Authored by David B.Collum, Betty R.Miller Professor of Chemistry and Chemical Biology – Cornell University (Email: [email protected] , Twitter: @DavidBCollum),
This Year in Review is brought to you by Pfizer, FTX, and Raytheon…
Every year, David Collum writes a detailed “Year in Review” synopsis full of keen perspective and plenty of wit.This year’s is no exception , with Dave striking again in his usually poignant and delightfully acerbic way.
To download Part 1 as a pdf, click here: 2022 Year in Review: All Roads Lead to Ukraine .
Introduction Every year, I write an annual survey of what happened in the world.After posting at Peak Prosperity, it gets a bump from the putative commies at Zerohedge 1 , 2 , 3 , 4 who I read religiously.
(I have topped over 60 cameo appearances at Zerohedge, consistent with getting booted off Twitter four times.) Why do I write it? My best answer is that you do not understand something until you have written your ideas down coherently.I am also trying to figure out who keeps yelling “Beetlejuice!”
Write as often as possible, not with the idea at once of getting into print, but as if you were learning an instrument.
~ J.B.
Priestley, English novelist
I break every rule of blog marketing.Nobody writes one gigantic blog a year, but it makes the rounds.It is onerous and exhausting, especially since I must necessarily procrastinate up to the deadline.
2022: The Year I spent reading Dave Collum’s 2021 Year In Review.
~ Commenter
Most years, I write what I can and then wrap it.In 2021, however, I had a primal drive to cover the usual stuff plus two topics that do not lend themselves to abbreviation: the Covid pandemic and rising global authoritarianism.
Many are now realizing that the former is a manifestation of the latter.While I may not have been correct I had to get it right…if that makes any sense.Like so many young athletes in 2021, I left it all on the field.
I uploaded it too demoralized and depressed to even send it to friends, confidants, and family.
The peeing was special.
~ David Einhorn
Diehards found it anyway and reached out with comments.Two I call good friends had diametric views that I will take the liberty of paraphrasing.Sitting on one shoulder was Tony Deden, founder of Edelweiss Holdings based in Switzerland and a saint, who sensed my pain and urged me to stop writing.He went beyond the pale by inviting me to detox in his chalet in the Swiss Alps or on his 25-acre strawberry farm on Crete.I had to pass because traveling is hard on the family.
On the other shoulder was David Einhorn, a friend of a dozen years who has helped me in ways few will ever know.He told me I must keep writing it.I think 2021 could have been the apex and a perfect time to stop.I sided with David this year but may soon follow Tony’s advice.
OK, Dave, but what is that peeing thing about? Well, I was scheduled to host David and his lovely girlfriend, Natalie, for a late dinner on a Thursday night at my house.
I answered the door in my bathrobe, they had horrified looks, and I exclaimed, “Fuck.It’s Thursday?” We got takeout, and all was fine, even after my sweet little Boston Terrier puppy, Fiona, pissed on Natalie.That , dear friends, is how you treat financial royalty!
All Roads Lead to Ukraine.Trying to understand the war from a dead cold start was monumentally hard.
Geopolitical events occur to teach Americans geography; I am no exception.As a combination of foreshadowing and trigger warning, I am going to steelman the debate by taking a decidedly Russian perspective but am not sure it is steelmanning if you come to believe it.If this is gonna drive you nuts, I beg you to stop reading because you will just get mad while I wallow in the slime of your frustrated soul.
I propose Vladimir Putin for the Nobel Prize in Medicine, for solving COVID globally in 48 hours.
~ Anonymous
As Ron Popeil would say, “But wait.There’s more!” The Ukrainian theme runs deeper than that.Here is a little more foreshadowing.Canadian trucker crusher Chrystia Freeland has deep Ukrainian Nazi roots.Nina Jankowicz, initially appointed as head of Biden’s Orwellian “Disinformation Governing Board” (Ministry of Truth for short) was doing psy-op work in Ukraine in her previous gig.
The collapse of the second largest cryptocurrency exchange in the world (FTX) revealed a massive money laundering scheme through Ukraine with political ties in the US.
The rising tide of a global neo-Nazism—an idea I am still dubious about—connects tiki torchers in Charlottesville, suspicious rabble-rousers in the January 6th “insurrection”, the Patriot Front, and the Azov Battalion in Ukraine.5 Who is that guy with the horns hanging out with Ukrainian “nationalist”?
The U.S.-sponsored bioweapons lab in Wuhan that spawned the SARS-Cov-2 virus has 36 counterparts in Ukraine.The crackhead son of the President of the United States ran scams in Ukraine via Burisma Holdings, the same country that his dad funded a proxy war.And who was the largest donor to the Clinton Foundation for 15 years? Ukraine.
Go figure.
A Year in Transition.This was my runner up for the title.
Aren’t we always stuck on the “Mobius Strip from Hell” that never ends? Francis Fukuyama and Tom Friedman were wrong: history did not end, and the world is going spherical again rather quickly.Of course, we never know the future, but each year seems to have themes that play out with a quantized feel to it.By contrast, 2022 has left world economies heading south but with no bottom in sight.Neither the Fed nor the markets are done inflicting pain.The risk of global famine is real but with inestimable consequences.The futures of Bitcoin and other crypto currencies hang in the balance with more than just price corrections now in play.
The war in Ukraine could end with a whimper (but only if Russia wins) or with a thermonuclear conflagration (nobody wins).Europeans are pondering the relative merits of freezing to death owing to lack of energy or starving to death owing to lack of food, but maybe those potentially biblical events are just clickbait.The WEF has reared its ugly head—the WEF’s Great Reset is not just a theory—yet we still haven’t a clue what those diabolical authoritarian meat puppets are up to.Why do we have to start eating bugs and forfeiting all earthly belongings and to whom.
It is hard to see how we smoothly get to 2023 from 2022.
Me by email: [blah blah, blah…we are hosed…blah, blah, gurgle, gurgle]
Larry Summers: Thanks for these thoughtful comments.I mostly agree.
Stephen Roach: Thanks Dave.I am in violent agreement with Larry these days.Under Powell, the Fed is currently in the deepest hole it has ever been in.
Anything is possible, I guess—including a night-time landing on an aircraft carrier in the midst of a raging typhoon.Might not be soft, though…
Maybe the markets and economy will be fine—maybe I am merely full of shit—but the other guys in that email threesome are deep and dark too.Stephen, who has been so generous with his time and wisdom over many years, expressed dismay in an op-ed over a particularly inaccurate call about what would happen.I offered wisdom in return:
Me by email: Several years ago I promised myself I would stop reading about what will happen.I am not sure we ever know what had happened and am clueless about what is happening.
Roach: You are a better man than me!
My accrued wisdom comes from having read and made too many predictions that were garbage or profoundly early.I have spent countless hours over the years pondering alternative narratives via suppositories offered in the press, good versus evil, the meaning of life, contemporary events in historical contexts, and what it means to be human.The future is too much to handle.Michael Crichton once noted that it is sobering to read newspapers from 30 years ago; the above-the-fold hot topics seem so irrelevant.
He also pointed out that persistent fear can lay waste to your mental and physical health.6
I identify as a conspiracy theorist.My pronouns are They/Lied.
When there’s no such thing as truth, you can’t define reality.When you can’t define reality, the only thing that matters is power.
~ Maajid Nawaz, British activist and radio host
I am confounded that I—one of the <2% of Cornell’s faculty who are openly right of center—am trying to warn the rest of my colleagues that they are being duped by the evil corporations in collusion with Big Government—the definition of fascism.Too much acid in middle school for this boy I guess.Despite my growing doubts that I may never penetrate the layers of the onion where truth resides, my resolve that has strengthened over the last couple of years is that when something of importance seems off or confusing, your default position should be that somebody in a position of power is conspiring.Why? Because that is what people in power do.It is in their DNA. They wake up every morning pondering how many baby harp seals they can bludgeon that day.Give me any topic—a keyword even—and I can serve up an alternative model that will not be told on CNN.My training as a parent tells me those demons are scheming. So, indeed, I am a conspiracy theorist.If you are not one, ignorance is bliss. Hang on to those lovely thoughts. Those who always default to incompetence as the explanation appear not to be under the spell of the little green gremlins who crawl out of my cell phone and molest me while I sleep. The True Believer.In 1953, the formerly homeless Eric Hoffer 7 wrote The True Believer , 8 a short and highly digestible story of mass movements—why they start, where they get their oxygen from, how they end, and who the critical players are. The book got into my DNA.Not to be a plot spoiler, but Hoffer’s ideas are too important to count on you going over to Amazon. You can discover what your enemy fears most by observing the means he uses to frighten you. ~ Eric Hoffer Mass movements start with intellectuals, often in universities where most bad ideas are hatched.The movement gets oxygen when the masses—what Hoffer calls “the fanatics”—pick up the ball and run with it.Hoffer serves up an unflattering view of the fanatics as societal bottom feeders with little to lose from profound change. “Fuck it: let’s do it!” They feel important as part of a glorious army fighting for a righteous cause, with villains who are the root cause of the wretchedness of their existence.They don’t want freedom but rather a freedom from responsibility.The rallying cry is always about a future that promises to return to a once-glorious past.Make America Great Again.Battle-scarred soldiers returning home searching for something familiar and elevating embrace militias.Friend and author, Peter Boghossian, reminds us that you will not sway fanatics with facts but rather by understanding where they are coming from emotionally. 9 Our greatest pretenses are built up not to hide the evil and the ugly in us, but our emptiness.The hardest thing to hide is something that is not there. ~ Eric Hoffer At his most poignant moment, Hoffer notes that there is often self-sacrifice involved, whether it is ancient clerics giving up all Earthly belongings including sex to climate changers giving up their cars (and maybe sex).They need to feel their suffering is not wasted. Propaganda does not deceive people; it merely helps them to deceive themselves. ~ Eric Hoffer Artful leaders will sense the direction the masses are moving and then lead them there.Their tools include imitation, hatred, and propaganda.We must conform (mask up), hate the opponent (Donald or Hillary), and tell the noble lie (vaccinate for the children).Propaganda doesn’t flip natural tendencies, only amplify existing ones. Sometimes a movement peters out, and other times it ends in tragedy measurable in millions of lost lives. Oddly, many are more willing to die for an abstract future than to protect rights and material goods they already possess.A clever leader can head the mob off at the pass.A potentially brilliant example, Malcolm X, inserted Islam—not my favorite religion I should say—to bring meaning to otherwise meaningless lives.I have a theory that FDR was an insider—shocking I know—who recognized that fanatical Trotskyites were going to win if Amity Schaes’ Forgotten Man was left adrift.By compromising bigly and contrary to right-wing dogma, FDR saved capitalism.But beware: disillusioned fanatics don’t just move to the middle but rather flip to the opposite pole, retaining their fanaticism. The “true believers” are addicted to movements; they are serial zealots.I catch glimpses of this looking in the mirror. I think of myself as a “True Disbeliever”: give me a narrative, and I will find the other side, but am I simply joining a different mob? Probably, but at least it is usually the less populated one. Passionate hatred can