Podcast: Play in new window
- Rapid Middle East Re-Shuffle With Assad’s Exit
- Invisible Hand Of Free Markets VS Tariff Strategy
- Send Questions For Q&A Program To in**@mc******.com
“There’s a long period of status quo. It was upturned quickly. In this case, you had the Gaza conflict in Israel’s engagement with Hamas and Hezbollah. And then we have the Russian invasion of Ukraine, which, you look at these two factors, and they actually inadvertently blew up the 54-year-old regime in Syria. Without Hezbollah on the ground, without Russia in the sky, Assad could not keep the reins of power. So, yeah, timing is everything. Things change quickly, and I think we have to be honest with ourselves when things do change.” —David McAlvany
Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
Well, David, today is your 50th birthday, and sorry, I just have to betray the age, but it’s pretty darned exciting to have you sitting here and realize that I’ve known you since, what, you were 12.
David: It’s been a few years.
Kevin: We’ve had a few Taliskers together. You studied for your pilot’s license over at our house when you were just—
David: You taught me how to fly-fish.
Kevin: Fly-fishing. That’s exactly right. But I couldn’t wait. I had to give it to you unwrapped. I got you a copy, and one of our clients actually knows about this. I’ve shared with him just the other day that I found a copy of The Wealth of Nations by Adam Smith, written in 1776, but this was the published date: 1818. It’s an amazing copy. You can tell the people who owned it ahead of you, Dave, from 1818 on. They treasured the book because they have marginalia in there and notes to themselves and little clips from articles and magazines from the 1800s that they pasted into the book that added to the commentary of the book. So I was just extremely excited to have you see this.
David: It makes me wonder what happens to the books that I’ve read and the notes that I’ve made in those books. I don’t know that anyone will appreciate the conversations that I’ve had with the authors, the way I have enjoyed and engaged and appreciated them.
Kevin: As you write marginalia in your books.
David: Yeah. But I mean, there is a hope that, like this, a couple centuries later, you get to look and say, that’s the point, isn’t it? Here’s the conversation. Here’s what he picks up. There’s the debate. He nailed it. This is where he engages with the author. And no, Smith’s not right on that point. So the engagement, the challenge, the debate, it’s pretty cool to see it in the margins.
Kevin: Well, and we’ve been talking about, with Trump coming in there are a lot of applicable things that we can be looking at because right now there’s talk here in America of tariffs. Adam Smith addressed tariffs, and you’ve interviewed Michael Pettis, who recently has written about tariffs, and I don’t know that he necessarily agrees with Adam Smith in all occasions. And so wouldn’t it be fun if the two could debate each other and actually say, okay, Adam Smith’s saying, “No, it’s the invisible hand, not the government.” And Pettis going, “No. Sometimes the government can get away with it.” What do you think?
David: Yeah, well, just as a reminder, real quick before we dive in there, we have our Q&A coming up, and so if you would submit questions, would love to engage with you as best we can. Send those over to in**@mc******.com. That’s in**@mc******.com. If there are questions of a metaphysical nature, I probably will leave those for a private conversation with you. Let’s schedule some time. If it’s economics, if it’s finance, if it’s international relations, public policies—
Kevin: Scotch recommendations.
David: Oh, certainly, we can certainly— Yeah, the merits of peat, let me tell you.
Kevin: But talking about timing, what kind of week do we have? What kind of month do we have? We’ve got a new president coming in here in just a month or a little over a month.
David: Timing’s everything.
Kevin: We’ve got Syria, I mean the Syrian situation.
David: We’ve got tariffs which are being discussed. I’ve got my birthday. Well, that’s not timing I’m necessarily too happy about, but with so many other things, timing is everything. And I think we’ll see that as we talk about tariffs today. If we take a brief look at tariffs and see how they help and hurt, and reflect on timing as a critical factor, the Great Depression, which kicked off in 1929, came at the end of nearly a decade’s growth in economic activity.
