EPISODES / WEEKLY COMMENTARY

Seat Belts & Inflation: A Second Too Late Is Still Too Late

EPISODES / WEEKLY COMMENTARY
Weekly Commentary • Feb 16 2021
Seat Belts & Inflation: A Second Too Late Is Still Too Late
David McAlvany Posted on February 16, 2021
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  • Powell says now’s not the time to worry about spending
  • Biden’s Plan – A giant all-in bet to “run it hot”
  • Cancel culture lion may just turn on its own master

 

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Seat Belts & Inflation: A Second Too Late Is Still Too Late
February 16, 2021

“The idea that culture wants to define what an appropriate conversation is, or who adds value to that conversation on the basis of intersectionality or some other absurd criteria, it pisses me off. But what colleges and universities caved to a long time ago, is going mainstream and I’m going to protest that. If you’re limiting your inputs, I think that ultimately has a devastating impact on your outputs.” —David McAlvany

Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. Last week we talked about skiing in powder, and it was beautiful, it was warm, compared to what you did this week. Which is the contrast to running something hot, you were running cold. How cold was it in Montana?

David: They started at negative 17, and warmed up to negative nine. It gave me the sense of being in Germany with negative interest rates. Like you think, where do you go from here? Cold, colder, coldest.

Kevin: We’re sitting in the studio and you used to have a nose.

David: I know.

Kevin: Now it’s black and part of it has fallen off. But given temperature changes and some of the things that are going on, I looked at what’s going on in Texas right now, Dave. And this morning we were on a call, a man in Dallas, and he said, “You know what’s happened? A neighbor of mine. He’s got a swimming pool, a heated swimming pool.”

David: Heated swimming pool.

Kevin: And it’s iced over like an ice rink. So, things are not running hot in Texas, either.

David: No. Well, and we’ll get back to running hot in just a minute.

Kevin: Speaking of that, because we’ve been talking about inflation and the inflation numbers, we’ve for years looked at it and said, “Well, how do you really calculate inflation?” We were talking about hot dogs last week and chocolate, things that affect our lives. But when CPI comes out, a lot of times it doesn’t tell the whole story. Look at the rents, the delinquencies and rents affecting the CPI number right now.

David: Well as you consider the world, you have the developed and developing, if you want to put it in those terms. In the developing world, most of the money is spent on housing and food. Reuters pointed out this last week that through a mix of currency depreciation, rising commodity prices and then coronavirus disruptions, food inflation soared 14% last year in Latin America’s largest economy. And they said that was the largest increase in two decades, with the headline figure masking the hikes in the big staples. 76% jump in rice and a doubling in soy oil prices. Again for us, it’s not as big a deal because maybe in the developed world, we spend a little less as a total percentage of our income on housing and food. But Bill King pointed out that due to mortgage delinquencies and moratoriums, even the part of CPI here in the United States, which factors in rents. In fact, it’s about a 40% contribution to the core CPI calculation, very understated this last time. What he pointed out is there’s a 3% discrepancy between effective rents and asking rents, which depresses the rents calculation in BLS, the Bureau of Labor Statistics, CPI calculations—

Kevin: This is because of delinquencies, right? Right now the rents are not caught back up, the COVID year, whatever it is.

David: That’s right. So when renters become current, effective rents as a part of CPI calculations will rise significantly enough to push the inflation here in the United States, that figure, push that measure higher. And again, otherwise the rents portion, which is almost 40% of the core CPI, was unchanged from last week’s report. No surprise, energy, commodities, transportation, these were all up.

Kevin: Well, not to mention that, but I mean, you were talking about rent. Properties everywhere are skyrocketing as far as real estate. So we can get into that, but the commodities aren’t the only thing rising. It’s where you live.

David: Yeah. Bloomberg pointed out on February 8th, that global markets from the US and European bonds to stocks and oil are sending a clear signal, and they say inflation is finally coming back. You look at the different parts of that, oil’s rallied back and is now posting a 23% gain for the year. Copper, as we discussed on last week’s quarterly investor call—

Kevin: You call it Dr. Copper. Right, yeah.

David: Yeah. That’s exactly right. Dr. Copper is speaking with some authority. Not only does it give us an indication of economic activity, but also implied increase in costs. Natural gas, I guess with colder weather, no surprise, but higher by 15% year to date, gasoline, 20%, corn, 11%. And if you’re looking at back to transportation inputs, Maersk is one of the shipping container companies, shipping companies, that brings those huge 40-foot long containers from all over the world. Shipping costs have spiked there because number one, you’ve got a surge in demand for products. And number two, you’ve got companies who are playing catch up, they’re needing to restock. And so there is a little bit of a pig in the python in terms of supplies coming from manufacturing sources and getting over here. So a big bump.

Kevin: And like we said last week, it’s not necessarily the actual price that we’re worried about. It’s the expectation of future price rises.