give meaning and purpose to an empty life. ~ Eric Hoffer With social media and hoards of unhappy campers noticing massive wealth disparity, we have entered the Golden Age of Fanaticism. The Forgotten Man has reappeared.While reading Hoffer’s 70-year-old treatise, I could see it everywhere—MAGA, Trump haters, Antifa, climate changers, vaxxers, anti-vaxxers, maskers, bitcoin hodlers, pro-choicers/lifers, black lives matter, Tiki Torchers, or spotted-owl savers.Will this era end with an FDR or a Josef Stalin? Part 1 Introduction My Year Investing Gold and Silver The Economy Inflation The Fed Broken Markets Energy Collapse of FTX News Nuggets Roe v.Wade Truckers Patriot Front Uvalde and Other Shootings Climate Change Nina Jankowicz Part 2 War in Ukraine Part 3 Covid and Vaccines Conclusion Acknowledgment Books My Year I have the right to remain silent.I just don’t have the skill. From 12 years of tradition and a need to chronicle my life before my adult-onset progeria causes me to hit my expiration date or lose one-too-many marbles, I go through Dave’s Year.It is like a diary.High points in 2022 included a hedge fund founders’ dinner in NYC. I don’t remember founding a hedge fund, but there I was in a midtown Manhattan rathskeller dining with about 8 guys with net worths that were comfortably larger than mine.The high point was watching a legend with battle scars wrestle a tech bull (calf) to the dirt, declaring, “Do you know what a 95% correction is? It is a 90% correction that then cuts in half!” I got this odd sense that many of their profound skills ran deep but were siloed. When asked for our outside-the-box idea at dinner’s end, I went with “Russian oil companies.” About a week later I made my move, two days later Putin made his move, and two seconds later the shares stopped trading. Fortunately, I sized my position brilliantly—so small that it did not matter—because I was looking to catch the dead cat, not the falling knife.It is possible they will reappear when Wall Street decides it’s time.Nevertheless, the dinner guests got a chuckle. I am told that my writeup on Covid in the 2021 YIR 1 was being considered by Steve Scalise’s staff to be uploaded to the Congressional record: “I will send this to my staff on the Select Subcommittee on the Coronavirus.They will be able to pull a lot of gems out of this.#2 – My staff is excited to get this data, and they’re combing through it.” I have no idea if it made it, but I savor pyrrhic victories. I also get my share of unsolicited gifts—“schwag” as they call it—including heaps of books from authors, a sweater, a set of Wiseguy suspenders, 2 a hat saying “Vaccine Survivor”, Epstein coffee mugs, 200 Ivermectin tablets, and a few silver rounds.I’m holding out for ingots and cash.Gold would be great but rhodium is my first choice. I learned doing long-form podcasts with Chris Irons (QTR) that keeping an empty glass nearby allows me to go on for hours without a formal break.This year I learned that if you are also drinking copious amounts of ginger ale, do not get distracted.It was Gandhi time. Podcasts .I do tons of podcasts (below). Talking to smart people is a hoot, and if they want to record it and post it on the internet, I am up with that.(I have many more phone calls.) They are all good.The irony is that I can bust my ass to get 2,000 people to click a paper in the Journal of the American Chemical Society and get over a quarter million clicks from a two-hour podcast with Tony “Pomp” Pompliano.Largely for archival reasons, the podcasts are listed below.Attempting not to offend any hosts, I will highlight a couple.The three-hour Twitter Spaces with the legendary George Noble (Peter Lynch’s understudy) was honorific.The podcast with Anthony “Pomp” Pompliano from a cabin in the Adirondacks seems to have captured the public’s imagination the most. 3 Two foursomes with Tommy Carrigan, Tom Luongo, and Jim Kunstler are raucous.4 , 5 A scheduled Newsmax interview was cut short when one of Biden’s drone attacks hit his target and me with one shot. The New Orleans Investor Conference filled with old friends and bucket listers included four independent speaking gigs. Sometimes I wonder what wormhole I exited the organic chemistry universe to enter the politico-economic universe.Curiously, a self-evidently black limo driver who drove me through the murder capital of the US 6 to the hotel had gone through his own wormhole to become 100% MAGA.I wrote about the rising tide of black conservatism in 2016; he assured me I was correct.7 George Noble marathon Twitter spaces.8 2022 New Orleans Investment Conference 9 Boom and Bust panel 10 with Jim Stack, Peter Boockvar (@pboockvar), and Jim Iuorio (@jimiuorio). 2022 New Orleans Investment talk: The Merits of Price Gouging.11 2021 New Orleans Investment Conference round table released (2022) 12 Justin O’Connell (@GoldSilverBTC) on GoldSilverBitcoin 13 George Gammon (@GeorgeGammon) The Rebel Capitalist Show 14 with a few short clips.15 , 16 , 17 , 18 Elijah Johnson on Liberty and Finance podcast (two) 19 , 20 Jay Martin (@JayMartin) of the Jay Martin Show.21 Tom Bodrovics (@PalisadesRadio) on Palisades Gold Radio. 22 James Kunstler (@jhkunstler) on KunstlerCast.23 Tommy Carrigan (@tommys_podcast) of Tommy’s Podcast with Tom Luongo (@TFL1728) 24 Tommy Carrigan of Tommy’s Podcast (@tommys_podcast) in February 2022.25 Tommy Carrigan of Tommy’s Podcast (@tommys_podcast) in May 2022.26 Tommy Carrigan (@tommys_podcast) on Tommy’s Podcast with James Kunstler (@jhkunstler), Tom Luongo (@TFL1728) in August, 2022 27 Tommy Carrigan (@tommys_podcast) on Tommy’s Podcast with James Kunstler (@jhkunstler), Tom Luongo (@TFL1728) in November, 2022 28 Tom Luongo (@TFL1728) of Gold Goats ‘n Guns.29 Craig Hemke (#TFMetals) of TFMetals Podcast.30 Marty Bent (@MartyBent) on Tales from the Crypt. 31 Jim Iuorio (@jimiuorio) and Bob Iaccino (@Bob_Iaccino) on Futures Edge.32 , 33 Crypto Highlights 34 Anthony Pomp (@APompliano) 35 My Zoom group (Medical Doctors for Covid Ethics International) (starts at 25 minutes). 36 Michael St.Pierre Stand-Easy with MSP .37 Kai Hoffmann of Soar Financial (August, 2022) 38 Kai Hoffman of SF Live interview (October 2022) 39 Lee Justo (@Lee_Justo) of Risk 40 Cedric Youngelman (@CedYoungelman) of The Bitcoin Matrix.41 West Virginia radio show “Us & Them” 42 Anthony Fatseas (@AnthonyFatseas) on WTFinance 43 Tom Pochari 44 , 45 , 46 Tyler Chesser (@thetylerchesser) on Elevate 47 , 48 Four TradKatKnight podcasts (behind a paywall) that I’ve never listened to I mean, they say you die twice.One time when you stop breathing and a second time, a bit later on, when somebody says your name for the last time. ~ Banksy YIRs from Previous Years.I have to do a little housekeeping.Website rollovers and general internet rot has damaged links to twelve consecutive YIRs.A fully repaired comprehensive list is here and listed below. This is merely archival, hoping somebody will keep uttering my name even if it is to curse me. 2021 Year in Review: Crisis of Authority and the Age of Narratives ( PDF ) 2020 Year in Review: WTF Happened in 2020? ( PDF ) 2019 Year in Review: Epstein Didn’t Kill Himself. ( PDF ) 2018 Year in Review: Views From Inside My Matrix.( PDF ) 2017 Year in Review: Markets Fiddle While Rome Burns.( PDF ) 2016 Year in Review: A Clockwork Orange. ( PDF ) 2015 Year in Review: Scenic Vistas from Mount Stupid. ( PDF ) 2014 Year in Review: Pushing Out on the Existential Risk Curve in a Global Game of Tetris.( PDF ) 2013 Year in Review: Austerity is not a policy.( PDF ) 2012 Year in Review: Free Markets, Rule of Law, and Other Urban Legends.( PDF ) 2011 Year in Review: Signs of an American Spring and a Fourth Turning. ( PDF ) 2010 Year in Review: Fugly Gives Way to Muddling.( PDF ) 2009 Year in Review: Thirty Years of Investing from the Cheap Seats. ( PDF ) I have so many good friends on twitter.These are two of the toughest hombres on Twitter: Mr.Fly is well-known on fintwit.Marc is a famous short seller who went supernova in the mainstream press by calling out FTX a month before the collapse.(Marc: my offer for dinner on my deck still stands. Same holds for you, Mr.Fly, but I’m not a floosie.) Before moving into the specific issues I should mention fact-checkers.They started with a husband and wife team at Snopes that, over time, was putting out more content than theoretically possible for a twosome.They have proliferated like Tribbles across the internet and have mutated into propaganda machines.Fact-checkers get things right only when it is politically expedient.If you take what they say at face value, you are an idiot, and that’s a fact.49 My immutable law of fact-checking is that the more you find, the more likely the so-called conspiracy theory being debunked is correct. My allusions to fact-checkers throughout the document are, without exception, mentioned as a vote of confidence that the idea being checked is correct. The truth is like a lion; you don’t have to defend it.Let it loose; it will defend itself. ~ Saint Augustine of Hippo Investing There is time to go long, time to go short, and time to go fishing. ~ Jesse Livermore, the most famous trader As I say every year, I will be fine in retirement as long as I do not fuck up.The problem is that inflation now increases the probability of fucking up massively.You can’t sit on cash for too long without serious erosion of its value, but more people have died reaching for yield than at the point of a gun.There are treacherous waters ahead. Replaying the tape so y’all understand how I got here, I had three great decades and one dawg.I was 100% long bonds getting about 12% annualized from 1980 leading up to the ’87 crash.The crash and a chat with a colleague caused me to flip to equities. Shocking to those who know me, I became a raging equity bull—a tech bull—until about July of ’98, when market valuations made me too nervous: I pulled half of my equities out.Following the Asian crisis, some dumb luck with trivial back-of-the-envelope calculations convinced me we had rallied back into an epic bubble.I decided that leaving even half my equities exposed had been stupid and pulled the rest out in mid ’99.(Pulling the trigger on my soaring tech stocks took cojones.) I went long cash and gold in ’99, white-knuckling it through the 2001 bottom was hard, but I haven’t sold an ounce to date.Hoping to hedge inflation I bought quite a bit of Fidelity energy and material funds starting in 2001, leading to an amazing (graded on a curve) 13% annualized return for the decade ending on 12/31/09. The market does what it should do, just not always when. ~ Jesse Livermore After three decades of good calls, Mr.SmartyPants then failed to anticipate the Fed having trillions of acts of sex with barnyard animals to mitigate what should have been a deeper plunge in ‘08–’09.I did not ride the ‘roid rage up to 2021. While the world partied like it was 1999, I rode what Dylan Grice called his “cockroach portfolio: 25% stocks, 25% bonds, 25% cash, and 25% gold” but with a lower equity weighting, clawing out a 4% annualized gain in total net worth.I forgive myself.One of the greatest bull runs happened, but it never should have.I can hear the bulls cackling about “what is versus what should be.” However, I think the next secular bear market has started and will take years to finish.Being right this time will not be that satisfying: “The vanquished cry but the victors do not laugh.” The age of financial assets is over. ~ Murray Stahl, Horizon Kinetics At the urging of some luminaries who suggested my portfolio was a little out of balance (psychotically so), I saw opportunities in energy in 2020 as it dropped to just 2% of the S&P, Exxon was replaced from the Dow with Salesforce.com, and nuclear power could glow in the dark someday.(BTW-Exxon is up 83% since the swap while Salesforce.com is down 49%.) If 2020 was the energy bottom, I nailed it.Those gains shown below do not even include substantial dividends. By no means did I size the energy move right, but it was enough to make a difference.I think we are entering a commodity and energy boom that may last decades owing to decades of underinvestment that may persist as governments oppose fossil fuels on “ethical” grounds.1 You might want to buy the companies that already have pipes and mines in place, approximating royalty trusts.Grantham says such companies are 60% cheap relative to the S&P.2 (I prefer absolute valuations, not those based on a curve relative to other bubbles.) Murray Stahl, a very impressive maven at Horizon Kinetics, sees a 25-year cycle dead ahead as the age of finance for the sake of finance tanks. 