May 4, 2011; A Bird’s Eye View on Afghanistan, Derivatives, and the Precious Metals Market

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: David, of course, on everybody’s mind right now is that Osama is dead. The question, after we go through the celebrations and the reflections and all the different things that we go through after a decade of dealing with this issue is, “How relevant, really, is it, and what does it really reveal about what we should be doing, as far as analysis for the future?”

David: Kevin, I think the question that has been asked by many people is, “Why are we in the Middle East?” That has been asked many times. “Why are we in Pakistan and Afghanistan?” We have had an excuse for ten years – pursuing Al Qaeda.

Kevin: Nothing like a bad guy to have to chase across the West, or the East, in this particular case, and now that we have strung up the bad guy, what do we do next?

David: Right. I think, Kevin, it is always important to look at underlying stories when you are trying judge political decisions, and even geopolitical decisions. The classic example would be the Panama Canal. It was not supposed to go through Panama. If you look at the lakes that are strewn all throughout Nicaragua, that was the original plan, and there would have been very little excavation required to take the route through Nicaragua.

Kevin: So Panama was never the original intention, it was Nicaragua. What changed that thought process?

David: It was actually an orchestrated revolution coming north from Columbia, combined with a major PR campaign directed to the House and the Senate. It was a masterfully done job. For the details of the story you could look at a chapter from Our Crowd, a book written, I think, in the 1960s. It is a fabulous telling of the tale of how politics and money intertwined. That may seem like a strange way to look at Osama being taken out of the picture, but frankly, when you look at Afghanistan, it is important to understand who their neighbors are, and what role they have played in the last decade in the energy world. It is not actually Afghanistan that you should have your eye on, it is Turkmenistan. Turkmenistan has the fourth or fifth largest natural gas fields in the world.

Kevin: In other words, we, again, are taking our analysis to that three-letter word, oil.

David: Or natural gas, but it is energy. The problem is, Turkmenistan sits on the eastern side of the Caspian Sea. It is land-locked. It is not next to anyplace where they can back up a truck, so to say.

Kevin: But they have gas.

David: They do have gas, and the only way to move it is either by rail, or by pipeline. The traditional pipelines have gone north to Russia, and with the fall of the Soviet Union, that changed the calculus, if you will. It became of greater interest, to the rest of the world, where that natural gas flowed. It wasn’t going to, necessarily, be, or exclusively be, to the Soviet Union. There have been proposed pipelines from Turkmenistan. The most famous one is the TAPI, which stands for Turkmenistan-Afghanistan-Pakistan-India pipeline.

Kevin: Other than Turkmenistan, the other countries are the ones that we hear about in the news, why our military is stationed there, but the why is rarely ever talked about as far as oil or gas or pipelines. It is usually Osama, or terrorism, or Taliban, or Al Qaeda.

David: The Taliban were largely in control through the 1990s in Afghanistan, so in the negotiations for the TAPI pipeline, going back into the 1990s, you had two groups: An Argentinean company, and then a U.S. company (wink-wink-nod-nod), Unocal, which was vying for the rights to put in the TAPI pipeline and operate it. The interesting thing is that negotiations broke down with the Taliban in July of 2001.

Kevin: Okay, now wait a second. You are talking about negotiations between a U.S. company, an Argentinean company, and the Taliban? They were actually talking up through July of 2001?

David: That’s right (laughter). What is interesting is, immediately following the 2001 invasion, post 9/11, moving into 2002, really, the interim president, President Karzai, met with President Musharraf, in Islamabad, in February of 2002, and they announced their agreement to cooperate on the proposed pipeline. So you have what went away as an option, now back on the table as an option, and it looks like we are going to continue to move forward.

