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The McAlvany Weekly Commentary

with David McAlvany and Kevin Orrick

Artificial Bliss: FED Strong Arms The markets As Guaranteed Buyer

September 29, 2021

“When rates move higher in earnest, it won’t be because the Fed wants them to, it will be to a degree that makes the Fed squirm very uncomfortably because they’re going to call their friends over at the Treasury who are saying, wait a minute, you understand that interest, this line item on the national budget, interest is now creeping towards 10, 15, 20, 25% of the total of our budget. All revenue that we generate from taxes, more and more of it’s required just to pay interest.” — David McAlvany

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

You could dream Dave, if you wanted to that you were the bond market instead of the gold market because you and your family have been in gold for— this is going to be 50 years coming up on 2022. What if you had a guaranteed buyer of every piece of inventory that you had? So when we keep the inventory board, what if you had a guaranteed buyer, what would the price be? If you knew somebody was going to and buy everything, always, all the time. And I’m of course I’m referencing the Fed right now. And when the Fed talks about market cycles, whether they’re cyclical, the short ones, or the secular, the long ones. And when people try to do analysis, what they’re really doing at this point with the bond market, especially, and with the debt market, is they’re trying to analyze something that there has been a guaranteed buyer already baked into the system. How in the world do we even look at these markets anymore?

David: Yeah. This is the new great power, where you can just choose the price and spend whatever you want to determine the price. It was Bill Clinton’s political advisor James Carville who said, “I used to think that if there was reincarnation, I wanted to come back as the President or the Pope, or as a baseball player with a 400 batting average. But now I would like to come back as the bond market. You can intimidate everybody.” And it’s true. There used to be this thing in the bond market that was alive and well, and it was discipline to the marketplace. And that discipline has been wrecked by the Fed’s footprint, basically taking away or temporarily stripping power from the bond market and claiming it for themselves.

Kevin: Okay. So the cycle, okay. When we talk about cycles, those are shorter term, but secular in the bond market, the secular cycle can last 35 years, but that secular cycle’s also affected at this point. It’s been lengthened, hasn’t it?

David: And I think that’s really what we’re talking about is the short-term stripping of power. It’s actually not a surprise that secular shifts and secular trends are ignored. You have Jerome Powell 30 years ago, who was working as the Assistant Secretary of the Treasury. And he argued that if we’re just regular about our bond options, if we’re predictable, the market’s going to appreciate that. And we’re going to continue to see a reduction in bond yields.

Kevin: And that was back in the ’90s.

David: That’s right.

Kevin: That was when the market was a little freer than now that Powell’s at the helm.

David: Well, and maybe it was true, but the context in 1991 was that there was a secular shift from record high yields a decade before.

Kevin: Right.

David: To normalizing yields at lower and lower levels.

Kevin: Inflation was not as bad at that time.

David: That’s right.

Kevin: That’s the ’80s.

David: It had been fading. We were entering a post-cold war period of labor cost shrinkage.