3 I intend to give them some money to play with, but not yet. Figure.Fidelity FSENX energy fund. I live on Cayuga Lake in a house that is a lifestyle changer, but it is threefold more than I needed, which forces me to call it a real estate play. Cash in TIAA and other short-term bonds are returning 3.5%.I also have 15% of my wealth in a fund that is not under my control (white privilege from my parents) that is an old-man 40–60 portfolio with both portions getting beaten up (–12% ytd). My risk assets and their 2022 returns are as follows: Fidelity Select Gold Portfolio (FSAGX): +11% Fidelity Natural Resources Fund (FNARX): +35% Fidelity Select Energy Portfolio (FSENX): +58% Goehring & Rozencwajg Resources (GRHIX): +15% Impala Platinum (IMPUY): –18% Jaguar Mining (JAGGF): –40% Kirkland Lake (KL): +8% Palm Valley Capital Fund (PVCMX): +2% Rio Tinto (RIO): +3% Sibanye Stillwater Limited (SBSW): –12% Sprott Physical Silver Trust (PSLV): +3% RSX –100% Central Fund of Canada 0% Gold 0% Silver +3% Many of these positions have fortress balance sheets and huge dividends (not included above), making them buy-and-holds as long as their dividends remain.Owing to the relative weightings of all assets (not shown), dividends, and net savings (21% of my gross salary contributing 0.8% to that gain), my 2022 year-to-date wealth accrual came in at 0.5%.Graded on a curve, that’s pretty good.But throw in inflation and I still got whacked. Let’s walk through some of the thinking.I have a small position in Eric Cinnamond’s PVCMX. Eric is a brilliant micro-cap investor.He had closed his fund and then reopened it in 2019.He listens to hundreds of conference calls, shows no interest in hot tips, and invests when he sees the whites of their eyes. The chart is revealing (below).It is flat for the first nine months because he bought nothing .Eric nearly bottom-called the March 2020 covid dip and then went flat again.He is currently 80% cash equivalents. I am paying him for his patience and will give him more when I see activity pick up. Goehring and Rozencwajg’s GRHIX is a uranium play.It is long-term (decades), but these guys seem to know the below-the-radar small miners.So far so good.I ticked that position up a little this year but it is not chunky yet. As Europe and the rest of the World get pounded by energy shortages, people may soon be begging for nuclear power plants in their backyards—NIMBY turns RIMBY (right in my backyard).As to the other energy issues, I will leave that to the section on Energy and Ukraine.Rio Tinto has all the attributes I like, and it would require an asteroid to take out their global entire mining operations.Even if the ESG movement goes wild and everybody turns to alternative energies, gigatons of basic metals are going to get pulled out of the ground, arguably way more than known reserves.4 This superimposes nicely on Russia’s diminished contributions to the commodity supplies. The game of nominal value of money is over, as this system does not allow to control the supply of resources…Our product, our rules.We don’t play by the rules we didn’t create. 5 ~ Alexei Miller, Gazprom CEO The three platinum miners (IMPUY, SBSW, and ANGPY) have strong balance sheets, handsome dividends, no tailwind from a stagnant platinum spot price, and valuations like Russian equities.They are, however, also in South Africa where confiscation of assets is by no means a zero-probability event, 6 , 7 and labor issues are always present.8 , 9 The founder of a fund professing to be the largest private holder of one of the three reached out to give me a two-hour phone tutorial.Critically, these platinum miners are making their money off rhodium.Unidentified shoppers are stealing catalytic converters from cars (including my son’s).10 SBSW is actively investing in new production. 11 Above-ground platinum supplies have been cut in half in one year.12 The hydrogen fuel cells could be game changers, and they use lots of platinum.13 The risk is that Goldman has a ‘buy’ recommendation on the miners said to be based on good fundamentals, which probably means they have shares and ingots to unload on suckers.14 Figure 1. Platinum (blue) versus gold (orange).15 I had owned a token position in the Russian equity fund RSX for years, but I was interested in a bigger position. RSX was loaded with Lukoil, Phosagro, Sherbrook, and Gazprom, all priced like used pillows at the Salvation Army Thrift Store.Some very smart guys were speaking of Russian energy companies as contrarian plays in 2021. Then Vlad decided to threaten Ukraine, and those shares started selling hard.Although rare bulls like Harris “Kuppy” Kupperman saw the contrarian play of a lifetime, most shareholders wanted out.Kentucky’s Pension plan was a huge holder, 16 which is the most contrary indicator because everything they touch turns to shit.I pulled the trigger on another token amount—less than 0.1% of my net worth—as the shares dropped to about 20% of net asset value with a P/E below 2, hoping to go full goblin if geopolitical tensions subsided. A couple of days later trading of all Russian assets was terminated, and the margin calls on the big players came rolling in.17 So are my RSX shares gone for good? I am not sure.It’s like a Cuban expat living in Miami holding a land deed in Cuba—a dollar and a dream.As it stands, by terminating trading of the shares, we essentially handed the ownership of companies holding vast resources back to the Rooskies. Does that make any sense? Meanwhile, JPMorgan and Bank of America continued quietly trading Russian bonds.18 I’m not sure how that works, but it tells me that trading equity shares will resume when Wall Street says so.Kuppy et al.could emerge as big winners. Blackrock and Goldman will get first dibs after that.I will not be given a cheap entry, which means my token loss will become a token gain. Gold and Silver I’m a fan of gold.I think gold’s valuable in a crisis.The market has come to believe in an omniscient Federal Reserve, and it’s no such thing. These guys don’t really know what they’re doing in any deep way.It’s a giant financial experiment, and we’re at the mercy of their experiment that maybe is right now in the process of going wrong, so God help us.1 ~ Seth Klarman, Baupost Having entered the World of Peter Schiff —every imaginable disaster that Peter envisioned was tee’d up—gold had a nice start but did very little over the year. One should not, however, be discouraged.Over the last two decades, gold has climbed 9.1% annualized (Figure 1), which is impressive for a pet rock.I can hear you say, “Yeah.But who owned gold (or silver) for two decades?” The answer is me and about five other guys.I should probably take this opportunity to draw the readers’ attentions to Incrementum’s reports, which are eye candy for the bugs and a primer for bugs-in-training.2 , 3 Figure 1.Gold performance. What is holding gold back? Possibly the crypto hodlers—those who “hold on for dear life”—are sapping demand for alternative currency equivalents, but they haven’t exactly benefitted from a strong bid with BTC down 59% ytd and down 72% off its all-time high. I can entertain the idea that powerful (supra-sovereign-level) are rigging the gold market, but I am not convinced.4 In related news, JPM got its annual “tax the rich” wrist slap for committing massive fraud in the gold futures markets.5 , 6 “This was an open strategy on the desk.It wasn’t hidden.” However, I remain unconvinced that they are suppressing the price rather than simply running over investors on both the upside and downside.The globally destabilizing dollar strength in the Forex currency markets certainly hurt gold price in dollars; gold denominated in all other currencies has done well.However, the dollar is still getting trampled if we stop grading on the Forex curve (see Inflation). The above-ground gold supplies from mining are growing only 1–2% annualized.With gold demand being sopped up by ETFs, it strikes me as possible that for gold to take off it may require price discovery in which the physical market overwhelms the futures market by forcing a default at the Comex, which seems plausible given that in a world becomes more dystopian. Goldman raised their price target to $2500, 7 which is, as noted, a contrary indicator. Companies whose profits are so undermined will likely see their share prices drop…Another way to defend the purchasing power of your savings if we return to an era of price controls is by investing in gold.8 ~ Russell Napier, legendary deflationist of yore There were a few memorable moments in the global gold markets. Uganda was said to have discovered deposits capable of producing 320,000 tons (OK.tonnes.) of finished product 9 to increase the above-ground global supply 200%.The market didn’t even flicker at that ridiculous claim.The 2014 CIA-sponsored coup in Ukraine and the subsequent invasion of Crimea elicited the generous offer by the U.S.to take possession of $12 billion of Ukrainian gold for safekeeping.In 2022, the U.S. shipment of money and weapons led to the generous U.S.offer to take ownership.10 , 11 , 12 We seem to scoop up this barbarous relic every chance we get.The Ukrainian debacle, including confiscation of anything remotely Slavic, has revealed to Russia and all those paying attention that the dollar may be an undependable reserve currency.Russia and China have been amassing gold steadily for most of the last two decades.In an interview that caused my eyes to bulge like a cartoon character, Simon Hunt estimated that the putative 8,500 tons of gold owned by the U.S.may be dwarfed by 12,000 tons of Roosky gold and 55,000 tons of gold in China, 13 of which 12,000 are owned by the public.14 State-owned corporations have warehouses bulging with stashes. At the very end of 2022, evidence of a big buyer—a gold whale—was traced to China. I believe it would be both risk-reducing and return-enhancing to consider adding gold to one ́s portfolio. ~ Ray Dalio, Bridgewater Associates Silver was tame too (Figure 2).As with gold, the 9.2% annualized 20-year return is nothing to sneeze at.The above-ground silver supplies are said to be dropping, 15 but I have been hearing variants of that story for my 23 years of ownership.The global effort to squander resources on sketchy sources of energy such as solar panels is a reason for optimism.Silver is in every electronic device, including contemporary solar panels, and is embedded deeply enough to be uneconomic to recycle at current prices, especially in the Western world.16 Figure 2.Silver performance.17 Our central case is a hard landing by the end of ’23…I don’t rule out something really bad…We are in deep trouble…the repercussions of that are going to be with us for a long, long time. 18 ~ Stan Druckenmiller, God The Economy The global economy is too much in flux to predict even six months out. The Fed is hiking while many leading economic indicators are sloping downward.The Fed used the word “pain.” Pivot watchers think the Fed will chicken out, but I think they intend to bring the system to its knees.A hard landing will look like a yard sale—broken and useless shit everywhere—but it will also be an emergent process in which the details of the wreckage cannot possibly be predicted.If it is accompanied by deglobalization—if the global players continue to be uncooperative—it could get really ugly.Ex-Stratfor demographer discussed below, Peter Zeihan, says that a profound deglobalization is an inevitable consequence of demographics.1 Putin and NATO are accelerating the process, and it could collapse with one bone-headed move.Meanwhile, the Covidians are preparing the Hofferian fanatics for the next lockdown. This economic crisis is just beginning, and it’s going to be as bad or worse and as long as it was during the 1970s. ~ Peter Navarro, former White House economic advisor Before largely taking a pass this year and watching the economy play out, I would like to take a shot at the question that has plagued many: where have all the workers gone? It is like going into the woods and finding no squirrels or birds. Some economists have called this a strong labor market.I might concede tight, but broken is more accurate.Seven million American men of prime working age—25 to 54—are not merely out of work, but not even looking for it.It is now called the Great Resignation. When you ask small business and restaurant owners where their former employees have gone they respond with some variant of “working for somebody else.” I have not found these mysterious employers of lower-wage workers.Somehow there is a lack of price discovery between workers and potential employers.The missing workers may stem from multiple contributions: Illegal aliens went home and did not come back; People sat on their decks pounding brewskis during the lockdown, deciding that retiring or living on one salary is not so bad; Disabilities, real or