EPISODES / WEEKLY COMMENTARY

U.S. Has To Borrow $20 Trillion In 36 Months

EPISODES / WEEKLY COMMENTARY
Weekly Commentary • Nov 01 2023
U.S. Has To Borrow $20 Trillion In 36 Months
David McAlvany Posted on November 1, 2023
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“This is a big week. We’ve got payroll numbers, we’ve got the FOMC, multiple central bank meetings, including Bank of Japan. They’re considering a modification to their yield curve control policy, and that’s even as the yen sort of teeters on the edge of breaking down. It’s now past the 150, at the tipping point. On the other hand, you could have things go the other direction. If the Japanese government bond rates move higher, Japanese savings might just begin that shift back, repatriation to Japan, back into JGBs, pressuring the dollar lower, Treasury yields higher. This is interesting. Out of Treasurys. I’ll be honest, this would be a bad week to lose an audience for our IOUs. Yes, there’s lots of data, but right in the middle of this week, very significant Treasury auction on Wednesday. Yellen is center stage.”–David McAlvany

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

Last Thursday, Dave, was very successful. We have many people watch the webcam of the team, Morgan and Philip and Robert, yourself, Doug. Very rarely—in fact, that’s the first time listeners outside of the McAlvany platform who are not invested on McAlvany’s platform could see all of that. And that’s still available. If our listeners would like to see it, they can go to mcalvany.com and watch that webcam.

David: Yeah, that gives you a comprehensive view of what we’re doing in the hard asset strategies. And a further note, this Thursday, we never tire of teaching and exploring what we’re doing and how— The Tactical Short call with Doug Noland and myself, that’s Thursday at 2:00 PM Mountain [register for the call here], and we would love to have you there, taking a look at new paradigm dynamics and the implications for volatility in the bond market spilling over into many other markets.

Kevin: Well, and I think about the guys who were talking last week and then of course the Tac Short call. There’s not a Keynesian in the bunch. And what I mean by Keynesians, John Maynard Keynes, he came up with some truisms, but he really didn’t have a heart for my wallet or your wallet. He had a heart for the government’s wallet, because he said saving was unnecessary, even though he himself had become a millionaire several times over. And he also talked about a government being able to print just about as much as they want. And he did admit, he said, inflation is a tax that only one in a million understand. You would think that would be a warning, but it was actually, I think sort of a chortle.

David: No, it’s become a prescription. It’s become a mandate by academics to say “When we get to a certain place and time, there is this strategy, and we will employ it.” 

This is a big week. We’ve got the payroll numbers, we’ve got the FOMC, multiple central bank meetings, including the Bank of Japan. They’re considering a modification to their yield curve control policy, and that’s even as the yen teeters on the edge of breaking down. It’s now past the 150, at the tipping point. On the other hand, you could have things go the other direction. This week, if the Japanese government bond rates move higher, Japanese savings might just begin that shift back, repatriation to Japan, back into JGBs, pressuring the dollar lower, Treasury yields higher. This is interesting. Out of Treasurys, I’ll be honest, this would be a bad week to lose an audience for our IOUs. Yes, there’s lots of data, but right in the middle of this week, very significant Treasury auction on Wednesday. Yellen is center stage.

Kevin: Dave, in the past, you’ve interviewed Charles Calomiris, and he talks about a lot of the crisis that we see is actually by political design. It’s built into the banking system already.

David: Yeah. We’re still withholding criticism as to this Wednesday’s meeting with Yellen. We don’t know if the part she’ll play is comedic, if it’s tragic. Wednesday will be clarifying.

Kevin: You think she’ll bake cookies? Grandma Yellen.

David: I think she sets an amazing tone. Bond market volatility has exceeded stock market volatility. And you’re looking through Jim Grant’s most recent missive. He had this to say: “You have to ask yourself, how can complacency reign in junior securities when anxiety is the mood in the market of senior securities? This doesn’t make intuitive sense.” To be honest, it’s the bond market that’s a little smarter than the stock market, and stock traders are trading, typically, momentum only. And for the bond trader, there is some math, there is some appraisal of a broader picture that’s important. And you mentioned Calomiris. Calomiris has a small feature in Grant’s most recent letter. And of course, he was a Commentary guest a number of years back.

