbers are suggestive of not only higher inflation numbers, but lower expectations of economic growth. So once again, we’ve got a privileged few, whether it’s the economists or the statisticians that are seeing/crafting a different reality than what the average American is.

Kevin: Last week you brought up something that I think is really wise. We talked about the Rip Van Winkle investing, or what you call the vacation trade. And the question would be, all right, and again, I’m going to use the theater analogy here because we’ve got it going. You walk into a theater. I don’t know if this has ever happened to you, but it has happened to me, especially in New York because here it’s dry all the time. Virtually always, you just don’t need an umbrella. But in New York, you can go into a show and two hours later walk out into just a torrential downpour. That’s the real environment.

Now, when I’m in watching, say Phantom of the Opera, I may hear the rain pattern on the roof, but I’m unaffected by it. But if I go in that theater without an umbrella and I walk back out into a torrent, I’ve made a mistake. And so my question would be this, the longer-term trade for the person who says, “Yeah, this is unreality, and yes, people are suspending disbelief, but there is a reality that I’m going to have to have an umbrella for.” My question would be, again, just like last week, what do you do for the longer-term vacation trade, Rip Van Winkle trade, walking out of the theater trade? Do you have your umbrella, and what is it?

David: Yeah, I carried that same conversation point into an interview I did with Charles Schwab and commented on the vacation trade, the five to 10 year trade. The trend for precious metals is higher. And again, there’s a contrast in my man between what is a long-term trend and a short-term trade. And we’ve talked about the uniformity of movement of all asset classes and the volatility of that movement too. So those are trades potentially, but not longer-term trend. I don’t know that the stock market being up this week is sustainable, or the bond market rallying is sustainable, or the RMB and the yen, again, moving considerably in the last 10 days is sustainable.

But gold on the other hand, I do think the move higher is in fact sustainable, and that would be the place to park resources for a half decade or more. The breakout to all-time highs has occurred in a dozen countries, and it’s going to migrate to our currency, perhaps before year-end. You can think of that as a trade, but I think you are investing in what has been a long-term trend and is continuing to play out.

Trades are short-term phenomena, buying bonds to play the volatility in rates. Great, no problem. Not opposed to that. We did that for our managed accounts 30 days ago, buying 2-year Treasury notes, in small quantities of course, but now you’ve got massive amounts of money piling into that kind of trade. I fear it will only last as long as the market’s blissful ignorance of inflation, as the CPI chicanery and deception. Once that’s recognized and inflation concerns return, the trend, the longer-term trend of rates, being higher for longer will be back. And again, this is something that I don’t think your BLS statistician can explain away. The bond bear will return with higher rates. The everything bubble dissipate into the everything bear we first ran across in 2022.

Kevin: I don’t want to sound like we’re just completely against the trade. Like you said, 30 days ago, you were buying 2-year Treasuries. You have to be aware of the shorter-term trades as long as you don’t mistake them for the longer-term trend.

David: Well, that’s right. The distinction between trade and trend is vital. Let’s come back to what we started with. Buy what’s scarce, sell what is ubiquitous. This is the age of government finance. It has defined the world. It has saturated the markets with too much liquidity. The world of gold defines the world of scarcity. It defines the world of security. This is an easy trend to consider, invest in scarcity, avoid what is overproduced.

*     *     *

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, 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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