Conspiracy theory fans, tin-foil hat wearers everywhere, Nostradamus wannabes, the broadly unhinged and, of course, our professional purveyors of doom and gloom roosting on evening cable news see patterns where there are none, embrace straight-line projections based on disparate and unrelated data and loudly and often shrilly bleat that the end is nigh. That’s all good for ratings (almost as good for ratings, which is why we hear so much of it, as talking about Donald Trump… which for many amounts to generally the same thing).
These folks cherry-pick from what is admittedly a plethora of generally troubling things and events, ignore the positive and weave a narrative of doom. It’s not hard to do, it’s certainly fun and it’s apparently lucrative (ratings-wise at least).
Serious people don’t buy any of this (I’ve applied to join the Serious Persons Club, but there have been strong objections). Serious people think that crises tend to resolve themselves, that all doomsters are overwrought and that systems revert to the mean. Serious people embrace what that 19th century wag Georg Jellinek called the “normative power of the factual.” His point was that it’s human nature to see the world as static, as fixed and immutable, almost a weighty thing, resistant to change. Serious people believe that the social and economic momentum of our highly interconnected system, our geopolitical and macroeconomic reality, always resists discontinuous change. Data suggest they are usually right (except where they’re not). Crises, or perceived crises, come and go, talking heads blather portentously about bad things about to happen, but we’re all still here.
But what if the looneratti are right this time? Maybe aliens are, in fact, among us (eschewing Harvard Square for their depraved experiments on the abducted for small towns in Arkansas, probably because they’re just not comfortable with the woke Cambridge vibe). Maybe Elvis still is in the house. Maybe the medicinal powers of bleach have indeed been overlooked.
Just because one is paranoid doesn’t mean one is not being followed. In the same spirit, could we be somnambulating towards disaster, already locked into a path inevitability leading to calamity?
If it’s true, no one is paying much attention. Notwithstanding the shrill clamor of the nutters and the portentous blather of the commentariat warning us this and that, most of us are just getting on with life, dealing with the day to day. Tire rotation, doctor appointments, kids’ online lives, the stuff of everyday life, leaves little bandwidth for contemplating the Four Horsemen of the Apocalypse. But what if we’re fiddling while the match has been lit and Rome will burn?
To be fair, there are a lot of anxiety-producing events in the geopolitical and macroeconomic sphere. Torn from the headlines, here’s a partial list that is passingly troublesome:
- Revanchist powers around the world, eager to restore past glories are causing trouble.
- Two large, long-ossified alliance systems are facing each other, bickering internally and constantly roiled by micro-confrontations and bellicose tubthumping from the other side.
- An ascendant power is growing increasingly aggressive in the pursuit of its global ambitions.
- Autocrats with enormous power stand at the helm of revanchist regimes and aspirational hegemons around the world.
- Kinetic war in Southeast Europe.
- A US polity that is increasingly populist and isolationist and deeply divided.
- A weapons race underway with new technologies threatening to upset the existing balance of power.
- There are policy voices amongst the heights of governments around the world who seem to think conflict is inevitable and sort of okay.
- Episodic efforts to restore detente continue to erode and fail, and longstanding treaties are allowed to expire.
- Active economic competition among the hegemons and aspiring hegemons has begun to slop over the edges of its purely economic lanes, and is evidenced by more directly hostile conduct (hostages anyone?).
- Hegemons fighting for clients and influence across large portions of the Third World.
- Trouble in the Bosporus.
- Politicians remain, as always, ill-informed, largely dazed and confused driven, in a reptilian sort of way, by self-interest which makes the passing fascinations and entitlement mentality of the “folk” (voters) more important than larger issues of geopolitical and macroeconomic menace.
- A major global financial crisis is in the near memory of policymakers (and those MBAs who at least read about it while getting their degrees).
- Sex scandals among the political elite rivet and distract the world from considerably more important matters (arguably).
Quite a litany. You know that’s all true. You read about it every day. One can see how the tin-foil hat set can conflate that data series with some sort of inevitable march toward calamity, can’t you?
