The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
“The world has some relational sorting out to do, in the Far East, in Africa, and of course, in Europe, with the entire union taking on the added pressure of a refugee crisis. So you should carefully consider the surface level benefits of diversification. The frying pan and the fire are different geographically, too.”
– David McAlvany
Kevin: Happy New Year, Dave. It’s great to be swinging into 2016 but I was just thinking as we were going through some numbers here, a few minutes before we started to record, 2013 had a stock market gain of 40%.
David: That was better, yes.
Kevin: A trajectory of 40%. 2014, one year later, the stock market still rose, 3%, it was a little bit slower. 2015, we ended, and actually for the first time since 1939 the stock market was down in a pre-election year. But we ended down 2%. Now, if you were taking calculus class and trying to figure out the trajectory of the ball when you throw it up, and when it turns down, going up 40% two years ago, and then 2% one year ago, and then last year dropping 2%.
David: It’s easy to see that there has been some momentum lost, and that the trajectory we are on is probably not real positive.
Kevin: A parabola, and now to the downside, possibly, especially with what is going on in China.
David: I think so. So, if you are keeping the first thing the first thing, when investing, it is typically easier for an investor to focus on the reward side of that old risk/reward equation.
Kevin: There has been no risk, Dave. For the last four or five years, let’s face it, the central banks have basically disqualified the word “risk.”
David: And so people will just sort of enumerate and prioritize the benefits of an investment over the costs, again, with those benefits getting almost a heavier weighting just on the basis of enthusiasm and what not, by any prospective investor.
Kevin: Do you remember the old days when the central banks weren’t intervening to this degree? You actually did consider risk. You would say, “What is the possibility of actually losing money here?”
David: That’s right. So keeping the first thing the first thing means looking at the downside before the upside, which is not to say that all losses can be avoided, but that an appraisal of risk should come at the same time as an appraisal of reward, and in my opinion, take a first priority. Having said that, you can survey the last five years and you can see that any substantial concerns about loss in the investment markets put an investor behind the curve. So, to put the first thing the first thing puts you in second place for five years. And again, it boils back to, what was driving the market for these five years? Was it normal market behavior, the things that drive growth in an economy, or was it funny money from a variety of central banks. And of course, that is, in fact, what it was – five years of asset growth were compliments of central bank liquidity, and that has encouraged an increased risk-taking and the setting aside of those concerns and of the costs, going back to that cost benefit analysis, or any sort of risk analysis, in favor of a blanket, “Listen, all boats rise with the tide. You need to jump in before you miss out on any more of this growth,” that kind of thematic.
Kevin: Right. You have to think about what pushed the stock market up – central bank intervention. But how does that occur? A lot of that occurs with companies taking out debt, very low-priced debt, and turning around and buying their own shares back. That pushes the share price up, it pushes the earnings up. But that’s not real growth, is it?
David: Trends tend to feed on themselves, so growth trends – where you see a stock moving up in price, there tends to be supportive behavior, which exaggerates the trend. The same thing happens on the downside.
Kevin: So, if we are talking about the breadth of the market, though, there were only a few stocks that did really well and the majority of the market has been dropping for a while.
David: This is, I think, a really critical point. You enter with your advanced decline studies and an appreciation of breadth in the market, which is basically just saying, “Let’s look at the entire landscape and not just a few names, and let’s see if there is any difference in performance between your household names and the broader markets. And these last five years, accompanied by unprecedented interventionism by central planner types, as that has unfolded, the equity market winners have actually become few and far between while the losers have proliferated. Again, there are far more stocks that are moving sideways to down than those that are putting in double- or triple-digit positive returns.
Kevin: But there are a handful of technology companies – it is like the old story before the tech stock boom was over – there is a handful, and then…
David: There’s everyone else.
David: So a few storied technology companies have moved to highs, the general market has languished in what appears to be a massive market-topping formation, if you are looking at a chart. So the separation became really obvious, the separation between these few standout companies and the broader market, because obvious in 2015 with the equity markets failing to make any real progress, and largely finishing in the red for the first time since 2009.
But momentum and volume and this thing that we call breadth – these were issues as far back as 2013 and 2014. You began to see the internals to the market deteriorating even as the price indices continued to move up. Now, how do we finish for the year? The transportation index was absolutely awful. That is one that is supposed to move in lockstep with the Dow Jones Industrial average when you have a growing economy. You will see both of those move in lockstep, either up, or in the case of a real decline in the markets, you’ll have them both moving down in concert, as well.