Kevin: And the roaring ’20s. Right.
David: And one of the reasons why I mention the Great Depression is because oftentimes the criticism of tariffs is, look at the Smoot-Hawley protective tariffs. Look at what they did to exaggerate or make the depression that much worse. We should stay away from tariffs altogether.
So the Great Depression, again, ’29, came at the end of a decade of growth in economic activity, growth in financial market speculation, growth in credit expansion. Early on in that decade, we had the Forgotten Depression of 1921. We shared that conversation with Jim Grant exactly 10 years ago. It’s a forgotten depression because of how short it was and how quickly the economy healed, and the strategy, the response was quite different. Government spending was cut by 50%. Taxes were reduced from a top marginal rate of 73% to “a mere” 58%. That was 1921.
18 months later, we were rushing into the roaring ’20s. Importantly, the marginal tax rates continued to decline throughout the decade. So there was added fuel from a consumer standpoint. 1924, the top rates came down to 46%. Two years later, 1926, came down to 26%, where it stayed for the rest of the decade. So far more capital for investment, far more benefit to the consumer as well, with more money to chase a growing quantity of goods both domestically produced and those imported.
Kevin: So the discussion oftentimes, when we go into a crisis like a depression, tariffs are often viewed whether it’s a positive or a negative. Now, we talked about Adam Smith viewing tariffs as a negative, but that’s not always the case.
David: They are often viewed as a negative. I’m not too keen on them. There is a direct and damaging impact on the consumer, who ends up paying higher prices on imported goods. But leave it to Pettis, another one of our Commentary guests, to highlight this and challenge it in this week’s Financial Times.
He makes the point that tariffs are designed to lower the consumption share of GDP. So household consumption is reduced relative to economic production of goods and services. So you’re moving money from the consumer to the producer. That’s in essence a policy choice, redirection of that flow.
Kevin: So the effect a tariff would normally have is, the imports coming into the country, those importers are going to shrink back. The domestic exporters are going to be expanding their business.
David: Yeah, there’s a transfer—
Kevin: So the idea is to bring it here.
David: Exactly. There’s a transfer from one part of the economy to another. Net importers shrink back, net exporters expand their footprint, and by raising the price of imported goods—or raising the price on those imported goods when the tariff gets factored in—you increase the profits of domestic producers of those same goods, making the economic decision to channel benefits to domestic producers and away from the consumers who are, yes, they’re paying a higher price. So at the same time it’s a tax on consumption and a subsidy for production.
Kevin: And is that why Adam Smith was against it, because he felt that that affected the unseen hand?
David: Yeah, I mean that’s a part of it, but that’s where the conversation is often left in today’s world—as a policy litmus test, a reflection on capitalist greed, producers ranked higher by policy over and above the consumers. So again, it’s the capital versus labor contrast or debate.
It’s interesting that Adam Smith was largely against the use of tariffs. He suggested that ultimately the producer with the ability to specialize and stay connected globally, have access to global markets, participate in free trade, will surpass the producer protected by policy. Tariffs in his view were antithetical to free markets.
Kevin: But have things gotten more complex? I mean, is a consumer just a consumer?
David: That’s right. Pettis argues that consumers are more than just consumers. They are also producers, and an increase in production eventually feeds back into an increase in consumption. The key requirement is—and I think this is an important distinction—tariffs in question need to apply to goods that we can effectively and competitively produce.
So let me give you an example. If we put a tariff on bananas here in North America, that would be a terrible idea because there’s no way for us to increase production of bananas and then circulate those benefits to the producer/consumer. It’s just a stupid idea.
Kevin: So that’s another form of specialty is also like produce. But what are some of the things that we might be able to produce more competitively if we had tariffs?
