Thoughts on Coming Apart and the Coming Great Reset
Turning and turning in the widening gyre
The falcon cannot hear the falconer
Reviewing the Bidding
Thoughts and Theses
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No changes this week
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.
The crisis would be precipitated by debt, deficits, entitlements and demographics.
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.
The Fed, Congress and the Executive Branch have now made that crisis inevitable and of a much higher order of magnitude than I anticipated.
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.
The Fed has three alternative paths: inflation, austerity and default. For now, they have chosen inflation.
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.
The Fed will likely continue on its current path until something breaks.
When the Fed signals the end of raising interest rates, we will likely enter a new era of currency devaluation and yield curve control.
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.
Biden made a major strategic error by confiscating Russian currency reserves.
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.
Inflation is peaking - for now (January 2023) - 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.
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.
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.
Housing is weakening.
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.
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.
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 was dodged until next year.
Food disruptions over at least the next year, and probably for several years, primarily as a result of the Ukraine war, will be significant.
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.
June 2, 2023
Thinking About What's Important, Economically
The whole modern world has divided itself into Conservatives and Progressives. The business of Progressives is to go on making mistakes. The business of Conservatives is to prevent mistakes from being corrected. - GK Chesterton
Ee would not be surprised if the US economy, US employment, and US inflation all stay strong and even accelerate…right up to the moment that the US economy goes over a cliff in the form of either a US bank or US fiscal crisis, likely triggered later this year. - Luke Gromen
To learn who rules over you, simply find out who you are not allowed to criticize. - Voltaire
People often talk about their identity as a statement of individuality, but the concept of identity is actually a negation of individuality at the point of highest relevance. It is a way of asserting allegiance—conforming—to a group of other people who share a few traits, experiences, desires, or goals with you. - Jonah Goldberg
No change to my outlooks -
The whole debt ceiling thing was just theater - all performative nonsense - and the media bought it, hook, line and sinker, not because they did not know it was all theater, but because 24/7 news has its needs for content and drama, and reality is not a consideration. If they were into proper representation, they would have simply said, "Nothing happened today, but this thing is going to pass with a menu of minor achievements for both sides. Now to sports.") The only meaningful bits were the change in permitting (probably - the Democrats may renege as they tend do on these things - poor Joe Manchin has to feel like Charlie Brown facing Lucy with the football) - and putting a hard date on student loan repayment. Otherwise, just bits and pieces that moved no meaningful balls forward.
Last week I mentioned I was reading Principles for Dealing with the Changing World Order by Ray Dalio. He and I have the same framework and come to the same conclusions, so, of course he is brilliant. I wish he had written it 30 years ago and I could have focused on something else. His analyses are both much broader and much deeper than mine. If you have not had enough gloom and doom and would like to read a well-thought-out discussion of where we are and why and where we are going, it is a must-read. Otherwise, carry on.
I don't even know what to do with this one: State Farm is stopping the sale of new home-insurance policies in California effective Saturday, because of wildfire risk and rapid inflation in construction costs.
We live in suburban Austin. Following are the last names of the highest-ranking GPAs in the graduating high school class in our area of town (nominally upper middle class white). Just, wow, and metaphors without end.
Austin's two entrants into the national spelling bee are Shethan Bolla and Tarini Nankakumar. The ultimate winner was named Shah, but, for those of you who still look for a return to empire, there is hope - Charlotte Walsh came in second.
White supremacy ain't what it used to be. At least the winner was a toxic male.
A new, world record
The Bee gets it
Dylan Mulvaney (he/she/they), the Bud Lite poster person, is "a little bit romantically interested in women (his word)." And then hopes to be impregnated by her. Damn, life's complicated.
Harald Malmgren - Putin has no interest to help POTUS, but strong interest to please Xi. As for Xi, much of Twitterland unaware China economy in distress, Xi desperate to keep inflow of capital from advanced economies + discourage Congress pressure for tougher actions on tech transfer to China
Indian official drops phone into dam while taking selfie. The dam was then emptied so they could retrieve the phone.
(Announcer - China has significantly more emissions than any other country, with India in third place)
Jane Fonda - It’s good for us all to realize, there would be no climate crisis if there was no racism. There would be no climate crisis if there was no patriarchy. A mindset that sees things in a hierarchical way. White men are the things that matter and then everything else [is] at the bottom." (She would have achieved BINGO by just mentioning trans - she almost had a quad-fecta.)
Ok, enough already - Massive amounts of seaweed washing ashore in Florida contain flesh eating bacteria
No explanation, so far - Schoolchildren in India will no longer be taught about evolution, the periodic table of elements, sustainability, pollution or energy sources such as fossil fuels and renewables. Chapters on all of these topics have been cut from the textbooks and curricula for students aged 11–18.
(Kit - I think this unrestrained retail theft is a great metaphor for the state of our culture.) Giant Food, which operates over 160 locations across DC, Delaware, Maryland and Virginia, has begun restricting entry and exit points, beefing up store security (some armed), displaying fewer high-dollar items on shelves, and reducing the number of self-checkout items, company CEO Ira Kress told the Washington Post.
Ira Kress, president of Giant Food, says his company has taken some actions in an attempt to deter shoplifting.
According to Kress, retail theft has increased "tenfold in the last five years," which is not "an understatement," while violence has "increased exponentially."
"The last thing I want to do is close stores," Kress continued. "But I’ve got to be able to run them safely and profitably."