David: That ends up being a huge part. So, you’ve got the 10-Year Treasury Breakeven, which keeps marching higher as well, 2.22, on it’s way higher this week. And again, that’s about anticipated inflation. As you say, that’s the key, expectations. We mentioned property prices, just looking at single-family homes, they’ve now exceeded the previous peak, moving up 14.9% in the fourth quarter to $315,000 for the median price family home. Prices surged the most on record and of course you have low rates, which are part of that equation. Low interest rates are both a symptom of our credit maladies, but equally a cause of what I think is pain ahead. You’ve got lots of people who are getting into houses that are going to be underwater. You get a minor uptick in rates and all of a sudden the equation in terms of home value changes pretty quickly, rates rise. And in fact, when you look at what the dynamics are that move rates higher, rates tend to rise higher on a faster pace, more easily than they fall.

Kevin: So we were talking about running cold when you were running 17 below, in Montana. But, Bloomberg’s talking about Biden economics is just— it’s counting on running-it-hot economics. So what does that mean, Dave?

David: Yeah. Run-it-hot economics. I mean, we had last year’s CARES Act, which was the biggest federal injection of cash ever. We’ve got the $1.9 trillion proposal pending now, which would be number two on the cash injection scale list. And we covered this last week, where Larry Summers and Olivier Blanchard are, they’re concerned— but we talked about that last week. But also you’ve got this $2 trillion proposal for clean energy, a $1.5 trillion spending plan for manufacturing and childcare.

Kevin: You’re just printing money. You’re creating dollars out of thin air.

David: Or at least credit out of thin air and obligations out of thin air. And this kind of spending in the context of already-rising commodity prices is a big deal. It’s a big deal if you’re interested in hard assets. Now that’s if you’re interested in hard assets and want to see some benefit from exposure there. But it’s also a big deal for very different reasons if you’re sitting on a large bond portfolio. Big deal not because there’s an opportunity, except if you’re getting out of the way of a potential catastrophe. But it’s a big deal because holding on to the belief that the world’s central banks are going to forever have your back is going to come at a high price. Yes, they’ve been buying down the rates and certainly they can reverse course. Certainly we could have a tightening of monetary policy and we could have the bond market throw its taper tantrum 2.0, that’s always a potential reality. Maybe we have the stars in alignment for that kind of a move this year or next. But before that happens, before a policy shift to tighten, we’re already beginning to see the market shift. That is already in play.

Kevin: Well, we can’t really count on them tightening right now. Powell’s already said he’s not going to tighten, but tightening can occur naturally when interest rates start to rise, that tightens the economy too.

David: That’s right. And Treasury rates are on the move, and that’s a natural form of tightening. Even as the Federal Reserve continues to buy up $120 billion, not evenly split. Actually most of that is in Treasuries with a smaller bit in mortgage backed securities. That’s $120 billion a month. And in spite of the 120 billion in artificial purchases, we’re still seeing interest rates in the Treasury market move, because apparently that’s not enough.

Kevin: Yeah, but what’s so strange? Okay, interest rates on Treasuries are rising, it’s not enough. But junk bonds, the interest rates on junk bonds are falling at the same time. What in the world does that mean?

David: Right. So the 10-Year Treasury is at 1.25% and rising as we speak. At the opposite end of the risk and credit spectrum, junk bonds are posting all time highs, last week, that’s highs in price, with the yield slipping below 4% for the first time ever, right? So Treasuries are moving lower in price and higher yield at the opposite end of the spectrum is getting some real play. You have to ruminate on that. $855 billion of junk paper, according to Bloomberg, under 4% in yields, and actually municipal bonds are following the same direction. You’re talking about all time highs in terms of municipal bonds, all time lows in terms of yields, yielding less than they ever have before.

Kevin: But they’re standing on the bridge of the Federal Reserve. In other words, okay, so the risk-on environment right now is being fueled by the faith that everyone seems to have in the Federal Reserve, just continuing to be able to keep rates low.

David: So the question I would have for someone who’s sitting on a large municipal bond portfolio is this, you’ve just received, in terms of capital gains over the last 24 months, probably the equivalent of five years’ worth of income. Why would you leave that on the table? I mean, there’s this old adage we seem to forget when we’re at market highs, because nobody wants to take money off the table, but you buy low and you sell high.

Kevin: Okay. So explain what you’re saying because you caught me off guard a little bit on that.

David: Well are we talking about bonds?

Kevin: Are you talking about the principal increase in the municipal bonds?

David: That’s right.

Kevin: Yeah.

David: As yields drop, the principal value, you have capital gains—

Kevin: Take the money and run is what you’re saying?

David: Take the money and run.

Kevin: Yeah.

David: Take the money and run.

Kevin: All right. But the risk-on environment, why would you take the money and run? What if they keep falling?

David: And that’s the point, you’ve got yield chasing, you’ve got the commitment by a variety of central banks around the world, and that yield-chasing and risk-on market dynamic, it continues unabated, even as Treasury market dynamics are signaling a shift in inflation concerns. And frankly, junk bond owners should be terrified. But these are not normal days, are they? And these are not seasoned investors either. Well, perhaps that’s not so. Because perhaps the investment community has just marinated so long at the lower bound of interest rates that they’ve forgotten what it means for interest rates to be mean-reverting. For there to be duration risk, which increases and credit quality which is not a static thing, it can change. They’ve forgotten that the quote unquote, “all-powerful Fed” is in most respects like the all powerful Wizard of Oz. Do you remember that scene—

Kevin: Oh yeah, the illusion.