The real question I have is, why are we in Afghanistan and Pakistan? Are we likely to leave the region, given the fact that we have, essentially, a strawman? The reality is, now that he is gone, we are not likely to see a change in troop allocation from Pakistan and Afghanistan, insofar as we still have an interest in the TAPI pipeline, and seeing that it is operated in a way that does not change geopolitical calculus. You have to have certain players. In this case, the pipeline goes to India, ultimately, which, if you are looking at Asian calculus, we are more interested in reinforcing the relationship with India. One of the proposed pipelines would actually go through Uzbekistan and go to China, instead, which again, leaves us in a lower power position, if you will. If this can be orchestrated in such a way where we benefit, whether it is just that of leverage, or actual cash flow through a U.S. corporation, that leverage is something to keep in mind.

Kevin: There is something that has been interesting to me over the last 48 hours since we heard about Osama. I thought my kids, who are in their young 20s, would have really keyed into this, because they were 10 or 12 when 9/11 went off. But in reality, enough time has passed that they were introspective in completely different ways. I don’t mean to say Osama was old news, but he was an old excuse to be in a place, and we now have to come up with a new excuse. It will be interesting how this plays out.

David: The reason why we are champions of the TAPI pipeline is that the alternative, which New Delhi could consider, comes, not from Turkmenistan, but from Iran. So it goes through Iran-Pakistan-India, or Turkmenistan-Afghanistan-Pakistan-India, and if you can avoid going through Iran, there are obvious benefits in terms of U.S. foreign policy. We have been supporters of the TAPI pipeline, not the IPI pipeline. Again, was this about Señor Osama? No, in fact, he was, in my book, a strawman.

Kevin: Then, considering the volatility that we are seeing in the market, we are seeing the analysis come out, and they are saying oil prices now are going to be on the downslide because Osama is dead, and gold and silver are going to go down. We are going to have volatility in these markets, and excuses for volatility in these markets, but we have to keep a broader perspective, do we not?

David: I think you could look at that in relation to the silver and gold markets. Something happens and maybe it is a reaction to fewer tensions in the Middle East because we are ahead of the curve in terms of our efforts with Al Qaeda, and that is why gold and silver are selling off – the fear premium is being taken out of those markets. No, not really. The CME changed margin requirements twice last week, and once this week – a 9% increase, a 10% increase, followed by an over-the-weekend announcement that went into place, and then finally, the third announcement of a 12% hike to maintenance margin and initial margin requirements.

Kevin: Let’s put that in perspective. To go out and buy a futures contract, you have to put a certain amount of money down, very much like a mortgage on a house, and when you have that money riding, that market can go up. You can make quite a bit of money if you are long in that market, or it can go down, and if you were betting on the up, you can lose money. But what you are saying is, the margin, the amount of money that the investor had to come up with, has been raised. That seems like manipulation, David.

David: I like the housing analogy, Kevin, because basically what you have, if this were the happen, theoretically, there is a parallel here. The bank calls you and says, “Well, you did put 25% down on your house as a down payment, but send us an extra 9%.” And then the same week, “Send us an extra 10%.” And then the next week, “Send us an extra 12%.” And you are saying to yourself, well, I don’t keep that kind of cash around. And here is the point: In the silver market, if you can’t hold the position, if you don’t have enough liquidity, if forces a liquidation.

Kevin: That is what happened to the Hunt brothers 30 years ago.

David: And you can move margin to 100%, where you go from a leveraged position, 5 to 1, to where you are not allowed any leverage at all, and you have to come up with a tremendous amount of capital, and it has everything to do with liquidity. This is the beauty of running the exchange. If the house begins to lose, guess what the privilege is of those who run the house?

Kevin: They can shut the game down.

David: Or change the rules in the middle of the game. It is fascinating.

Kevin: David, you are going to be talking in Las Vegas in just a few days, and it reminds me of these casinos where you walk in, and if you are losing money, they serve you free drinks. If you are winning money, the free drinks may slow down just a little bit, but if you’re really winning money, they ask you to leave.

David: And they want to know who you are, because they are going to keep an eye out for you, and they don’t want you to return.

Kevin: Well, okay, David. Taking it from the volatility issue, there has been something that a lot of people are saying will decrease volatility in the market – a change in Federal Reserve policy, where we actually have not a secretive Fed, but a very vocal Fed. Ben Bernanke just came out and said, “This is what I am going to do.” What are your feelings? Does that remove volatility from the market?

