It's pretty clear that we've gone from overstimulating to potentially / probably overtightening. The Recession Reaper is getting his cloak on and sharpening his scythe.
One big question still captivates me... Then what?
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Right, because we're going a little off-piste and broad, here's the tongue in cheek schematic of my thinking 👇
Some of what follows will not be rational. Just an honest attempt at making sense of things...
In any case, humans are emotional, irrational creatures. Barely evolved apes. That includes me and you.
It's a miracle that anything works. But it does. And civilisation somehow keeps progressing.
Progress is the perfect place to start actually... Specifically, what drives societal progress?
You can answer this in a thousand ways. For me, it all boils down to one thing.
The feeling that something is wrong with the world.
That feeling is THE biggest driver of progress.
Why else would we invent Artificial Intelligence?
Or anything at all?
That feeling is why humans have flourished and dominated the planet where other species have not.
It's also why Utopia can never be real. We'd just be insanely bored.
Best of all, it has roots in truth. Things can always be better.
However, the feeling that something is very wrong with the world is often ignored or dismissed. It's an unquantifiable, imaginary feeling, so it's easier to just brush it off...
But that feeling absolutely sums up where we've been and may frame where we're heading...
The never-ending Trump/Brexit vs Intelligentsia divide typifies the debate.
At the basic level, one side has the feeling that things are 'wrong'. They might not express it well, but that's the basis.
On the other side, "but the data shows, the model says and history suggests" left-brained intellectual types will tell us that everything's going great. We're making progress.
In many ways this is correct. Yet there's also evidence that societal norms are breaking down, safety nets failing...
Progress in one realm comes at a cost in another. Stuff like homeless crises, addiction, extreme obesity, general lawlessness, a soft judiciary system and so on...
And no consequences for anyone. Not the leaders who have overseen the decline, nor those who are taking advantage of the softness...
No wonder people think something's very wrong with the world
It's mainly happening at the margins, but perception matters. Humans generally prefer order & societies invariably organise themselves into hierarchies.
One of my favourite hand-wavy theories is that we're reaching a tipping point for tolerance, especially tolerance for the kind of disorder that excessively hits the bottom line 👇
Shrink, an industry term for theft, reduced the company’s earnings by roughly 14 cents a share last quarter compared with the same period in 2022.
Lululemon even fired two employees for calling the police on looters. It's against company policy (for the workers' own safety)...
It's no surprise that this is happening. Without genuine consequences, why wouldn't you steal?
Far easier than the inefficient, time-consuming process of earning money to pay for stuff.
If the consequences for just taking what you want are minimal or nil, there's actually an opportunity cost to getting proper employment and forfeiting the 'easy money'...
But this isn't just about shoplifting. In markets, everyone's looking for edge. Something that allows them to profit via competitive advantage. Sometimes that advantage is simply, crime 👇
However, edge is frustratingly transient. The longer an opportunity persists, the more likely that someone rinses it to death (the edge ceases to exist)...
It's now at the point where price hikes are on the cards to cover additional costs (loss, extra security etc) and stores are closing in areas where in-store crime is simply too high to manage.
A turning point for tolerance
There's simply too much profit heading out the door to ignore. And too many people feel unsafe. It's too much to tolerate. That edge is wafer thin.
If you're reading this and thinking...
"Hang on a minute, that's me... I'm part of the organised retail crime cartel"
Pack it up and head home.
Seriously, wind it down. You had a lovely little edge, but it's mature now. Dumb money has piled in. Literally. Brazenly. Right through the front door. Let them hold the bag when security gets beefed up and punishments return.
It's already started...
Relaxing laws (or the enforcement of those same laws) is/was dumb policy. Now the consequences are becoming undeniable it begins to revert...
The same applies to companies forgetting who their customers are & the entire point of advertising...
“Your role is to sell. Don't let anything distract you from the sole purpose of advertising” ~ David Ogilvy
Just a terrible business decision.
Excessively Low Interest Rates Caused This
Wooooah! Where did that come from?! Are you REALLY arguing that low rates cause societal and corporate dysfunction Tim?
OK, maybe it's more correlation than causation but hear me out.
When rates are zero or negative, there's no cost for bad ideas, terrible execution, lack of originality, failure. No price discovery. No immediate consequence. No need for lessons to be learned. Everything is tolerated, and has been. For a LONG time.
As with anything that persists, those effects compound. Eventually we get to a society that doesn't work well for anyone. Economics and society are, to my mind, one and the same. Which is why I mentioned the societal effects before bringing rates into it.
Don't get me wrong. I'm not saying that modern life is a complete disaster zone. In many ways, life has never been better. It's more that certain things are out of balance, and have been for years.
The Covid disruption and response opened Pandora's box. Inflation became the genie that refuses to return to the lamp.
We jumped from one extreme (austerity, low rates) to the other (stimulus, higher inflation), and we'll probably overshoot again on the way back down too...
The question that captivates me...
Does anyone really want a return to the old regime?
Vincent Deluard's April 2020 note still resonates, more than three years on 👇
This report took the side of younger generations, whose ability to start families was indefinably postponed by crushing debt, a two-tier job market, and sky-high real estate prices.
But the deflationary “equilibrium” was also unsustainable for older cohorts: the “wealth effect” of rate cuts came at the expense of bond portfolios’ future income. Central banks’ purchases of sovereign and investment grade bonds forced retirement savings into wildly inappropriate investments, such as venture capital for loss-making unicorns, junk energy debt, and emerging markets bonds.
Ultimately, houses must be bought, assets will need to be transferred, households must be formed, and true prices must be restored. A decade of inflation will devastate portfolios, but eventually save the economy.
The 'equilibrium' was an illusion. A decade of inflation might be the cost, but it's not inflation itself that will 'save the economy'.