If you have the time and the curiosity, you can read Calomiris’ most recent article he wrote and published with the Federal Reserve Bank of St. Louis. Not all Federal Reserve outposts sponsor the same kind of discussion. Some are more political. There’s a few that are echo chambers for Keynesian orthodoxy. But the Federal Reserve Bank of St. Louis is I think a little bit more open-minded, more open-minded than most, and occasionally publishes best-in-class analysis. Admittedly, we might be biased by what we consider best-in-class. Calomiris was a McAlvany Weekly Commentary guest, and this is a stellar paper for the Fed.

Calomiris wrote Fragile by Design. That was when we talked to him a couple of years ago about sort of a sobering thesis. Banking crises result from deliberate political choice. This is policy preferences that were designed to benefit one constituency group, but at the cost of many others. And usually, those preferential choices, those policy choices, are the bedrock of the next crisis.

Kevin: If the central banks use inflation and the Treasury uses inflation as a policy choice, it’s still, I mean, to be honest, it’s felt by the person who’s just trying to put in an honest day’s work. I was reading in Exodus 5 the other day about when Pharaoh took away the straw but still demanded the same amount of bricks. And so the laborer, who had to go out and find that straw on their own instead of being given straw, it was very much like inflation. It was completely wearing them out, and yet the cost of lifestyle was still demanded fully.

David: When we go back to Calomiris’s book, Fragile by Design, handing out free money ultimately does have a significant cost. So most politicians weigh the benefit in terms of votes, and that’s more important than the costs. Ultimately, the risks and the consequences get socialized and spread across all citizens. And really, no place is that truer than with inflation. It’s felt by all, and it’s acutely felt by some.

Kevin: Well, and a politician’s not going to want raise taxes because everybody sees that. Inflation really is the tax that only one in a million understands.

David: Yeah. In Calomiris’s new paper, the topic is fiscal dominance, which sounds dreadfully boring until you realize that it’s the technical jargon used to describe the end game—the end game in the bond market. And all of a sudden you realize, wait a minute, we’ve been tinkering with this experiment in fiscal and monetary policy for a few decades now, and wondering what does the end game look like? Well, fiscal dominance is that description.

When the debt markets revolt, and Treasury auctions fail, inflation as a tax policy comes into full swing as the final option. Calomiris says, “fiscal dominance is when the Fed loses control of monetary policy because of the Treasury’s funding problems. It’s a crossing of the fiscal monetary Rubicon.”

Kevin: You had talked about Treasury auctions failing as possibly being a sign, and brought up, a couple of weeks ago after the Hamas attacks, we saw a rush into bonds basically on Monday, Tuesday, and Wednesday after that Saturday attack. And then by Thursday, when the Treasury came out to auction, that was exhausted at that point. We didn’t have a fully failed auction, but it sure was a shot across the bow, wasn’t it?

David: It sure was, because demand did not match up with supply. What you’re really talking about in extremis with a failed auction is when there’s no demand, and there’s plenty of supply, and the embarrassment forces the Fed to cancel the auction.

So you get indicators, you get signposts to watch for that make inflation far more effective in relieving the burden of debt from the public Treasury, and that’s when you sort of crank up the inflation tax, selectively cut interest that you pay to particular parties. This is what Calomiris describes in his paper. Interest paid on bank reserves will be cut to zero. This is sort of the process of choosing winners and losers. We’ve talked about that in terms of financial repression, but the banks are, in this case, part of the loser category. This is not unprecedented. This is typically the first step. It’s kind of the first ingredient in a balance sheet cocktail, and we might even call this balance sheet cocktail the corpse reviver. You pay no interest on reserves, and then you add to this mix the requirement of banks having to hold large percentages of their deposits, deposit liabilities, in that form, zero interest reserves.