David: Kevin, this is what we were talking about on our Friday comments. We write those on our Wealth Management website, mwealthm.com, if anyone is interested in reading them. But the gist is this: You have the Fed, which has been very secretive since its founding in 1913, and it is really not the business of the market what the directors of the economy are going to do. That has been a respected and appreciated position taken by both the general public and the Fed.

Kevin: Partially because they have so much effect in the market. If somebody knows what they are going to do, it is called discounting in the market. They can just go out and buy or sell what they need to be ahead of the game.

David: I think what we end up having is academics who aren’t necessarily market practitioners – not to discount their intelligence, they are highly intelligent – but they are so focused on one particular nuance of monetary management or fiscal management, as it were, that they do not see what the impact would be of transparency. Certainly, at a popular level, you and I may want more information. We may feel that they have hidden things from us and therefore they should disclose. I think there is some benefit to us, as individual citizens, to know what they are doing.

Kevin: As long as everybody knows at exactly the same time, and has the same tools to react.

David: Our problem with the full disclosure is really this. It is not as if we are just curious citizens. We are also curious speculators. And as curious citizens, it helps us sleep better at night knowing what is happening, and in an age of deceit and lies, transparency and truth are like a salve. We feel comfortable with what they are doing. That has its own merits, and I think they are using that to their advantage, but the disadvantage is that we are equally speculators. Give me information as to how the economy is going to be managed, and I know how to leverage a bet.

So what happened here, with an academic doing what appears to be the right thing, in terms of transparency, is reminiscent of what happened in 1999 when Alan Greenspan was making his best efforts to say, “The derivatives market is a wonderful thing. It is going to reduce risk in the marketplace by allowing investors to choose what portion of risk they want to take on, and what portion they want to sell off and allow someone else to shoulder.” Essentially, we are sharing the risk versus having one institution bear the full brunt of one particular calamity. So, in theory – just as our current Fed president is doing – in theory, judging and appraising the situation and moving forward with a new policy, we had that same thing initiated, actually before 1999, he just gave public comment to it. The problem was, in actuality, we have seen a market go from less than 10 trillion, to now with a notional value of 231 trillion just in the United States. It is 15 zeros.

Kevin: Fifteen zeros? You are talking a quadrillion.

David: One quadrillion. I mean, I pause, because I don’t know what that number means, really.

Kevin: And talking about spreading the risk…

David: …but that is the global derivatives market.

Kevin: Where is AIG now? Where is Lehman now? Granted, AIG got an awful lot of bailout dollars and some of these institutions did, but the risk, itself, was not eliminated, it was just broadened.

David: I think this is what you end up with in the speculative community. Given an opportunity of shedding the risk, and sharing it with someone else, what do they do? Reduce risk across all of their bets? Or know that they can increase their leverage and increase their bets because some of the risk has been deferred to another party? In fact, what was intended to lower total systemic risk has increased it, because individual companies say, “That’s not my problem.”

Kevin: Even without the derivatives market, with the mentality of the people right now, there is an optimism in the market that is amazing. One of the ways that you watch how people are responding to the markets and their fear of risk is just funds that make money when everything else goes down, like a bear fund.

David: Did you know the Rydex bear funds have the lowest investor participation at any time in the last ten years? Couple that with the volatility index, which is your ratio of puts and calls, and what some people would call a bear index, or a negativity index, and it shows you how many people are betting against the market, or for a rise in the market. When it gets to 10-15, that low number means everyone is on one side of the boat and they are betting that things are going to be very good from here and there is no reason to have a short position out there, to hedge risk against decline.

Kevin: David, systemic risk is one thing, but in a way, with these institutions that are taking on so much risk, we are redefining “too big to fail.”

David: Look at the top four, whether it is J.P. Morgan Chase, Citi Group, Bank of America, Goldman-Sachs. They still have the most exposure, according to the comptroller of the currency, end of year 2010 – the numbers are just out. You have banks which have, on average, between 1 and 1½ trillion dollars in assets, and yet all four of them have more than 40 trillion in notional value of derivatives exposure, with J.P. Morgan leading the pack with just shy of 80 trillion.