David: I think electric vehicles would be one. We have spare capacity in the auto manufacturing sector. We’ve talked about that in recent weeks, several million vehicles that we can create. So an increase in tariffs on imported EVs would create a benefit to the producers of domestic electric vehicles that would allow for—if you’re thinking about the broader economic impact—improved productivity. With improved productivity comes more competitive and increasing wages. There is a benefit to consumers, and that benefit to consumers via higher wages creates, on a long enough timeframe, an offset to the initial higher costs for the product.
Kevin: One of the arguments that was going on all through our nation’s history, that 1818 date of the Adam Smith book that you have there, that was the date that the second central bank raised rates, and they were tinkering. Those were tools that they were using. They were adjusting credit. Now what you’re talking about with tariffs is a little bit of that same type of tinkering as far as imports and exports.
David: Yeah, and I think this is where a key difference between a Pettis and a Smith emerges. One’s okay with tinkering. The other would say, “What are you doing? The market will direct the flows. Don’t interfere.”
So tariffs shift capital flows, tariffs shift and rebalance consumption. These tariffs are then tools. They can be used selectively to accomplish those ends. So if you want to prioritize producers, you do one thing. If you want to prioritize consumers, you do something else. And I think Smith’s question was very basic. What is the purpose of an economy, if not to effectively and efficiently deliver benefits to households, to consumers?
So out of hand he would immediately critique and I think even say, “What are you thinking? Why are you tempted to tinker with the channeling of flows, showing preference for producers over consumers? It’s not your role to do that. That is the role of the unseen hand. The market will determine the best place, the best product, the best price. Get out of the way. The market will take care of it.”
Kevin: So let’s pretend like the book’s not sitting on the desk, but Adam Smith is actually sitting here. If you were to ask him, what are some of the harms that he sees with tariffs?
David: Yeah, I think the increase of the cost of goods for consumers by reducing competition and protecting less efficient domestic producers, that is one of the things that when you start playing favorites. You see this with subsidized areas within an economy where you don’t have to be as competitive if you’ve got a subsidy. You just get in front of government money and you kind of control the market.
Kevin: Even Elon Musk has benefited from that.
David: Oh, sure, absolutely. So the harms to the consumers, Smith argued again, the cost of goods, higher reduction of competition, and you’re basically supporting your less efficient domestic producers. I think Smith emphasized that the ultimate purpose of the economic activity is to benefit consumers. If you think about the reason for existence and the direction of flow, economic activity is to benefit the consumers, not producers or government. This is another form—or think of it as a litmus test as it relates to tariffs. There’s other ways of saying this, too. When we use the term public servants, that’s a designation, public servants, that suggests that governmental organization is for the benefit of its citizens and not the other way around. So Smith’s concern is that in the midst of deploying tariffs, we’re flipping the pecking order and becoming servants ourselves to government or monopoly power.
Kevin: You brought this up a couple of weeks ago when we were talking about Smith. You said that he was a moral philosopher. He understood the nature of man. What you’re saying here is, I think, that you’re assuming a lot, with tariffs, that the government’s actually going to act always in the favor of the consumer.
David: I think he would argue that the tariffs are a distortion of the natural order, and that tariffs interfere with the invisible hand of the market. There is that natural allocation process, and it’s more efficiently done by the market—what he describes as the invisible hand.
So what is the difference between the seen hand and the unseen hand? The seen hand is government fiat, government control, and sort of the Mandarin application of idealism. Whereas the invisible hand is the expression of aggregate self-interest directed to determining prices and efficient flows of products from place to place. It’s what we know as the free market. So again, if you distort the natural or the markets, you’re raising the cost of imported goods. Tariffs, again, are distorting price, encouraging domestic industries to produce goods that they may not be in the best position to create, not the most efficiently.
Kevin: Well, and as America was coming into its own back in the early 1800s, it was trying to figure out how not to be a mercantilist society like they had come out of Britain, but actually have this free market. So these were determining times.
