Is there ever propaganda where there is no moral corruption? Can authoritarianism take hold without propaganda? Two subjects for all of us to ponder. Yet, the most important question of the moment is this: has there ever been an historical episode where entrenched corruption coupled with effective propaganda has not resulted in autocracy?
One thing I’ve often written about during the past decades is the ease with which we ‘Westerners’ call Russia or China corrupt and coercive. Of course, as I first found out when my father took me to Moscow in 1968 and when I later visited China during my round-the-world backpacking trip, corruption, propaganda and repressive dictatorship unapologetically stare you in the face when you navigate Communist societies. Officials look for bribes, the state-owned press pushes fictional narratives and, worst, the regime locks you away if you voice or practice dissent.
It took me many years to see through the far more refined levels of corruption along which our liberal democracies work. Are there any members of our legislatures left who aren’t taking their marching orders from corporations and special interest groups, even when it hurts the voters who put them into office? If so, I’d guess they’re in a considerable minority. The worst part: once a corrupted legislature is a reality there is little hope of a reversal—after all, only the main beneficiaries, namely the legislators, can vote an end to it.
Let’s next look at propaganda, the tool that keeps the voting public in the belief that a given status quo, no matter how unfavourable to society, is necessary, acceptable or even desirable. Again, we Westerners know all about how the Chinese, the Russians or the Cubans manipulate information, but seem blissfully ignorant of similar practices in our own backyard. Let’s look at just two of the major themes of our times as relevant examples of how manufactured narratives can erode both moral integrity and societal wellbeing.
Years ago, what was known as armaments manufacturing started being referred to as the “defense industry”. In time, citizens critical of America’s Forever War found themselves being accused of supporting terrorism. In a similar vein, chemical giants like Monsanto gradually became members of the “agricultural complex”. Those who questioned the idea of using herbicides like glyphosates were said to be unappreciative of world hunger. In both cases, the mainstream media were the willing disseminator of propaganda advanced by the state and its corporate ventriloquists.
In the context of the pandemic, consider the Canadian Joint Operations Command’s initiative, launched in April of last year, to use propaganda techniques similar to those employed during the Afghanistan war within its own borders. According to the Ottawa Citizen, which obtained details under an Access To Information proceeding, military leaders called for “shaping” and “exploiting” information. Apparently, the effort was “needed to head off civil disobedience by Canadians during the coronavirus pandemic and to bolster government messages about the pandemic.” Another separate program, overseen by Canadian Forces intelligence officers, culled information from citizens’ online and social media activities.
Vibrant examples of government overreach seem to be inherent in anything connected with Covid- 19. Relentlessly, national health authorities tell us to observe ‘the science’, but scientific debate is brutally stifled whenever it criticizes or even questions big pharma recommendations or government directives. It’s equally alarming that social media giants like Facebook or Twitter, tech platforms like YouTube and their cousins in the conventional mainstream media, brazenly “cancel” even internationally renowned virologists and epidemiologists if they veer from the party line, presumably in return for favours from government to be collected at a later time.
Meanwhile, in North America, Europe, Asia and Down Under, there have been numerous recent incidents where corruption and propaganda escalated into undisguised despotism. One of the most disturbing events occurred in late 2020, when Ontario Premier Doug Ford ordered random stops of people so that their reason for being outside their home could be determined. Luckily, Ford’s dictatorial measure failed because police forces refused to cooperate, while the Canadian military’s nefarious propaganda scheme was shut down after an investigation. Those would be unimaginable outcomes in any of the world’s more notorious dictatorships, but that’s not to say that our governments won’t try again and again.
Why is the pandemic a huge opportunity for deeply compromised governments? Mainly because it covers up half a century of policy blunders. Let there be no confusion: Covid is not the cause of the dystopian distortions we are currently experiencing. Those of you who’ve read my strategic updates know that I’ve commented on the unsustainability of most of our policy platforms for many years. Everything from health, education, agriculture and the environment, to monetary, trade and defense policy has been beset by systemic mismanagement and exploitation, seemingly leaving no way out. Well, the pandemic has supplied the perfect catalyst. Better yet, those responsible for promoting and upholding unworkable systems will never be held accountable. It’ll all be the fault of the virus.
Some readers of today’s update will ask whether I’d rather be living in China or Russia. The answer is an unqualified no. I cherish what’s left of my personal liberties and my property rights far too much. Yet, I also recognize that institutionalized rot and narrative manufacture are as alive in Chicago or Montreal as they are in Shenzen or St. Petersburg. I don’t know about you, but I find that deeply disturbing, because I believe that once the self-reinforcing loop of corruption and propaganda is unleashed, continuous government overreach becomes deeply entrenched. Worse, if it’s not emphatically rejected by the people, authoritarianism takes hold.