The dream here is to be able to monetize debt, keep the game going, while not having to pay interest on a segment of debt in the system, allow for excess credit growth to continue well beyond sustainable levels as measured next to GDP without an obvious consequence, the obvious consequence being continuing to pay the outflows on interest.

Kevin: I’m not a fan of all bankers, but I really do feel for the local banker, because we just got our third quarter books from Weiss Research, and I’ve been giving ratings to my clients, which, anyone who’s listening who’d like to get ratings on their banks, give us a call. We’ll be happy to do that.

But I noticed for the first time in my career, Dave, here, 36 years, we’ve been giving Weiss ratings and I’m seeing banks that were A-rated last quarter, this quarter being D-plus rated. There’s a radical shift right now in a lot of the bank’s ratings, and I can’t necessarily see all the details as to how that algorithm came up with that, but you think about the bankers who, over the last several years, we’ve talked about the strain that they were under when they had all this stimulus money coming in. They couldn’t loan it out to actually pay interest. The bankers who did choose to pay interest had to go out and buy long bonds, which right now are in their portfolios. They’re down 30% or more if they have to sell those to pay the depositors. We know this sequence, but it sounds to me like this next step— Some of the interest that they were earning was on their reserves from the Federal Reserve—or is that from the Treasury?

David: It’s interesting you talk about this big shift from A to D, and there being a number of banks that were really high quality. And actually in those reports, I would encourage anyone to call in and get one of those, because you’re talking about 15 different categories, including hot money in terms of the percentage of capital non-performing loans—

Kevin: Stability index. Yeah.

David: And one of the things that I think is particularly useful in this period of time is looking at their investment mix. The percentage that they have in securities versus your more run-of-the-mill loans. And this is an area where you used to say it’s the safest place to put money. You’re not taking any risk when you are in securities, because typically you’re talking about mortgage-backed securities and Treasurys. And yet this is where the losses are accruing. This is where the Federal Reserve themselves has gone negative in terms of their equity. You look at the capital that they have compared to the losses that they have on balance sheet assets, over a trillion dollars in losses.

It’s really fascinating because this week we’ve got the Bank of Japan, we’ve got the Bank of England, we’ve got the Fed all facing the music in terms of their balance sheets. And they’re all able to say, look, it doesn’t really matter. We do accounting different here. And in the case of the Fed, they don’t use GAAP accounting, so it doesn’t matter. In the case of Sweden, just a few weeks back they had to raise capital because their books went upside down. But we’re talking about figments of imagination. We are very solvent as long as we get to do this accounting gimmick and move things into a liability category that someday will pay back to the Treasury.

It’s amazing. I was thinking about it as I read through the numbers on how upside down a number of central banks are. Actually the only one who’s not completely upside down right now is the Swiss National Bank. I was just reflecting on the opportunity to play it by a different set of rules. The central banks can, and they take advantage of that. Enron did something very similar in terms of creating these off-book, off-balance sheet entities in which to sweep liabilities and pretend that they didn’t exist. And Wall Street loved it because they looked so pristine and beautiful. The smartest guys on Wall Street had this love affair with Enron up to the point of capitulation, failure and fraud discovery. But the fascinating thing is the governments of the world, the central banks of the world, get to do this because they can make up new rules as they go along.

Kevin: They can fake it on paper for a little while, but I’ve always been entertained by looking at the latest perpetual motion machine. It’s always been an illusion that you could actually create a machine that would perpetually generate its own movement. Always, there’s a trick. It’s like a magic show. There’s always something coming in from the outside that you don’t see. And it’s the same thing with changing accounting rules. You know what? Money doesn’t grow on trees. You can try to tell somebody that this is the first tree ever that money grows on, or a perpetual motion machine that actually doesn’t take energy from the outside. There’s always a cost.

David: Coming back to Calomiris’s article, this notion that commercial banks could be under tremendous pressure to apply or extract the inflation tax. The banking system capital flows represent a large percentage of earned, of spent income if you’re talking about the broad section of the public. To be able to extract value from the banking system float is in essence what we’re talking about. Banking system profits in this case gets squeezed. This is a tough scenario. We’ve seen this before in US history.