Kevin: So you are saying they have 1½ trillion, or less, actual, real, on-the-books money, or exposure, but the derivative exposure is 25-30 times that.

David: Correct, Kevin. They are cumulatively a large part of that 231 trillion domestic derivatives problem.

Kevin: For institutions.

David: Correct.

Kevin: Plus, a few others make up a quarter of a quadrillion dollars of exposure.

David: But if you want to look behind the scenes and see what is being done in politics and why things are, or are not, being done, follow the money. Again, whether it is the TAPI pipeline, whether it is going back to the Panama Canal a long, long time ago, this is where the rubber meets the road. We have a derivatives nightmare in front of us, and it is not something that we particularly want to face, because, and we have talked about this in the past, Kevin, it is a little bit like a nuclear reactor. We had a meltdown with Chernobyl, caused by what?

Kevin: It was actually a safety check that triggered things. You know what? It was the same thing with Apollo 13. They did a cryo stir and then all of a sudden, boom! The side of the service module blew out.

David: Okay, somebody is following NASA, and I appreciate that it is you.

Kevin, this is the issue. We have had the Dodd-Frank bill, which could have had teeth to help regulate this systemic and institutional risk problem, relating specifically to derivatives. And instead we have chosen opacity. This is the same thing we did in 2004 when there were several congressional hearings dealing with Fannie Mae and Freddie Mac, and guess what happened? “Be quiet. Don’t say anything. This is politically motivated. This is race-driven. Why are you all over Franklin Raines and his management of Fannie Mae?” In those hearings they went so far as to play the race card and say that Fannie Mae should not be scrutinized. Any scrutiny that was being brought against the company was a direct result of racism – Franklin Raines, the CEO and Chairman, being criticized on the basis of race.

We have had the opportunity to be transparent. We have had the opportunity to look at the facts before there was a crisis, and each time we get close, there is a reason to not go there. We don’t want to go there, not with the derivatives, no we don’t, because we don’t know what kind of worms we will find in the can, and we can’t afford to find out, because at this point we are talking about something that dwarfs the national economy.

Kevin: And it could cause a Chernobyl. It reminds me of something. Most people now who are listening have moved from the old TV to the new HDTV, which are fascinating because when you are watching football, you can practically see the actual blades of grass. It is just amazing. But I will tell you, some of these actors and actresses that I thought were just pretty darn good-looking, I can now see the pores in their skin, and I can see the imperfections of the makeup, and I say, “Oh, this was not made for HD.” (laughter) If you think about it, with the derivatives markets, if you really zoom in close, it is really ugly. It is not a glamour photo anymore.

David: Kevin, if you are looking at these four institutions, J.P. Morgan, Citi Group, Bank of America, and Goldman-Sachs, they have credit exposure as a percentage of risk-based capital – that is tier 1 and tier 2 capital – which is very popular to discuss in Europe and within banking circles, which for Bank of America and Citi Group, is roughly 200%, J.P. Morgan closer to 300%, and Goldman-Sachs, roughly 600%. If you want to understand the risks inherent to the financial system, as they remain unaddressed, you have to look at the derivatives market.

Kevin: We have interviewed Richard Bookstaber a couple of times. Richard was a key voice in front of Congress on how to bring transparency to these derivatives. Each of these derivatives is its own unique kind of being. Some of them are pages and pages of contract. How in the world do you bring transparency to something that is uniquely written?

David: It is uniquely written, Kevin, but we think the world is small when we ponder the 7 degrees of separation. In the derivatives market, it is 2, perhaps 3, degrees of separation. You have Greenspan’s speech, which we mentioned, in 1999, to the Futures Industry Association when he said, “These new financial instruments are increasingly important for unbundling risk.” What that neglects is the market reality, not the academic truth or insight that he may have brought, but the market reality, which is that if you can cover losses on the downside, speculation increases. So while in theory derivatives make the market a safer place by spreading risk across multiple institutions, in practice it becomes a license for speculation, and it ends up tying all financial institutions together, wherein if one is impaired, they all have exposure, either directly or indirectly.