But we’re doing something right now. We’re going back and we’re analyzing, hey, is there a use for tariffs in the 21st century? And that sometimes applies to wealth creation as well. The old mercantilist system was sort of like a zero-sum game. You had losers and you had winners, whereas the free market that Adam Smith was talking about was actually a wealth creation kind of market. It wasn’t zero-sum. It was both sides benefit.
David: Yeah. And to be clear, Smith had an allowance for there being appropriate times to have tariffs. When you’re at war, when you’re defending an industry. There’s certain cases where he’d say, “Okay, on a temporary basis, this definitely makes sense.” So there is a yes, but, and this is where you just don’t want to approach tariffs anytime, all the time. We’ve talked about Trump using tariffs as a negotiating cudgel. And I think that’s largely what he’s going to do. But in the event that he does implement a bunch of tariffs, it’s worth thinking about some of these things.
So Smith argues that free trade allows nations to specialize in industries where they have a comparative advantage. And that comparative advantage terminology is really key to understanding the arguments for free market economics. If you take advantage of comparative advantage, if you allow that to operate, it leads to greater overall wealth. This is one of the most critical aspects of The Wealth of Nations. The full title of the book is An Inquiry Into the Nature and Causes of the Wealth of Nations. And he would say this is one of those things that is a part of the cause—if you want to see the great wealth, one of the most critical aspects.
We go back to bananas, Ecuador, Honduras, they have the climate for growing them. Nowhere in the US can we compete with their soil, with their climate. So we open our doors for Central American produce. We benefit from that Central American comparative advantage because of trade cooperation and open flow of capital and goods. We get to buy bananas really cheap from Ecuador and Honduras, and we don’t have to worry about producing them here. We couldn’t if we wanted to. So tariffs, in essence, disrupt that specialization. They reduce the mutual benefits of trade between nations, and he would say, “If this is the way you’re going to approach managing an economy, ultimately you’re going to reduce the wealth of nations, not increase it.”
Kevin: Well, and there’s always the danger of monopoly, Dave. You and I’ve talked about this before, monopolies can form in free market economies, as well as with tariffs or when governments start checking the flow of funds from one place to another.
David: Yeah. And he’s often a critic of monopoly. He makes the case that tariffs in fact encourage a context where monopolies can form, can protect inefficient domestic industries and create the conditions for monopolistic businesses to thrive. The real cost is long-term. Over a longer period of time, you’re stifling innovation and you’re reducing aggregate productivity. Smith was a moral philosopher before he was an economist, and you can always sense that what he’s arguing for is more than pragmatics.
Kevin: Well, and that brings us to Michael Pettis because we’ve read books by Michael Pettis talking about running governments like you run a business. That’s far more pragmatic than it is idealistic.
David: Well, and I think, first and foremost, you’ve got to remember, Pettis was a trader. Long before he became a government consultant and a finance professor in China, he managed portfolios in emerging market debt. And so this is balance sheet pragmatics. It’s risk management on a minute-by-minute basis in light of a changing market environment.
Kevin: Which doesn’t always allow you to be a long-term philosopher.
David: No, there is a greater pragmatism with him. And that kind of contrasts with Smith’s idealism. Smith was a prophet. He was a preacher of the free markets. Pettis is more of the pragmatic, different things work under different circumstances, and he’s right about that. He concludes in his Financial Times piece by saying, “Rather than treat tariffs as a species of evil that must be resisted, economists should instead debate the conditions under which they’re likely to be harmful versus those under which they’re likely to be beneficial.”
That’s why I started with the phrase “timing is everything”. The Smoot-Hawley protective tariffs were introduced in a period where credit was already contracting. So the stock market had already taken its first hit in October of 1929. So banks are failing, credit was contracting, and the consumer was being pinched both economically and psychologically. Then, in June of 1930, we slapped tariffs on over 20,000 items intended to protect American industries and our ag producers. And we’d already seen the credit tightening because of the decline in the stock market. But international trade has its own credit requirements and with an increase in trade frictions from tariffs, and then the reprisals, the responses that came back, there was an even greater tightening of credit in the international markets as well, reinforcing what was a fledgling global depression, what we now in retrospect call The Great Depression.
