When Saying Beats Being

McAlvany Recap • Jan 22 2024
When Saying Beats Being
MPM Posted on January 22, 2024

Stories substitute for reality in 2024. Movies or video games define reality for some people, political messages for others. Things long considered inviolate—such as gender, ability, or character—can be established by assertion rather than substance.

Economic systems are advocated and chosen based on what true believers say they’ll do rather than what history has proved they actually do. And government “statistics” define reality, despite constantly being changed in ways that include less and less of reality.

In short, this is the day of what’s told, not what’s true. If you’re a good raconteur or propagandist, you’ve got a bright future. If you’re good at anything else … sorry. You should have listened better in your communications classes.

So perhaps we should not have been surprised that Fed chair Jay Powell’s sorta-, kinda-, almost-promise to lower interest rates in 2024 spoke volumes to the market. Investors knew—they just knew—they were absolutely sure—that the Fed would pivot. So when Powell gave an inch, they took a mile. And then two. And then 20. And then…

Never mind that America’s economy is relatively little more productive or developed than it was 30 trillion dollars in debt ago, or that all that money somehow has to be repaid. Happy days are here again—or at least that’s how the story goes.

For those of us who still prefer substance to story … well, keep reading. You won’t be disappointed.

Key Takeaways:

  • When crazy is contagious
  • I’ll gladly pay you Tuesday for a hamburger today
  • The trust-me trade—a small hook holding up immense markets
  • Gold and silver hunker down to weather the pivot-storm

The McAlvany Weekly Commentary: It was Keynes who observed that markets can remain irrational longer than you can remain solvent. His economic theory favored the state over individuals, but his grasp of economic and financial phenomena was often eerily incisive. In that vein, David and Kevin note this week that the market is again in manic mode, moving forcefully higher despite fundamentals that if the US were any other nation would indicate fiscal mismanagement of cosmic proportions, and bankruptcy by any objective measure. David gives examples, both historical and current, of the market’s irrational exuberance. The hosts do not discourage all participation in such markets—the Investment Triangle has an entire leg devoted to growth and income investments—but they do reemphasize the base leg of the triangle. If gold’s value is also irrational in this environment, it’s because it’s greatly undervalued. If you’re going to spend your days anticipating snapback or reversion to the mean, how much better to be contemplating a sharp increase in price rather than a sharp decrease.

Credit Bubble Bulletin: After putting names to the many faces of financial activity in the current market tear, Doug cites the numbers as well. Indeed, the pent-up demand for “good” news has carried all before it, affecting many markets globally in the aftermath of the Fed’s vaunted—if understated—pivot. But where most market participants see only fair winds and following seas, Doug sees present benefits purchased with future security. We’re “witnessing the consequences of last year’s major loosening of financial conditions—and confirmation that the ‘dovish pivot’ is a worthy addition to the long list of Fed policy blunders. More importantly, it’s all part of one incredibly prolonged and erratic ‘terminal’ Bubble phase, which seduces only to punish later.” Indeed, delayed gratification doesn’t seem to be an element of character for traders in the year 2024.

Hard Asset Insights: Morgan focuses this week on the weak basis for the raging bull market currently in effect. After waking up to non-transitory inflation following the pandemic, Jerome Powell channeled Paul Volker to battle the unexpected foe. His de facto message to markets? “No need to worry, we’ll be back to business as usual in no time—trust me.” But Morgan’s assessment of this implied promise is that now “it’s 2024 and the trust-me trade is overly consensus, overly extended, overbought, and overestimated… In short, the current trust-me dynamic is good for a trade higher in financial assets, but unless the narrative of easier policy and inflation lessening to target is actualized, the trade will eventually fail.” And actualizing those goals has, as Morgan further explains, a vanishingly small chance of success. What will happen when trust is not rewarded in the long term? Stay tuned for further HAI analysis.

Golden Rule Radio: True to form, when demand for equities and other common investments waxes, demand for gold wanes. Gold’s dollar price correspondingly dips, and that’s what we’ve seen. Miles gives shape to the outcome through his charts, and further notes that he expects a bit more of a pullback before gold is ready to follow its secular direction higher. Such gyrations—particularly the downturns—can throw new investors in gold, who may expect its intrinsic value to always buoy it and prevent it from losing dollar price. A decline in gold’s dollar price when fundamental economic conditions are so bad is counterintuitive in the extreme. For such investors, GRR can be crucial. Miles’, Tory’s, and Rob’s insights can flesh out the picture and give much-needed perspective. This week, Miles deliberately redirects our view from gold’s immediate gyrations to a 20-year picture, during which time gold has appreciated well over 600 percent. Indeed, stepping back and looking at the big picture should be a regular discipline for all investors—which charting can greatly assist.

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