David: —in the Wizard of Oz where all of a sudden the credibility is gone.

Kevin: Yeah. Pay no attention to the man behind the curtain, right?

David: I know. Credibility is gone because the illusion is no longer there. Power gets stripped when the illusion dissipates, right? So, investor faith in the all powerful Federal Reserve, again, quote unquote, “all powerful Federal Reserve” that flourishes with no doubts or uncertainties. But what happens to that faith when market pricing changes and hits you upside the head with a two by four.

Kevin: So appropriate, I was reading this morning about the story in the Bible of the man who built his house on a rock versus the man who built his house on the sand. Now the house that went into the sand or onto the sand really probably went up very quickly. I would imagine it was pretty impressive because it’s like, “My gosh, how can he build so quickly?” But of course when the storm comes, which one survives? I mean, that’s the parable and with what we’re seeing right now, when you have junk bond rates falling, which means you have an enormous appetite for junk bonds and you have Treasury rates rising, the interest rates, they can’t buy enough of them. There’s something terribly wrong, and again, you’ve talked about signals of what does the top of a market look like? Is this what the top of a market looks like?

David: Well, one of the major themes for 2020 was the expansion of debt. Not only did we have massive credit expansion in China but we also had massive credit expansion here in the United States. I think one of the themes that will define 2021 is, who got to play in that and who didn’t? Because even as demand for fixed income and higher yield has increased, the Wall Street Journal reported that for the first time in more than a decade, bank lending shrank in 2020.

Kevin: Really?

David: Yeah. And so what you’re seeing is what we’ve often called shadow lending. You have your private equity guys who can’t find enough companies to buy and so they start issuing debt themselves. Private equity becomes private debt or private credit. And you find all of these ways that financial operators, but not banks, are getting into the lending business, and they don’t have to comply with the same capital requirements and rules that banks do. So guess what lobby groups are going to pound down the door, the Biden administration. You know the banks are already up in arms about the fact that they’re seeing their loan books shrink, and they were talking about all the big banks. I’m sure some small local lenders could be a comparison and contrast there. But your large banks, whether it’s B of A, Wells Fargo, Citigroup, their bank books, their loan books shrank last year. The other issue is that you’ve got financial technology companies, which are standing in for old-school brick-and-mortar banking entities.

Kevin: So are we going to see regulation coming into this?

David: Absolutely. So as we’ve talked about regulation into cryptocurrencies, there is regulation coming for fintech, there’s regulation coming for private equity and private debt, because these are all work-arounds for a system that is otherwise fairly well-regulated. And from a macroprudential standpoint, controlled for the quote unquote “safety of the system.” So again, 2021 ends up being a response to 2020 and the excesses in the credit markets, with banks being left out of the big benefit.

Kevin: You see, that’s counterintuitive. You would think with all the money that’s been printed and all the money that’s been borrowed this year, that banks would have actually enjoyed the ride. But you’re saying they’re being squeezed out by the non-regulated entities. 

You remember the conversation we had? Okay, we have some of the greatest guests. I love Russell Napier. Okay, he’s got a strong Scottish brogue but, if you really listen carefully, he has been ahead of the curve over and over. He’s the one who wrote Anatomy of the Bear. Do you remember the conversation we had? I think it was about 2011, 2012, when he told us that inflation was not his concern. Deflation was his concern. In fact, he was shocking. He said, “We may see Treasury rates fall well below the stated inflation rate.” And I remember that was counterintuitive to me because we had had these huge bailouts. We had quantitative easing, remember one, two, and three? And Russell Napier’s like, “No, not yet. Not yet. I’m concerned about deflation.” It’d be worth finding out what he’s thinking about right now, now that we’re starting to see inflation.

David: He has an interesting model. And that model is, let’s continue to learn because there’s a lot more that we don’t know.

Kevin: The Library of Mistakes.

David: That’s right.

Kevin: Right.

David: He runs the Library of Mistakes in Edinburgh and you’re right. I’ve been back and forth with him in emails, here recently. And while he was concerned with deflationary market dynamics for many years, he’s migrated to the inflationary camp. And so, I want to sort through his arguments, of course we have to sort through his Scottish accent as well, on the program in the coming weeks.

Kevin: It’s worth it. It’s worth twice or three times listen to get through the accent, to hear the information.

David: Just as a reminder, if you haven’t made a study of his book, The Anatomy of the Bear. It’s something of a cult classic among investment professionals. It’s not a book just for the shelf, it’s a book to be read and re-read. It’s very valuable reading. The research and time he put into that—absolutely immense. Russell took me to Adam Smith’s grave, off the Royal Mile in Edinburgh. And then we went to dinner and finally to a private single malt club. I think it was The Scotch Malt Whisky Society.

Kevin: Right there in Edinburgh?

David: Yeah.

Kevin: Yeah.

David: That was 2014, so it’s a little fuzzy. More because of the timeframe than from the evening’s tastings.

Kevin: Do you remember when you were there also talking to Smithers? I remember the interview because there was a harp in the background, there was a harp playing the whole time.

David: That’s right.

Kevin: Yeah.