Banking can become a very tough business when a regulator tells you what you can and can’t do. Where your money must go, even if you’re going to lose on that basis. I’m fascinated by this. Every few weeks we see some new trick being tried by the People’s Bank of China, and all of a sudden the Agricultural Bank of China or any other of the major banks in Shanghai and Beijing, they’re having to bend over backwards and they’re under pressure so that the system continues to work.

Kevin: They want to make you think that you really don’t need straw for bricks. And you know what happens when you don’t use straw for bricks? They crumble.

David: Yeah. The inflation tax affects every outstanding dollar, and every interest-bearing balance in the banking system where the interest paid can be squeezed and the benefits siphoned off by the Federal Reserve.

Kevin: A couple of years ago, Dave— We’ve talked about this client of mine who’s a banker up in Wisconsin, and he called me and he said, “Kevin, we’re getting all this stimulus money, it’s pouring in. I cannot pay interest on all the deposits without going out and buying long-term government bonds, and I’m not going to do this.” So he went to his board of directors and he asked, “Could we put some of this money into gold?” He literally was trying to hedge his own bank from what you’re talking about right now. Of course, the board of directors came to him and said, “No. You’re not going to buy gold.” But why not that strategy?

David: Well, last summer I spoke to a bank board meeting down in Santa Fe. It was a group out of Kentucky, and they gather once a year, and they asked me to comment on the gold market. So this is a bank who is very unique in their approach, and does have a healthy mix of hard assets. They’re not just a typical bank with a securities portfolio and some loans. They own precious metals. They own a lot of different things. But I would, to any other bank president, highly recommend that you consider this issue of fiscal dominance. The non-legislative caprice of the Federal Reserve Board—again, I say non-legislative because this is just a policy shift. It can be announced tomorrow. 

Consider the value of gold as a balance sheet asset. It goes one step further. I would encourage you to think about depositor capital, which, when held in a program like our Vaulted program, combination of gold and silver, can remain off balance sheet, yet still provide income benefits to the bank. In an age of inflation taxes, in an age of fiscal dominance, why not consider how to lead financial disintermediation instead of that being dictated to you by a thousand fintech firms? Because when the banking industry, the commercial banking industry comes under this kind of pressure on the other side of fiscal dominance, you will find market share collapse as fintechs become the new version of banking with a thousand workarounds to this Federal Reserve Board, non-legislative caprice.

Kevin: So I’m going to take Janet Yellen’s. I can’t believe I’m doing this, but I’m going to take Janet Yellen’s side right now. And you would say interest rates are rising because it’s harder and harder to get people to buy debt. Janet’s going to say, “Hey, you’re wrong. It’s just because we have a strong economy.” Is that what we’re going to hear this week?

David: Yeah. And exhibit A would be Argentina; rates are rising, super strong economy. Exhibit B would be Turkey; rates are rising, super strong economy. Exhibit C; rates are rising in the United States, super strong economy. As mistaken as the Fed was about inflation being transitory, the Treasury is equally misguided in the perception of higher rates having little to do with the market’s registering a vote of no confidence on their fiscal policies.

And instead, as you say, this is a measure of robust economic activity. So to Janet Yellen, I say one word: Balderdash! Why? Last week Janet suggested that the surge in long-term bond yields in recent months is a reflection of a strong economy, not a jump in government borrowing driven by a widening fiscal deficit. That’s right. Deficits don’t matter and too much supply of Treasurys, that doesn’t matter. And in fact, she says, I don’t think much of this is connected to US budget deficits.

Kevin: I don’t think there’s much connecting with Janet, to be honest with you. So what used to be a risk-free rate is now a rate-free risk because people are saying we don’t buy it.

David: One of my neighbors, I think I’ve told you this before, worked with Janet in San Francisco and loved working with her. She thought she was a great boss. And anyways—

Kevin: Well, she seems like a nice lady.

