March 14, 2012; New Twists on the Bond Market

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: David, we were meeting last night and talking about today’s show, as we often do. You had just come from one of your radio interviews. You do a lot of radio and TV. One of the things you mentioned was that you noticed some of the hosts can be very politically oriented and perhaps not have any idea the importance of economics.

Last night the host asked you, very innocently, “How does inflation really affect me?” It hit you that you really need to perhaps give these people a basic, fundamental understanding of why they are affected by economics.

David: Kevin, there are some basic economic concerns that people have, or frankly should have, but they don’t see the importance of economics as a study. Things like: Can you take care of your family? Will you achieve your financial goals? In light of a 20-30% decline in the dollar, which we would anticipate over the next 2-3 years, and that would be, of course, after the present rally peters out, we think, certainly, the dollar has legs to 85, maybe 87, compared to the euro index. What you are essentially factoring in is an increase of 30-50% in consumer goods and services that you are used to having as a part of your daily life. As you experience the increase of costs, can you take care of your family? Will you meet your financial goals?

Kevin: That is what I was thinking about after we met last night. How can we restate this so a person can understand that the Greek default is important, as is the fact that China is running a trade deficit for the first time? I was thinking, “How does this affect me?” The question came to me, “Can I take care of my family if everything costs a third more than today? If I knew that all of my bills were going to go up by a third, could I take care of my family?”

David: Kevin, for most people, when they look at economics or they read about an economist’s view of this or that, the reality is that it is very easy to understand how economics is boring, because it does not appear to have any relevance to daily life, particularly the way economists talk about their stock in trade.

The issue is this: They are dealing with very minute issues, intellectual details which have to be parsed out to prove a point. For most intellectuals, that is all they ever want to do – prove a point. The real issue within economics is how you live your life. If you have the means to live your life, what are the rules that impair the living of your life? These are actually things that do matter to people, but they don’t necessarily see economics as relevant, because economics is not written in a relevant format, in a relevant way.

Kevin: David, a great example of that is this Greek issue. We have heard about Greece for two years now. Greece, Greece, it’s going to default. What is going to happen when it defaults? They don’t really care whether Greece defaults because they don’t understand what that means, but Greece sort of did default since the last time we were here talking, and it will matter because of the rule of law.

David: And this is an interesting scenario. We had the Greek default last week, we had the credit default swaps which have to be paid now because of a technical default, and it is going to cost about 3.2 billion dollars.

Kevin: What is 3.2 billion dollars in the scheme of trillions?

David: Yes, because when you are talking about credit default swaps north of 30 trillion dollars, 3.2 billion is nothing. Granted, we are talking about a small country. There was more money on the table in terms of credit default swaps. That has been canceled out, or policies – if you want to think about them as insurance policies – that have been allowed to expire over the last several years as people figured, “You know what? This is too political, it will never go our way.”

But we have the international swaps and derivatives association get together and they determined the payout. This is an industry group that has an interest in an orderly operation within the bond market. It’s not interested in a Lehman-type moment where we are talking about 5 to 5½ billion dollars worth of counter-party risk, which in that case was not anticipated, and caused a number of dominos to fall.

In this case, the ISDA and the whole bond community anticipated, and there was no surprise. They sort of led the investors through the process of getting their heads handed to them, versus it being a surprise event.

Kevin: The thing is, too, the people who own Greek debt right now took three quarters of the value – that was a haircut, they just basically gave it back – and they were actually willing to not call it a default. I don’t know how that works, but then Greece came in and forced the few who didn’t voluntarily do that, and that’s what started triggering the credit default swaps.

David: Right, because the ISDA looks at collective action clauses, which are basically forcing the hand of minority owners into an action that is not volitional and that is considered a default. But the beauty is that there was, to that degree, the perception of contract law being maintained, and as and when these credit default swaps are paid, you do have, actually, the maintenance of that contract law.

Kevin: The question is: Is there resolution? Has this been resolved, and are we finished with the other countries? What about Portugal? What about Spain?

David: Let’s back up just a minute, because without the rule of law, and specifically, without respect for contracts being binding, the capital markets, as a whole, take a major step back. In other words, the ability for Wall Street, or any other center of capital in the world, whether that is Tokyo, or London, or what have you – what happens is that they don’t have the ability to raise funds via bond offerings or stock offerings and things like that if there are not contracts backing what they are doing. The part that is different than the implementation and the perception of contract law being maintained is that some PIIGS are more equal than others.