When you have one moving one direction, the other moving the other direction, you basically have a nonconfirmation, a nonconfirmation of what people assume to be the trend. Everyone is assuming we’re in a bull market, and yet the transports being off nearly 17% last year while the Dow finishes off just a few percent, again, you have a nonconfirmation of a bull market.
Kevin: You brought up the transportation index. The investment world lost, really, a great market analyst this year in Richard Russell. Richard Russell has, for 50-some odd years, written the Dow Theory Letters. He yielded to the Dow Theory system rather than his own emotions sometimes. He always owned gold, he always said, “Let’s buy gold.”
But when the stock market was confirming a bull market and he didn’t agree, he still went out and went with the bull. But what confirms the bull, of course, are the indexes confirming each other. He had been warning the last couple of years that we were getting nonconfirmation, especially last year.
David: These were not the opinions of one man, this was a system of analyzing the stock market, going back to Charles Dow who invented the Dow Jones Industrial and Transportation Average, and was the original editor of the Wall Street Journal. His ideas were then taken and grown by Rhea and Hamilton, and Richard Russell came in close to 60 years ago and started writing on a daily basis on the market. So, a significant loss for those of us who were accustomed to reading him. That was a daily ritual of mine. For the better part of a decade I would go home and read that. This was before we had kids, of course (laughs). We would read that, my wife and I, and just talk about things that were happening in the market. And of course, he had lively and entertaining anecdotes from World War II, being a part of that generation and serving as a bomber during the war.
Kevin: If he were here right now he would be saying, “Guys, watch the transportation index. If it is not going up, and the Dow is, you have nonconfirmation. The likelihood is a downturn.
David: They don’t do very many breadth studies or things like that, but you look at the Russell 2000, you look at other broad-based indexes which were weak, barely finished the year, without stumbling significantly, and what does this portend for 2016? I think what is suggests, what it projects into the future, is a reversion of psychology, from being inherently optimistic and confident because we know the Fed has our back, to slightly more pessimistic and reticent to see what is going to drive growth in 2016. So, I think there is a very significant psychological shift. That shift will take us back to the first thing being the first thing, where risk appraisal before blind faith and financially engineered opportunities is going to be front and center. And that has not been the case for the last five years. So now people are going to ask questions about risk and not just look and say, “Gosh, last year it was up 20%, that’s what I want to own.” Instead of looking back, and then looking ahead, they’re going to be looking ahead and saying, “I need to know a little bit more about what lies in the future, because we don’t have the full effort of the central banks. We found them actually to be very ineffectual in terms of creating economic growth.
Kevin: Sometimes you can smell something that you can’t quite put your finger on, but you say, “You know, I recognize that smell, and it means danger.” And the smell that is in the air right now is the implosion of two credit funds that remind me, Dave, of the 2007 prefinancial crash. There is a movie out right now called The Big Short, written by Michael Lewis, and he talks about what exactly occurred during this credit meltdown. We’re starting to see signs, very similar to 2007, appearing right now. You can smell it in the background.
David: You’re right. You’ve got the 2007 dynamics. The undercurrents of the market are changing. You have the parade, or charade, if you will, sponsored by Wall Street which continues. You have Barron’s and their final issue of 2015, provides a very interesting risk appraisal for the new year. 100% of the economists surveyed were positive about the prospects for economic growth in 2016, and bullish on the stock market.
Kevin: You know what your dad would be doing right now, because your dad always says the majority ultimately is always wrong. Why do you need an economist if 100% all agree?
David: This is the dismal science, and all of a sudden there isn’t a dismal person in the mix. Remember that when everyone is thinking the same thing, no one is thinking. More to the point, they are not thinking about what could go wrong, and I think that will be a defining shift in the markets this year. I would say, “Get out or get short.” Either one of those options may make a lot of sense prior to this next market awakening and risk reappraisal.
Kevin: Dave, I have a number of clients that are farmers. I have one particular one in Illinois. He is dumb like a fox. He calls me and just talks the weather and asks me what I think is going to happen in grains. He knows good and well I don’t know grains like he does. He trades very, very well. But I guess the question would be, what is going to happen in grains, because we’ve been talking about the stock market, but commodities have been showing definite signs of weakness, as well.
