Happy Sovereign Wednesday! Not sure I'm back from hiatus as my schedule has been packed between launching the new Alpha360 Foundations and travel for work but I wanted to send out this quick update because I think it's important. At a minimum, it should elevate your focus on some of the challenges we'll be facing in the months ahead. Stay strong sovereigns. -MK
It's impossible NOT to be bearish right now. My thesis doesn’t apply to the politicians, public health experts, or the talking heads on cable or CNBC. If you're motivated to talk your book or incentivized to push an agenda, you can take any damn position you want. Especially in our "post-truth” era.
I'm talking about people with actual skin in the game. People running their own money, client money, or are compensated solely on performance. Your AUM be damned, if you fit into any of the aforementioned categories, it's impossible not to be bearish if you're paying attention.
Bearish doesn't mean Black Monday is lurking like the Grim Reaper waiting to strike at any moment, but it does mean the risk-reward probabilistic calculus has shifted measurably worse over the past several weeks.
Since January I’ve written about the perceptible shift towards a power dynamic in politics and other sectors that minimize truth or forfeit the public good in favor of the consolidation of power. I've also warned about runaway inflation, and the 'transitory' label that was a weak psyop by Fed economists to jawbone down inflation.
Social and political factors have a longer-term macro effect on financial realities and a potential National Divorce, but in the short term all the market moves still key off traditional economic factors and models.
This means our 24/7 news cycle and access to immediate information, forces the schools of fish to adjust quickly to the prevailing economic tides (while failing to realize the ocean of forced liquidity they’ve been swimming in will be dry in a few years).
Ignore the Evergrande and Debt Ceiling red herrings. And behold, the pale horses of the Bull Market Apocalypse: Runaway Inflation, Central Bank Policy Mistakes, Supply Chain Chaos, China's Regressive Pivot and Social Disintegration.
Inflation is real and a threat to the entire social fabric. Even with the government's laughingly manipulated numbers, inflation readings are coming in the highest they've ever clocked. CPI and PPI are running anywhere from 5-7%, 3x the Fed's stated goal.
The ugly truth is those numbers aren't even close to the REAL inflation numbers, which are running closer to 15% and 25% or more for critical items like food and energy. The upper class has the financial wherewithal to shoulder those types of redline numbers. However, the devastatingly bad government policies in reaction to the Covid pandemic such as lockdowns, remote schooling, and vax mandates have devastated small businesses and gutted the middle class- particularly when grocery and gas bills are up 30-50% year over year.
Numbers like these lead to revolutions, not to recessions. As society’s faith in their government disappears, push back is inevitable. Despite what the press and their puppet masters have been feeding you, inflation isn't a temporary shift that can be ameliorated. It’s endemic and people and businesses have altered their underlying expectations which creates a vicious cycle of more inflation. Supply chain disruption, lack of workers (again due to shifts in psychology and bad government policies) and a fundamental psychological change means inflation has taken root. Supply chain issues and lack of confidence in the government will give birth to stagflation.
High inflation/low growth environments are never good for risk assets or equities. Period. The Fed's artificial buying only moderately cushions the inevitable blow. Barring a Fed ownership of roughly half the market (which is a distinct possibility) equities and bonds are not a great risk/reward calculus here.
In the last 40 years, inflation like I’ve described above would be a major existential risk to a bull market and societal harmony. And yet, frighteningly, inflation isn't even the number one risk by a longshot. A policy mistake by the Fed to try to tighten or taper to combat inflation would be, by far, the worst mistake with the severest consequences.
Powell is a lawyer, when the markets need a principal. There's a big difference. There isn't a first tier bank or hedge fund in the world that would let a lawyer run their trading desk, and that's essentially what the Fed has become: one giant world devouring hedge fund trying to manage the impossible task of unwinding decades of bad Fed and fiscal policy to keep markets and the economy humming. It's like juggling chainsaws while riding a unicycle - you can do it for a few minutes, but eventually either physics or exhaustion is going to win. The markets need a bat-wielding, fear inspiring principal who commands respect to try to engineer this impossible landing.
As I’ve written previously, the Fed is completely boxed in. Dien Bien Phu, Vicksburg, Leningrad. Powell would take any of those siege positions versus the one he’s currently in.