David: We did the interview in the lobby of the hotel, and there was someone playing the harp in the room where they’re drinking tea and whatever. So it was about the time of high tea.

Kevin: You know, you live the life. You lived the life right there in Scotland, but okay, speaking of Smithers. Smithers exited the stock market and if we were talking to him today he’d say, “Yeah, I probably exited a little bit early. But, I still have my money, and the stock market is still overvalued.” Now let me ask Dave, the stock market just seems like it’s bubbling over right now. I mean, is there an end? We’re hitting record highs on price earnings ratios and margin and all these other types of things. How far can it go?

David: Yeah. Andrew Smithers talked about the Q ratio and—

Kevin: Tobin’s Q.

David: Tobin’s Q, as the most reliable. And he demonstrates in his book, how Tobin’s Q is the most reliable valuation metric. He picks apart every one of them from price to sales, to price to book, to price to earnings, all of them are inadequate compared to the Q ratio, it’s worth looking at. 

But I think he would say an early exit is better than a late exit because when valuations shift the other direction, losses accrue very quickly. Just like it takes a long time for interest rates to get to low levels, and then when they move higher, they tend to move at the pace of a sprint. They don’t give you much time to think about it. That’s really the market as a whole on the downside. It takes a long time to get to lofty levels. And it doesn’t take very much time at all to give a lot of it back, which is why I think he would be, even though he was early in moving to cash, completely content. Better an early than a late exit. 

Our friend Bill King has said, in the last few days, “Don’t overthink the stock market now. It’s a runaway bubble fueled by record Fed credit creation, record non–World War fiscal stimulus, record retail participation, record manipulation, record hucksterism”—which I think he’s talking about Portnoy and Musk and Reddit—but he continues, “And record regulator insouciance.” That is a context, in my opinion, Kevin, where risk is ignored. And frankly, it’s a context where quite understandably junk bonds are moving higher, not necessarily justifiably but understandably. And—

Kevin: So we can count on them continuing to just create money out of thin air, because even Powell this last week, he said, “It really doesn’t— The federal budget, don’t worry about that as far as how much money we print, we’re not going to combine the two.” It’s a little bit like Daddy Warbucks just basically saying, “Don’t worry about it.” Actually I’ll use a better example. Remember Jurassic Park, John Hammond, he built this beautiful theme park with dinosaurs on it. And he said, “Spared no expense. Spared no expense,” that line over and over and over, you can YouTube it and that line occurs over and over. Spared no expense

David: You love Jurassic Park.

Kevin: That’s what we’re doing. Why do I quote that movie so often? I don’t know.

David: It’s a good one.

Kevin: But they spared no expense and the Fed’s not sparing an expense either.

David: Well, speaking of bubbles, I really don’t know what they serve at the Economic Club of New York, whether it’s coffee or champagne. But I think they might have been serving bubbles at the last conversation. Jerome Powell spoke last week, and the markets toast the idea, they love the idea of patiently accommodative monetary policy. Investors love knowing that Powell is committed to QE continuing until “substantial, further economic progress is made.”

Kevin: You mean that’s a quote, right?

David: Yeah.

Kevin: Substantial, further economic progress. We’re going to keep printing money until we see some motion.

David: And speculators are giddy knowing that tightening will not occur until low-income workers enter the recovery. Monetary policy is lopsided in its benefits. We know that. It favors asset owners, it does not favor low income workers. So, thinking that monetary policy and accommodation is somehow going to trickle down to low-income workers and that you’re going to keep the pedal to the metal until they see some benefit, that could be a very long time indeed. So, do speculators like it when they hear Jerome H. Powell talk about these things? I’m using ages, Havenstein, I’m going to give him that middle name from now on. That could be—

Kevin: From early Germany, 1920s, if you don’t know who Havenstein is.

David: I guess the question is, will we see a natural tightening occur, sufficient to throw the brakes on? Because, we already have this idea that we’re going to run it hot, that’s the strategy. We’re going to keep on, not only with the monetary policy but with fiscal stimulus as well. And it’s okay if we run it hot and yet we begin to see the bond market say, you can talk about running it hot but we’re not sure we like the consequences. We’re going to have to adjust our price some way somehow, for all things to be equal.

Kevin: He even talked about federal budget issues not really being a factor as to what the Fed does monetarily.

David: Yeah. That’s exactly right. Federal budget issues don’t factor into the Fed’s deliberations. That’s interesting, if you think about that. We’re running deficits. How is that not supposed to impact the credit markets? How are massive deficits not supposed to ultimately impact the cost of capital? I think Powell has some huge presumptions there. But according to Powell, according to Jerome, now is not the time to worry about federal debt. Of course you have that sentiment echoed by the Treasury Secretary, Janet Yellen.

Kevin: Well, yeah, of course now is not the time to worry about it. You only worry about it when it’s too late. When you put your seatbelt on, when you get in the car, it’s because you don’t probably have time when you need it the most to put it on. You just don’t have time. And doesn’t history tell us the same thing with Federal Reserve policy?