David: Yes, a man in Illinois understands how much precipitation in Brazil or Argentina is going to affect his crop. It’s a more comprehensive view of the world than most of us are used to, and it’s definitely one to hold in high regard.
Kevin: When he calls for advice, Dave, I stop and listen.
David: (laughs) Bloomberg’s Grain Index, which includes corn, wheat, and soy, this week sank to a nine-year low. And last year when you and I returned from Argentina we discussed the massive export duties on grain and cattle from Argentina.
Kevin: It caused those farmers to just silo that wheat. They didn’t sell it because of the export duties.
David: That is exactly right. They created their own commodity banks, if you will, by putting those products under the roof and waiting to sell so that they weren’t subject to the gouging governmental rates. Again, they created their own commodity banks and that represented that the products that they produced were actually their deposits. Now, with those export duties diminishing, you have the new administration under Macri – more commodities are coming to the market. Combine that with good rains and the current crops are expected to exaggerate supplies. Just in the last few weeks of the year you saw a massive increase in grain exports out of Argentina. So, what are we talking about here? We are talking about falling prices as a glut of product.
Kevin: Those commodities also have to move, and when the prices are falling and there is a glut of product, you start to see things show up actually on the transportation side of things.
David: You do, and 2015, as we closed out the year, the Baltic Dry Index returned to the lowest levels it has seen dating back to when it was created in 1985. This is what it costs to ship a large container ship from one part of the world to the other. The Financial Times observes that a number of private equity companies thought that it would be smart to get into the bulk shipping space. They were anticipating growth in the global economy, they bought the recovery theme, and they also saw a number of older ships going to the scrap heap, and they felt, “This is our opportunity. We will finance these purchases. Money is cheap, we might as well do something while the money is virtually free, and go out and buy some new ships.” What they had not factored in was a dramatic decline in the price of fuel. Think about this. It allowed ships to increase their travel speeds because they were no longer worrying about fuel efficiency, and again, that is normally a pretty good concern – fuel efficiency – because fuel costs are a huge component in terms of your operating budget.
Kevin: And you can understand. I can look at the dynamics here and I would have never thought that oil was going to fall as far as it did, as quickly as it did.
David: But this results in faster arrival times and an increase in shipping capacity with the existing fleet. So what is the net result? You have day rates on those ships which are well below the operational costs, even before you start paying interest on the loans that you took out to purchase those new ships. Ah, the hazards of investing. So again, we’re exaggerating supplies, and we’re seeing what happens as a consequence, pushing the prices lower. You have the fuel savings cost. While it is a blessing to some it is a curse to others, as you can see.
Kevin: Dave, the ships that they were investing in, these weren’t just run of the mill ships. These are ships that almost look like floating cities. These are the biggest they make.
David: That’s right. And the cape-size ships – and the assumption that they were operating off of was a pickup in demand, an increase in demand for products, both in terms of the commodity demand in places like China, but also in terms of the finished goods all over the world, as a result of a pickup in global economic activity. And the reality is, that industry, the private equity industry, was reading probably a few too many rosy reports from Wall Street, and demand for dry bulk shipping, instead of increasing, has contracted. And what does that reflect? It reflects the continual slowdown in China, and a global recessionary trend.
Kevin: And sometimes these don’t show up in prices right away. When you have oversupply or undersupply, sometimes you don’t see it in the price right away, so I guess my question would be, how long does it take for over supply to show up in a market?
David: Well, it depends (laughs). This last week in China it took approximately seven minutes. In seven minutes…
Kevin: Half a trillion was lost.
David: Chinese equity markets erased 590 billion dollars worth of investor capital, and the Chinese equivalent of the plunge protection team then got busy buying up Chinese stocks to keep a bad situation from getting worse.
Kevin: So in other words, the prices doesn’t have to change right away. It goes on and on and on and then suddenly – you’ve heard the old adage about how some of these exciting jobs are only exciting every once in a while and then they’re boring otherwise.
David: Just as liquidity was radically altered back in 2007 – we were talking about that earlier with some of those hedge funds and mutual funds which went under in 2007, and liquidity changed radically in the mortgage-backed securities market in the space of seven days – seven days. So literally, in an eight-day period you would have been looking at two radically different pictures, one where all is well, all is normal. And a seven-day migration – eight days later, the world is in financial chaos.