Kevin: What do mean? Portugal, Italy, Spain, Greece…

David: Right, yes, I am going back to the Orwellian reference and Animal Farm. All pigs are equal but some pigs are more equal. And if you are the ECB, you are more equal, because while there was a 70% haircut taken by the hoi-polloi bond-holder, guess what? If you are the ECB, you could take that Greek debt on to your balance sheet, and you didn’t have to take a haircut at all. Isn’t that special?

Kevin, there is that suspicion that the rules will change in the middle of the game and that there are preferential parties in the marketplace who will always get a better deal, and that does, ultimately, erode confidence in the capital markets.

Kevin: That is what I want to know. If I was a bond-holder and I took a 70% plus haircut, I would probably not want to go back in and buy a bond like that again, especially if I did not feel the contract had been held up.

David: There is no resolution, and it is a matter of months, perhaps years at the outside, before we see the Greek government forced to renegotiate the terms again. We will see, just in the next few days, how those bonds trade in the open market. They are already trading in the gray market at about a 17-19% yield, so what that implies is that it is just a question before we re-default, so yes, first default, now we have the re-default in the crosshairs, so to say.

Kevin, the best way to avoid a tortured recovery over the next 10-15 years within Greece would be to remain a part of the Eurozone, but drop out of the currency union and gain that ability to depreciate the remaining debts – not an outright default, but default via inflation, the same kind of thing that we are doing here in the United States, just to settle in surreptitiously. They could do that, to some degree, in Greece, and yes, you could argue that that would hurt the banking sector, moving back to the drachma, but it would give the entire economy the opportunity to regroup around their primary global offering, which is tourism – export a tremendous amount.

Kevin: Do you want to go to Greece for cheap?

David: If you become the cheapest, most beautiful destination in Europe, then people come in to spend their euros in exchange for your drachmas and they get beautiful 3-4 week vacations on the beach.

Kevin: Well, now I’m going to swing to the other side of the world. Japan and China have been countries that we know have been exporting to us far more than we import to them. That means that we run a budget deficit with them, but they actually have extra money to turn around and give back to us. Japan is running a budget deficit. Granted, they had a tsunami, so I am not taking that away, but Japan right now is importing more than it is exporting.

David: And given that they ran a budget deficit in 2011, it is understandable, given the crisis that they had with Fukushima. Now we are into January statistics and they still have a trade deficit at around 5.4 billion dollars. According to the Japanese Ministry of Finance, this is actually the largest trade deficit on record. The real challenge is to imagine how Japan will finance this deficit. Up until now they have been running huge levels of debt compared to GDP – 200% debt to GDP – which is one of the highest in the world, and that started 20 years ago at about 20% compared to GDP, debt to GDP.

These levels have, in fact, been maintained, and we look at debt as long-term, nonsustainable, but here they have played this game, and perpetuated the game, and they have maintained it because they have been financing it domestically at very low rates. Now we have to envision the need for Japan to finance its trade deficits externally.

Kevin: Like us, when he have to be selling our Treasuries, but they are having to sell Japanese treasuries worldwide to try to just finance their own deficit.

David: And if it is financed externally, then credit may be viewed in a different light, foreign source creditors versus domestic source creditors – this is a game-changer, not only for Japan, but it is a game-changer for the U.S. It really is the end of an era for the U.S. as we have moved from a creditor relationship to a competitor relationship in the capital markets.

They need to raise capital to finance deficits. We need the same capital to fund our own deficits. You see how we are running into conflict with folks that we used to have strong monetary relationships with.

Kevin: Okay, that’s Japan, and again, this is a program talking about relevancy to the person who is listening here in America. We have worldwide listeners. We are not trying to be abstract here. All of these things do dramatically impact our bottom line. Let’s look at China. China is a country that probably has been seen more as an engine of growth for America because we could buy cheap goods from them and they would turn around, and since we sent them more money than they sent us, they could turn that money around and reinvest in U.S. Treasuries and finance our deficit. Now China has been shrinking. You talked about that last week. They continue to try to bring about what they call this soft landing in the recession by lowering reserve requirements in the banks. Can you explain that a little bit?

