Thoughts on Coming Apart and the Coming Great Reset
Turning and turning in the widening gyre
The falcon cannot hear the falconer
Kit Webster
Reviewing the Bidding
Thoughts and Theses
Jump to beginning of newsletter (for some reason this jump is not working and appears to be a bug in the system - I am working on it)
No changes this week
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In the early 1990s, I predicted a severe crisis in the US in the early 2000s - see My Journey for details of how those thoughts were developed, and a description of my predictions, essentially all of which have held up well. That crisis would result in a resetting of the country's financial system and financial institutions and therefore would profoundly affect all parts of the culture and all institutions, including government and military.
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The crisis would be precipitated by debt, deficits, entitlements and demographics.
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The purpose of this web site is to Contemplate Out Loud about ways in which current events are reinforcing or contradicting my predictions. And to create a continual update of thoughts for the future.
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The Fed, Congress and the Executive Branch have now made that crisis inevitable and of a much higher order of magnitude than I anticipated.
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The crisis should be played out over the remainder of this decade. There will be a new world with a new financial system and a new culture under construction at the end of the crisis.
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The Fed has three alternative paths: inflation, austerity and default. For now, they have chosen inflation.
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We are deep into a multi-year end game and to the point at which things will generally become worse, faster, although nothing will move in a straight line.
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The Fed will likely continue on its current path until something breaks.
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When the Fed signals the end of raising interest rates, we will likely enter a new era of currency devaluation and yield curve control.
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Biden is significantly contributing to underinvestment in fossil fuels that will result in a multi-year, perhaps multi-decade, energy crisis. He is attempting to cross the green energy chasm in two steps. We will get to the point where even leftists will treasure every drop of oil and every lump of coal. I discuss this critically important issue, perhaps the most important issue we face today, in The Energy Crisis.
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Biden made a major strategic error by confiscating Russian currency reserves.
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The last stimulus payment, and arguably the one before that, were major errors, contributing significantly to inflation, shortages, extraordinary speculation and the increase in asset prices.
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Inflation is peaking - for now - and it will remain at a high level. In the long run, because of debt levels, there is no practical alternative to continued, elevated inflations - which will probably rise and fall in waves. Stagflation is my bet for the foreseeable future.
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There will be deflationary / disinflationary crosscurrents including demographics (retirement of Boomers, declining birth rates), and debt rationalizing and blowing up of debt, worldwide. Temporarily, we will have the interesting phenomenon of too much retail inventory as a result of overordering during supply chain issues and a slowing economy. Inflation is necessary; deflation /disinflation is the wild card.
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The economy is weakening - recession is probable, and there is definite slowing down at a fairly rapid pace. Actually, there is a good possibility that a recession has already begun. However, recessionary pressures may recede for a quarter or so. The third and fourth quarters of 2022 are two of those quarters where the pressures are temporarily receding.
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Housing is weakening.
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Ukraine should lose the war. A combination of Russian incompetence and advanced weapons from the West, primarily the US, is resulting in at least short term advantage to Ukraine. It is not clear what Russia's next moves are. See Ukraine.
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Russia may be winning the financial / energy war. Energy is so fundamentally important, and Russia has so much of it, while the US is burdened by extraordinary levels of debt, that Russia holds the better hand. The West's counter to that better hand is sanctions. Having said that, sanctions, particularly those leading to an inability for Russia to maintain their oil fields, will begin to create problems over time. These problems will be for Russia and for the whole world, because the world needs Russian oil. Very high stakes poker. See Ukraine.
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Europe will have serious energy challenges this winter. Now that the Nordstream pipelines have been damaged, they do not have the alternative to reach accommodations with Russia. Nature has smiled on Europe for half a winter with mild weather. The bullet may be dodged until next year.
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Food disruptions over at least the next year, and probably for several years, primarily as a result of the Ukraine war, will be significant.
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I outline my thoughts about how the next few years will unfold here.
Beth tells me, enough with the analysis, already. People want to know how you feel. I am not so sure about that, but if you are interested, I emote here.