Well, the only problem with this data set is that it’s not only today’s dataset. In fact, all that happened in the years leading up to World War I. Oops. A world-girding war that killed over 20 million people, redrew the political boundaries of Europe, Asia and the Mideast, and incidentally sowed the seeds of World War II, would qualify, I suspect, as a bad thing.
Now, as a card-carrying aspirant to the Serious Person’s Club, I’m not suggesting we get all Santayana here and conclude we’re seeing a remake of the same old movie. I’m not suggesting the inevitability of some world-girding conflict but, on the other hand, it seems more than a tad intellectually unserious, languorous indeed to dismiss or ignore the possibility that these parallels are meaningful. (Anyone want to volunteer to play the Archduke Franz Ferdinand this time around? Hey, he was the star of the show. It was a brief appearance and it didn’t end well for him, but you could end up more famous than your career heretofore would justify.)
Arguably, we should give more thought to the sort of discontinuous misadventure which we haven’t seen for a very long time. Is the risk of something seriously disruptive 1 in a 1000? Is it 1 in 100? What if it’s 1 in 10? And to be clear, a kinetic war is far from the only thing that could go wrong and be meaningfully disruptive. Obviously, if the big one goes up, not much matters and the advice from the 1960s will remain compelling…put your head between your legs and…well, you know the rest. If we end up in some sort of significant level of global economic conflict, some significant level of disruption of global norms, the US domestic landscape may radically change.
What would happen? Who knows? I certainly won’t even assay much of a prediction. I’m just trying to raise awareness that this is a real question.
Okay, I said I wouldn’t make a prediction, but my best guess, based on a past-is-prologue sort of analysis, is that when a major crisis occurs, central banks (including ours) would rapidly begin to print money and fiscal stimulus will go into high gear (thank God our national debt is a mere $35 trillion, so we have plenty of room to react to geopolitical stress…kidding!). Labor will get tight. Supply disruptions will ensue. Inflation will probably reaccelerate. Industrial policy will follow. Governmental intrusion into all aspects of the economy will occur. The free flow of information will diminish as censorship grows (it was called the Spanish Flu because Spain was neutral and the only country in Europe that didn’t have massive censorship preventing discussion of the disease, so they’ve got naming rights, not perhaps what they had in mind). This will make it hard to conduct business and business decisions and assess the value of assets. Market forces will be diminished by governmental activity. Business will be torqued by the government’s crisis response and it might be difficult to make money except at the intersection of profit and industrial policy.
But, as we are sitting here today, continuing to wait for our Godot-like recession that’s been predicted (promised?) for the better part of a year to finally arrive, we should think about this. While we’re waiting for Fed tightening to actually become nonaccommodative, or at least show some stability embracing a neutral stance, while we’re waiting for inflation to begin to slow and value discovery of commercial real estate assets (among other things) to again be achievable, we should take into account the risk of something truly disruptive happening over the next several years. What that argues for me is that the current environment of high interest rates, high cap rates, a diminution in the availability of liquidity from the banking system could end sooner than we would otherwise expect. (Absent such an event, I rather expect current conditions to continue well into 2025.)
This thought exercise through the darkling woods is meant to remind that while the straight-line projection of disparate events and false narratives are the mother’s milk of the conspiracy theorists, the straight-line projections and assumptions of continuity of the Serious People might also be wrong.
You’ve got to play the cards you’ve got. The opportunity we see now to take advantage of distressed debt, distressed lenders and the rapid repricing of assets resulting from the Fed’s efforts to squash inflation must be taken up. Raise capital. Find more leverage (or develop your own). Relearn the rules of the liquidating trust and the means and methodologies of levering nonperforming assets. Take advantage of risk-based capital issues in our banking system and embrace both cash and synthetic means of transferring risk. We need to get ready. The current status, the phony war resulting from markets’ inability to internalize the fact that current conditions aren’t transitory will end soon.
The opportunities of this current market mosaic might not last all that long. Find revenue where revenue can be had, but be prepared to pivot to a place where there is a rapid restoration of accommodative interest rates, all sorts of fiscal fun that would make the response to the Covid contretemps look modest and be ready to engage with an activist government that for good or ill will clearly intrude into the economy in ways that we can barely imagine today.
Net/net. If you have capital, conviction and analytic horsepower, get into the game now before the game has a chance to change again.