Kevin: At that point you had the real estate crisis.
David: Right. So, in this case, liquidity and its reciprocal, oversupply, was experienced, again, in a matter of minutes. Time marches on and it now takes minutes instead of days or weeks for crisis to emerge and for the authorities to step in on fear of a complete collapse.
Kevin: I know this sounds like an ignorant question because a lot of times these things have to adjust. But almost always someone is looking for a trigger. Let’s face it. On financial TV they have to come up with a reason why all of a sudden the Chinese markets lose over half a trillion dollars.
David: Yes. And you can look at triggers and a lot of that – the market is going to do what it is going to do, regardless of the triggers. Triggers are more or less a way of looking backward and saying, as you say, the news agencies would say, “Here is what caused it.” There is a whole host of causes which would be a part of the demise of the financial system in China, or cause a longer-term recessionary trend in China. The trigger, in terms of what people were reacting to in the moment was the PMI report from China, the Purchasing Managers Index, which is a survey of 430 small- to medium-sized manufacturers in China. And it was a disappointing number. It is in recessionary territory, they expect it to improve from the month of November to December, and in fact, it declined. And the funny thing is, funny enough, the Chicago PMI, Purchasing Managers Index – we have the equivalent thing over on this side of the pond – it is in far worse shape than the Chinese, but what the heck, it’s only an industrial recession here in the U.S. (laughs). And after all, haven’t we sort of learned and grown with the times? Who needs the old world where you make and sell stuff? That’s an out-of-date model. In the new world, in the new economy, we can all get revenue from YouTube clicks and monetizing Facebook Likes (laughs). Everybody can make money from advertising, you don’t even have to sell anything anymore. And do you realize, it is the exceptionally bright that recognize that stuff is passé. That is one of the reasons why we are in the context of an industrial recession. We don’t need stuff.
Kevin: Why would you need to make anything when, like you said, you get paid for YouTube clicks.
David: If you haven’t figured this out, Kevin, it’s probably because you’re reading too many books instead of staring at that pinwheel of death on your computer screen, which, did you know that if you stare at that pinwheel of death long enough it will reveal all truth to you if you just wait and stare at it long enough?
Kevin: Right now you just raised the blood pressure of a lot of the listeners who can’t stand that sign.
David: There is a final note on the Chinese. After setting a record with their foreign currency reserves last June at just a skosh over 4 trillion dollars, they have entered into a six-month period of massive interventions and bailouts which have required the spending of no less than 600 billion dollars. Again, that is since June. So, that burn rate has the Chinese running out of those monstrous reserves, the largest in the world, in a three-year period. So, three decades to accumulate, three years to blow through it. And to quote our friend Robert Higgs, crisis compresses time.
Kevin: Isn’t that so true? They call them black swans because no one saw it coming, but crisis is very predictable, you just don’t know when.
David: Crisis compresses time, it also compresses balance sheets. And when those two meet, a compression of time, and a compression of money, then it gets really ugly. And that is also, about the time you see decision-makers getting desperate. Desperate decision-makers making difficult decisions under difficult circumstances – well, at least we are living in an unprecedented age of peace (laughs).
Kevin: I want to shift gears here, speaking of unprecedented age of peace. I go back to the 1870s, the Franco-Prussian war, Otto Von Bismarck, after the French were defeated and Germany united – it was Prussia and then they united – there were all these alliances that were put together that really created a sense of peace from the 1870s until we got up to 1914. I would liken that period of time, Dave, to the Kissinger/Nixon/OPEC/Saudi alliances that we have had. It stabilized the dollar with the petro dollar. We have pretty much defended the royal family in Saudi Arabia. But now things seem to be changing. We are making alliances and nuclear deals with Iran, and Iran has sworn to create excessive revenge, basically, on the Saudi royal family.
David: On a geostrategic note, you are right, we have a very similar acceleration of a crisis dynamic. You have Saudi Arabia, Bahrain, United Arab Emirates, and several other Middle Eastern Countries, including Kuwait, who are cutting off diplomatic ties with Iran. They’ve done that in the last three days.
Kevin: They’re pulling out of their embassies and getting out of town.