perceived, have risen; Some workers have joined what I call the less productive part of the workforce, which includes bloggers, substackers, and YouTubers looking for patrons while others are, as one trucker told me, “trading bitcoin”; Cops have taken a hike because they now hate their jobs at the very moment that (or because) crime in the cities is spiking; Mom-and-pop businesses were destroyed by the lockdown policies of Fauci et al .; Moms or dads who home-schooled their kids are now savvy enough to recognize that marginally offsetting daycare costs with a second salary is common core-level math and economics (makes no sense). Some died from covid and what is euphemistically called “excess mortality” (vaccines); The Ethical Skeptic, an anonymous and impressive blogger and covid analyst, compiled 42 reasons behind Dolly Parton’s hit song, “You Can Take This Job and Shove It.” 2 It will require wage increases, severe economic hardships, or simply maxing out all credit lines to pull the workers back to the workforce.Paradoxically, workers needing wage gains will be inflationary. Inflation Stagflation is going to kill you. ~ Rebecca Patterson, chief investment strategist at Bridgewater Associates Hyperinflation is going to change everything.It’s happening. ~ Jack Dorsey (@jack), CEO and founder of Twitter, on 11/22/2021 At the hedge-fund founders’ dinner in New York City only one of the players convinced me they understood that inflation had reverse-transcribed itself into our DNA and was hunkered down.The rest seemed to believe that the Fed would throw a switch and inflation would be vanquished—Bernanke-style. Society seems to have forgotten that many of the most horrid events in history followed on the heels of destructive inflations.Rudy Havenstein understands.1 Inflation is a worldwide problem right now because of a war in Iraq… excuse me, the war in Ukraine.I’m thinking about Iraq because that’s where my son died.2 ~ Joe Biden, talking about Bethesda, Iraq The qualifications of our leaders seem undeniable.We have a president who noted that a rise from 8.2% to 8.3% is OK because it is just “an inch” (putting the thumb and forefinger close together) and a vice president who thinks that the slight increase means there is almost no inflation. Meanwhile, Congress passed a nearly half trillion dollar bill to fight inflation…and then allocated the money to climate-change grifters and to grow the IRS secret police by 87,000.3 Am I the only one who sees “the Grim Reaper” in the IRS logo? I’m sick of this stuff! The American people think the reason for inflation is the government spending more money.Simply not true! ~ Joe Biden It’s important to dispel some of those who say, well it’s the government spending.No, it isn’t.The government spending is doing the exact reverse, reducing the national debt.It is not inflationary. ~ Nancy Pelosi The people in Washington will tell you inflation is produced by greedy businessmen or it’s produced by grasping trade unions or it’s produced by spendthrift consumers or maybe it’s those terrible Arab sheiks…only money has that printing press and, therefore, only Washington can produce inflation.4 ~ Milton Friedman Ron Paul warned us for years that government spending is the problem as did Milton Friedman.Davy Crockett even had his come to Jesus moment in his legendary speech to Congress, “It is not yours to give” 5 in which he apologized for voting for a big recovery act. Never have so many owed so much to so few.The quirky genius Kim Dotcom reminded us what economist Larry Kotlikoff 6 has been sounding the alarm about: even if you were to sell all factories, real estate, hard assets, and equities—a complete liquidation at current market prices —the US would be $66 trillion in the hole.7 Seems problematic.Even Dan Akroyd on SNL got it: 8 I will present to Congress the Inflation Maintenance Program, whereby the US Treasury will make up any inflation cost losses through direct tax rebates to the public in cash.Now you may say, “Won’t that cost alot of money? Won’t that increase the deficit? Sure it will, but so what? We’ll just print more money.9 ~ Dan Akroyd imitating Jimmy Carter, 1978 The answer to the age-old question, “do rising prices cause inflation or does inflation cause rising prices?” is “yes.” Inflation is impossible to discuss without introducing gross distortions. The idea that something so complex as the ebb and flow of prices—something akin to global weather patterns—can be described using a binary vocabulary—inflation or deflation—is bonkers.Even if you throw in a few adjectives to smooth the edges, it still doesn’t work. There is a tribe in Africa that has three numbers: one, two, and many.They were never going to invent calculus.Economists armed with calculus will never be able to describe money flows using only two words.Language corrupts ideas. Now we’ve had moments in history with extreme leverage, we’ve had moments in history with extreme inflationary forces, and even speculative environments. But, I assert that we’d never seen these three macro-imbalances occurring all at once. ~ Tavi Costa (@TaviCosta) of Crescat Capitol Calculating the CPI (consumer price index) requires measuring various consumer prices and then statistically overweighting components that naturally go down (tech) or can’t be measured (implicit rent).10 Thanks to the Boskin Commission, at the behest of politicians looking to distort the numbers to look good and reduce the cost of inflation-adjusted payouts, came up with a Nobel Prize-worthy concept—the fudge factor.My favorite is “hedonic adjustments.” Let’s ignore the fact that hedonic is defined by some chick named Mirriam Webster as “of, relating to, or characterized by pleasure” whose etymology stems from medieval agricultural economists “choking the chickens.” For those of you who may be unaware, Boskin is the economist/weasel/fraud who helped to officially distort the CPI, making it more or less worthless as a measure of inflation. ~ Barry Ritholtz Let me illustrate with my favorite example.The blender your grandmother bought in 1945 died after 70 years because you dropped that pig on the floor. It was replaced by the plastic piece of crap with a life expectancy of the fruit in your smoothy and can’t even be repaired.The cost per use has soared just like the other rapidly depreciating crap in your house, but economists have not yet included accelerated depreciation in the CPI.Thus, the price of the new blender is not hedonically adjusted higher because it is chintzy; it is hedonically adjusted lower because it has more buttons.Addendum: On December 14, having completed this diatribe, my blender broke. Another CPI adjustment is called “substitution.” Imagine the price of ribeye has soared from $9/lb to $18/lb—it has.Economists assume that the savvy shopper will switch to strip steak, which is now way overpriced at $9/lb.Through the miracle of “substitution,” the Boskinites claim the price of dinner hasn’t changed, so there is no inflation.Now switch to neo-Marxist Klaus Schwab’s favorite protein—bugs—and we have a deflationary crisis calling for Fed intervention.The “substitution” correction should be alongside WD40 and duct tape in the pantheon of all-purpose tools. Oddly, economists seem to have overlooked the subtlety that substitution should be hedonically offset by the reduction in quality.Ribeye is twice as expensive because it is twice as good.I propose Collum’s Universal Law of Hedonics (CULH): substitution x hedonic = 1.0 Shadowstats.com 11 and the Chapwood Index 12 have both figured out how to determine inflation: they monitor prices without just making shit up.Lo and behold, inflation has been a runaway train for years.However, you must follow the science or, as my Maw used to say, “you can like it or lump it.” She had other nonsensical aphorisms like “TS”, which took me years to decipher. Figure 1.Chapwood Index showing inflation in 10 major cities.13 Welp.Choice of metric aside, inflation is finally here. After years of those predicting inflation owing to Fed and government largesse, even the mangled CPI rose a demonic 8–9% (higher for those of us living in reality.) Notice the number of likes on that otherwise sterile tweet.I hit a nerve that day.Another accountant replied, concurring that he gets the same number. Jim Iuorio of CNBC fame says his restaurant—yes, an Italian restaurant—is seeing 25% hikes in food costs. Oh well, going into an inflationary period concurrent to entering an economic recession hits two other hot bones that have crawled up my ass.Who defined a recession as the period in which the economy is turning down? According to Mirriam of Mensa, a recession is “the act or action of receding.” OK.I gotta let that one go, but I should add that they don’t want to use “depression” because Mirriam calls that “a place or part that is lower than the surrounding area.” Thus, to exit a recession you only need to turn upward (moving off the first derivative of zero.) To exit a depression is like exiting a sand trap: you must exit the other side. Golfers spending time in sandtraps surely understand depressions. My second bone to pick is that boomers will recall from their childhood that economists believed that stagnation and inflation could not co-exist, forcing them to invent a new word, “stagflation.” Think about this: economists were shocked that consumers buying fewer goods and services with the same amount of income puts a drag on the economy? I should have been an economist—a low bar to clear—but that would have required at least one course in economics. Aside from priorities, is this even true? Is there any good reason to believe that inflation hits low-income households especially hard? ~ Paul Krugman (@paulkrugman), former economist I think nobody thought about logistic supply chains or any of that stuff until suddenly it became a big problem. ~ Paul Krugman, utterly clueless For years, Twitter was littered with people ranting about how inflation would chip away at their debt.How is that working for you? Is that mortgage payment shrinking or even getting easier to pay? What these inflationary virgins did not understand is that wages can be very sticky, whether owing to multi-year contracts or just psychology.Over 70% of Americans say their paycheck is not keeping pace with expenses.14 The other 30% don’t have a paycheck. In 2019, the so-called median deplorable earned $60K and couldn’t rub $400 together to replace their rapidly depreciating appliance without turning to credit.They now are ranting since that $6,000 reduction in real spending power will leave a scar.They’ve also discovered that only a chard of their monthly budget is discretionary.You can’t cut back on your tax bill; mine is going up 8% each of the next two years according to inside sources.That microchip-rich car can’t be fixed in your garage, and it ain’t gonna fix itself. You can cut those violin lessons—the little rug rat sucked anyway—but the hockey is non-negotiable.That mortgage hasn’t changed, but the escrowed taxes, insurance, and maintenance costs sure have.It also looks like you may have overpaid for that shack, making your abode and your 401K the only deflation in your personal universe. There is a great deal of Americans where it is uncomfortable that they’re spending more, but they are not gonna go under.You’ve got to stop complaining…you still have your job…so I’m gonna need you to calm down and back off.15 ~ MSNBC Guest Let me drive this point home using inflation to illustrate the miracle of compounding in reverse. Every year we all get some kind of raise (or not).During the GFC Cornell announced there would be no raises that year. On a campus with a faculty brandishing an estimated 2.5 million total SAT points, three business schools, and countless on-the-spectrum math geniuses wandering the campus in a daze, nobody seemed to notice that we got pegged.That 3–4% lost salary persists year after year until you retire, amounting to an entire annual salary lost if you are young.Inflation whacked us this year too: 3.5% raises into the teeth of 8% inflation reduced our salaries by another 5% (or more).Now we are talking over 8% reduction in our lifetime earnings in just two bad years.As an old guy, compounding of my annual salary movements is nearly over.I will top off the tank by staying on payroll, wandering the halls babbling incoherently, and occasionally soiling myself (SNAFU). One original thought is worth 1000 meaningless quotes. ~ Banksy I got into an argument with David Andolfatto of the St.Louis Fed years back in which he asserted Volcker contributed to inflation.Come again? Sounds like he was making an odd case, but those interest rates were ramming >15% returns into the banking system and consumers’ pockets.