David: I used to drive without a seatbelt, just because on principle it was my freedom to do that or not to do that. And if police wanted to give me a ticket for not protecting myself, I was fine with that because it was my right to not wear a seatbelt or to wear one. And it was a conversation with you that changed my mind on that. It has nothing to do with my regard for the law or the misapplication of the law, in my opinion. It has everything to do with responsibilities that I have to the staff here at the office and my family. And it’s a small, simple thing that I can do to make sure that if there’s something that I’m not in control of, that I still may walk away and be a value to my family and to the office. And so I had to reframe that completely, but now I wear a seatbelt.

Kevin: And I’m glad you do. William McChesney Martin of the Fed would have told you also the same type of thing with Federal Reserve. He said, “Remove the punchbowl before the party gets started.”

David: And now Jerome is spiking the punchbowl to get the party started.

Kevin: He ordered three more. Yeah, he ordered three more.

David: Well, history suggests that by the time policymakers do care about the debt, it’s too late, and you have other complications on your hands. So, Powell also had this throwaway observation on inflation which was that, it’s much lower now and it’s much more stable than it was 30 years ago, so we don’t need to worry about it. Listen, I mean, it’s obvious for anyone paying attention to trends in globalization and technology trends that there has been a period of disinflation over the last three decades. But as we know, with markets, it’s not where you’re at that matters, it’s where you are going next.

Kevin: Yeah. And Dave, going back to that seatbelt story, I jumped in the car one time during a rainstorm. And I put my seatbelt on only because I had promised my wife that I would. We were recently married, there was a rainstorm, I was going to go home. It was just a couple of miles away. And I actually had gone about a quarter of a mile before remembering to put it back on, this is before the days of ringing bells and telling you. But I just looked over and was like, “Okay, I’m going to do it for my wife because we talked about it,” and I put it on. And within probably a minute and a half, I had had an accident that would have killed me, had I not have put that seatbelt on. So, it is good to do something before the fact and not regret it after the fact.

David: Yeah. My colleague, Doug Noland, I think he sums up the circumstance that we’re in now pretty well. And again, it’s a summation of both the fiscal and monetary policy recklessness. He says, “The policy focus at this point is little more than a desperate monetary inflation to incite higher markets and more borrowing and spending. There’s no long-term strategy. How could there be? It’s ruinous inflationism. Capitalism has been crippled, the price mechanism sabotaged by central bankers hijacking the cost of capital, hijacking the cost of money, markets are broken, with the entire financial apparatus from the Fed to Wall Street to Washington geared towards imprudent spending and reckless expansion of non-productive debt.” 

And I think that’s one of the tragedies. Kevin, is that, when we see this expansion of debt, it’s not as if this is R&D for our future. This is down-the-toilet money. As much as we’re thinking about helicopter drops of money, we’re not re-engineering our economy for something bigger and better in the 21st century which will compete and beat say our next great superpower competition in the world of economics, that is the Chinese. No, we’re not reinventing ourselves. We’re taking money and we’re just flushing it.

Kevin: One of the things that we’ve lamented, and I know that Doug does as well, is the complete loss of price discovery. Price discovery is the accurate price between buyer and seller. And of course, when you have the Fed stepping in, you have no reason— I mean, it’s unreasonable the prices that we’re seeing in various things, either low or high. I even think, Dave, just to shift gears a little bit, it’s the same type of thing with news stories. I’ll take COVID for an example, I know that that’s a hot topic right now with everybody for the last year. But, isn’t it strange that our COVID fears finally were satisfied on the day the certification of the election of the new president happened, yet now the COVID fear, it doesn’t like Florida for some reason. So there’s no satisfaction in Florida, they can’t get satisfaction there, but we certainly did on the election certification.

David: Well, I think what you’re talking about is that it’s interesting that the COVID numbers began improving the day the election was certified for Biden.

Kevin: Yeah.

David: It actually dropped notably on inauguration.

Kevin: Breathe the sigh of relief. Biden’s in.

David: And now you have, this is according to the Miami Herald, the Biden administration considering domestic travel restrictions. And again, it relates to COVID, Florida is the top of the list.

Kevin: Wasn’t Florida a red state? Now that couldn’t have anything to do with it.

David: It’s probably the mutations that are of concern. We don’t know for sure. It could have red state retribution written on it. But yeah, I’m curious to see how the vaccines are offered going forward. This is a big deal. There’s a broader global conversation about travel and vaccine passports that has interesting social components. Tony Blair is a huge proponent of this across the pond. And there’s this conception of social responsibility, which understood in its particulars sets vaccination as a standard for good citizen/bad citizen categorization. What I’m curious to see is, if something like you recall this from previous commentaries where we’ve talked about Sesame Credits.

Kevin: Yeah, in China.

David: Trying to measure if a citizen is doing the right things or the wrong things. And you end up having limited social choices in light of whether you’re a good person or a bad person, but are we close to more of a global adoption of Sesame Credits? Part of what had me thinking about this was reading through a story by Stephen Roach. It was a very striking contrast with another article, actually two or three articles, that I read by Minxin Pei. All these are guests that we’ve had on the commentary.

Kevin: Yeah.