It's the change in the value/cost of 'money' and how that flows throughout society.
Where we go in the next cycle depends heavily on political change.
A rebalancing, a reversion to the mean? Probably more government involvement in the economy (for better or worse).
Now, people will push back against this idea. People always push back against change. They'll claim that our political structures are far too rigid for genuine change to take place.
I disagree. Politicians are the chameleons of the world. Gretzky always said he'd skate to where the puck was going rather than where it's been. If the puck represents votes, politicians will follow Gretzky's example.
And, the puck is gradually heading towards a younger cohort of voters.
So that's why inflation won't sustainably drop back below 2%?
It might. Especially in the short-term as tightening really bites. But I think low inflation as a regime relied on a lot of things that are no longer true.
Relative (geo)political stability. Dependable, low energy prices. Cheap labour from developing nations such as China and so on. The Great Moderation has itself, moderated...
Does this sound accurate? 👇
Societies have the inflation rate that they choose (over time).
Controlling inflation represents a series of complex trade-offs.
Inflation sticks around if society is not willing to pay the price of those trade-offs
For me, it's bang on.
Remember, the 2% inflation target was just made up by some dude in New Zealand. It's not a science.
Now, the current crop of politicians isn't too keen on trade offs. Those things are even less popular than politicians.
We want to have our cake and eat it too, thank you very much.
if the policy choice is roughly between higher inflation/higher government spending & austerity, I know which I'd back...
Serious austerity seems unlikely unless politics really changes
If we're truly overhauling our economies, bringing production 'home', and greening energy, it's hard to implement austerity at the same time... Will we see incomes continue to rise? Higher inflation on the back of higher labour costs? A greater share of the economic pie heading to households?
It seems possible, especially given recent history, but can it happen sustainably in the current system?
Even without the political change, is the Great Demographic Reversal sufficient leverage for workers to charge more for their labour?
And, taking it a step further... Will higher wages mean higher inflation (higher cost of services via higher wages), higher interest rates and a flatter housing market as one generation exits and another enters?
Higher Inefficiency, Higher Inflation? Or The Death of Bad Ideas Like Net Zero?
Let's be clear, Net Zero is a bad policy and here's why 👇
“When a measure becomes a target, it ceases to be a good measure” ~ (Charles) Goodhart's Law
Many of the goals of Net Zero are absolutely things we should aspire to. Just not 'Net Zero' itself. Realism is setting in. It's too prescriptive, too rigid. All stick and no carrot.
The shift towards 'cleaner' energy isn't going away, and the idea that nuclear isn't required has thankfully(!) gone the way of the dinosaurs. But the difficulty has always been balancing that transition out.
Here again, a complex set of trade-offs. How much should governments/the public subsidise this future vision to make it viable/affordable/acceptable to the majority?
Won't this be a terrible mis-allocation of capital?
Yes. But mis-allocation of capital will always exist. Total efficiency is an academic wet dream, not reality.
We took it to extremes in the low rate (anything goes) era. Now, we may need to contend with those same decisions under higher interest rates. Will a higher cost of capital lead to more effective allocation? Time will tell.
Again, do we really want to repeat the past decade?
Zero cost of capital yielded some spectacular leaps of logic.
Armed with a seemingly endless supply of surplus boomer savings (with nowhere to earn yield thanks to central bank interventions), Venture Capitalists (VC's) piled into every vague fantastical idea.
Many chose to subsidise middle class lifestyles. Not theirs. Ours.
Like drug dealers, they gave us a taste, tried to get us hooked, make us dependent, so they could jack the prices later... 👇
Predatory pricing is a strategy firms use to suppress competition. The predator prices below its own costs to force its rivals out of the market. After they exit, the predator raises its prices to supracompetitive levels and re-coups the cost of predation.
Now these ventures and assumptions face the acid test. Will we pay for those services if they're not cheap (VC/boomer subsidised)?
Food delivery.... Uber Eat, Deliveroo, Just Eat all charge a commission to the restaurant. Somewhere between 20 & 30% is common. There's usually a delivery fee charged to the customer too.
Yes it's convenient to have food delivered, but if these firms are forced to hike fees, how much will our appetites adjust?
Slowing growth in the delivery segment has already been noted in earnings reports... 👇
A thorough, uncomfortable probe of those VC exponential expectations is sure to be a persistent theme as market forces & price discovery return from exile.
Streaming wars too...
“They’re all starting to face the reality that they have to make money now and can’t just give all of the world’s content away for $5 anymore.”
Fintechs are starting to fold... 👇
This is all entirely normal as the cycle ends. What about the next cycle? Can we really just go back to the old regime?
The one that didn't work for anyone and stretched inequality to the absolute limits of social stability?
Not Inequality™ that's been weaponised by activists. That misguided idea that all things should always be equal (as if the world has ever been a fair place).
I mean genuine inequality, across generations and across wealth distributions.
The kind that makes home ownership unaffordable, leaving tomorrow's parents at the mercy of a landlord class that's incentivised to exploit. Where else are they supposed to earn yield?
No systems are ever equal. It's not something that should be aspired to (beyond ensuring Maslow's basics are covered). The Matthew Principle is real and universal. Innovation and risk-taking need to be disproportionately rewarded to ensure progress.
But if the inequality divide grows too large, society becomes unstable and unsustainable. Demographics increasingly play a role here too. Simplifying, the youth end up paying disproportionately for the old...
To an extent, that's justified. Prior generations built the foundations of today's society and they're entitled to enjoy the fruits of that labour. But there's still a balance to be found, and this ain't it 👇
Which is what makes me think the odds are stacked against a permanent return to the old regime. Maybe a brief visit for old times' sake. But the end of low rates, and the end of the demonisation of economic growth as a driver of progress? Absolutely.
More on the death of degrowth here.
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