Thoughts From
the Archives
More Coming
March 24, 2023
Instability As A Feature, Not A Bug
The policy response since the GFC is to always socialize the costs. That cuts off deflationary tail risks, and thus skews potential outcomes towards higher inflation, higher asset prices. There is no political will to bear any pain. IMO this is the big theme of the decade. - Joseph Wang
Markets
To summarize - I predicted peak inflation and then a recession and then strong inflation. So far, so good. Inflation did peak when I said it would, and comparisons year-over-year will only get better. Next up is some kind of disinflation / deflation and a recession. When the Fed starts cutting rates in response to the damage being done, we will enter into a whole new world.
You may or may not have followed the collapse of Credit Suisse, but the Swiss government, of all people, retroactively changed the law to make it work.
Coming to a panicked government near you.
Paranoia is an appropriate response.
The recent economic changes have made regional banks unviable, but they lend a lot of money that keeps the economy going. This will be a major issue going forward and a very recessionary one.
The primary thing to keep in mind is that desperate times call for desperate measures. As things start to come apart, you will see things from the government and Fed you never imagined.
No change for my market outlook. The outstanding questions for the past month or two are whether the dollar has topped / gold and silver bottomed. The jury is still out, but I am very close to changing my guess to - they have. One interesting point is that the cycle trends for both gold and the dollar should be bullish here.
And, let's not forget bitcoin. The jury is also still out on whether its bull market has begun. The evidence is that it has, but if the stock market is going down, bitcoin should be going down, too.
Grinding Down - Quality Of Life (Necessarily) Deteriorates
(entirely appropriate steps being taken to fight climate change and to gain
sustainability that will negatively impact your life)
(Click here for an introduction to the grinding down process.)
Authorities from the Bay Area in San Francisco have decided to ban the use of natural gas-fired water heaters and furnaces, citing pollution and health concerns.
A global biofuel boom is set to drive us to a shortage of vegetable oils — used for cooking and now increasingly to power trucks and planes — intensifying a debate over food versus fuel.
War, Energy and Food
The revolt of Dutch farmers against unreasonable nitrogen pollution regulations has succeeded, with their Farmer Citizen Movement (BBB) party winning big in regional elections to become the biggest bloc in the Senate.
Good times -
Polish Ambassador to France Jan Emeryk Rościszewski: "Either Ukraine will defend its independence today, or we will be forced to enter into this conflict."
The deal allowing export of Ukrainian grain through Black Sea blockades has been extended for another 120 days despite initial Russian resistance, Ukraine announced Saturday. Ukrainian Infrastructure Minister Oleksandr Kubrakov said 25 million tons of Ukrainian grain have already been exported under the deal since its adoption last July.
Thanks to stockpiles of fertilizers (and some help from mother nature), the world was able to wiggle by last year. With increasing disruptions to the nutrients used in fertilizers and food security overall, the world is going to face severe problems in the years to come. - Peter Zeihan
Secretary Blinken said that a ceasefire in Ukraine would be "unacceptable" if brokered between China and Russia.
The Permian is still growing. So we still have some growth in the Permian left. However, think of it this way. The entire global oil industry, as far as its growth, is now dependent on basically six counties in West Texas. That's the only growth that's taking place in global oil supply today. Everything else is either plateaued or in the process of decline right now. So once the Permian actually begins to decline, then all of a sudden, where is the next great source of oil supply growth going to come from?
Profits at Russia’s medium and large firms fell by 45.4 percent in the second half of 2022 relative to a year ago, the worst drop since the first half of 2020. The hardest hit industries were wholesale and retail trade, followed by mining. More than half of Russian businesses say shortages of skilled labor is a significant problem. Officially, Russia’s economy is expected to shrink by 1-1.5 percent in 2023, after declining 2.1 percent last year.
Short Takes
Alrighty, then - Mexican president says lack of 'hugs and embraces,' not drug cartels, to blame for fentanyl crisis
As Sweden looks to reorganize its embattled 1 trillion kronor ($90 billion) pension system following an embezzlement scandal, the office overseeing the process says it won't accept applications from asset managers that don't incorporate ESG (Environmental, Social and Governance) into their strategies.