Maybe Volcker’s recession initiated the reversal of the inflation mindset and money flows while Russia’s cheap resources, China’s cheap labor, and the U.S.’s great demographics did the heavy lifting.I’m still pondering Andolfatto’s thesis a decade later.
Engineering a higher nominal GDP growth through a higher structural level of inflation is a proven way to get rid of high levels of debt.
That’s exactly how many countries, including the US and the UK, got rid of their debt after World War II.16
~ Russell Napier, author of Anatomy of a Bear
There is too much debt in the world, so they must inflate it away, which they will.
That’s the only thing you need to know.17
~ Eric Peters, CIO of One River Asset Management
Ominously, the inflation is global.
18 How else could the dollar be so strong in the Forex markets? Germany, for example, put together back-to-back quarters of 33% rises in producer prices (45% year-over-year in September), which ought scare the hell out of all of us given their history.19 The combined balance sheets of the world’s central banks grew tenfold in less than two decades.
20 We have a global debt problem which appears to be getting addressed by global inflation.Much of it comes from the tens of trillions of dollars rammed into the global system during and following the GFC (Great Financial Crisis) 21 , 22 and then trillions more to enable the IFL (Insane Fucking Lockdown) that completely screwed up the supply chains.If the Fed had not promised somebody behind closed doors that they would do their part, the lockdown would not have happened.No Fed, no lockdown.Period.
Now you know who to blame.
Let’s not let that “inflate away debt” idea—Ray Dalio’s “beautiful deleveraging”—go by uncontested.It reminds me of picking yourself up by your bootstraps: have you ever tried to do it? Those who say the world is doing it right now seem unaware that the rate of debt growth is outpacing inflation.Hard to see how that gets you anywhere.
The U.S.debt-to-GDP has grown >15% in four years.23
Wobbling on a weak understanding of global finance, I called out to financial Twitter (fintwit) for examples of countries that inflated away their debt without a deflationary default in the end .(Of course, inflation is a default too but humor me.) I got answers, many from smart guys who thought their answers were obvious but don’t work for me:
Weimar Germany? No.
They screwed the populace but big sovereign debts were denominated in gold, ultimately leading to WWII.
Argentina? Please: They defaulted 6 times in the last century.
An obscure answer: Canada in the 1980s and 1990s? They did burn down their debt, but the inflation rate was way too low to account for it; austerity and growth get a lot of the credit.
Japan? Nope.Although not imploding yet, their debt-to-GDP is a monster with inflation just beginning to flicker.
The post-World War II United States for the win! They had double-digit negative rates on sovereign debt, and bondholders got crushed.So that is a valid case, but let us not forget that the U.S.was the only industrial nation standing—a juggernaut—controlling 80% of global GDP.
How much post-war debt reduction was inflation and how much was American Exceptionalism (a term coined by Stalin)? Someone smarter than me could do that math.
The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades.A large-scale reorientation of supply chains will inherently be inflationary.
~ Larry Fink, CEO of Blackrock
There are other problems looming that are ominous.The world is said to be at the precipice of deglobalizing, propelled by a collapse of the global population.Yes.
You heard that right.imploding.
Deglobalization means that goods and services may no longer be made most efficiently and economically.Former Stratfor demographer, Peter Zeihan, claims population collapse and accompanying deglobalization is already baked into the cake (see Books).24 The conflict in Ukraine has been horrible for inflation since energy prices drive the prices of everything, and one could imagine the conflict accelerating deglobalization.If the conflict gets worse or spreads, I’d say it is time to panic.
I grew up in France, so I had a good dose of Marx in my education.
The first thing Marx teaches you is that revolutions are typically the result of inflation.
~ Louis-Vincent Gave, 2021
The Fed We have got to get inflation behind us.I wish there were a painless way to do that, there isn’t…there will be pain.
~ Jerome “J-Pain” Powell, being clear
We’re going to have a good deal of pain and suffering before we can solve these things.
~ William McChesney Martin, 1969, and there was pain to come
The Fed is now in a bind.The drag queen shows at the Eccles Building are over.Forty years of disinflation and jawboning to the point of blowers cramp created a gargantuan recency bias, leaving generations of Americans unfamiliar with the socioeconomic horrors that bad monetary policy can inflict on an economy and society.
We are confronting an inflation problem, but what policy tools do we have to defeat it? Recall that when Volcker took on the inflation Balrog, the national debt was 31% of GDP.Now it is more than four times that.Total public and private debt relative to GDP is up almost threefold.Volcker did not have to worry about the systemic risk that his successors at the Fed nurtured to maturity.Since the Fed has been accused of keeping rates “too low for too long” too many times by too many smart guys, they can’t plead ignorance no matter how compelling that defense seems.
Hiking rates to bring down inflation is not a ‘policy mistake,’ it’s the Fed’s mandate.The true policy mistake was believing that 0% rates, buying billions of mortgage bonds in a housing bubble, & increasing the money supply by 40% in 2 yrs would have no negative consequences.
~ Charlie Biello, CEO of Compound Capital Advisors
Leading up to 2019, the Fed had belatedly started hiking rates and reducing its balance sheet.
I thought it was way too late and possibly a mistake to do both concurrently.The repo market started convulsing in late 2019, prompting the Fed to pivot yet again by “going direct”—shoving money straight at the consumers—at the behest of Blackrock in a white paper.1 , 2 , 3 A few months later the Fed agreed to put the economy in an induced covid coma, causing much bigger problems.Inflation is now in our DNA as the dreaded “inflation expectations” have taken root.Unlike his predecessors, Powell is in a brawl with fiscal policymakers—way too many tools inside the beltway spending money to slay inflation—with whom Powell has neither control nor allegiance.
It will turn out to be largely impossible to normalize interest rates without collapsing the economy.
~ Edward Chancellor, market historian
The second fundamental problem is one of legacy and credibility.Many market participants—pivot watchers—see Powell et al.
as swamp creatures, controlled by some higher power to mitigate all pain and damage.I see Powell as a guy who wants to be in the pantheon of central bankers alongside Paul Volcker while being compared with the profoundly destructive Arthur Burns by the likes of Roach, Summers, and others.4 , 5 Bill Gross called them an “ignorant—yes ignorant—Federal Reserve” while making allusions to “Ponzi finance.” 6 What path will a narcissist at the peak of his power choose: protector of credibility and legacy or savior of markets and destroyer of currencies? I suspect legacy wins, but it is just a hunch.The markets are currently taking the other side of the bet.
So far, Jerome Powell looks more like Arthur Burns than Paul Volcker.
~ Bill Dudley, former head of the New York Fed
Before looking at what the Fed might do going forward and with what level of fortitude, let’s look at what prominent Fed detractors have to say in their own words juxtaposed with a few Fed comments for comic relief.Mind you, most of these are not just loose-cannon bloggers.
The country is suffering from the worst cost-of-living crisis in 42 years.The Fed wasn’t data-dependent and now has sacrificed its credibility.
~ Lacy Hunt, Hoisington Investment Management and former deflationist
This is the fundamental problem…It is a fundamental trap…It’s gonna be really bad.
I think we should worry more about deflation.I think that is a huge risk people aren’t thinking about.If the Fed pops this bubble there will be a deflationary spiral…It is going to cause devastation.7
~ Mark Spitznagel, Universa Investments, on Dr.
Frankenstein and the monster
There is a whole generation of people who don’t remember inflation.They don’t know what it is, and so I think inflation is a non-existent threat.
~ Alice Rivlin, former Fed governor, circa 2017
The Fed’s latest moves are consistent with a central bank that is continuously scrambling to catch up with realities on the ground.
It is the kind of thing that one typically finds in developing countries with weak institutions, not in the issuer of the world’s reserve currency and the custodian of the world’s most sophisticated financial markets.
~ Mohamed El-Erian, former PIMCO
I think we’re in one of those very difficult periods where simply capital preservation is I think the most important thing we can strive for…[The Fed] has inflation on the one hand, slowing growth on the other, and they’re going to be clashing all the time.You can’t think of a worse environment than where we are right now for financial assets…Look at the level of overvaluation we’re in right now in terms of rates and stocks…Sub-two-percent inflation is a much better problem to have than above-two-percent inflation.8
~ Paul Tudor Jones, founder of Tudor Investment Corp.
Hitting or exceeding 2 percent inflation for a few months does not mean victory.
To fully achieve the goal of price stability, we need to see a sustained period of moderately above-target inflation.Only then will the job be complete.9
~ Mary Daly, San Francisco Fed President Mary Daly, in 2020 showing zero understanding of “price stability”
I don’t feel the pain of inflation anymore.I see prices rising but I have enough…I sometimes balk at the price of things, but I don’t find myself in a space where I have to make tradeoffs because I have enough, and many Americans have enough.