So both the tightening of credit and the retaliatory responses slowed global imports and exports, locked in the trend of rising unemployment and a vicious cycle of belt tightening—again, consumer belt tightening—at least until we saw policy interventions, which took us on a very different track, and were helpful in one respect and very harmful in another. We had the devaluation of the dollar, 1933. This ended up being a more or less global currency devaluation. Actually, the pound sterling devaluation came first. That was September 21st, 1931. The British abandoned the gold standard, depreciated the currency by 25%, and largely offset the pain of US tariffs which we had put in place in June of 1930.
Kevin: So you bring up a really interesting point. We’re talking about tariffs right now, but another way to check the flow or move the flow of funds is just to devalue your own currency. We’ve seen that over the last few decades.
David: These interactions are really kind of fun. If you think about, again, credit contraction, a response hopefully to help US producers, we do the tariffs in 1930, the British respond with a devaluation. We respond to them with our own devaluation, 1933. All of these things are sort of tit-for-tat. And there’s a rabbit trail to go down on that point, devaluations can be a tool to offset tariffs. You find that, okay, they’re going to charge me 25% more on a particular product. Okay, I’ll just devalue my currency. The product is that much more competitive. It doesn’t matter if somebody is paying a 25% tariff, it’s basically going to the consumer at the same price because I lowered the currency exchange.
Kevin: Well, sure, because think about how much we buy from China, and they’re talking about stimulus right now. Do you think part of that stimulus might be a devaluation to offset tariffs?
David: Yeah, I think the Chinese are very likely, in the near future, to let the RMB or the yuan float and devalue freely. Tariffs can tempt fates with competitive devaluations. We don’t necessarily know who would respond to that, but it seems like if we’re going to be aggressive with tariffs, they’re going to be aggressive with their flexible currency management.
The main point remains that tariffs instituted during a period of credit contraction don’t have as clear benefit because consumers and producers are already struggling. So that’s where, again, I say timing is everything. You can get away with implementing tariffs as long as they hit at the right time. But if consumers and producers are already struggling, you have to be very careful. If credit conditions are loose and the consumer is frenzied—we have that today, and I’m just picking one statistic, Black Friday, online credit card usage up almost 15%. We’ve got plenty of consumption going on. This has been a decent year for retail sales. So if credit conditions are loose, the consumer’s frenzied, you might get economic growth driven by consumption and production. Consumers’ access to credit, and that continuing, would be most helpful. So I guess what I’m saying is it’s not axiomatic that tariffs break things. They can break things. It just depends on the timing. It depends on if your credit markets are still expanding or if they’re in a contraction mode.
Kevin: So a question we all have to ask if these tariffs are going to go into effect when Trump comes in, how long will the credit cycle remain loose?
David: And that’s the critical piece. If we implemented them today, credit conditions remained as loose as they are today, I don’t think the impacts would be primarily negative. So you’ve got the Pettis loop of benefiting producers and circularly benefiting consumers at the same time. I think that could work.
But if the credit markets shift—we’re going forward with these policy choices, right? If the credit markets shift and the real tightening within the credit markets occurs as we’re implementing these tariffs, I think you open the possibility of a 1930-style beggar-thy-neighbor depression complemented by Chinese currency management diverging from patterns of the recent past. You’re moving towards a floating system, allowing the currency to devalue.
Timing is everything. Context is key. And history, I think will be kind to policymakers and presidents according to luck, according to good fortune, according to whatever you want to say about the coincidence of timing.
Kevin: But sometimes people take credit, they think it’s their knowledge that got something done. Sometimes it’s just timing, right?
David: I think every young investor has to figure this out at some point, but you should never confuse brains for a bull market. That’s an important lesson for a trader. There’s some people today trading at the S&P’s all-time highs, NASDAQ-100’s all-time highs, Bitcoin’s 100,000, and they feel like they’ve got a PhD in money printing. Don’t confuse brains with a bull market.