David: Some of whom are now in conflict with each other, Minxin Pei is critical of the Chinese approach to the Corona Virus. And I’m reading Steven Roach, in his own conversation, conflicted over the heavy-handed but very effective Covid management in China. Again, Minxin Pei would disagree with that. But contrast that with the less effective, in Stephen Roach’s view, Trump-Biden-American version of contact tracing, lockdowns, vaccine rollouts, and the point being, you can do a lot more quickly, as they have in China, when individual liberties are not a consideration.

Kevin: Right. Yeah. Command and control. You can do a lot with command and control.

David: But they’re—

Kevin: And we’re supposed to have individual liberties in this country.

David: —there’s long-term trade offs to that as well. And it’ll be interesting to see how the conversation here in the US is engaged with, perhaps how it’s curated, over these issues of individual agency and choice and collective obligation. And frankly, I have a few concerns over how politicized it seems everything is becoming and how limiting that can be to a thorough explanation and dialogue on facts and science and ultimately individual choice.

Kevin: Well, when you and I were last night, when we were talking over— see I had a Talisker you had a Lagavulin 16-year, right? Yeah. And the Talisker you had purchased for me, it was a distiller’s edition. Thank you, Dave.

David: It’s beautiful.

Kevin: That was for my birthday. I’ve been keeping it since then, but, yeah, as we talked, we were talking about, could we be moving on false assumption and, as an American, I just assume individual liberty, I assume constitutional rights. And yet what I’m seeing right now is there seems to be this overshadowing of that, for this larger term top-down social responsibility message. Forget about whether COVID is affected or not, what I’m talking about is an overall philosophy change.

David: Yeah. And there’s a component to it that has an ethical appeal to the greater good. What you should do is what is good for everyone, and that can justify the actions. And studying ethics, there’s lots of ways that you can approach ethics. Greater good, that’s one model of ethics. Utilitarianism is another model, there’s at least a half a dozen or more, at least in the Western approach to ethics.

Kevin: And you even talked— Plato approached it from several different ways, and then Aristotle, he basically said no, there’s a balance between the two, and so, it’s an interesting question, and we don’t have to get too philosophical today. But it really bothers me. Let’s go back, though, to something that shocked me, Dave, because we do talk about money and finance here, and one of the assumptions that I’ve always had is that Wall Street is just going to stay in New York.

David: Yeah.

Kevin: But speaking of Florida, they’re thinking of maybe moving to Florida.

David: The corner of Wall and Broad is geographically located in Manhattan, right?

Kevin: Yeah.

David: This is where the New York Stock Exchange is.

Kevin: 400 years of trading. Yeah.

David: Well, this is my conjecture, but speaking of Florida, you’ve got the New York Stock Exchange chief warning that the exchange will leave New York if a stock transfer tax is imposed. And it’s not like they can just scurry across to New Jersey, New Jersey is equally inclined to impose the tax. So instead of the NY or New York Stock Exchange or NJ, New Jersey, I don’t know why you’d want to do that. But New Jersey Stock Exchange, could we end up with the PBSE? Everyone else on Wall Street seems to be migrating to Palm Beach, why not the exchange?

Kevin: Well, do we even really need an exchange these days with HFT and laser trading at high speeds, where the exchange is, does it even matter anymore?

David: Well, it does matter to the high-frequency traders who have computers located spatially as close as possible to the exchange. If the exchanges move, we know the high-frequency trader computers will too. And that raises an interesting point. The SEC is being sued for ruling that everyone, you, me, everyone, should have access to the US Exchange’s high-speed data feeds, not just the high-frequency traders who pay a premium for that.

Kevin: You mean, so all animals really are created equal, not more animals are faster or more equal than others.

David: Well the exchanges, New York Stock Exchange, NASDAQ and the CBOE, they don’t like it. I mean, obviously they make some money by selling this premium service. But the high-frequency traders don’t like it either. Obviously, that’s about losing an edge, and the exchanges are now pursuing legal action. But yeah, you’re right. I mean, Wall Street has always been a level playing field, right?

Kevin: I was traveling this weekend too. I was down in Phoenix and I like to drive down there sometimes just so that I can have nine hours in the car to think. And I started thinking about something, Dave, that I’ve thought about many times before and I don’t understand it. Maybe there’s a mathematician who’s listening who could send us something and just tell us why elections are so amazingly tight. Okay, when you have hundreds of millions of people in a country, why is it that it comes down to tens of thousands as to the 50-50 split as to whether it’s going to be Democrat or Republican? I either smell a rat or I don’t understand the math, but why is it so close?

David: I mean this was a fascinating thing from the Washington Post, Jeff Bezos’ paper. I thought it was interesting coming from the Washington Post, of all papers. This came out on the ninth of this month and the discussion was about how narrow the margin of Democratic Party victory was. Republicans came within, according to the article, 90,000 votes of controlling all of Washington. 43,000 votes for president, 32,000 votes for the House and 14,000 votes for the Senate.

Kevin: That makes no sense, how does that happen?

David: I didn’t fact check the Washington Post. I assume that everything that comes from the Washington Post is 100% true. Bezos never has had an agenda and neither has the WaPo. So, what I just find fascinating is that that is a percentage of the American population. 90,000 votes, really ain’t much at all. And I know if you’re a student of the markets, this makes sense. Markets are determined by what happens at the margins, prices change by just a slight variation. A few more buyers than sellers, a few more sellers than buyers, that little margin defines the price trend.