10
~ Mary Daly, San Francisco Fed President, in 2022 showing zero understanding of inflation.
I know from studying history that credit eventually kills all great societies.We have essentially taken out our American Express card and said we are going to have a great time…Perhaps we are simply responding to the same type of cycles that most advanced civilizations fell prey to, whether it was the Romans, sixteenth-century Spain, eighteenth-century France, or nineteenth-century Britain.11
~ Paul Tudor Jones, founder of Tudor Investment Corp.
The West is now awakening from decades of poor policy.
The consequences will appear overwhelming at first.We’ll get through, but that long, painful process has only just begun.12
~ Eric Peters, CIO of One River Asset Management
I think now we have more credibility, we’re moving faster, we will be able to bring inflation under control sooner and with less disruption to the economy than we had in the ’70s.
~ James Bullard, President of the Saint Louis Fed
Now that the Fed finds itself in such an uncomfortable situation—one largely of its own making—it may be inclined to eschew further rate hikes, particularly given the growing criticism that it is tipping the economy into recession, destroying wealth, and fueling instability.
Yet such a course of action would risk repeating the monetary-policy mistake of the 1970s, saddling America and the world with an even longer period of stagflationary trends.
~ Mohamed El-Erian, former head of PIMCO
The Fed’s application of its framework has left it behind the curve in controlling inflation.This, in turn, has made a hard landing virtually inevitable.
~ Bill Dudley, former head of the New York Federal Reserve
Because inflation is ultimately a monetary phenomenon, the Federal Reserve has the capacity and the responsibility to ensure inflation expectations are firmly anchored at—and not below—our target.
~ Lael Brainard, current Vice Chair of the Federal Reserve, May 16, 2019
Staff economists at the Federal Reserve predict…a measured inflation rate of slightly less than 2% in 2022, according to minutes of the September Federal Open Market Committee meeting released last Wednesday.
~ James Grant, @Grantspub, October 2021
Valuations have only begun to retreat from record extremes as a decline in the economy begins and at a time when the Fed is not only unable to come to its rescue but is forced to implement policy that will only make things worse.
~ Jesse Felder, The Felder Report
The length of predicted recession—two full years—is extraordinary.Add to that probably the most bearish comment I have ever heard from a Fed bank—“the odds of a hard landing are around 80%” and wow!
~ Albert Edwards, Societe General (SocGen)
We want to see inflation move up to 2%.And we mean that on a sustainable basis.We don’t mean just tap the brakes once.
But then we’d also like to see it on track to move moderately above 2% for some time.
~ Jerome Powell, April 2021, on pain avoidance
Possibly the most robust indicator of an impending recession is when the Fed dismisses the inverting yield curve as a predictor of an impending recession.
~ Albert Edwards, SocGen
Since 2010, Central Bankers became active market participants—uneconomic market participants with infinite balance sheets, seeking to distort market mechanisms for pricing of risk.These distortions spread into all financial markets…this easing cycle has no precedent and undoing something so unique will not resemble previous cycles…To return balance sheets to where they were in 2010 at the beginning of QE would mean a sale of $20 trillion in assets, or roughly equivalent to selling the entire $24 trillion in U.S.annual GDP.
13
~ Lindsay Politi, One River Asset Management
The Fed doesn’t want to get into the credit allocation business.
~ Loretta Mester, Cleveland Fed President, after buying $1.3 trillion of mortgage-backed securities in less than two years
It could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions.
~ Janet “Yeltsin” Yellen, on the credit allocation business
The Fed since Volcker has been pretty clueless and remains so.
What has been more remarkable, though, is the persistent confidence…despite the demonstrable ineptness in dealing with asset bubbles.
~ Jeremy Grantham, GMO
We are on the cusp of a rare paradigm shift in interest rates.
Such changes take decades—or even generations—to occur.But when they do, the financial implications are profound.
~ Nick Giambruno, founder of The Financial Underground
Their job is to fight inflation.They’ve done a terrible job of it so far.
~ Jeff Gundlach, founder of Doubleline Capital, in reference to the Fed
Underlying inflation appears to still be well anchored at levels consistent with the Fed’s average 2 percent objective, and so—unlike in the Volker and Greenspan eras—no extra monetary restraint is needed to bring trend inflation down.
14
~ Charles Evans, President of the Chicago Fed
You know what upsets me the most? People say why do you get so exercised about the Federal Reserve? It’s because the people they screwed going in were the lower and middle-class people, and the people getting screwed on the way out are those same people.They’re getting it on both ends.
~ Guy Adami, money manager and CNBC host (a good one)
We will not allow inflation to rise above 2% or less…We could raise interest rates in 15 minutes if we had to.
~ Ben Bernanke, winner of the 2022 Nobel Prize in Economics
Thank you, President Fisher, I know we put a lot of value on anecdotal reports around this table, and often to great credit.But I do want to urge you not to overweight the macroeconomic opinions of private-sector people who are not trained in economics.
~ Ben Bernanke
The Fed surely put the holdout deflationists—Napier, Hunt, and Shedlock—in their place, although it could still be the end game; David Rosenberg thinks so.15 I am going to disagree with Milton Friedman here: I did not believe inflation is just a monetary problem or government spending problem.It may start that way, but it mutates.Now the Fed has to deal with the Bronteroc.By assuming inflation is always just a monetary phenomenon, market participants stop thinking because the Fed has their backs.I think this model is now wrong.
I think the Fed absolutely does not get the pain associated with a collapsing bubble.
16
~ Jeremy Grantham, founder of GMO
I am not sure there is widespread agreement on the Fed’s goals.Is it to fight inflation, pop an all-time record bubble across all asset classes, euthanize the market zombies, 17 , 18 regain credibility by detonating the Fed put 19 —the implicit guarantee under the markets—or…wait for it…destroy the Europeans? 20 Maybe Powell is channeling the legendary King Canute, showing that even the most omnipotent King can’t stem the tides.No matter what, the bulk of the stock toshers seem unwilling to grasp that the Fed will push rates up until the will to speculate is broken.Michael Every of Rabobank suggests “They are being told clearly they can no longer have their cake, and everyone else’s cake, and eat it and fit in their jeans.
And they are ignoring it.” 21
Failure is not an option for Jay Powell.I think they’re going to 4% come hell or high water.Until inflation comes down a lot, the Fed is really a single-mandate central bank.22
~ Richard Clarida, former Fed Vice Chair
Does the Fed have the fortitude? The Bank of England folded fast to save their pension system.
23 Some thought the Fed couldn’t lift rates above 1%.24 This is no longer 14 days to flatten the yield curve.They are up against a wall:
“The Fed has never before started a rate hiking cycle when inflation was already 7.9%.” 25
An anonymous (but prominent) commentator with the pseudonym Mr.Skin noted how many times Powell has referred to “real interest rates” and said he wanted them “over +1%.” They are camped at about –10% right now, so that is an unveiled threat to “unwind unknown globs of leverage.”
Roach sees the “Fed funds rate up 10% from here.” 26 Powell insisted that a neutral policy stance is “not a place to pause or stop” and that the Fed would embrace “a restrictive policy stance for some time.”
Fed President Loretta Mester warned that they would raise rates “even in a recession.”
I don’t think the Fed is gonna let up just because the economy starts popping a few rivets.
There isn’t enough blood in the streets for a Theranos lab test.Before this is over, there will be bloated corpses, shattered dreams, and milk cartons with Cathie Wood’s face.
I am still waiting for [Powell] to act boldly—‘boldly’ means he has to shock the market.If you want to change someone’s view, if you want to change someone’s action, you can’t slap them on the hand, you have to hit them in the face.
~ Henry Kauffman, legend
The Federal Reserve appears to be braced and wants participants in the market to understand they will stay the course…the rough landing odds are very high…Monetary policy is currently on the right course but current right course will have to persevere.”
~ Lacy Hunt
What about other central banks? It appears that they have been cast adrift while we try to solve our domestic problems.This could become a monetary Monroe Doctrine.
The strengthening dollar is wreaking havoc on global credit markets.The Fed sent a few currency swaps to alleviate a few currencies getting pegged by the strong dollar, but my sympathies are not high.We have a $2 quadrillion notional value derivatives market that has overstayed its welcome in the world of wealth creation, serving only to finance finance.The Swiss National Bank stress really leaves me cold since they were printing francs to buy US equities.When in Econ 101 did you guys learn about that? Fuck ’em.
We now understand better how little we understand about inflation.
~ Jerome Powell
Broken Markets My money remains on the likelihood that this is the early stages of a profound bear market in assets.Populism in the west has a long way to go.
QE has undermined savings, and now populism will undermine the price mechanism.We are at the start of a 25-year cycle, so get used to it.
~ Crispin Odey, Odey Asset Management and a notorious bear
I am suspecting that the broken YIR clock is finally right.
What we will find out is whether it blows up your house at high noon.The presumption that bailouts by the Fed would always be forthcoming and would always work has allowed investors to buy speculative non-GAAP tech garbage.That model may be tested.We are looking at some events that have not been seen for many years (decades).For starters, we are coming off a frothy high in the equity markets said to be the biggest bubble of them all.This is occurring concurrently with a serious, if not potentially disastrous, downturn in the bond market.Recall that a 60:40 portfolio in the 2007–09 bear market was cushioned by the bond market.The risk parity cult—those striving to bring risks and rewards of stocks and bonds to parity by leveraging their bond portfolios—may have overshot their mark.
We also haven’t seen inflation levels like this for four decades.To top it off, we are not coming off a euphoric high.Investors may have done well in their portfolios, but all other geopolitical and social pressures have left us plebes in sour moods.Entering a secular bear market in stocks and bonds pissed off at the World is not a solid foundation to begin a long slog.
When I look back at the bull market that we’ve had in financial assets really starting in 1982.
All the factors that created that boom not only have stopped, they’ve reversed…We are in deep trouble.
~ Stan Druckenmiller
With the Fed boxed in by rapidly rising but still historically low rates and serious inflation, it is akin to a visit to your oncologist.What comes next? You get your affairs in order.
The luminary Murray Stahl of Horizon Kinetics has a way with words.He notes that “the Age of Monetary Policy is over.” Channeling some of Murray’s thoughts blended with a few of my own, we may be at the end of a unique economic cycle.
In the early ‘80s, the Russians were starved for capital and began flooding the world with dirt-cheap commodities.The Chinese were starved for capital—quite literally China had $38,000 of foreign reserves in its banking system as it exited its self-exile 1 —so they began flooding the market with dirt-cheap labor.The US long-bond rates began a four-decade trek from 16% to essentially zero.Meanwhile, the boomer demographic not only hit the workforce, but they brought their wives with them in large numbers.
