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McAlvany Weekly Commentary

Kevin: Welcome to the McAlvany Weekly Commentary. Merry Christmas and happy Hanukkah. I'm Kevin Orrick, along with David McAlvany. Well, David, it's fun recording these programs. I had lunch with your son, who is a freshman in college, and I told him, "I'm thinking back 25 years, 26 years when we had lunch together, and what's happened, and then, before that, me working for your dad." What's amazing is these conversations have turned into the Weekly Commentary. And as I was talking to your son, I was thinking, wow, no wonder. There's so many interesting things to talk about, books, the things that we've studied, just our thoughts and dreams moving forward. The questions that our clients ask, I was reading through them and I was thinking, they're really family. Don't you feel like this is sort of family? David: Oh, I do. It's an extended conversation. It's a lot of what we experience, the two of us, when we get together for the regular Commentary meetings on a Monday afternoon and evening. Some of the questions are beyond what I have the capability to answer, so this will be the first Q&A that we bring in Philip Wortman and Morgan Lewis to tackle a couple of the ones that are just right down their alley. Kevin: I'm looking forward to that. Well, tell you what? Let's just go ahead and get started. And I hate to start saying that John Maynard Keynes might be right on something, but here's the question, "Dear Kevin and David, John Maynard Keynes was a complex human, but one thing he got absolutely right was the relationship between macroeconomics and wars. You and Doug (Doug Noland) have been warning of macro risks in China for years now, and we see those warnings playing out in real time. However, as China's economy falters, so does their ability to invade Taiwan. Are the Chinese still serious, and are they a serious military threat to Taiwan? Thanks, Seth." David: Well, thank you Seth. Yes, the Chinese economy has experienced much slower growth, and their primary source of growth has been impaired for many years from the real estate sector. And even now we're beginning to see yields on those companies, so their borrowing costs—numbers that you just can't even wrap your minds around. The very best case scenario is Vanke going from 17.5% to 21.5% just in the last two weeks. And then, on top of that, you've got other yields for companies that are 500%, 1,000%, 12,000%, and higher. So it's basically saying, in that sector, is game over. They do still maintain GDP growth well above that of the U.S. Even if you discount the official statistics by 30 or 40%, I would argue that the case for war does not go away. In fact, it increases with economic desperation. There's the aspect of public distraction on the one hand, playing to nationalist themes, and there's also the positive impact to youth employment, what is today an unemployment problem, both inside the military via conscription and in manufacturing employment growth, as well, for military hardware. So discouraged and unemployed youth need purpose. Low levels of inflation in China also leave them with the latitude to increase spending and money printing with less immediate negative impact to their consumers. Gas war is inflationary, so that's one other aspect of that John Maynard Keynes macroeconomic connection between war and the economy and macroeconomics, but the deflationary malaise they've been locked in is creating a dynamic which increases social and political pressure domestically. Thus far, they've not announced any radical fiscal measures to break that trend, and so I think it's worth keeping in mind that war could very well be an opportunity to redirect that negative attention. I think they understand the global demand for semiconductors and other manufactured goods from Taiwan. They may be inclined to invade Taiwan as if it were a hostile takeover of an industry or company. Not everyone's happy about a change in management, but your suppliers,