Kevin: Being a father makes me realize that these guys, academically, may think they are right, but as a dad, if I covered all of my kids’ losses from this point on, it is going to increase risk. Real world or common sense sometimes trumps what is written about in long thesis for Doctorates. But here is one thing we do know. The academics love to come up with a solution that includes printing money. And then they love to academically tell you that it does not turn into inflation.

David: If you read last week’s Newsweek, in Niall Ferguson’s article he said that the Fed may deny it, but Americans know that prices are rising. Inflation is back. “I can’t eat an iPad.” This could go down in history as the line that launched the great inflation of the 2010s. It’s eggs, it’s milk, it’s bread, it’s meat. These are the basic American foodstuffs, and they are all grain-dependent. We have had, not only the money-printing on the one side, but we have had pork-barrel spending on the other, creating this whole ethanol craze, which is driving the price of basic foodstuffs, the stuff that we eat. Did you eat eggs this morning? Did you have milk with your cereal? Perhaps a slice of toast? Maybe you are the steak and eggs guy. Guess what? Now you have double the expense, both on the steak, and the eggs, side.

Kevin: I’m just eating quail eggs, that’s all I need to do. I mean, why buy the regular egg, if inflation is making it smaller?

David: The irony is that now pork-barrel spending is driving the price of pork through the roof. A pound of sliced bacon cost today $4.54 compared to two years ago at $3.59. That is a 26% increase in two years.

Kevin: I just recently heard on BBC on the radio that the IMF says that food prices have actually risen 36% worldwide over the last year.

David: It is interesting that households have less and less to spend on basic things, and at the same time they are in a pickle with Congress having to consider raising taxes. We are in a bind. We do not have enough money coming in. We have to increase revenues. Cutting spending is probably not going to happen.

Kevin: And they are not going to cut entitlements.

David: What you have, basically, is a second or third act in the fiscal crisis nightmare. What we have is something that is unsustainable, both in terms of a rising cost of basic foodstuffs, and basic expenses, set against rising taxes. It has to happen. It has to happen. I am not for it, because I do not enjoy it, but I see that it is necessary, to some degree. It was David Walker who suggested three parts cuts for every one part increase in revenue, in other words, an increase in taxes.

The reality is, they are going to ignore Walker now that he is out of office, just like they ignored him when he was in office. That is probably medicine I could take: Three parts of a cut to current spending, to one part increase in taxation. The point is, and Thomas Donlan made this very clear in last week’s Barron’s article: Our taxes barely cover our social welfare programs. Basically, everything else is being put on credit. If you look at our current deficit spending, if you look at where current outlays are going, we are spending as much on social welfare programs as we have in income. We don’t have enough for anything else.

Kevin: David, I hate to be the bearer of bad news, so I am going to let you be the bearer of bad news, and I hate to have people turn the program off just completely depressed, but would you just tell the listener how much they would have to raise taxes at each of the tax levels to even cover what we have already spent?

David: Not to catch up on debts, not to pay off the national debt, but just to pay our budget, to pay what we are spending now and can’t afford, we would have to see corporate taxes go from 35% to 88%. 35% is an unrealistic number since there are so many ways that the multinational corporations get their effective tax rate to less than 10%. But assuming they were paying their way, and they were at a 35% rate, that would have to be bounced to 88%. The top tax bracket for individuals would have to go from roughly 35%, also to 88%.

Kevin: The “wealthy” would have to have an increase from 35% to 88%.

David: Mid-tier income earners would have to go from 25% to 65%, and the lowest-tier, 10% currently paid in income tax, would have to jump to 25%.

Kevin: So for those who are saying, “Let’s stop printing money, let’s stop throwing newly-printed inflationary money at the system,” that is the other side of the coin.

