The Need For Risk Control In A Schizophrenic Market

Fed says it will stop telling the markets its next move

Quick rally in stocks doesn't change long term bear trend

Biden "given" really good jobs "surprise"

The Need For Risk Control In A Schizophrenic Market

August 10, 2022

“We had a year and a half, two years ago, the transitory references. Early on, as inflation was starting to heat up, it was going to be transitory. I think they were hoping that there’d be sufficient talk to keep inflation expectations modest, and to keep those expectations un-rooted, and I think they were hoping to avoid having to do anything. Don’t raise rates, but just talk it down. And now all of a sudden it’s here, and it wasn’t transitory, and it does require something of a more muscular action.” — David McAlvany

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

You’ve been on a road trip, Dave, since you’ve come back from France, and you’re looking at colleges for your eldest son. And we were talking about it, life seems to have these decisions in it that at the time you think, “Oh my gosh, I’m making a decision for the rest of my life,” sometimes we put so much weight on it because we think, “Well, this is a definite, and it’s going to set the course of action for the rest of my life.” But actually when I look back at my life, yes, picking colleges, that type of thing could be very important. But I look back and I look at how unpredictable my life has actually been. I could have never actually planned any of the great things that have happened to me.

David McAlvany: Yeah, it is interesting how much stress there is around some of these decisions, and we’re getting to see that firsthand with our oldest. Class size and college size and emphasis, and people ask him what he’s going to study, and the reality is you got to have an answer, but it almost is irrelevant because, at least if he’s like his father, it’s going to change five times your freshman year anyways. 

But we take comfort in having answers, even if we don’t really know and can see the future. What we have is some alleviation of pressure and stress with this pretend world of coming to terms with what our future holds. And so much of that gets factored into the markets as well. If you think about, we just need something from the Fed, give me something to seek my teeth into, that way I feel better. It may not tie into reality, but it makes us feel better in the moment.

Kevin: Don’t you think the Federal Reserve for the last 10 or 12 years has offered a false sense of security, because they were able to print money and it didn’t create inflation really until just recently? I get a lot of my clients saying, “Well, gosh, is gold going to make up for inflation?” But we’re very centered here in America with how things are priced in dollars. If you look at gold, I mean, yeah, it’s off about 3% here in the United States this year, but look at what it’s doing in other currencies.

David: Well, and as you’re suggesting, the markets have gone to extremes on the basis of this false confidence. The Fed has projected a certain narrative about what the future holds and what they’re willing to do to guarantee that future, and people just speculate. People increase the size of their bets. The leverage that corporations and individuals or speculators, hedge funds are willing to take on has multiplied considerably based on the world, the certain world that the Fed has projected. Is it certain? Not exactly, but that’s what has been conveyed. And so, yeah, I mean, gold’s off 3% year to date in US dollar terms. Yes, it’s rallying off the lows of 1675. Yet, despite this— Call it poor performance in US dollar terms, the commodity’s up 12% in British pounds, it’s up 13% in euros, it’s up over 20% in yen. 

Gold is off, but we have certain things that we know from history in terms of the way gold behaves at particular jun...