David: Sure, and I think that old relationship is important to rehash, because essentially, China has offered us a subsidy, a consumption subsidy, here in the United States. Every family, regardless of having declining incomes over the last ten years or so, has been able to continue to buy the goods that they think are important, whether that is a new Apple product, whether that is a new this or that, the gizmos and gadgets that we hang on our walls, that we have in our cars, that keep us entertained. These things were extraordinarily cheap because of labor arbitrage, if you want to put it in those terms.

Essentially, we are taking advantage of low-wage labor in China, and the goods that can be produced via that low-wage labor. Now we are talking about an increase in labor wages in China, we are talking about a government that is trying to toggle back and forth between maintaining growth, but also preventing bubbles that develop. They have now lowered reserve requirements three times in China, and this is an attempt to manage a soft landing, and so far they have done a good job of it.

Kevin: That’s what we call easy money. That’s when they start easing the money supply. That can lead to inflation, too, and that has to be managed.

David: But they are doing a pretty good job of that, too. They have lowered the official inflation rate even further from 4½% down to 3.2% in February. For context, that is off of a mid-year number of 6½% last year. Of course, these are “official” inflation numbers. But again, the measures that they are taking have been very effective. The trouble for the U.S. is showing up in the Chinese trade data, just as we were talking about the Japanese trade data, and this is where you begin to wonder. Maybe this isn’t just Fukushima. Maybe this isn’t a trade deficit that is being run on the basis of a slowing economy, slowing exports, increased imports to rebuild the country, or that part of Japan which needed it. Maybe this is a bigger story.

Kevin: I am going to refer back to an interview that we did about a year-and-a-half ago with Paul Craig Roberts, who worked for the Reagan administration. He explained the simple relationship that we had with China, and it was very simple. We buy 450 billion dollars more of their stuff than they buy of ours, which means they have dollars. They turn around, in turn, buy our U.S. Treasuries, which allows us to run a government deficit of about 450 billion. Of course, it is much higher than that now. That symbiotic relationship was a sort of circular relationship, over and over and over, year after year, it allowed us to run a deficit. Right now, Dave, what you are saying is that China, itself, is running a deficit, no longer a surplus.

David: Right. Bloomberg reported that it was the biggest trade shortfall since 1989. China’s current account surplus peaked at about 10% of GDP in 2007 to 2008.

Kevin: Just 4-5 years ago.

David: Yes, and it has declined to less than 4% last year. This year is likely to remain positive for the full year. This is the interesting thing: February’s balance of trade registered a 31½ billion dollar deficit. Again, that is on the heels of the Japanese January trade deficits of roughly 5 billion.

Kevin: Right, so the Asian countries, the biggies, are running deficits at this point.

David: Again, these are trade deficits, meaning that they are importing more than they are exporting, but the problem is that these are economies that thrive on exports. They need to export products. They don’t have internal organic growth. They must supply the world with stuff.

Kevin: And we need them to have more money so that they can turn it around our direction.

David: Yes, because honestly, if it was not for that subsidy from China over the last ten years, we would have seen more of an inflationary bite, and it would have been much more painful, sort of a slow degradation of income levels in the United States. But again, that has been masked, in large part, because of cheap goods coming from the developing world, China specifically. The Chinese Ministry of Commerce, which expects to move in the direction of regular trade deficits over the next several years. The problem we noted with Japan is apparently not isolated, and that is the issue for us. We will have to replace two of our primary creditors for real-time funding needs if this, in fact, continues.

Kevin: Let me ask you a question, Dave. You said the Chinese, for the last ten years, were not buying 300-450 billion dollars worth of our Treasury debt. If they are not there, and they are not buying it, and the Japanese aren’t doing it as well, who then does that? Are we talking about just pure monetization, or are we talking about the United States turning around and printing the money and buying it from themselves?

David: Let’s use the word partial instead of pure, in reference to monetization. Partial monetization would be required in the U.S. market, but you would also see the need and the requirement for capital controls so that investors don’t have the choice of taking capital elsewhere, and in fact, as a captured asset, can be deployed, in essence, the domestic forcing of Treasury purchases. We don’t have any indication that that is being discussed, or that will happen, but it is a logical outcome of losing our creditors overseas.

Kevin: David, you brought something up when we talked earlier about this, and it makes sense. Let’s say that the Federal Reserve and the Treasury understood these deficit numbers that we are just now seeing come across the pages of the Economist Magazine and Financial Times. Let’s say that they knew these deficits were building last fall, or last summer, and there wasn’t going to be Asian buying of our Treasuries.