David: Right. Or you could look at this differently and say, “Let’s stick it to the wealthy. They have so much money, they can pay. They don’t need their income, they have so much in assets, just let them eat what they already own, they don’t need income.” If we taxed 100% of the top 2%, which is anyone earning $200,000 a year and more – if we taxed that 2% at a 100% tax rate, that would help us to the tune of 300-400 billion, which is a fraction of our current deficit spending.

The reality is, we have to tighten our belts, and we are not willing to. This is why we are not willing to: Government is not willing to because government is growing to the point where they are the leviathan. They are the monster which is, in the immediate future, going to be consuming upwards of 60% of GDP. If you harken back to Woodrow Wilson, he said, “Liberty has never come from government. Liberty has always come from the subjects of government.” The history of liberty is a history of resistance. The history of liberty is the history of the limitation of governmental power, not the increase of it.

This is the problem, because the fiscal crisis is compounding. We have the folks at Cato, specifically Michael Tanner, who says that by the mid part of the century, we will have 60% of GDP which is going to go just for the operations of the federal government. We are on a financial death march.

Kevin: It is like an animal eating its own young. There will be no generations after that if they are eating their own young.

David: It is wrong, I think, for us to focus on our current debt levels, because that is a smaller piece of the bigger problem, the bigger problem, again, going back to the Cato research and Michael Tanner. The larger disease, he says, is a rapidly growing government that is consuming an ever-larger share of our national economy.

Kevin: But if you have everyone employed, let’s say we have high employment numbers, and a healthy economy, you probably could have tax increases, whether we like it or not, but our employment picture does not seem very clear right now, and it is certainly not improving.

David: No. In fact, a lot of the jobs that have been taken overseas are going to stay there. If you look at multinationals – and this was from the Wall Street Journal – since 1999, U.S. based multinationals had eliminated 3 million jobs here in the U.S., while at the same time creating approximately 2 million jobs outside the United States. The jobs eliminated were permanent replacements when they moved the 2 million overseas, and there were major efficiency gains and savings in terms of pensions, medical, this and that. If you look at the way corporate America is structured today, and it has made sense for corporations to move overseas with their operations, but the difference between 3 and 2, is 1 million, which is what they have described in the past as productivity gains – those are gone. As we have improved technology, as we have created supply chain efficiencies, we have just eliminated a lot of jobs that didn’t need to be there as technology has improved.

Kevin: We have talked about the reduced buying power of the dollar, and we have talked about the need for increased taxes, and really, no matter how much we increase them, we are not paying the bill. Then we have also talked about employment, and that is a problem right now. It is not getting any better. David, there was man that you knew. Before he died in 2004, he made an outrageous statement. His name was Sir John Templeton. He said that before the real estate fall was over, the prices of houses would fall 90%.

David: Here in the United States.

Kevin: And he said that when that happened, he would be a buyer. Where are we in the housing market right now? We certainly have not had, in dollar terms, a 90% drop.

David: I had to scratch my head back in 2004 when he made that statement, and it has begun to make sense, as you have seen mild depreciations in real estate across the country, the price of the average single-family home has come down, but the price of gold or real money has gone up considerably, and will continue to. It is very reminiscent of the 1970s. Between 1970 and 1980, the average single-family home, at the beginning of that decade, went from costing 600 ounces of gold, to about 80 something.

Kevin: This is getting back to measuring in real value.

David: Yes. But it was roughly an 85% devaluation of the U.S. housing market, in gold terms, and then it returned from that 85-ounce level, up to about 600, actually a little bit north of 600, starting in 2000 or 2001.

Kevin: 600 ounces of gold for a median-priced home.

David: Now we are at 120 ounces. We have seen an 80% depreciation. We are knocking on the door of Sir John Templeton’s guestimate of a 90% devaluation in U.S. home prices. But not in dollars terms, which is interesting, because he didn’t make that clear, but it has happened, yet again. Maybe it is 86%, maybe it is actually the 90% number that he called for. What it implies is an easy target price for gold in the 2100-2300 range, maybe with a spike to numbers that are half again as high as that, or maybe even twice that number, before housing is actually at the bottom.