Probably nothing - The International Atomic Energy Agency (IAEA) has sounded the alarm bells over some 2.5 tons of Ghadafi-era natural uranium that has disappeared from a site in Libya that is not under control of the Tripoli-based Government of National Unity
For me, AI is terrifying - I think its influence will increase exponentially from here (however, I am playing around with it and it does some very neat things)
Our Peter Pan culture - Fifty-seven percent of Gen Zers and Millenials say they do not feel like they have adulting figured out. In the survey, 63% of Gen Zers and Millennials said they did not feel like they were prepared for the responsibility of being an adult, and admitted they feel burned out by adulthood.
You know of my relentless quest to protect you from misusing language. Here is the latest.
"Oxfam has released an “inclusive language” guide which apologizes for using the English language before going on to deem a number of words ‘offensive’, such as “headquarters,” “local,” “people,” “mother” and “feminine hygiene.”
The poverty and hunger charity was slammed for caving to absurd levels of political correctness after issuing the bizarre 92-page guidance to staff members.
“We recognise that this guide has its origin in English, the language of a colonising nation. We acknowledge the Anglo-supremacy of the sector as part of its coloniality,” states the introduction.
“This guide aims to support people who have to work and communicate in the English language as part of this colonial legacy. However, we recognise that the dominance of English is one of the key issues that must be addressed in order to decolonise our ways of working and shift power.”
Apparently, merely using the English language is now racist and offensive.
The word “headquarters” is criticized because it “implies a colonial power dynamic,” while “field trip” is also frowned upon because it can “reinforce colonial attitudes.”
Staff are even told not to say they “stand with” people they support because it “potentially alienates people unable to stand,” while even the word “people” is to be avoided because “is often misunderstood as only referring to men.”
“Mother or father” are also verboten because it is important to “avoid assuming the adoption of gendered roles by transgender parents,” according to the guide, while “feminine hygiene” is also a bad term because it implies menstruation is dirty.
Even the terms “LGBT, LGBTQIX, homosexuality, gay and lesbian” are to be avoided because people who consider themselves part of “the whole LGBTQIA+ community” might be offended if the ‘plus’ isn’t used."
You're welcome.
AI uses more energy than other forms of computing, and training a single model can gobble up more electricity than 100 US homes use in an entire year. Yet…no one knows exactly how much total electricity use and carbon emissions can be attributed to AI
University of Michigan has 163 DEI officers. Ohio State and U Virginia each have 94. Georgia Tech has 41 DEI
Introspection
Still on a quest to keep your vocabulary in sync with the Zeitgeist - not pedophile; use minor attracted persons.
Our Banking System Is Unstable - By Design
The run on and collapse of Silicon Valley Bank have led to a lot of discussion and finger pointing.
I don't want to get into all of that, again.
What I do want to point out is that all of this is a feature, not a bug, of the system.
This is all complicated, and my discussion will be simplistic, but I hope you get the gist.
Our banking system (and that of most of the world) is called a fractional-reserve banking system. This foundation is the basis of the strengths and the weaknesses of the system, along with duration risk, which I will discuss in a minute.
Leverage is what enables us to have more than we have actual money for.
Banks are required to only keep a fraction of the liabilities it has, including your deposits, on hand as a reserve. Bank reserves - cash on hand, plus cash at the Fed - currently has to be 10% of deposits. In addition, a bank has to have a certain level of capital in relation to its risk-adjusted assets. That calculation is really obscure but assume it equals 8%.
Let's talk about duration risk. Again, simplistically, a bank will lend money for a length of time, usually measured in years, but it owes depositors their money whenever the depositors demand it. This can be a problem if enough depositors want cash NOW.
The inherent instability comes into focus - only 10% of deposits in cash against loans outstanding for years.
Again, simplistically, if more than 10% of deposits are demanded at any one time, the bank cannot honor them. In one scenario, the bank would sell assets to raise the needed cash, and if there were enough assets, then the depositors could be, over time, made whole.
Before the government guaranteed up to what is now $250,000 per depositor, there were many runs on banks, such as the one in the movie, It's A Wonderful Life. Everybody wants to be in front of the line because they need their cash now instead of later, and they could, and often did, lose their cash. The FDIC guarantee calmed things down.
Ok, in order to get lots of loans, you have to have fractional reserves, and loans by their very nature create duration risk.
Now, let's quickly, and yet again simplistically, go to SVB.