In fact, the Asians not only have slowed down their buying, they are actually divesting of some of the bonds that they already held. But if they knew that, and Bernanke came out on TV and said, “I’ll tell you what we’re going to do. We are not going to do QE-III, but what we are going to do is to take some of our money and we are going to go out and do an Operation Twist.” Is Operation Twist a replacement for this Asian buying that no longer exists?

David: What it is, is a smoothing operation. What the central banks around the world have tried to do, over and over again, with various monetization schemes, is to smooth the pricing in markets where they didn’t want volatility to be, where they didn’t want “price disclosure.” If the price of something is dropping precipitously, you have to say to yourself, “What’s wrong with this picture?” If a stock goes from ten dollars to ten cents, you can reasonably ask what was wrong that picture. That is the last thing the Fed and the Treasury want in relation to the financial markets.

Kevin, just to back up a little bit, because we have not only a loss of individual countries that will be there to finance our deficits, but on top of that we have, according to the most recent TIC flows, and we mentioned this last week, China being a liquidator of Treasuries. This is very concerning. With China being a liquidator of Treasuries, the cash flow for future purchases is also drying up, and again, we are talking about the cash flow from trade that we do with China, the 450 billion you were talking about in reference to the conversation with Paul Craig Roberts, that is the cash flow that has been used for financing our deficits.

Kevin: One of the things that we have said is mandatory for China, in the long run, to become a superpower, is that they have to become internally consumption-oriented. Stephen Roach, one of our guests that we have had in the past, pointed that out. He said, “They have to start buying from themselves, rather than continually waiting for America to buy their toys and their products.”

David: That is a very fair question to be asking: Is the trade deficit number, the shortfall in China this most recent month, an indication of a transition to internal consumption, or is it simply less cash flowing into exporting countries and fewer deliverable goods making their way out? Which is it? Is it an export problem, in which we are not importing, they are not exporting, or is that they are beginning to transition to internal consumption? And is this actually a very positive element in the growth story for China?

Kevin, global recessionary dynamics are, in fact, changing consumption patterns, and changing capital flows to the countries that export basic stuff, and that is what we are seeing, that what once was a surplus in these producing countries, and I’m talking about manufacturing production, is now becoming the surplus in places that are oil-producing, specifically.

Kevin: So then the trade deficit numbers in China do not have to be interpreted as Western European and U.S. decline-driven. It could be from other forms.

David: Yes, because if consumption in China were on the rise, this would also explain a good deal of the trade statistics, but to counter this idea, we would look at the domestic consumption numbers and savings rates, savings rates being a considerable variable, and in fact, we have a declining savings rate. So what we would be looking for is a declining savings rate, which would indicate that China was, indeed, consuming more and saving less.

Kevin: Yes, but that is not the case. They are continuing to save more and more.

David: Exactly, so there is little support for it. In fact, we have seen the savings rate from ten years ago go from 37.7% back in 2000, to now being about 52.6%, and it continues to rise. So, the Chinese continue save, but not spend. Consumption as a percentage of GDP – again, are we seeing a shift? And the argument would be, no, because in fact, we are seeing a decrease from the mid 40s, 40% of what GDP consumption was several decades ago, to now it being less than 35%.

It is moving in the wrong direction, which reinforces the idea that we have global economic slowdown in front of us, and what you actually have is the demand destruction for finished products, both in Europe and the U.S., which is now flowing into China and Japan. They are exporting less. They are continuing to import just as much as they were, and the numbers are now turning into deficits.

Kevin: Okay, David, I just want to play a game here. Let’s experiment a little bit. China is now running a deficit. They have always run a surplus. We are running a deficit. We haven’t run a surplus in a long, long time. Somebody’s running a surplus. China can’t be at deficit, and we can’t be at deficit, without someone running a surplus. Is there a shift that is occurring that is maybe under the current, that is not being talked about in the press, in which somebody, somewhere, is running a surplus, when frankly, China used to?

David: And that is the oil-producing countries, so we are seeing a reallocation of capital to the stuff that we wanted to consume, now to the stuff that we must consume, just for necessary living.

Kevin: It’s a shift to commodities.

David: It is a shift to commodities.

Kevin: Is this a forced bank, like John Maynard Keynes talked about, where you have a currency that is somewhat backed by a commodity that is a worldwide currency?

David: That is exactly right. We continue to run deficits various places in the world, and that is going to show up as a surplus on someone else’s balance sheet. That’s a great observation. The money is going somewhere. If we are still running deficits, the surplus dollars are showing up somewhere, and lo and behold, it is the Middle East and the oil-producers.