The Economy and Inflation—An Update
For several months now, I’ve dismissed the Federal Reserve’s “very transitory inflation” story, pointing to pressure points on numerous fronts. In recent weeks, further evidence of supply chain disruptions, shipping and other transportation gridlocks and labour woes has surfaced. The Baltic Dry Index, which measures the price of moving raw materials globally, has more than tripled recently—the chart on the left captures the story better than words can.
In this context, it is also notable that reported inflation data are highly misleading, particularly in the United States, where the method of statistical calculation keeps getting tweaked, invariably with the intention of understating price pressures. A good example are average vehicle selling prices which, according to J.D. Power, the leading U.S. data analytics and consumer intelligence company, were up 36% in the past seven years. But the ‘new car’ component of the U.S. consumer price index shows an increase of only 7% for the same period. According to the people reporting this, the U.S. Bureau of Labor Statistics, adjustments of this type (they actually call them “hedonic adjustments”) are necessary for a considerable number of index components. A recent Bloomberg article entitled The Consumer Price Index Is Not Economic Reality sums up the situation quite accurately: “The first architects of price indexes appreciated the degree to which these numbers are nothing more than vague approximations that, precisely because they rest on such shaky foundations, can be put toward political ends.”
In short: if you’ve stopped trusting government with inflation statistics, you’re on the right track. For years, consumer prices have been rising at a faster pace than reported. In the context of today’s reported U.S. numbers (5.4% year-over-year for consumer prices; 8.6% for producer prices), we are in treacherous territory. Of course, a severe global economic slowdown may yet dampen inflation, but that is not what the official narrative is based on.
What is the official story, as advanced by central bankers and many private sector economists? Most attribute current price pressures to the Covid- inspired, on-again/off-again demand bottlenecks. While that is an undeniable factor, looking at price developments from this one perspective seems myopic. We see a number of other drivers that are rarely covered in such narratives.
Let’s step back from the pandemic and look at the macro forces that suppressed G-20 inflation during the past few decades. One of the most conspicuous was the advent of technology, which resulted in massive productivity enhancements. A second, equally potent development was globalization, which brought much of the world’s manufacturing capacity to low-labour cost venues. Together, technology and globalization allowed for ever more accommodative central bank tactics to be inflation-neutral.
Where do we go from here? While it’s too early to dismiss technology-inspired gains in productivity, globalization has clearly moved into reverse gear. Led by the U.S., and in some cases forced by Washington’s America First mantra, many of the key economies have replaced their trade-friendly agendas with a more protectionist approach. Global trade, just like economic and monetary policy and their more distant cousins such as environmental, agricultural or health policy, have all become completely politicized.
The most tragic part is that, during the past 30 years or so, Federal Reserve actions have not only facilitated government debt and deficits, but in doing so have vastly enriched the elites while impoverishing ordinary citizens.
Money is abundant, goods are scarce – (U.S. M2 Money Supply since 1960)
Your Portfolio
I could have entitled today’s portfolio section Where to Put Your Money, but the truth is that neither I nor anyone else in the business knows. The reason is that far too many systemic problems have been allowed to grow for too long, which makes for enormous distortions and creates the potential of increased volatility. Moreover, the inevitable adjustments may be multi-faceted and unfold over a period of years, or manifest in a more violent, compressed way. The impact on financial markets and individual asset classes is impossible to predict.
Given these realities, we believe it’s prudent to stay defensive. Throughout this year, we’ve harnessed a robust cash reserve (currently at 30%) and maintained a solid 15% gold position. The remaining 55% of our model portfolio is invested in equities. Most of our holdings are in companies with strong balance sheets that are capable of generating robust cash flow and ideally pay attractive, sustainable dividends. Early this year, we also started positioning ourselves more aggressively in commodity-related stocks, especially in the energy, copper and fertilizer segments.
While this strategy has paid off, our overall performance nonetheless lags the key stock market indices. One obvious reason is our hefty cash position, another is gold’s listless performance. After being last year’s star performer, the yellow metal has been consolidating in the US$1,700/$1,900 range, which has caused significant liquidation. Nevertheless, we continue to be impressed by gold’s positive fundamentals and believe chances for a meaningful advance are high.
Best wishes,
Peter Cavelti