David: And they are basically saying, “We’re not talking anymore.” You have one Shi’a cleric, with three other Shi’as, who were executed by the Sunni House of Saud, along with 43 other Sunni terrorist coordinators who were executed as well, and this old sectarian divide flares in what has already been a mass pile of combustible relationships.
Kevin: We talk about triggers in the market, but this really was a trigger.
David: You have Sykes-Picot which divided the map arbitrarily a hundred years ago, but you watch the region and as you count the bodies the conflict always circles back around to the blood feud in the family of Islam. And believe it or not, these are the kinds of distinctions and lessons that we do talk around the dinner table in the McAlvany household. We decided to extend that into a broader conversation with a curriculum for any family. If you have kids who are aged 10-18, it doesn’t matter, we’ve created a tool for you to be able to lead a dinner table conversation around issues relating to investments, economics, current events, entrepreneurship.
Kevin: It’s called The Missing Chapter.
David: If you go to themissingchapter.net, you can look at eight free lessons and then subscribe to the remainder. They’re meant to have one per week for the school year. Just to facilitate a deeper family conversation around the issues of our day. We talk about this blood feud in Islam, the difference and the history between what is the difference between Sunni and Shi’a? Why is there a difference? Why has there been a conflict since the 7th century.
Kevin: And what I love about them is, it is a short synopsis. These days none of us have enough time to really get the good information in anymore.
David: Each one is a seven-minute video.
Kevin: There you go.
David: And no time commitment at all except what you want to put into a dinner table conversation and we provide those resources. This is why I think where the U.S. now stands is a very awkward position, because on the one hand we’ve cozied up with Iran in recent months, which is decidedly Shi’a and we are still keeping an awkward embrace with the House of Saud, Wahabi, which is an offshoot of the Sunni version of Islam. And we see ourselves somehow above the conflict between Sunni and Shi’a. But that is a world where you have to pick your sides, unequivocally.
Kevin: Just look at the last 10-15 years. That is Middle East history – Sunni/Shi’a.
David: That’s right. The “blood feuds,” whether it is this one or any other one, pick your side, there is no such thing as neutrality. Neutrality is suspect. Even the outsider – we need to know what side you’re on. So, this is what is happening in the Middle East. You have the leadership in the Islamic world which remains up for grabs. We have flashpoint issues which have emerged in recent days, which justify across the region the solidifying of resolve and increased engagement with the issue, the primary issue in the Middle East today, which is, who will dominate the Middle East in the name of Islam in the 21st century?
Kevin: And I am wondering – is it going to be the OPEC that we have known in the past? Is it going to be the hegemony of the United States and the power that we can enforce, or it is going to change?
David: I think it is safe to assume that anything that has been in the past may not be in the future. If we assume the OPEC of the past is the same OPEC, with the same clout, in the future, I think we are naïve. You have the Saudi Arabians which have flirted with the overthrow of the House of Saud for as long as the House of Saud has been in power.
Kevin: Right. Even in their own home country.
David: That’s exactly right, and we are talking about massive transfers of wealth from oil revenues to social programs and other forms of welfare payments, which have reinforced political stability in Saudi Arabia.
Kevin: They’ve given away free bread and circuses. That is what they have done. They have had the money so they are entertaining the people even though the people are very, very dissatisfied.
David: That stability comes into question when the source of funding dries up. Granted, there is a lot of money still in the coffers in the form of reserves, but just like the Chinese, as we were talking about earlier – how much cushion is enough when your burn rate is 100 billion dollars a month? That is what you can ask the Chinese and the Saudis are going to have their own version of that, as the Russians are now, too. So, there is also, of course, the opportunity for the Saudis to borrow funds once they run out of their reserve assets. But if you look at the weekend’s events, keep in mind that you had 47 executions occurring over the weekend – were like 47 lines in a letter, to the rest of the Islamic world, the House of Saud was stating succinctly their resolve to maintain the status quo. “You speak against the Saudi regime, or if you act against it, the result is the same. You will die.”
Kevin: But they are acting extreme in ways that make me feel like it may be a desperate means of trying to maintain power.
David: That’s right. Most of the Sunnis which were killed went back to a conflict that occurred almost nine years ago. They have been rotting in jail and now they killed them. It’s not like the current ISIS threat, but they were trying to illustrate a point and communicate loudly that if they have a problem with ISIS or ISIL, then the same results will be the case. “Respect the House of Saud,” is the message.