Kevin: Well, and your family’s been in the gold business now for 52 years.
David: There’s one more thing. You should try and account for the impact of credit dynamics as a part of the backdrop for effective policy implementation. So again, it’s not just an idea because this is really where if the idea is good, if the idea is bad, it’s going to work more or less depending on the prevailing conditions. And because we live in such a financialized world, these are the conditions that either exaggerate and promote success with a policy or crush it.
Kevin: So credit dynamics, basically the flow of funds, liquidity. Liquidity seems to be the key to just about everything.
David: Right.
Kevin: Okay. So you would agree with Smith on the tariffs most of the time. But if there’s a lot of liquidity out there and you need to be pragmatic—
David: It’s not going to kill us.
Kevin: Right. Okay.
David: So I agree with Smith that tariffs are contrary. They’re contrary to free markets. So in an idealistic sense, I don’t like them. They are an impediment to the optimization of comparative advantage. I think that’s how I would summarize it. But that doesn’t mean they can’t be effective in shifting capital flows and supporting sectors in an economy depending on the broader credit backdrop in which they’re implemented.
Should we be doing that? Should we be choosing winners and losers? Should we be focusing on who gets the capital or who doesn’t? Smith would question whether capital should be redirected or controlled in any artificial manner that’s not driven by supply and demand and the powerful unseen hand, which he always contrasted with the seen hand of the policymaker. So free market magic held more sway, more appeal for Smith than Mandarin meddling.
Kevin: Well, and long after Smith was dead, we got a chance to test it with the two depressions. We had the depression in 1921 that Jim Grant talked about, and there wasn’t meddling. And we came out very, very quickly. And then we had the 1929 depression. The Smoot-Hawley came in after that.
David: Well, we mentioned earlier, there’s a hard-edge cutting to the budget, 50% cutting to the budget in ’21 that didn’t help economic growth straight out of the gates. In fact, you could argue it caused more pain on the employment front, but it resolved things faster—reducing taxes and reducing government spending. So the depression of ’21 in many respects shrunk the policymakers’ influence, and by reducing taxes allowed for a direct expression of market preference, the net effect being a much shorter time to recovery. 1934, economic growth was almost 11%, 10.8%. It was huge. But double-digit numbers, double-digit economic growth was also off a catastrophically arrived-upon low base. So a big percentage gain off of a very low number because of—
Kevin: A dead cat bounce, right?
David: Essentially.
Kevin: A cat will bounce from enough of a drop.
David: Essentially, because most economists agree that until the war engine was cranking in the 1940s, the depression’s lingering effects were still being felt. And if you just want to measure that by the Dow Jones Industrial Average, the lingering effects were in place until November 3rd, no, November 23rd, 1954. That was the first day that Dow Jones Industrial Average traded at its 1929 peak. 25 years. 25 years is a long time to get back to breakeven.
Kevin: So this brings up a great point. You said timing is everything. One thing we all have a limit of— Okay, there are some people who’ve got a lot of money. There’s some people who’ve got a lot of land. But we’re all limited by about the same amount of time. So these indexes that you watch, Dave, like Buffett. Buffett’s getting older, he’s cashing out to a greater degree than anytime in his investing career.
David: Yeah. I mean, we look at the Buffett ratio. When we discuss market valuation metrics, there’s the Buffett ratio. There’s Tobin’s Q. There’s Shiller P.E. We look at price-to-book, price-to-sales. We do it because we appreciate the value of time and know that decades of growth can be reversed in quarters, even months, and then take decades again to fully recover. Now, that’s not always the case, but often if psychology in the market is sufficiently damaged, time is what it takes to heal. And that’s something we don’t have an infinite amount of. I’m particularly aware of that today.
Kevin: Right. At 50.
David: Yeah.
