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Everything Bubbles & Endless Summers... End

June 21, 2022

“We had speculative darlings that got crushed last week, tech and cryptos under the most pressure, 20, 30, 40%, but everything got sold, right? Now what do we get? Do we get a summer rally? Do we get the month end, quarter end rally attempt? Do we have endless summers? Is that what we’re back to? Hey, the nightmare of the first two quarters is behind us. Now all we have is blue skies and perfect waves.” — David McAlvany

Kevin: Welcome to the McAlvany weekly commentary. I’m Kevin Orrick, along with David McAlvany. 

I was thinking, we had the everything bubble provided by the central banks for a long time, and it reminded me of a movie, Dave, that came out at exactly the perfect time in American history, called Endless Summer. And this movie was the dream movie for teenagers because it’s guys who were— It was 1966 that it came out, and it was a documentary of surfers going from Australia to New Zealand, then to Tahiti, Hawaii, Senegal, Ghana, Nigeria, South Africa. They just chased summer and surfed all the time. And that’s sort of what we’ve had. 

Unfortunately, winter does come, and endless summer, unless you can travel the world and chase the summer all the time, winter comes. I know it’s the summer solstice this week. And so, yes, we’re at the peak of summer. That got me thinking about it. But if we don’t start preparing for winter now, it comes as a shock. And there was nowhere to hide last week. I mean, winter, almost, it was sort of shocking, wasn’t it? The everything bubble wasn’t looking so everything.

David: Yeah, it was reality setting in for those who had been on vacation chasing the perfect waves. Reality, even for the trustafarians.

Kevin: Trustafarians.

David: No place to hide last week, certainly that was the case. It’s often said that in a bear market everyone loses, and the person that loses the least, that’s the winner. And for us, it’s tough to feel great about losing less. I would rather own hard assets with cash flow than anything else in this environment.

Kevin: Yeah. But how about losing one or 2% versus 20%? Yeah, I think I’d rather lose one or 2%.

David: Sure, sure. The credit markets are in a tough spot. You’ve got sovereigns, sovereign debt, which has suffered in many cases even more than corporate debt, and I don’t think that’ll always be the case. Right now, you’re beginning to see the credit default swaps, what it costs to ensure against default, beginning to move, both for investment grade and high yield debt. And investment grade bond funds had their 12th week in a row of outflows. And as we know, as goes corporate credit, so go corporate equities.

Kevin: Mm-hmm (affirmative).

David: So new issuance, this is really key. Corporations have gotten used to sort of rolling debt. It comes due, they issue more, it’s at a cheaper price. It’s all good. They continue to debauch their balance sheet but it doesn’t matter because it’s always on better and better terms. So watching new issuance of debt is key to markets, seeing how they’re functioning, that they’ve been functioning so well is something we now take for granted. And we are now dependent on continued securitization and new issuance in the form of junk and investment grade debt. If those markets slow, if they halt, we begin to see major, major problems, and that’s when you’ve got something of a catastrophe in both the bond market and the stock market.

Kevin: Well, I’m wondering if it’s going to affect the confidence in the central banks?

David: Dislocations in the credit markets are a game ...