Kevin: We have talked about the competition between paper markets and physical markets. Paper markets are fine as long as everybody trusts each other, as long as the bonds pay when they are supposed to, you don’t take a 70% haircut, as long as countries aren’t abusing their ability to print. So David, the big question is, will China continue to buy Treasuries at an eager pace when the composition of their cash flow significantly changes?

David: You made the observation last night, Kevin, that nobody buys bonds just for fun, and in fact, that has not been the motivation by the Chinese. It has not even been a financial motivation. But it is to the degree that they can feed this dollar recycling, that they will continue to buy Treasuries. However, and this is the big thing, if their cash flows are significantly changed, impaired, slowed down, if they simply go away, then they don’t have the resource to allocate to Treasuries in the first place.

Kevin: David, as the surplus started to fall in 2007 and 2008, the Chinese had a strong investment initiative. Are they going to do the same thing this time?

David: That was 2009 when that initiative was announced, Kevin, and it has run its course. It was replacing the cash flow, maybe another temporary fix via government cash infusion, which is what they did.

Kevin: That was like a trillion bucks, wasn’t it?

David: Between credit put into the system, and cash actually invested – a trillion. But the risk of bubble dynamics and food inflation is incredibly high, and this is where the Peoples’ Bank of China has to be very careful, because in China, food inflation is a little bit like a lit match in a hay barn.

Kevin: I was talking to my wife the other day about this. We were talking about China. Yes, it may be the second largest economy in the world, but as far as the populace, there are 7-8 times the amount of people in China as here in the America. If we had food inflation here it would be an issue, but if they have food inflation there, the difference between the impoverished class and the elite class, or the upper income class, in China, there is a huge rift, and those people who are down on the lower end make up the majority, and they can barely afford their food.

David: Just to summarize, there are declining trade deficits in Europe, and I know this is a little bit boring, but again, it goes back to those questions, “Can you take care of your family? Will you achieve your financial goals?” The reason why economics matters, both domestically, and internationally, is because these factors end up impairing the value of your assets, and even your underlying currency. So, if you don’t know what is doing this, I think it is very difficult to make wise decisions and just step out of the way of a coming disaster, or get into the right kinds of investments that protect and preserve value during these periods of change.

Kevin: Which is a resource, not a paper.

David: Again, we are talking about record deficits in Japan, record, as in never been seen before, and you would have to go back to 1989 for the Chinese trade deficit numbers. Again, these are unprecedented issues. The question is, do they continue from here, or are they one-off events?

If you see trade deficits declining in Europe and the U.S., then that means there are declining trade surpluses elsewhere. Just take that as an axiom. If you are seeing less money that is being spent, over-consumption, so to say, and it goes away, those are less dollars flowing to those manufacturing countries all over the world.

Again, this is just to summarize, declining trade deficits in Europe and the U.S. – that equals declining trade surpluses elsewhere. So we are looking at U.S. and European consumption declining, which is driving those trade deficits down. Lower imports and a lowering of a trade deficit equals the lowering of trade surpluses with trade partners in Asia, equals no ready cash for Treasury purchases. We have a problem because we continue to spend like drunken sailors and we need someone to finance our current deficits, let alone our outstanding stock of debt.

Kevin: David, for the person who says, “How does economics really affect me?” What we are basically saying is that the free lunch that we have experienced for the last couple of decades – there is no more free lunch. It is happening right now as we speak.

David: Exactly. The subsidy that we have experienced as a country is going away. The U.S. trade deficit, along with others in the world, not just the U.S., seems to be transitioning away from countries that produce manufactured goods to countries that supply basic commodities, and this is telling, telling commentary, very important commentary, on how resources today must, and I emphasize must, be allocated by developed countries. It is also telling commentary on how everyday necessities are squeezing out the extras of life, the manufactured goods which we don’t have to have, the everyday necessities and the things that require oil as an input. That is becoming more important. Oil producers are the prime beneficiaries.

Kevin: David, it is fascinating to me. We are in an election year right now and people are talking about some of the things that the current administration has done wrong. That is what the Republicans are talking about. We had a relationship with the Chinese. We had a relationship with Japan. Right now that relationship isn’t quite as symbiotic as it was before. The problem is that the people who we see in that transition, too, we’re also having to send carriers into their waters. This is a completely different relationship when we have oil-producing countries as our next free lunch.