David: But if that’s true, that the rise in rates here in the United States has nothing to do with the US deficit, has nothing to do with supply, I wonder how it was that for 20 to 30 years US Treasurys were considered a benchmark for the risk-free rate, and remained lower than most global government bond yields. Yields were then a measure of credit risk, Treasurys the reference point, like a plumb line for what’s safe. We had some of the lowest around, the exception being the few central banks that were artificially suppressing rates even then with QE and yield curve control, other intervention measures.

Kevin: And we had good credit. I mean, that’s the reason why. We had good credit. We knew that we would pay those bills.

David: And a strong economy.

Kevin: Yeah.

David: But now somehow the world’s different. The one that Yellen’s reading and seeing seems confused. Italian 10-year, Greek 10-year, Spanish 10-year debt, French, British, Portuguese—all these and more now have rates that are below the US 10-year. We can agree that the US economy is on a relatively firmer footing at the moment, but to correlate that to bonds—more than that, to say the current economic strength is causing higher rates seems inconsistent with how we as a strong and growing economy set the global standard for low risk, low rates and a reliable reference for decades.

Kevin: One of the difficulties too, once you enter inflationary cycles— You remember when Alan Greenspan was with the Treasury? This is before he was with the Federal Reserve. He was part of the Whip Inflation Now campaign to basically pour water on inflation expectations. Because when you look forward and say, “Okay, what do I expect for next year?” It may be much higher than what actually is being reported this year.

David: Well, and to some degree, the way that you feel about that, the way that you anticipate that affects your behavior and becomes something of a self-fulfilling prophecy. So if you can hammer inflation expectations, you can control the outcome and to some degree guide history. So there’s a surprise for the academics. Maybe Calomiris is included in this. But this last week, the University of Michigan measure of inflation expectations came in well above the inflation rate, and it’s rising even as the official CPI falls. 

So 2024 is expected to be worse than we have at current levels. Inflation is expected to once again accelerate. For the consumer, that’s because you look at food, you look at fuel. Certainly factor that into your perceptions. The man in the street is concerned that things have not gotten better, as if inflation has receded. They’ve been told that inflation is coming down. But you have to remember, lower rates of increase are not a diminishment or shrinkage in inflation. It has not actually receded.

Kevin: Things are still getting more expensive. You’re exactly right. We have to remind ourselves.

David: It’s just a reduced amount sequentially. So if I go from speeding at 90 miles an hour and drop to 35 miles an hour, I’m still moving in a direction at 35 miles an hour. And I can’t pretend that the reduction in the rate of speed is the same as stasis or immobility.

Kevin: Mm-hmm.

David: So we still have inflation. It’s still growing. It’s still getting into our minds that this is an agitation, something that is creating financial angst. University of Michigan number, out Friday, told you about the consumer’s experience, about the consumer’s resurgent fear. If you look at the overall sentiment numbers, it improved, but the inflation expectations surprised on the upside.

Kevin: But you said this week is a really big week, and so these expectations are either going to add fuel to the fire or be quashed. I mean, you said— What data is coming out this week that we need to be watching?

David: Well, again, a big central bank week. ECB after 10 increases is staying flat, not doing anything. We could raise rates this week, low probability of that, but we could see—I mean, either way it’s a decision by the Fed. It’s a decision by the BOE. It’s a decision by the Bank of Japan. We’ve already gotten the decision from the ECB. So, big central bank week, macro events, huge data week, plenty of macro events to surprise investors.

The Treasury has auctions of longer-dated Treasurys, which is going to be telling. These are your, I think, 3s10s or 2s10s and 30s. Whatever it is, they’re longer dated. What quantities will be offered, how each of those maturities is accepted, how much of the supply will be absorbed. Again, we go back to Calomiris’s idea of a Treasury end game, and events like Wednesdays become important to watch and observe for nuance. He imagines a future event like what we had in 1973, where you have an auction. No one’s interested in financing debt at those interest rates. They expect more, and thus protest—don’t buy anything. Treasury is forced to pull the auction. Total failure.

Kevin: Is that what they do? They pull the auction if they can’t sell it?

David: Yeah. 

Kevin: Oh, that wasn’t for sale. Oh, yeah, never mind.