David: But again, you do not have to see a collapse in housing prices nominally. Maybe it is another 10-20% decline from here in nominal pricing. So it goes from $180,000 to $150,000. Or $130,000. But we are not talking about a collapse in prices, unless, I guess, you are talking about Detroit. But we have in front of us significant opportunities, and I think it takes, in our opinion, a bird’s-eye view to recognize the changes that are happening. We want to explore more in coming weeks what it means to take a bird’s-eye view, and see, as John Templeton did, what was a 90% coming devaluation in residential real estate in the United States.

Kevin: David, you know I am a private pilot. My house looks very different from above. Sometimes a bird’s-eye view really does require a completely different perspective than the day-to-day. You were just telling me about some clients, some friends of yours, who are in real estate, and in real estate development that have done that for many years, but they do something very, very unique. They take a bird’s-eye view, literally.

David: I know a man who learned this trade from his father, in real estate development, specifically. Real estate is, of course, about location, location, location – to grasp the importance of a locale, or to judge a future direction of development trends, demographic shifts. What is unique about this family is that they consider, almost on a subconscious level, the topography, the distance, the elevation. Again, they do this by getting a bird’s-eye view. The family owns a helicopter and they regularly explore for future options by getting a bird’s-eye view of an area and seeing something that other people who, ten feet off the ground, would never see.

Kevin: So, from a real estate developer’s point of view, they are sitting side by side in a helicopter looking at the potential of the next great growing area that they can go into that maybe the guy on the ground never sees.

David: It is almost as if geography shrinks with altitude. Relationships seem clearer between communities. Natural traffic flows, or anticipated growth patterns can be seen, as you are seeing cities and townships bust at the seams. Do you get those numbers from the town fathers and the economic numbers they are crunching? Or is it something as simple as getting in a plane and seeing what you see? Does that make the difference? You realize, actually, between two cities, you can be spitting distance, depending on how the wind blows if you are 5,000-6,000 feet up.

Kevin: David, that brings me to a question for you, and a response to a book that you put me onto, that I really should have read many years ago. It is a book called, The Fourth Turning. It is a theory, as you know, of historic cycles. We are talking about bird’s-eye views; a lot of our clients are not real estate developers and they are probably never going to fly a helicopter, but it seems that history has patterns very similar to neighborhoods from the air. If we understand the pattern, we can be ahead of the game, or even if we are not ahead of the game, we can be consistent to the season that we are in.

David: It is very similar to getting that bird’s-eye view. If you can enter the present tense and current events, not unlike what happened this week with Osama bin Laden, from a historical perspective, I think it does the same thing as shrinking geography. You shrink history, and you realize, we are only a few generations from 1517 and the pounding of the 95 theses onto the door at Wittenberg – revolution, if you will, in theological, and ultimately, social and political regimes. That is only six lifetimes from us – very, very close. I think to understand the present tense, you do have to get a little bit of an elevated view, and we can do that through looking at the cycles of history.

Kevin: Speaking of cycles, there are seasons within the cycles, and when somebody says, “Is this Osama bin Laden thing the epoch-changer? Is this the big game-changer?” In reality, if a person understands the season we are in, they will realize – no, it is a blip in history.

David: As important as it may be.

Kevin: It is not a game-changer.

David: Not a game-changer.

Kevin: There is spring, summer, fall, and winter. If you don’t understand the season you are in, you are going to be inappropriately reacting. I will use an example. My daughter lives in New York, and my wife, yesterday, was packing a big box of summer clothes. Why? It is still cool in New York, but she understands the summer season is coming, so we are going to send Shae the summer clothes and she is going to send the winter clothes back, not because right now she needs them, but my wife knows she will.

David: It’s coming, Kevin. This book Neil Howe wrote in 1997, The Fourth Turning – we are going to explore some of these ideas with him. How can our listeners gain that bird’s-eye view of the marketplace, and better understand current events in a historical backdrop? We will look at that this next week.