Kevin: So very much a public statement, and timed to be a public statement.
David: I think you’re right about that undercurrent of desperation, because this is in the context of declining oil revenues. It is not like the Saudis aren’t making money. They’re just not making enough money to keep buying off the public in a bid to keep power. And I think Iran knows this, and I think they are launching themselves into an era of accessing the global markets again. And by the way, they don’t have the same level of social commitments and social spending that Saudi Arabia does. Of course, they claim that their cost per barrel of oil is one dollar (laughs).
Kevin: Which means they can sell it for two and double their money?
David: Don’t forget the interesting twist of the Chinese having dumped billions of dollars into Iranian oil infrastructure while the rest of the world remained at arm’s length.
Kevin: Isn’t that a strange alliance?
David: It absolutely is. We know where the Chinese interests lie. Let’s see – interest – spelled s-e-l-f. Self-interest. The major events in the Middle East could well define the 2016-17 timeframe, making the U.S. election a low light. You have the recent statement of Iranian revolutionary guards vowing, and I quote, “tough revenge” in the not-too-distant future, that would trigger the collapse of the House of Saud. Those are the kinds of sentiments that Iran, again, a resurgent will, “We will be great again.” And of course, they have a long history of greatness. Keep in mind, these are the people that brought us the game of Chess. The Persian Empire, one of the great empires of all time, and that is the memory which informs the aspiration for Iran today.
Kevin: You wonder about the Saudi showdown with the Iranians. That threat, if they do carry through with that, Dave, there is more oil pipeline and refineries in Saudi Arabia than any of those other regions.
David: The world is undone with the Saudi royal family losing its grip on OPEC, and OPEC becoming less important as you see the primary contributor to OPEC thrown into chaos.
Kevin: So let me ask you a question. We’ve talked about the Middle East being aflame, basically. We haven’t talked about Europe on this program, but we know that Draghi is doing anything he possibly can to try to squeeze growth out by printing money. We’ve got the U.S. markets, at this point, not only losing momentum, but losing last year for the first time since 2009. So, an investor has to scratch his head because he is still not earning interest in the bank. Where does he go for some growth? Do you look abroad for the emerging markets at this point, or is that a danger?
David: I think as a reminder for the adventuresome investor, the grass is rarely greener on the other side and if you are concerned about U.S. domestic growth and the prospects of money-making as an investor in the U.S. markets, I don’t know that going abroad is the answer. I would say it’s not the answer. The world has some relational sorting out to do. It has relational sorting out to do in the Middle East, in the Far East, in Africa, and of course, in Europe, with the entire union taking on the added pressure of a refugee crisis, not only last year but that will carry into 2016, as well. So, you should carefully consider the surface level benefits of diversification. The frying pan and the fire are different, geographically, too.
Kevin: So, not to sound like a broken record, but are you basically saying, just go ahead and get out of the markets at this point, be cash liquid, and in cash, gold, and continue to watch and wait as these things develop?
David: It will be, in our opinion, prudent to be out or short. By out, I mean reducing equity and bond exposures by at least 50%, and by short I mean positioned to take advantage of the market’s reappraisal of risk, reappraisal of central bank power after having been blinded in recent years by institutional prestige, the certitude of central bankers that we have and will fix everything. And again, it’s these central bank theories which have not proved effective in the real world economy, only effective in the buying of time. So the concern is that, like adding length to a fuse, while we are grateful for the extension (laughs), it is time which was bought and we still need to be aware of the fuse running out. I think you look at and anticipate a major shift in market sentiment in 2016, and we have been saying all year, as 2015 represented a transitional year, 2016 represents what we were transitioning to. Do you want to have cash? Oh, by all means. Do you want to have gold? Yes, by all means. Do you want to eliminate part, or all, of an equity market position? I think it’s prudent to eliminate at least a part of it. If you want to be short the market, either as a hedge or as an opportunity for gain, I think you can either be short the market or a more conservative position would be simply to own five or ten-year treasuries, which will benefit in the event that a market such as the Dow or the S&P or the NASDAQ implodes in the coming year. These are practical steps that I would take, and again, this represents a year where we come back to the basics, we come back to the first thing being the first thing – looking at risk, as well as reward.