David: It didn’t not sell. We no longer offered it. So I see partial failure or lack of supply uptake as important. Yeah, it’s less dramatic than a total failure, but it’s revelatory as to where pressure points exist. Is it in the two-year? Is it in the three? Is it in the 10? Is it in the 30? Where is the concern acute? And how is Yellen playing the game? Because we’re coming into an election year where you want to juice the economy, keep things running smoothly. Does that mean she’s going to be tempted to issue more bills and keep things shorter term?

Well, that means as we come into 2025, we’ve got even more of a maturity cliff. Keep interest costs as low as possible through 2024, but roll the dice on rates to an even larger degree than you already have to this point. I keep on hammering these numbers, but they’re important. 14 trillion in rollovers by the end of 2026, throw in another six trillion in financing needs if deficit spending stays at the same pace we have for this year, two trillion a year, that’s 20 trillion looking for a home over 36 months.

Kevin: Wow.

David: It’s only government debt. You can add to that corporate, commercial real estate, other financings that are looking for friendly terms as well. It’s just a fascinating environment.

Kevin: I’ll gladly pay you in the next 36 months. You’re saying 20 trillion looking for a home over the next 36 months, and I think of that, I’ll gladly pay you Tuesday. Please just loan me $20 trillion. But I want to shift gears here because last night I came over to the house, saw your wife, and your wife and son had just gotten back from Turkey recently. My son and his wife have some friends that, as your wife and son were coming back, they were flying to Turkey because every year they liked to go climb in Turkey. Right now, Turkey’s looking like a dangerous place for Americans to be.

David: Well, it’s certainly less friendly, and I think the Turkish people have a natural bent towards hospitality, which is really beautiful. We’ve had some amazing conversations since my son got back, and just some insights that he’s had, which have been heartening. But there are a number of factors heating things up in the Middle East. Turkey’s getting more aggressive, to the point that the US and nine other countries have had their ambassadors expelled in the last 24 hours.

Kevin: That’s mainly Erdoğan, isn’t it?

David: Yeah, seven of them in total, if you look at the list, are fellow NATO members, and that’s fellow NATO members with the US but also with Turkey, because Turkey is a NATO member as well. Some of this relates to an issue of a protestor who’s jailed for what the government says is an attempt to overthrow them, almost like a J6 type accusation. Happened in 2013, he spent close to 10 years in jail. 2020, he was actually acquitted and then they came back with the same charges and are going after him for life. So what did he do? He provided a folding table with snacks on it for people who were protesting the government. I mean, it really does have a ring—

Kevin: 10 years in prison?

David: It’s like the DOJ has been learning and honing its skills off the Osman Kavala case. Acquitted in 2020, then recharged, I mean— What you have today, the international community is crying foul, for good reason. The guy hasn’t done anything. This is not an ax murderer. But in the current context, there’s just an edginess in the Middle East, and Erdoğan has zero tolerance for questioning his decisions. And you can see the edginess show up in other places. By the way, that was tongue in cheek earlier talking about the Turkish bond yields and things like that, because on the financial front, they’re in real trouble. Rates rising is an indication of trouble.

Sorry, the lira remains under intense pressure. In July of this year, the official interest rate was set at 15%. Every few weeks since then, in order to beat inflation, they’ve raised rates 500 basis points at a clip, 5% at a time. Rates have been lifted most recently to 35%. Seems like a big stick till you realize that inflation is out of control. Month on month, it’s changing 9, 10% a month. Annualize that, you’re in triple digits, right? I think Yellen, I think Yellen, frankly— Let’s just do this: Yellen should send a note of encouragement to Erdoğan, “Higher rates indicate a strengthening economy. We’re proud of you over here.”

Kevin: Everybody knows that, well, and Erdoğan would be happy.

David: This is the Treasury Department practicing diplomacy. You’ve got Juan Zarate back in the day writing about the Treasury’s great influence and Treasury wars and how the Treasury does more than—

Kevin: The military.

David: Well, in this case, she could be our greatest advocate. Erdoğan, you’re doing a great job.