Kevin: Well wouldn’t that imply then the next election that we’re coming into, in a couple of years, if that has that kind of close margin, there’s a vulnerability to really the party in power right now?

David: I think there’s an interesting vulnerability tied to a social dynamic. If that margin is actually so thin. Yes, small margins equal victory. So that’s done, we know that. But a 90,000 vote difference, and again, 43,000 for the president, 32,000 for the House, 14,000 for the Senate, if I read that article correctly. That’s a pretty limited Democratic Party mandate, right? So, how much is it risk in the midterms, comes down to what they try to get done in the first couple of years? Because, if you didn’t win by much, it might be that you frustrate a lot of people and you see landslides move the other direction. Landslides. And it’s not such a small margin at the midterms. There is that risk.

Kevin: It’ll be interesting to see— we’ve really looked at over the last few months with Justin McBrayer, just the perception management and control of the media. It’ll be interesting to see how the marketing teams on both sides, both the Democrats and the Republicans, play this thing out if the margins are that thin.

David: I think what it does suggest is we’re not out of the woods yet when it comes to bipartisanship and contentious politics. Depending on how the media and politicians play ball over the next six months, if there is a fair and respectful dialogue, then I think there’s going to be an interesting race come midterms. But if there’s a lot of disdain and disrespect, the midterms may be nastier than 2016 and 2020 combined. I’ll be interested to see how, frankly, the GOP deals with this. Because on the one hand, they’ve decided they don’t like Trump or anything that has to do with Trump. On the other hand, the number of voters that supported Trump in 2020, that is something they have to weigh against, say, the Capitol chaos in January. I think as we watch the impeachment hearings over the last week or so, the impeachment outcome may have been the first indication that the GOP does have some base awareness. But I think they’re in a very tough position.

Kevin: Just talking about the control of perception, we have to be very careful. You were talking about individual liberties, or we were earlier. You have to be very careful when you make rules against the other side because they may actually come back and haunt you. You’re reading a book right now that you’re fascinated with. I also know it’s making your blood boil.

David: Yeah.

Kevin: So why don’t we talk about that a little?

David: I mean, first regarding the media and policymakers promoting more cancel culture, I think that all attempts to limit voice promote exit. And that’s a very condensed way of looking at Albert Hirschman’s classic book Exit, Voice, and Loyalty. But again, if you attempt to limit voice, you promote protest and protest in the political context is usually sorted out at the polls. So—

Kevin: And I wonder if this next election… Trump in many ways was an easy target. Okay? By the way he spoke, there were a lot of people who just said, “No, we’re not going to do Trump.” But the iteration that comes out next, okay, because if a lot of people are like me, I feel like I’m being muted. I’m feeling like I’m being told that my opinion doesn’t matter so shut up.

David: Trump 2.0, not actually Trump, but a more polished iteration could emerge if the American middle gets squeezed by, whether it’s policy vindictiveness or exclusion from the conversation. And that’s, again, where I think the way this is handled over the next six, 12, 18 months, fair and respectful or with disdain and disrespect, it’s going to highlight how much of a culture war is past tense or right in front of us. It feels actually like it’s heating up not cooling down. I guess a part of that comes from this idea of unity being the stated priority of this administration. While the practical implication, the interpretation of that word, unity seems to be more about conformity. Maybe conformity is the actual meaning of the Democratic usage or reference to unity.

Kevin: Well, and we talked about command and control, okay? Unity under a command and control or a communist type of organization is going to be conformity.

David: Compliance.

Kevin: Compliance, at all costs.

David: We’re good if you do what you’re told.

Kevin: Okay. So the book that you’re reading actually is not written necessarily by conservatives. This is written—

David: No, not at all.

Kevin: —yeah. And yet they’re making the point, wait a second we may be muted.

David: Right. Everyone’s worried about the implications of not having a voice. I’ve mentioned Pluckrose and Lindsay, the co-authors who wrote the book Cynical Theories. And I’m further along in the book and rather disturbed by the themes that they’re getting to. I mean, part of it is I’m familiar with postmodern philosophy. My wife and I met at a speech that she was giving on the influence of postmodern philosophy on contemporary dance. I mean, these are things that have been of interest to me for decades. But what they’re doing is they’re basically saying from Foucault and Derrida and come, the practical out-workings of wokery and social justice warfare, intersectionality and identity politics. And that is moving from, just an academic sphere to the mainstream. I fully recognize this is not a financial or economic theme, but I see the consequences as having a large enough policy impact to stretch into the areas that we are more typically focused on.

Kevin: That’s one of the things— Over the last 13 years, while we’ve done this commentary— Because actually, Dave, this commentary has gone on since you were 12, because that’s when I met you. And we would get together. I mean, from the time before you were in college, you remember the times we’d get together? When you were in college, you’d come back. I remember that great Greek meal that we had on Second Avenue. You taught me about the philosophers and things that I didn’t know that much about and what a beautiful sunny day. But—

David: That was my sophomore year.

Kevin: It was a good year. You taught me—

David: Sophos moros, the wise fool. I had nothing to teach.