Walmart has said retail theft is becoming a bigger issue at stores across the U.S, and if the problem continues, it could lead to store closures and price jumps.
There is an old saying which goes, if you are not a liberal when you are young, you have no heart; if you are not a conservative when you are old, you have no head - seems to have some validity (from The New York Times.)
You know I am not much of a Biden fan, and he is deteriorating, but that fall at the graduation ceremony was a trip over a sandbag. One of the worst looks so far was actually legit.
It Ain't Easy Being Green
War, Energy and Food
Oops - The Internet now consumes 10% of global electricity. The system is hidden in buildings around the world. This causes twice the emissions of global aviation.
Moscow was hit by drones.
Thinking About What's Important Economically
I am a big Grant Williams fan. Intelligent, with a strategic mind. Seems like a good man. And I am envious of his access to so many of the most brilliant minds in finance and macro.
Long story that ends with Grant sending me the three topics that are currently on top of his mind.
Since I give him great credibility, they should be somewhere near the top of my mind, too. (All of the following comments are my thoughts and should not be attributed to Grant.)
The things at the top of my mind remain debt, deficits and demographics, but if you have to choose between Grant and me, without reservation, choose Grant.
Dedollarization. Maybe the best, single symptom of the end of empire. We bestrode the narrow world like a Colossus and now we are (on our way to) Ozymandias.
I met a traveller from an antique land
Who said: “Two vast and trunkless legs of stone
Stand in the desert . . . Near them, on the sand,
Half sunk, a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them, and the heart that fed:
And on the pedestal these words appear:
‘My name is Ozymandias, king of kings:
Look on my works, ye Mighty, and despair!’
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.”
Percy Bysshe Shelley
Some of this is just the normal changing of the guard. Reserve currencies and empires come and go over the centuries.
We are in decline and are managing our currency so poorly, that other nations, including allies, want to move away from it.
And, we made the singularly stupid move of freezing Russian reserves, scaring the total shit out of the rest of the world.
And, we are in the process of devaluing the dollar to cope with all of our debts.
Our enemies want to get away from dollar hegemony and are working to carry out transactions in other currencies.
Our friends want to get away from the dollar to have something stable.
Back in the early 90s, I predicted that the dollar would lose its reserve currency status as a part of the end game for this cycle - what I was at the time calling the crisis period for the US.
As we get closer, things appear more nuanced.
Perhaps the most important thing to understand is that the dollar is EVERYWHERE, used by EVERYBODY. Eurodollars, petrodollars, TBills, dollars, dollar-denominated debt. Everybody buys and sells and trades and borrows in dollars.
The system is coming down, but it is huge and it has a long way to go.
But, several countries, including China, Russia and Iran are actively working at the margins to trade in other currencies.
But, nobody wants their currencies, so there has to be a mechanism to turn accumulated, say, rubles, into something useful, usually gold.
I think this will be one of those slowly-then-suddenly things.
The end of dollar dominance is coming.
But not today.
The next major step will likely be the establishment of trading currencies for blocks of nations. The dollar will remain preeminent for the West, maybe the yuan for the China-sphere, and, who knows, maybe a third currency for the non-aligned.
Dedollarization is here to stay.
Slowly and then suddenly.
The next subject is one I am not even beginning to be up to date on - the Bank of Japan yield-curve-control exit.
So, Japan has the worst debt to GDP ratio in the developed world - way beyond our stupidity. So, what they have done is what we are probably going to have to do to be able to pay the interest on our debt - they have implemented yield curve control, where interest rates are not allowed to rise because the government buys essentially all the bonds issued by the Bank of Japan. It has gotten to the point where the Japanese bond, the JGB, does not trade because the government is the entire market.
All good things come to an end, and Japan is beginning to lose control of the yield curve. This will have the usual consequences to interest expense and deficits, but it is the unintended consequences that will be the most interesting, and on which I have the more tenuous grasp.
Lots of yen were converted into dollars (and euros) and spent on foreign assets because the yield on foreign assets was higher than the yield on domestic assets and because Japanese trade surpluses piled up. Start running the picture backwards as yields in Japan become competitive and Japan begins selling dollar (and euro) assets, including Treasuries. This is a big deal because Japan has a lot of foreign assets - over $1 trillion. In the end, this will impact the foreign exchange market, sovereign debt markets and asset markets in complicated ways, probably strengthening the yen against the dollar.
His last concern, the commercial real estate market, is much more straightforward.
In summary, the combination of increased interest rates and increased work from home has shattered the commercial real estate market. Many buildings are not profitable and owners are handing the keys over to banks. This is important across the banking spectrum, but particularly for smaller banks, which tend to hold a disproportionate share of commercial real estate loans.
The US banking sector is already weak, as demonstrated by the collapse of several banks recently, due to factors I have discussed recently and do not want to repeat here. We are just one event away from a massive run on small and medium sized banks. The erosion of the value of commercial real estate in the midst of general bank weakening will put additional, significant pressure on the banking system, and therefore, the Fed.
A Great Question
Simplistically, conservatives conserve existing institutions while liberals push for change.
I read a great headline this week - "What is left to conserve?"
There is a lot to unpack in that question, but liberals have, for better and for worse, changed so much that there is little left.
And no new institutions to replace the old.
I think that is one definition of a Fourth Turning.
We will have to create some new ones in the First Turning.
Well, It Was A Slow Week For Humor
From the Bee