Historically, the Fed would have aggressively raised rates to combat runaway inflation. They can't now and conceivably may never be able to give the Kobayashi Maru ‘no win’ scenario they have created.
They've created an economic system that is so fragile, so insanely over-leveraged and burdened by debt and obscure balance sheet derivative bombs everywhere, that a modest raising of rates to curb the inflationary trend (when a Volcker-style clubbing is needed) would end the financial world. Literally.
It would set off a deflationary bomb that would obliterate every bank, corporation, and household. You'd be looking at complete insolvency of the system, banks and brokerages failing to open, dry ATMS, retirement accounts seized...and the only way to combat that outcome? Print money like crazy (which they’re doing) leading to more massive inflation, etc. Lather, rinse, repeat.
So it's a Houdini-style straight jacket and vicious negative feedback loop in which the Fed is ensconced. Massive inflation is a Pyrrhic victory because a depression style deflationary debt apocalypse would be 10x worse than $150 to fill up your tank or a $400 weekly grocery bill.
The Fed and any person tied to capital assets will choose inflation. It will further suffocate and eradicate the middle class, but as far as the elites go, that's a good thing. A feature, not a bug. It also buys time for Hail Marys in the form of technology to possibly address current imbalances so the monetary and political reset will be less abrupt and less violent. But it’s coming regardless.
In simple terms, inflation is painful and bad. Raising rates to combat inflation and breaking the system is worse. Rational, intelligent actors would choose inflation (with thinly veiled attempts to tamper it down) over a deflationary apocalypse.
Perhaps the scariest component of any of this is my lack of conviction that the Fed is either intelligent or understands the consequences of their action. The last 30 years is a giant evidence folder confirming my take is the right one.
The latest nail in the coffin is a massive insider trading scandal that saw Fed Presidents front-running and whipping around futures in their personal accounts while making critical decisions on short term rates. If we weren't in the 7th inning of the biggest rigged ball game ever played, this would be front page news and there would be a Congressional and Justice Department special inquiry. As someone who was ripped from their bed in front of their family for being 5th in a tipping chain on a $16K trade and spent 2 years in prison for said trade, the irony of the most powerful insiders trading for their own benefit while setting short-term interest rates is not lost on me.
The collapse in public confidence for our policy making 'experts' is similar to the collapse of credentialism and ‘expert death' that Covid has illuminated. Rational minded individuals, assumed public health experts like Fauci and others who spent their lives studying these issues were semi-competent. It turns out they were just government hacks, glorified post-office perma-bureaucrats.
The Fed thinks it can slowly "taper" the $180 Billion a month they've been feeding into the System for the last decade in an effort to ‘kick the can’ down the road and avoid paying the bill for our past foolishness.
NEWSFLASH - they can't.
Our system is a house of unbalanced cards with deep derivative and overleveraged ticking time bombs everywhere. I'll use a historical analogy to illustrate my point since actual on- and off-balance sheet data is nearly impossible to come by.
The violent and destructive Great Financial Crisis of 2008 was caused primarily by Alan Greenspan and bad Fed fiscal and regulatory policy. Greenspan cut rates to historical and artificial lows near 1% to counter the Dot-Com Bust (the original bubble itself also a by-product of Greenspan's laughable Mayan end of the world Y2K hysteria). While the Dot-Com bust was painful for tech investors, it's impact on the real economy was negligible. Yet Greenspan cut and kept rates near 1% from 2002-2005 which fueled the entire housing bubble. Had rates normalized closer to 5% (and had the Fed and other banking regulators done their job in actually regulating banks and their abuse of leverage and market power), the housing bubble and ensuing financial crisis would never have materialized.
So here's the $64,000 question ($64,000 in 1980 USD which is the equivalent of $220,000 now - yes the USD is more sh*tcoin than stablecoin):
If the Great Financial Crisis of 2008 was caused by the Fed keeping rates low for 3 years and the ensuing leverage, imbalances, and speculation that built up into the system, how cataclysmic will the next crisis be since the Fed has kept rates at effectively ZERO for over a decade now?
If the Fed makes a policy mistake and thinks it can unwind its decades of moral hazard-inducing bad policy now by raising rates into a hyper-levered, hyper-speculative frenzy to curb inflation, it's game over for the global economy.