Kevin: That’s what this commentary is. It’s just an extension of our conversations we’ve had since you were young and I was young. And the point is, and you said something last night that I really have been ruminating on. It’s a discussion. The guests we have, we don’t necessarily always agree with. The books you read and I read, we don’t necessarily endorse every opinion of that author. But we said something about the importance of a discussion. Remember when we were talking about that, and you said, “You know Kevin, I think if we plant a flag too quickly on a particular opinion, and we say, ‘This is my opinion, and I’m going to die for it.’ You end a conversation pretty quickly and you end future learning.” There are an awful lot of things to learn from people that we don’t necessarily agree with.

David: Right. I think this is where, again, this cultural trend towards limitation of speech or defining and codifying what is appropriate speech or allowable speech. The limits of free speech are an obvious concern to someone with opinions and a penchant towards sharing analysis on a weekly basis, the podcast coming into a 14th year. We start with this as a foundational motivation. For me, I want to grow. And in order to do that, I have to learn. I have to discover, I have to explore. I have to continue to seek to understand. And the process for us includes an ongoing dialogue, that is not contained by hard edges. We’re interested in psychology and sociology and politics and political economy, as much as we are finance and philosophy. And I’m thinking, when I read this book, I think, I’d like to have a conversation with these authors to explore the nature of social interaction and where it goes from here. Because so much of what we do, tied to growth, learning, discovery, exploration, understanding, is about this interaction.

Kevin: You really don’t learn if you’re always going to the place that you already know. I mean, you talked about margins and markets. Margins, okay. You remember when we were fly fishing, we talked about how the fish are at the edges of two flows, that’s where you find them. And then we talked when you started training or when we started training for the triathlon, there’s something called the transition period. Well, races are won or lost on the transition. I’m a slow transition. But the truth is, on the margins is where you learn and it’s a little uncomfortable. And this is why, for a listener to the commentary, if you hear somebody on the commentary that you think, “These guys can’t possibly agree with this person,” well, good, good. Because maybe we’ll learn something, we don’t have to walk away friends.

David: Yeah and I’m not particularly friends of Foucault and you may want to, if we do have these folks on the commentary, brush up on a little Derrida or Lyotard or Foucault. They are the foundational thinkers for theories gaining popularity today. And they are defining the contemporary issues related to free speech. You think, well this is just the media and snobbery and whatever else. No, this has been in the making since the 1960s and ’70s, and has trickled down through the ivory tower to the man in the street. And there’s people operating as media producers who have been through their coursework in college, maybe a master’s degree, and take these things for granted as the basis of reality.

Kevin: I think, Dave, back when we sit around and talk, even when we’re talking on the commentary, how often do we quote past guests? It’s like we’ve got this community, there’s a group of people in the room with us all the time, and we can tap in and say, “Well, you remember when Carmen Reinhart said such and such. Or Napier said such and such.” Again, these are not necessarily people that we would agree with on every single issue, but you can tap into that community and you become a bigger person.

David: Yeah. In our conversations, we rehash the lessons learned from guests. And what you said a minute ago is so true. Sometimes, we have agreed with them, sometimes we have not. But we’re always learning and respectful and the ideas flow from a respect for gaps we know exist and must be filled in our own viewpoints. So, it comes back to presumption, presume too much about the world and the way it works and you may arrogantly limit inputs and dialogue that are vital to your success. Now I’m interested in the broadest and highest level of success, in terms of what it means to flourish as a human being. But also look at the arrogant attitude that you can have in terms of assuming you know the way the world works as an asset manager.

Kevin: Right.

David: That’s a risk we want to eliminate.

Kevin: Remember we talked about pilots, there’s old pilots and there’s bold pilots but there’s no old bold pilots. You got to be humble.

David: Right. So we presume the world is big. We presume the world is complex. We presume the world is constantly shifting. And so, too, must our analysis and engagement with a variety of sources.

Kevin: Well we brought up Hernando de Soto last night.

David: The Mystery of Capital.

Kevin: Yeah.

David: We come back to him, we come back to Napier and The Anatomy of the Bear. We return to an engaged critique of Keynes from a guy in finance today, Hunter Lewis. We were trying to—

Kevin: How about Carmen Reinhart.

David: Exactly.

Kevin: Yeah.

David: Harold James, Giulio Gallarotti. I think to myself, I haven’t had a conversation with Giulio Gallarotti in three years. I miss his inputs. John Taylor—

Kevin: We brought him up last week. John Taylor, we brought up last week, yeah.

David: Bookstaber, Higgs, Choucri. I mean, these are inputs. And frankly, the idea that culture wants to define what an appropriate conversation is or who adds value to that conversation on the basis of intersectionality or some other absurd criteria, it pisses me off. But what colleges and universities caved to, a long time ago, is going mainstream, and I’m going to protest that. Because without the opportunity to grow, without the opportunity to learn and explore and understand, we’re in a bad place as a society. If you’re limiting your inputs, I think that ultimately has a devastating impact on your outputs.

Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany. You can find us at mcalvany.com, M-C-A-L-V-A-N-Y.com. And you can call us at (800) 525-9556.

This has been the McAlvany Weekly Commentary, the views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor, to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.

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