I have argued generously that buybacks are a reach for yield given the low returns even on fortress balance sheets, but debt-fueled price pumping nicely propelled executive stock option valuations too.These tailwinds will not repeat over the next four decades.Globalization is fraying at the edges and, according to Zeihan, will be ripped apart in a global demographic collapse.2
Prior droughts have been due to rising inflation and/or high market valuation.The U.S.is now at risk from both… U.S.
returns are at now risk from both the prospect of higher inflation AND the headwind to returns from high starting-point valuations.
~ Gerard Minack, Minack Advisors and former Morgan Stanley economist
And, by the way, my definition of a correction is that it adjusts asset values and investors’ attitudes significantly .When was our last correction? March 2020? Not a chance.What attitudes got corrected? How about 2007–09? Not in my book.Investors were rewarded for their tenacity.The last real correction was 1967–81.Equity investors lost 70% of their equity gains inflation corrected.You could not give equities away even though, by all metrics, they were dirt cheap, but why take a risk on equities after 14 years of bludgeoning?
A simple reversion to trend, if it happened tomorrow, would require the S&P 500 Index to fall back below 2,000, the prospect of an even greater decline is a frightening one, indeed.
~ Jesse Felder, The Felder Report
Every year, I take a swipe at valuations.
Two years ago I went at the egregiously overpriced FAANGs and related tech garbage.Moreover, the FAANGs et al.
have an enormous collective market cap compared to the dot-coms that caused pain.
3 Although the FAANGs et al.humiliated me in 2021 by continuing their moonshot, their two-year returns are slightly sobering and exonerating:
Table.Two-year total returns of the FAANGs et al.critiqued in 2020
Amazon –43%
Apple +9%
Facebook* –56%
Genius Brands –59%
Google +7%
Microsoft +6%
Netflix –46%
Nvidia +26%
Salesforce –31%
Shopify –62%
Tesla –30%
Zoom –81%
*Metaverse
Today, only finance is profitable, while production is in crisis.
~ Thierry Meyssan, French journalist
At the end of 2021, an analysis of 25 valuation metrics showed the markets to be 120–150% above historical fair value.
5 , 6 I obsessed over 1994 as the year that valuations left Earth’s gravitational field.The markets have been steadily climbing the wall of worry residing above historic fair value with occasional pauses that refresh since then, propelled by (a) a bond rout intervention in 1994 that never really stopped and (b) the rapid rise of passive index investing.The curve in the following has no mathematical basis, but I think it captures the problem and the 1994 launch date nicely:
Find a metric that makes you more optimistic—be my guest—but it would be perilous to ignore the 25 I laid out in detail last year.7 With the S&P doing an orderly swan dive of 20% as of 12/16/22, many investors are looking to buy the dips.Do you really think unwinding <2 years of froth is all we are going to get? If I told you two years ago that you wouldn’t make any gains through 2022, would you have soiled your adult diapers? Of course not.It is not time to yell, “Cut me.” It is time to pull out James Stack’s 2013 chart showing what the Bear does to the Bull: Alas, the removal of such froth is only phase one of a secular bear market.Phase two rides in on the back of the recession, accompanied by lost revenues, mean reversion of what are currently record profit margins, and the disappearance of credit-constrained share buybacks.Phase three is when the blood, cadavers, broken bones, and shattered teeth litter the Street. Only then have we reached the Charles Manson helter-skelter market.The rotting corpses of malinvestments—the Enrons, Tycos, Worldcoms, Lehmanns, and heaven knows how many banks—will be stinking up the joint.Images of the 1921 Russian famine come to mind.In his 2022 book, “The Price of Time”, Edward Chancellor reminds us that, without exception, when rates have been artificially suppressed, the story has ended in tragedy— every single time . Markets are up 26% in six months. ~ Nikkei Bulls, 1/1/1991 Contrary to lessons learned from Greenspan, Bernanke, Yellen, Powell, and “What-Ever-It-Takes” Draghi, the markets can be uninvestable.Take the Nikkei.If you were in it in ’89 your capital gains are still underwater even without correcting for inflation.It took over 30 years to get above the ’89 high on a total return basis (including dividends but not fees, taxes, and inflation.) 8 If you weren’t in it but averaged down starting in 1989, it took two decades to break even.As the guest speaker in one of George Nobel’s Twitter spaces, I argued the Nikkei was uninvestable. 9 The quick counter was that you short it.First, shorting is speculating not investing, and, second, you would be slaughtered because it took too long.The U.S.markets in 1967–81 were also widow makers. Speculation is a zero-sum game in which speculators vie with each other for profits that they, in the aggregate, cannot achieve. ~ T. A. Hieronymus, University of Illinois Professor of Agricultural Economics It is time for speculators to refresh their memories that two and two add up to four, not eight or ten.10 ~ Time Magazine, 1967 The big European markets including the DAX, FTSE, and CAC have been treading water off their highs of more than two decades ago.Maybe they are finally cheap, but be careful about grading on a curve: When Murray Stahl says, “The age of monetary policy is over,” a corollary might be that the Age of the V-Bounce is over. If I am right, buying opportunities will be met with even better ones for a very long time.Headline-grabbing crashes do not correct investor attitudes; attitudes are corrected by markets grinding investors to dust over years .Somebody will make money—Taleb’s Fooled by Randomness says this—but it’s unlikely to be you or me. Warren “Never Bet Against America” Buffett noted that a majority of the top 20 companies in the world 30 years ago were Japanese, and none are in the top 6 companies today.11 Warren then asks rhetorically if you have figured out which will be the next top 20 and, implicitly, domiciled in which continent? On an upbeat note, Felder says “valuations of US large-cap value stocks relative to growth stocks are now 2.8 standard deviations cheaper than the long-term mean.” First, that is relative to growth stocks, and as Hussman has noted repeatedly The Bear eats anything and everything: all valuation deciles drop. A P/E of 10 might sound cheap, but there is no immutable law of markets that says it can’t drop to five. I believe we are in the biggest bear market in my life.This is just the second inning.A lot more to come…There’s no other country on earth that has staked so much of its net wealth in stocks.But we are at a very big peak of complacency. 12 ~ David Wright, 78-year-old co-founder of Sierra Investment Management Over the last 40 years the capital gain on the S&P grew about 6% annualized inflation-corrected (but not including dividends, taxes, and fees, which are nearly self-canceling.) Meanwhile, the U.S.GDP grew 3.5% annually (including an implicit inflation correction).Greater than 3%—half of those 6% annualized gains—are valuation expansions.Can we extend that potentially mean-regressing disparity over the next 40 years? Flip the argument and ponder what happens if we lose 3.5% annually over the next 40 years owing to contracting valuations.You make nothing but dividends minus fees and tax-loss writeoffs.You will make nothing, zero, nada.I will yet again post this chart from Ron Griess (The Chart Store) with blue lines brought to you by ChemDraw.Those blue lines represent 40–75 years of treading water off of market tops. There is a shot clock in basketball but not in investing. And here is another repeat chart.With few exceptions, charts showing market performance without inflation corrections are misleading if not worthless.You can mentally adjust for inflation using the Rule of 72, 13 but why can’t analysts just do it as a courtesy? Since the CPI has long since gone into disrepute, how do you correct for inflation when nobody believes the numbers? This plot that I got from Ron Griess and can find nowhere else shows the S&P market performance vs the M2 money supply, which was readily available until the Fed stopped reporting it a few years ago: Very odd.Is it possible that we have witnessed zero real capital gains over the most fabulous century in history? Are dividends (minus fees and taxes, of course) your only source of real gain? But…but…but the dividends are half of what they were in the first half of the 20th century! Indeed, that is consistent with my conclusion that equity markets are 100% overvalued.It’s arithmetic. I think that we’ve had 15 years of Disneyland that has destroyed the economic structure.Think about it: no interest rates. So anyone who’s today 40 years old has no experience in markets.Zero.They don’t know what time-value of money is. ~ Nassim Taleb, 9/15/22 I’ve given it my best shot to euthanize your hopes and dreams.Before covering a couple more topics lets pause to “bullet” a few nuggets that crossed my path: Bank of America announced zero down payment, zero closing cost mortgages for Black and Hispanic first-time homebuyers 14 in their new Tuskegee Mortgage Program. Overpayment for cars during the lockdown will likely cause a car variant of jingle mail as the prices drop well below the loan value.The loans during the lockdown were ultra-loose, but Banks are now shrinking the loan durations as default risks rise.The big PPP loans were used to buy Lamborghinis; strategic defaults and repos are spiking. 15 The municipal pension funds are still grossly underfunded, gutting their budgets and using leverage to keep up, turning the cities into shitholes. According to a Blackrock exec, ERISA rules say that your fiduciary responsibility precludes overlaying social agendas.16 The ESG craze was ill-advised and illegal.Well, there was too much money to be made by pushing ESG governance into industries and asset classes, so the authorities fixed that.17 It remains ill-advised. The chief financial officer of troubled Blood Bath and Beyond (BBY) jumped to his death. 18 The ultimate insult would be a posthumous boost in the share price, but it remains 96% off its all-time high.(I thought about buying this years ago but dodged that bullet.) Pension expert Ted Seidle says the state pension underfunding is without precedent and not caused by low contributions or low returns but rather mismanagement and corruption by Wall Street (overcharging).Seidle has personally raked in over $100 million on whistleblower awards while boomers slip into poverty.19 Robinhood, the brokerage firm of meme stock investors, is 80% off its 2021 IPO.The whole thing was a scam. Wisdom Tree’s 3x short nickel fund blew up.Some speculators were wiped out as nickel rose 250% in two days triggered by the Rooskies in Ukraine.20 Chinese nickel titan Tsingshan Holding Group had the same problem but got bailed out by JPM for reasons unknown to me; 21 the exchange just canceled the losing trades. The Big Guys seldom lose. Hedge fund Elliot Associates is scrambling in the courts to get $500 million of negated trades back.22 SNAP—the most onomatopoeic stock in the markets—dropped 88% off its 2021 high, placing it uncomfortably below its 2017 IPO price. European banks appear to be in serious trouble, with both Credit Suisse and Deutsche Bank (DB) trading at $3 and $10, respectively.DB is off 92% stretched over 26 years— 26 years.CS is off only 78% over that same timescale but 94% off its ’07 high. Cathy Wood is still in the game, and still hawking her wares on CNBC. Good news: The SPAC craze—funds with cash but no ideas akin to the South Seas Bubble—seems to be waning as have non-fungible tokens (NFTs) that are basically autographed images from the internet). Roughly 40% of the US equity market can only survive essentially with new buyers entering the market because they’re not cashflow generating themselves.And that’s near a historic high, that’s like basically right in line with ’99, 2000.23 ~ Greg Jansen, Bridgewater With rates on the rise, GAAP earnings on the decline, and the global economy flirting with recession, the Walking Dead will be roaming until they run out of credit.There is no formal definition of what a zombie company is but, according to economists at the Federal Reserve, they are “companies that have too