Kevin: 50. 5-0.
David: Insofar as our portfolios are concerned, you’re not dealing with infinite time. So we hedge, we manage risk, we prioritize metals as a ballast asset for wealth preservation, for wealth multiplication, and we pay attention to the traffic into and out of various assets. Who’s coming? Who’s going? We have a trillion dollars in money flowing into ETFs this year. This is the autopilot sector. This is the autopilot exposures, if you will, unique sectors, unique companies, leveraged plays. But it’s basically the non-professional investors saying, “Just get me some of that, get me some of that.” And the most recent month, 140 billion in one month, I think it was one of the largest months ever. And that’s happening even as insider selling reaches scary heights. We had a little exercise today in the office looking at insider selling, and looked at the month of September, where if you compared shares sold to shares bought, it was 90% sales, 10% buys.
Kevin: These are the CEOs of companies. This is insider selling.
David: Yeah, 90/10.
Kevin: The top executives.
David: Now, the remarkable part of that exercise was that was the very best month of the year. Every other month was 97% sales to three, 95% to five, 96% to 4% purchases, 99% in the most recent month—
Kevin: December?
David: —liquidations compared to 1% purchases.
Kevin: Wow.
David: So we’ve got the insider selling even as you’ve got a rabid, rabid buying of ETFs, rabid trading of options, and CEOs are getting out in record numbers. This year, 1800 to be exact.
Kevin: Right. And you brought up a point in our meeting that a CEO, a lot of those shares are tied up until they decide to retire. And so oftentimes when you have a lot of CEOs retiring, what you’re saying is we want to take the money and run.
David: Yeah, I mean, you’ve got stock options which you can exercise along the way, and there’s provisions for that, and time schedules and things, but there’s a lot of restricted stock that is a part of compensation packages, and you can’t do a lot with that while you’re still in the job. I remember when the CEO of Bristol Myers Squibb resigned at the end of, what was it? 2000, 2001. This was at the end of decades of being in the business, decades as inside counsel, a trained lawyer, and then advanced and became CEO. And I knew him. I knew his family. When he left, 2000, 2001, this is when I worked at Morgan Stanley. I remember looking at the chart and saying, “I wonder what he knows.” And sure enough, it was almost 15 years later, 15 years until the share price recovered to that level, the level that it had attained the day he left.
Kevin: He knew when to walk.
David: Yeah. People that know their business know when to exit. And people who don’t know a business, they tend to overpay. And that’s this brilliant exchange. Insiders are exiting as the lumpentariat are buying. It’s mind-boggling to me that the retail investor is, without question, stepping in while the Shiller P.E. is pushing to 40, while the Buffett ratio is at 208%, while insider selling is off the charts, and CEOs are saying, “Hasta la vista, baby. I need to get out of my restricted stock, and this is a hell of a time to do it.”
I mean, in retrospect, this is all going to make sense and investors are going to say, “We should have seen it. Why didn’t we see it?” And really the problem is, people don’t know how to deal with their emotions. People don’t know how to deal with anger. People don’t know how to deal with fear. People don’t know how to deal with greed. They’re overcome and overrun by what goes on inside of them biochemically, physically, and they make really stupid—really stupid—choices because they’re not engaged rationally.
Kevin: Right. Well, I’m just thinking what an amazing period of time we’re alive, Dave. Adam Smith’s going to sit here and say, “No, this is bad timing to do these tariffs.” Pettis is going to say, “Well, as long as the credit keeps expanding, we may be fine with the tariffs.”
David: That’s right.
Kevin: But the thing is, we may be at a turning point because you talk about these CEOs walking, how many did you say this year are retiring?
David: So you got the insider selling. We contrast that with the retail buyers. 1800 CEOs calling it quits in 2024.
Kevin: Wow.
David: That’s 19% higher than it was last year, which was 1500 CEOs. Still a big number. And maybe it’s just a bunch of old, tired, worn-out suits. Maybe they see that they need a break. But my guess is that they know their best days are behind them. The easiest days are in the rearview, and we’re tied to the easiest credit environment imaginable.