David: Kevin, we like to think of Iran as the primary concern in the Middle East, perhaps with Syria as a second port of call, not that you necessarily want to visit, but that is where our navy may end up. But let’s ask this question, Kevin. If, in fact, oil producers are the prime beneficiaries of these trade surplus dollars, and we need those surplus dollars to be recycled into Treasuries, isn’t it a helpful encouragement to have a good part of our naval fleet floating around the Mediterranean, just as a friendly reminder that not only do we have enemies in the region, but we hope we can count on you as a friend?

Kevin: It sounds to me like we are trying to juggle, first, two balls, then three, then four, then five. Operation Twist seems to have just been a delay. When our Treasury is having to go in and buy our own debt and change the maturities just to keep things from falling apart at the time, now what we are having to do is militarily apply it. It reminds me, David, of the model that we have talked about over and over and over. The financial moves to the economic, moves to the political, and now we are starting to see the geopolitical and the strategic kick in.

David: You bet. Kevin, I think one of the things that we see as a major tailwind to the precious metals market is this lower rate environment where you have a decision made by the world central bankers to employ what is called financial repression. I quote Michael Pettis, out of China, saying, “Lower rates increase the financial repression tax on households.” Essentially, what you are doing in a low interest rate environment is reallocating capital from the saver, from the bond-owner, to the debtor, and ultimately, to the banking system.

Kevin, this is one of the things that we see as a major reversal. Not only is there a credit quality issue within the U.S. Treasury market, where essentially, we are insolvent and have no ability to pay our debts, and we are seeing our ability to finance them dwindle away. That has been the topic of discussion today. But Kevin, there is reason to believe that higher rates are around the corner. Financial repression of this sort was in play from 1945 to 1980. It is common, at least in U.S. financial history, but what did that period end with? It ended with a period of wild inflation and radically high rates.

Kevin: David, when you use the word financial repression, I think of my grandma, and I think of people who have saved all of their lives, thinking that they could live, just on the interest of their savings. We saw that people could do that maybe a generation ago, but at this point, the Greek debt right now is running at about 17-18%, I can call my 92-year-old grandma and say, “Hey, grandma, would you like a 17-18% for the next 3-4 days before they fail? Or, she can turn around and buy a U.S. Treasury and get 2%, 3%, maybe 4%.

David: Three-month paper, 14 basis points.

Kevin: So, they aren’t going to keep up. There is no real positive return.

David: Yes, and this is the point. We often refer to Swedish economist, Knut Wicksell, who predicted just such an outcome, in which lower rates ultimately lead to considerably higher rates, and this is what we contemplate. The bond bear – where is he lurking today? And when should our concerns become acute? We see a motive on the part of the central banks to suppress interest rates. They may do so for a long period of time. If they are successful, then we will see a tremendous bull market in precious metals that lasts not 3-5 years, a normal time frame, but 10, 20, or 30 years, on the basis of central bank policy, which is fighting tooth-and-tong, employing this new and subtle form of taxation called financial repression via low interest rates.

This is the battle that an investor has. The battle for investment survival is no longer against the market. The battle for investment survival is against your central bank. As strange as that may sound, and I’m not trying to create conflict here, but you have to survive the next 2, or 20 years, and this period of financial repression, as creatively as you possibly can. That, classically, has been precious metals, as an opt-out of the system. Too much risk, no reward, it is taken from me either via taxation, or via interest rate suppression – I’m out.

Kevin: Just to repeat, what we have talked about many, many times, to survive this financial repression, you can’t necessarily have everything in the stock market, everything in cash, or everything in gold, because you don’t know when that is going to reverse. But with the triangle, which we have talked about before, even just having a third in precious metals, a third in productive assets over on the left side of the triangle in stocks and bonds, and then a third in cash. That may not be perfect, but it does cover the bases, doesn’t it?

David: Kevin, this is one of the most epic battles that I think investors will ever get to see. Again, it is financial and it is economic, and as far as most peoples’ daily lives, it may not have any bearing whatsoever, but when you go to finance a house and it costs you 16-18% as a mortgage rate, instead of 3.85%, I’m telling you these things do matter. They do matter, and you do need to be asking the question, can I take care of my family, and will I achieve my financial goals, as this battle unfolds, between interest rate suppression on the one hand, and the market dynamics which would naturally draw interest rates considerably higher?