fucking much debt and pathetic earnings that can’t pay the interest on their loans without taking on more debt or doing handjobs behind the dumpster at Wendy’s.” 24 In short, their cash flows don’t cover their interest payments.Luminaries claim 20–40% of the S&P 500 are zombies—that’s 100–200 destitute mega companies. But more optimistic estimates assert that only 20% of the Russell 2000 are in the zombie spiral, which surely should have a higher percentage than the S&P since they are mostly story stocks.Despite lists of Zombies, I have had no luck locating a list of the S&P 500 zombies.25 Stephany Pomboy reminded me that it is a moving target.It does not require a vivid imagination to believe that they are proliferating in a rising rate environment. There will be plenty of debt-for-equity swaps (liquidations) as distressed asset investors pick at the carcasses. Prepare to see an absolute ONSLAUGHT of corp defaults and downgrades.The myth of corp B/S strength is about to be shattered spectacularly. ~ Stephanie Pomboy, 90% invested in precious metals excluding house and cash In response to a podcast in which I begged for help, a woman named “Alice” (@Alice91453) ran the numbers and gave me a spreadsheet showing the cash flow and debt for every company in the S&P 500.26 Alice’s list shows for each company the interest rates on their current debt that will turn them into the walking dead.Of course, debt will vary for each but you can begin to imagine the carnage as sovereign debts and rising corporate debt spreads start exacting their toll. If you can’t afford rent that’s your fault for living in a city.Maybe if you lived in an open field or perhaps some kind of bog. ~ @InternetHippo I don’t wish to spend much time and effort on real estate, but somehow we managed to blow another bubble.It does not seem as frothy as the last—the 125% NIJA loans and condo-flipping TV shows seem subdued—but that may be because the purchases are by permanent capital (investors). Whether current valuations and location of the debt pose a systemic risk is beyond my pay scale, but I am not sure you want to be exposed as the largest landlords are pulling back on purchases to “ease away from the shifting housing market.” 27 You want to be out of the splash zone when the likes of Blackrock start liquidating their positions because previous razor-thin profits boosted by huge leverage are no longer supported by near-zero interest rates.The world will be a better place when these predators are pushed back into their lairs.28 After the total value of all cryptocurrencies reached an apex of just under $3 trillion last November – of which Bitcoin accounted for roughly $1.3 trillion – a rolling crash of epic proportions has wiped out more than two-thirds of that digital wealth.For crypto, however, there is no central bank standing by willing to bail out those who are caught up in the contagion. ~ Doomberg Cryptocurrencies.I would be remiss if I did not pay at least lip service to Bitcoin and the other cryptocurrencies: it is a multi-trillion-dollar asset class that could cause unimaginable pleasure or pain.Despite gargantuan efforts from the hodlers, I have not been converted. I may someday, but it will take a Battle of Bastards between the hodlers against the State with the hodlers staggering off the battlefield dazed but alive.Microstrategy, a former tech stock-turned bitcoin hedge fund, got brutalized as Bitcoin dove from $60,000 to $15,000.Surprisingly, Berkshire-Hathaway lost billions by lending to Three Arrows Capital, a crypto hedge fund that collapsed.The Orifice of Omaha once again shows he does not just buy great companies.He is a stock jobber and, on a bad day, an asset tosher. I have said all along the crypto assets are highly speculative, very risky assets.My very humble assessment is that it is worth nothing. It is based on nothing, there is no underlying assets to act as an anchor of safety. ~ Christine Lagarde, spokesperson for the State offering her very humble assessment Bitcoin’s problem may have been triggered by a number of calamities in the crypto underworld where “shitcoins” reside unsupervised.The $60 billion dollar network that markets LUNA tokens collapsed, sending $60 billion of perceived wealth from whence it came. 29 Stablecoins are like poker chips at the casino except you cannot turn them back in for dollars if murky grifters decide to squander the dollars while you speculated.The stablecoin Terra collapsed in minutes once its LUNA reserves collapsed.30 Christine Lagarde called for a crackdown—first shot of the Battle of the Bastards?—because they are “based on nothing”, and she understands the world of unbacked currencies.31 Maybe she is too old; crypto seems to be a generational thing: Terra’s collapse brought attention to other larger and assumedly more “stable” stablecoins. Although stablecoin Tether is priced at parity—one Tether equals one dollar—it is said to be fractionally reserved (technically insolvent), 32 leading many to believe Tether will follow Terra down the blockdrain.Taibbi did an exposé on Circle Internet Financial, creators of the second largest stablecoin, USDC, for running a Ponzi scheme.33 What would happen to the crypto market if the stablecoins went bits up is unclear even to the devout hodlers.They seem confident, but, like in so many markets, confidence is everything and capricious. Crypto is basically a ponzi scheme, it’s a way for really really really smart people to make money off of really smart people. ~ @MacroTalkGuy The crypto index had a particularly bad day on June 13th, dropping 22%.But don’t count the bitcoin hodlers out.Lacking central banks to bail them out, they have already had more than their fair share of bungee jumps. Bitcoin’s privacy got Ted Cruz’s endorsement (FWIW), 34 while Edward Snowden suggests that there is nothing private about cryptos.35 Reports of the FBI retrieving stolen bitcoins suggest that Ed is correct.Mark Jeftovic, a particularly astute hodler, notes that crypto assets held in accounts are subject to bankruptcy settlements.36 I watch from the cheap seats with interest. Luna fell 99% from $100 to $1.Then it fell another 99% from $1 to 1 cent.An important lesson here: if an asset falls 99%, it can still fall another 99%. ~ @fintwit_news And that is all she wrote. Wait.What? Nothing about the collapse of FTX? Cool your jets.That is a story of corrupt geopolitics, not crypto. Energy From deep within my conspiratorial mind emerged a theory about these contemporaneous supply constraints.No. Let’s call it a narrative.If I was an Overlord and needed to sell a reluctant world on nuclear power, rather than patiently waiting for the plebes to get the memo, I would engineer a fossil fuel crisis—a cataclysmic one—to usher in the New Nuclear Age.I can imagine everybody squealing, “We need nuclear power to save us!” It worked for the vaccines. Mark my words—it’s coming.1 ~ Me, YIR 2021 All things considered, that is looking like a prophetic nugget of wisdom.Yet again, however, we face another topic from the Year in Transition in which our forward visibility is like peering through mashed potatoes.We will return to energy considerations in the sections on the War in Ukraine, but I have scrounged up other nuggets worth a ponder.For starters, I see no evidence that fossil fuel production will ramp up to fill any voids. The regulators make us a capricious consumer.We have psychologically damaged an industry that needs to project at least 10 years out to invest in big projects with political moods that change overnight and a political tide that is decidedly going out not coming in.Meanwhile, our proxy war with the swing supplier (Russia), who is cozying up to the other swing supplier (Saudi Arabia), is ominous.Even without the geopolitics, the enthusiasm of Aramco’s CEO seems muted: Many of us have been insisting for years that if investments in oil and gas continued to fall, global supply growth would lag behind demand, impacting markets, the global economy, and people’s lives.The increases this year are too little, too late, and too short-term.These are the real causes of this state of energy insecurity: under-investment in oil and gas; alternatives not ready; and no backup plan. But you would not know that from the response so far…when the global economy recovers, we can expect demand to rebound further, eliminating the little spare oil production capacity out there.And by the time the world wakes up to these blind spots, it may be too late to change course.And at least this crisis has finally convinced people that we need a more credible energy transition plan.2 ~ CEO of Aramco Politics.Biden tapped the Strategic Petroleum Reserve (SPR) intended for national security to juice the midterm elections for the democrats.It seems irresponsible. 4 Whether these are sales of real oil or only speculative tweaking of the futures market has been questioned.5 He also threatened Big Oil with a special tax on their profits, which, I hasten to add, are non-existent when the price of oil drops and the producers continue to meet demand anyway.6 Take away the profit incentive: Way to go Brandon.At least you stemmed the red tide. Cornelius Vanderbilt made a profit of 14 cents from every barrel of flour shipped over his railroads.His efficiency lowered the price of flour for consumers.Did Vanderbilt keep any of you down by saving you $2.75 on a barrel of flour, while he was making 14 cents? 7 ~ Edward Atkinson, Cotton magnate, 1886, to a group of workers At the state level, California governor Gavin Newsom keeps making friends and influencing people on his Road to the Whitehouse by implementing bad ideas that are popular among the valley girls and boys. In his ascent of Mount Stupid, Gruesome Newsom banned natural-gas-powered water heaters and furnaces in residential dwellings by 2030.8 He also went after Valero for “price gouging”, the always popular war cry that is anathema to free markets and price discovery.Valero’s counter-attack did not beat around the bush.9 Gavin—may I call you Gavin?—wanted to impose a punitive tax on gasoline that he hoped would not be noticed by the consumers at the pump.10 The effects of California’s policies are self-evident: Peak stupidity was attained when Gavin decided that he would phase out gas-powered vehicles altogether the same week that California power providers urged consumers not to overburden the grid when charging their cars. Shale producers have been unable to secure financing in the new ESG grift. The Biden administration, after marinating in schadenfreude, found shortages and price hikes appalling now that there is a war and demanded they open some spigot…somewhere…just do it.11 Much of the social history of the Western world, over the past three decades, has been a history of replacing what worked with what sounded good. ~ Thomas Sowell Electric Vehicles.As the car makers of the world chase Tesla into the future of gas-free vehicles, one can’t help but wonder whether the grid will be ready, the bugs worked out, and the supplies for battery production located. I am told EVs are a hoot to drive.Toyota seems to stand alone in putting the brakes on this, 12 , 13 suggesting that the world is not ready yet: Here is a nice analysis of the cost and energy demands of electric cars—a bean count of the hydrocarbons needed to make the cars and batteries.14 The Hofferian green fanatics tend to overlook the energetic costs of hauling 500,000 pounds of ore from mile-deep open-pit mines in a faraway land to make one EV while marveling at the absence of a tailpipe. The 2023 Chevy Bolt EV retails at $26,595.After an estimated 70,000 miles, the replacement battery is projected to cost $29,842 based on today’s price .15 At least you can charge it on your VISA card. Imagine the chaos of a million electric cars powering down while fleeing a hurricane zone. Once you clean up the carcasses, there remains cars to charge or tow rather than just pouring a can of gas in the tank. (Actually, my mechanic told me submersion of a car—a computer with wheels—after my wife drove one into a swamp.) Senators are pushing a bill to electrify the military vehicle fleet and retrofit all submarines with screen doors.16 We should focus on the issue of electric school buses.I was proud to introduce the first piece of legislation to electrify our nation’s fleet of school buses. ~ Kamala Harris Shortages.On the international scene, Europe looks like it could be heating homes by burning tires this winter as the War in .