Kevin: Well, and the Chinese, you haven’t even mentioned much about the Chinese.
David: No, I haven’t said anything, but probably the two most important issues currently in play, we’ve got Chinese stimulus, which has finally been released on a scale that has market participants paying attention. Time will tell if the benefits flow to consumers or producers, back to our earlier conversation. But I wonder if this isn’t the 2008, 2009 kind of intervention that the Chinese offered at that point. Global financial crisis, massive scale of intervention, and the markets paid attention—kind of the Chinese version of a Draghi moment. What is it in response to?
I mean, even this week, these are your large real estate development companies. Vanke sales are off 34.4% year over year. Country Gardens are off 52.3% year over year—steep decline from October levels. The politburo is desperate to repair psychology, to be able to stimulate just as we devalued in ’33 and the pound sterling was devalued in ’31. Is it inconceivable to think that a part of the Chinese solution and stimulus and putting a floor under what has been a catastrophic decline— I think the RMB devaluation is coming—money printing and stimulus that help them move the GDP needle higher, even with the FX value moving lower.
Kevin: Sometimes in our lifetimes, and I know this was very impactful on you, Dave, something will happen in the news where you go, “Wow, I didn’t see that coming.” I remember when you told me about the Berlin Wall.
David: Yeah, 1989. I’m in Southern California. What fairgrounds was I near? I remember the newsflash. I remember the two gentlemen I was standing there with as we looked and said, “Okay”-
Kevin: And your mouth was agape. You were like, “That couldn’t have happened.”
David: Well, in part, I mean, it was extra shocking because of the kinds of things as a family we talked about around the dinner table.
Kevin: Right?
David: Right.
Kevin: Communism was just growing and gaining momentum.
David: The red threat became the dead threat. And in a moment you’re like, “Hmm, this changes some things.” Well, so Chinese stimulus was one of the important factors we didn’t spend a lot of time talking about. The second, which maybe we can come back to next week, decades just got squeezed into a matter of 10 days in Syria.
Kevin: Yeah, amazing reorganization of the Middle East.
David: History, sometimes we make sense of it in retrospect, but if we take an honest appraisal, we’d have to say we did not see that coming. Which Middle East expert would’ve said 2, 3, 4 weeks ago, Assad will not make it through the end of the year? We’re talking about a 54-year stretch for dynastic, multigenerational family dictatorship—not business, but—
Kevin: But you brought up in this commentary today, timing is everything. There were a number of chips on the board that you couldn’t have predicted ahead of time.
David: Well, exactly. There’s a long period of status quo. It was upturned quickly. In this case, you had the Gaza conflict in Israel’s engagement with Hamas and Hezbollah, and then we have the Russian invasion of Ukraine, which, you look at these two factors, and they actually inadvertently blew up the 54-year-old regime in Syria. Without Hezbollah on the ground, without Russia in the sky, Assad could not keep the reins of power.
So, yeah, timing is everything. Things change quickly. And I think we have to be honest with ourselves when things do change—the market dynamics that shifted in October of 1929, the political dynamics which changed this week in Syria, things that you take as sort of status quo. When there is a shift, you either recognize it as such, aware of the context and the dynamics that are changing, and then re-gear, engage creatively with the events as they unfold.
Kevin: Well, and oftentimes, Dave, the way we can engage creatively isn’t just because you and I are sitting down and talking. We’re talking to our clients and our friends all week long, and I’ll just ask them, “Hey, what are your thoughts?”
And this brings us to the question and answer program that’s coming up. We do encourage our listeners to send us questions, send those to in**@mc******.com. And yeah, we’ll engage those questions because maybe some of our listeners are asking questions that we should be asking, Dave.
David: Absolutely—and haven’t thought to yet. So we appreciate them greatly.
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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.