China has been the global engine of growth for three decades. American financial and political elites gleefully sold out American manufacturing, labor, and supply chains to benefit multinationals like Apple and Nike by sourcing undermarket (ie, slave) labor, goods and capital from the Chinese. We uprooted and outsourced our entire national supply chain to a nation with fundamentally different beliefs on freedom, democracy, and religion. Until President Trump tried to push back, we also allowed them to price dump and destroy American industries at will.
China has now reached the limits of its growth and its own debt hangover is rearing its ugly head. Evergrande has received most of the press, but it’s much less of an issue than China's decision to wholesale retreat from capitalism and to eradicate the burgeoning crypto industry in its nation.
China had a practically insurmountable lead in bitcoin mining, this century's equivalent to the Strategic National Reserve. Instead of embracing bitcoin as the inevitable FGRC (Future Global Reserve Currency) and leaning into their lead, they chose to wipe an entire industry off the map because it represented an endemic threat to the authoritarian, social-credit model on steroids the CCP is rolling out. Free and trustless, censor-proof decentralized money can never coexist with a surveillance slave state.
China's decision to nix the Ant IPO after it went public and publicly curbing billionaire capitalists like Jack Ma was a clear sign that China’s multi-decade experimentation with capitalism-lite and quasi-open markets was ending. That move was a gross betrayal of the unwritten bargain that has governed the global economy since the mid-80s. Namely, China would provide dirt cheap labor and goods for Americans and the rest of the world in exchange for capital flows and increasing their own populace’s standard of living as they transitioned from an agrarian to an industrial economy. That game is officially over.
Globalist shills like Larry Fink, the World Economic Forum and others who are on the payroll or whose livelihood depends on China, will continue to try to promote them as trade partners and upstanding global citizens. Neutral arbiters know China has changed the rules of the relationship dramatically in the last few months. Perhaps their release (considered accidental, but even the Wall Street Journal is now walking that back as new evidence mounts) of a bioweapon into their own population and subsequent, potentially criminal, informational blackout that continued to its spread should have been a warning sign for global citizens that they’re a bad actor (if the Ughur concentration camps, slave labor, environmental degradation, and economic and cyber warfare they’ve waged for the past 20 years wasn’t a clue…).
Either way, it’s clear that China is reversing course and stepping back in time to a pure state consolidation of all facets of the economy and society. Now that the digital yuan CBDC is ready, China will strong-arm any company, executive, partner, or 'citizen' that does not fall in line. The social credit scoring system was just a warm up for the absolute totalitarian, panopticon control they are rolling out.
The question at the heart of the matter is: how much of the world do they take with them behind their 'Silicon' Curtain? They already own half of Africa and are making either calculated bribes or hegemonic noises in the South China Sea and elsewhere as part of their Belt and Road Initiative.
The implications of 1/7th of the world economy going offline and rejecting capitalism cannot be understated, nor has it been remotely priced into the global economy.
While supply chain disruption has been a very real and critical factor for the last 18 months, it's been eerily quiet in the mainstream press. Far less interesting than Britney Spears’ bid for freedom, few hazards will have a bigger impact on our economy and society in the next 12 months than the supply chain crisis.
Critical chips for all types of electronics and components have been in short demand since early last year. To reiterate, our wholesale offloading of critical supply chains and goods to China means as China goes, so goes the world. The energy crisis in China means factories already straining to keep up with demand are being rationed power and can't stay open because the lights and electricity can't stay on. What does manage to get delivered is either sitting on docks or stacked up in ports because of government unemployment and labor policies that paid people to stay home. Docks, trains, ports, and trucking routes are short-staffed. The inane vaccine mandates and passports (for a vaccine that is significantly less effective and safe than natural immunity or proper therapeutics) compound a massive supply chain issue that will keep businesses and customers increasingly desperate for inventory. Empty shelves in supermarkets, long delays for electronics and other raw materials or business staples are now commonplace. We are firmly entrenched in 'cascading failure' mode and it will get significantly worse before it gets better.