Kevin: Doing a great job building that economy.

David: Economy must be booming with rates at 35%. If we could only aspire to rates like that, and a booming economy like yours.

Kevin: All right, so I’m going to shift gears. A few years ago, remember the Turkish flotilla that went down to Israel? Remember that?

David: Yeah.

Kevin: Yeah, that got held up, but we’ve got the same thing going on now with Israel between Turkey and Israel.

David: The Mediterranean is going to get pretty crowded. If you’ve ever been to a marina that doesn’t have any open slips, it’s boat after boat, after boat, after boat. Mediterranean is going to look like that. The Italians have sent eight or 10 boats to the Mediterranean. We’ve sent a slew of boats to accompany our two carrier groups. We’ve now got the Turkish government sending boats. The Turkish flotilla launched in support of Hamas, in support of the Palestinian people. The communiqué is that humanitarian supplies are on the way, that all that’s there is humanitarian supplies.

Kevin: If I remember right, that Flotilla a few years ago had more than humanitarian supplies on it.

David: Well, it depends on what you consider a humanitarian mission. If your goal is to kill Israelis, and that’s viewed as humanitarian, then bullets in boxes is a humanitarian mission.

Kevin: Yeah.

David: And that’s what it was 10-plus years ago with the Turkish flotilla.

Kevin: Yeah.

David: I don’t know about this one. But Turkey has a clear line of loyalty to its fellow Islamists and a clear disconnect from its European security partners in NATO. This is really strange to me, Kevin. Whether it’s NATO or the UN Security Council membership, these are both puzzling to me. Two of the permanent members in the UN Security Council, Russia and China, that’s interesting. I mean, how do we make decisions? The group of five that makes all the big decisions about global security, I don’t know. I don’t know.

Pew Research polled perceptions of NATO throughout Europe, and you’ve got Turkey and Greece, the two that have said, “We don’t like it. Don’t like it at all.” Both pulled over 50%—thought disfavorably about membership in NATO. Only Russia in this Pew poll had more negative views of NATO. Go figure. Go figure. But at least—

Kevin: Well, you think of Greece’s history with Turkey. I mean, all you have to do is look back a little over a hundred years and see decimation.

David: Well, they don’t like NATO, but they do have an approval for Israel. So at least, of the two countries, Greece appreciates Turkey’s violent past and remains suspicious of its involvement with Palestine. They’ve thrown their full support to Israel. And again, when you know history, 1915 to 1923 was pretty rough. If you were Greek, if you were a Syrian, if you were Armenian, Turkey slaughtered them in full-blown genocide. And I mention it because the past aligns current geopolitical interests very quickly. The Greeks may hate NATO, but Greek leadership has great recall on the need for self-defense. And when Turkey throws in their lot with Hamas, they say, “Sorry, not friends of Turkey. Can’t get over, can’t get over, can’t get over.” It sounds like a stutter because it is. It’s PTSD from 1923.

Kevin: So I have a question on American involvement, because we have these red lines. Don’t cross this line. Or you have these symbolic types of things that occur, like last week, where, yeah, we sent an F-16 over and we blew up an empty warehouse. There was a symbolic statement being made, but kinetically, it really had zero impact.

David: Well, so we used the F-16s to take out, I mean, they said Iranian-supplied arms depots in Syria. I don’t know what was there or not. But it’s an escalation in the Middle East, and it’s a warning of US commitment to an expanded geography of conflict. After 19 attacks on US personnel within 10 days in Iraq and in the region—we’ve already had 30 US military personnel injured, I don’t think any deaths—Biden finally let the birds fly.

Kevin: Isn’t the enemy Iran? I mean, granted, there’s a lot of things tied to it, but if you had a connect-the-dots paper, every dot seems to be connected to Iran.