The Fed was raising interest rates, which caused the value of the portion of SVB's assets held in bonds to go down. Their assets, and therefore their ability to raise enough money to depositors, were eroding. Through perfectly-legal accounting slight of hand (the slight-of-hand accounting regarding banks varies, but the greater the emergency, the greater the legal slight-of-hand accounting required to make things look better than they are), the bank did not have to recognize the losses on those bonds. Some in the financial community were aware of the erosion in asset value. Given other issues at SVB, such as significant duration mismatch exposure and management practices, SVB was seen among short-sellers as being increasingly vulnerable.
SVB's management also knew that things were going in the wrong direction and decided to raise capital. Ironically, by trying to raise capital it admitted that it may have a problem.
Peter Thiel yelled "fire," and the rest is history.
The entire banking system, without exception, has the same issues SVB did with respect to the market value of bonds and their duration risk. Most banks hedge part of their risk (which raises the issue of counterparty risk, but we won't go there) and the rest is part of doing business, but there is Fed-induced rot at the core of all commercial banking. (As far as I can tell, SVB did not hedge any of its risk.)
There are a lot of banks on the edge and the issues in front of us are, how bad is it going to be and what is the Fed going to do about it? More important is the question of whether depositors will keep their confidence in the system. The lower the confidence, the larger the number of bank runs and the greater challenge to the system as a whole. Any panic will feed on itself, perhaps to the point of bringing down the entire system.
In general, even though "too-big-to-fail" banks, such as Chase and Bank of America, have the same bond-price problem, they are very unlikely to either incur runs or to collapse in the face of a run. We could, however, see "bank holidays" like there were during the Great Depression, when every bank in the nation shut down to give depositors time to cool off and the government time to take steps to help address the problem.
The remainder of the banking system is vulnerable.
Hang on.
It was always going to be challenging and painful to reset a dysfunctional system, and we are just at the beginning of the reset. SVB is a canary in the coal mine.
Bill Gates on AI - developing AI is "as fundamental as the creation of the microprocessor, the personal computer, the internet, and the mobile phone."
Beyond Terrifying - We Are Really, Really Screwing Up, Here
Short Takes On Dumbing Down
(You can tell that I think this is a big deal in several dimensions. First, Blacks are being disadvantaged; second, others are being dragged down by the concept of equity; third, the US as a whole is becoming less dynamic.)
One of the areas of the greatest attention in recent years for anti-racism reforms in schools has been grading and testing systems. Whole university systems have abandoned standardized testing as inimical to minority advancement while secondary school systems have eliminated expulsions due to disruptive conduct, removed proficiency requirements in math and english, and eliminated advanced programs for learning.
In Minnesota, District Superintendent Dr. Wayne Kazmierczak has campaigned for grading reform. He has argued that “grading can be one of the largest areas in which systemic racism and inequities are perpetuated,” according to the school website.
New York will change what it takes for students to reach “proficiency” on state math and english language arts tests, calling last year’s lower scores the “new normal.”
A scoring committee that reports to the Board of Regents said Monday that they must take into account the results of last year’s tests for students in grades three through eight to determine whether schools are showing improvement from year to year. On Thursday, the committee wanted to clarify that they must also reset scores because the tests will have new performance standards.
Last year some schools posted shocking results — in Schenectady, no eighth grader who took the math test scored as proficient. And the scores for the third through eighth grade tests throughout the state were much lower in 2022 than in 2019, a result no doubt of the absence of in-person learning during the first year and beyond of the COVID-19 pandemic.
New York City Mayor Bill de Blasio announced the elimination of the Gifted and Talented (G&T) program for the city’s school system. G&T programs have been denounced by some as racist because a disproportionate number of white and Asian students are in the advanced programs. The De Blasio panel previously declared such programs to be “segregation” due to the lower number of minority students.
Today just 1 in 10 Black Chicago public school students can read at grade level and only 1 in 20 are proficient in math. This is a failure of culture and the system on a grand scale.
An interesting turn in the dumbing down of NYPD standards for women -
Female cops are “insulted” by the NYPD’s efforts to boost gender equity — by lowering standards during rookie tryouts, including scrapping the timed 1.5-mile run. The controversial shift — which former training Chief Juanita Holmes said would help more women applicants make the grade — sparked fireworks between Holmes and Police Commissioner Keechant Sewell, who sources said wanted to keep the run.
It Has My Sympathy
Not Funny