As @man_integrated put it, "The catastrophic failure cascades of supply chains are not a conspiracy, except one of building an over optimized house of cards. Shifting the blame to some nebulous "they" is attempting to avoid the bill that has come due for decades of outsourcing our economic sovereignty.``
Economic folks like to dismiss social factors. I believe social issues matter as much or more so than economic ones. Markets are psychological animals where confidence is paramount, and investor sentiment, emotion, and psychology all have an outsized impact. Remember, it was the social media induced hysterical fear, shaming, and censorship - not Covid itself that led to a devastating overreaction to the Covid scare. We voluntarily destroyed the greatest economy in the history of the world for a virus with a 99.98% survival rate that could have been treated with available supplements, therapeutics, and metabolic adjustments that would have turned it into a mild flu for all but the elderly and obese. Instead, we dug a hole we won't be able to recover from as a country anytime soon, especially as we continue to double down on horrible scientific and economic policies like lockdowns, masks, and mandates in light of the colossal failure of the much-hyped ‘vaccines’.
Rampant censorship by Big Tech and their big leaders to squash truth and open discussion made it clear the battle wouldn’t only be against Big Pharma.
Collapse of institutional trust and competence is at an all-time high and reaches into every aspect of the government and regulatory landscape. We’re beyond our parents’ blind trust that those in power equate to the highest intelligence in the country. The FDA has been bought and sold by Big Pharma and the current administration thinks we should trust our so-called experts on foreign policy. Afghanistan was the ‘Failure Heard Round the World’ and revealed truly the Emperor has No Clothes. Even the most ardent Democrats now realize what a disaster it was to elect a Puppet suffering from Dementia.
While it’s unclear whether the orgiastic frenzy in assets like NFTs, meme stocks, and other assets of questionable value is the proverbial ‘bell at the top’ or just semi-logical expansions into short term momentum assets since we know cash is being debased at a rate this country has never experienced (40% of all dollars printed were created in the last 18 months). Without the Fed bid, stocks and bonds are laughably overvalued in light of the supply chain and inflationary crunch most businesses are facing.
Add in the mind-bogglingly stupid Federal lockdowns, vax mandates, and other business-destroying moves, and it's obvious the stock and bond market has dislocated from any semblance of reality or value. Bull markets get long in the tooth when the risk curve gets pushed farther and farther out. I think it's easy to make fun of the fact that pixelated JPEGs are selling for a $1M a piece, but is that really any less sane than someone letting the US government with $120 Trillion in unfunded liabilities borrow money from them for 30 years at a 2% rate? What about Eurozone governments borrowing money for 10 years at negative rates (ie, you have to pay governments to take your money and promise to return most of it in 3 decades)?
Most of the low-tier NFTs will end up with ‘no bid’, but in the short term it’s not insane to opt for digital scarcity no matter how ugly over negative government bond rates or tech trading at 100x earnings.
Great Mike. So we're f'd. What do we do now?
Well, assuming it's just a market correction and not the full blown National Divorce or Great Unwind that is increasingly inevitable, you'll be better off in commodities, cash, and crypto.
Cash is trash, yes. But for a 3-6 month hiatus, it will preserve its value well until the Fed realizes its taper charade is a grave mistake and kills the hawkish talk and jams the Control-P button again. During this time, scarcity and demand for crypto and commodities (still too much money chasing too few goods) should see them outperform relative to other assets. However you should be aware that in a pure 'risk off' scenario, crypto will get hit too because it's liquid and easy to sell. It should recover quickly however once the panic passes and you'll be able to pile back into high growth equities or other capital assets with all the exposure you saved by going to cash before the dip.
If it is the Great Unwind, well you should follow the 'Break Glass' emergency plans I've laid out in various issues of Sovereign Sunday since early January.
Will the world end? Most likely, not. And you can always load back up on equities and civilization when the storm passes and the good guys prevail. But like the original Boy Scouts motto (before they got neutered) Be Prepared!
Mike Kimelman is a bestselling author, entrepreneur and expert on disruptive innovation. Formerly an M&A lawyer and the founder of a New York-based hedge fund, he currently runs Dekryption Advisors - a strategic advisory and investment firm with a focus on digital assets and healthcare. He is also a high performance coach in the financial and personal mastery space.
Are you looking for a competitive edge and greater sensemaking on these and other topics? Check out my Alpha360 Foundations group coaching where we build higher level thinking around investing and optimize your brain, body, and life. www.truealpha360.com