David: There’s no doubt. Iran is sort of, I don’t know, it seems like they’re the ones who are sending out the invitations to get the band back together between China, North Korea, Iran, Russia. I mean, it really is. Think about it. Russian Foreign Minister Sergey Lavrov says that Israel’s bombardment of Gaza runs counter to international law and risks creating a catastrophe that could last for decades. I saw that quote and I thought, is he looking for distribution through the Babylon Bee? This is the Russian Foreign Minister. What exactly are they doing in Kyiv? It’s like, wait a minute, pot calling the kettle black. We have Iran-backed fighters in Lebanon, Hezbollah. We have Iran-backed fighters in Syria. We have Iran-backed fighters in Yemen, the Houthis. We have Iran-backed fighters in Gaza, Hamas.

Iran is being identified as a trainer of Hamas fighters, if not an instigator and funder. And this is the Quds Force officers who trained 500 Hamas and Palestinian Islamic Jihad members as recently as September. We’ve got the Houthis this week launching rockets on Saudi Arabia. We’ve got Houthis launching rockets on US forces. I’m so glad Biden delisted their terrorist status in 2021 to curry favor with Iran. We get Hezbollah, which is engaged in Northern Israel. Turkey, as I mentioned earlier, sending ships through the Bosporus to support the Palestinians. Russia meeting with Hamas in Moscow. Meanwhile, oil prices dissipate like there’s nothing going on at all in the Middle East.

Kevin: Yeah, that’s strange to me because gold broke 2,000 and held above 1980. So somebody’s leaning on gold right now from a geopolitical standpoint. But oil, do they feel that this is not going to affect the flow of oil into the rest of the world?

David: Yeah, Brent crude should be at a hundred dollars a barrel and rising, not 88 and falling. And markets are ignoring one of the larger naval buildups in the Middle East in history. I mean, I think the only larger one we had previous was that coming at Desert Storm where we peaked at 240 US vessels in the Mediterranean. 240. But we’re ramping up F-15s, F-16s, A-10 Warthogs, every range of missile defense.

Kevin: Does this weaken the Asian side of things though, Dave? Because we’ve been talking now for the last couple of years of the tensions that are building in Asia. Where does that factor in when we’re moving our weapons to the Middle East?

David: Well, yeah, I said weeks ago that the people who benefit the most here are the Iranians and the Chinese. And the Chinese do benefit because as we are stretched thin in the Mediterranean and the Middle East, we have to look at sort of a two-front conflict. Do we have the capacity? Do we have the arms, munitions, resources? What have we already spent in terms of resources in support of Zelensky and Ukraine? So off the radar are these little kerfuffles. The Philippine-Chinese relations. They seem to be less critical as we’re watching things become more and more inflamed in the Middle East. 

So China’s less in the limelight with Mideast relations boiling over. But in the background the Chinese are grinning. They’re grinning because the New World Order is being crafted through resentments, through hatred, through new alignments, a reminder of who your friends are and who your enemies are. And again, it’s getting the band back together. New degrees of distrust. Russia loves it. China loves it.

It’s the financial market disorder which we talked about earlier today, showing itself in the form of bond yields, saying, “Hey, something’s not healthy. Something’s not right.” I mean, it’s a little bit like you go to the doctor and the doctor says, “I don’t know how to tell you this, but 103 temp. It’s suggesting that something’s not right. Can I run a couple of blood tests?” Financial markets with bond yields higher is telling you, already, there’s anxiety in the system for a reason. Stock market completely oblivious. Remember a few weeks ago we talked about the S&P and the need to hold 4,200? We’re below that number. We’re below. Of course, it was at that time a rising 200-day moving average, so the price ticked below. Now we are well below, and this is your inflection point in the stock market. We have to recover here, or we have a cascade decline.

We are at a very precarious place with US equities. We’re at a very precarious place with both the RMB and yen. We are talking about financial market disorder in the same context of geopolitical disorder. Breaking the old system of friendship, making a new order. That’s what the Chinese love about this. They’ve got pawns on the board and they’re wasting themselves, but in the end, guess who wins? The Chinese love it. Jim Grant comments that gold in this context ought not to trade as an inflation hedge, but as an investment in monetary disorder, of which we surely have enough in the world. Monetary disorder, geopolitical disorder, financial market disorder. What a wild time to be alive. Try to keep your head.

*     *     *

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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