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Musings Report 2020-52 12-26-20 2021 Forecast: Global Crisis
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2021 Forecast: Global Crisis
In this final Musings of 2020, I'll bundle the themes I've explored from the very first (pre-pandemic) Musings of the year: Instability Rising: Why 2020 Will Be Different.
Not unsurprisingly, the conventional forecast for 2021 is blazingly bright: stocks will keep rising, economies will fully re-open and vaccines will conquer Covid. This is unsurprising because the last thing the status quo wants is for people to have doubts and fears, as these emotions crimp spending and speculative fever--the twin engines of a return to "growth."
One aspect of this is the framing of 2020 as "the worst year ever"--Time magazine's December 14 cover. As absurd as that claim sounds against the tapestry of human history, it reflects the desire to exaggerate both the calamity and the triumphant rebound.
I happen to be reading a monumental history of the Little Ice Age, which upended regimes and caused the death of between a quarter and a third of Eurasia's population in the 1600s--Global Crisis: War, Climate Change and Catastrophe in the 17th Century.
Scarcity of essentials--number one being food, of course--generates uprisings, revolts, rebellions, revolutions, civil wars, coups, conquests and wars, as those without seek to take from those who still have enough.
This book reminds us that the climate in our lifetimes has been remarkably benign. Setting aside humanity's role in climate change, history offers an abundance of evidence that extremes of climate stretch back to our planet's early days.
Whenever climate (or some other dynamic) reduces the availability of food, energy, etc., conflicts increase and political structures collapse. I've mentioned two books over the past few years that examine specific periods of decay, decline and collapse:
1177 B.C.: The Year Civilization Collapsed
The Fate of Rome: Climate, Disease, and the End of an Empire
I would also include the Antonine Plague 165 - 180 A.D. which toppled various empires and nearly unraveled the Roman Empire as an example of how pandemics wreak havoc on human populations and reduce production of essentials, further weakening survivors.
The status quo faith in technology and centralized policies--monetary, political, social--has generated an extreme confidence that the future trajectory is onward and upward. No doubt most people had the same confidence in their regimes in 1175 B.C., 164 A.D., 475 A.D. and 1617 A.D.
Which brings us to three themes I've covered this year: extremes, cycles and luck.
Extremes get more extreme until virtually every participant is swept up in the euphoria of the herd and euphoric confidence that whatever is rising will rise forever because... regardless of the specific context, the reasons given always sound plausible enough.
Those of us who were adults in 1999 recall this euphoria in the dot-com era. The same euphoria is present today as there are no stock market bears, Big Tech, Tesla and bitcoin are skyrocketing, and FOMO (fear of missing out) and confidence in future gains are the dominant emotions.
Extremes become more extreme, and once the herd is running, there's no way to predict the final peak. But we can predict there will be a peak and a collapse from the peak. We can also predict that the greater the greed, euphoria and confidence, the greater the resulting crash.
Part of the certainty of this cycle is probability. As extremes become more extreme, the odds of something breaking the ascent rise. This is reversion to the mean.
This is not just an artifact of human emotion; the natural world can also go to extremes when positive feedback loops "run to failure." (The classic example is a breeding pair of rabbits being introduced on an island without any predators. The rabbit population quickly expands, consumes all the vegetation and then dies of starvation.)
Skeptics of cycles tend to seek a causal mechanism that explains the cycle, and if there isn't an identifiable causal factor, they dismiss the entire concept of cycles. The problem is the causal factors are intertwined and can compound very quickly as linear dynamics become non-linear. Fragilities are masked by temporary fixes or momentum, and points of failure are hidden by the success of the overall system.
These two concepts--extremes becoming more extreme and cycles--are intimately related. As systems start breaking down, those in charge compensate by pushing whatever is still within their control to new extremes.
A recent example is the Federal Reserve's expansion of its monetary interventions required to keep the heavily indebted and leveraged financial system from collapsing. In the 2008 Global Financial Meltdown the Fed more than doubled its balance sheet in 5 months, from $900 billion in August 2008 to $2.2 trillion in December 2008.
Over the next six years (2009 to 2014), the Fed again doubled its balance sheet from $2.2 trillion to $4.5 trillion, an extraordinary and unprecedented 5-fold increase from pre-crisis levels.
This year, the Fed expanded its balance sheet from $4.1 trillion in March to $7.1 trillion in May, an astonishing $3 trillion increase (73%) in three months. The $200 billion increase since May looks paltry, but back in 2007 a $200 billion increase (from $860 billion to $1.06 trillion) would have been a completely unprecedented outsized expansion.
This exemplifies extremes becoming more extreme--a $200 billion expansion that would have shaken the financial world by its enormity in 2007 is now mere signal noise compared to the $3 trillion expansion in three months--and the way that failing systems are papered over by ever greater compensating extremes.
Once extremes reverse, the systems that were glued together by these extremes collapse. If a multitude of extremes are connected via self-reinforcing feedbacks, then the consequence of multiple extremes reversing is not merely additive, i.e. adding up the isolated result of each reversal, it is geometric, i.e. result #1 times result #2 times result #3.
This is how tightly bound systems that appear immutable collapse with shocking acceleration.
Lastly, there's luck. Our hubristic faith in the godlike powers of our technology and policies has discounted luck: who needs luck when you have godlike powers?
But luck has its own indiscernible dynamics and few if any recognize that what we've assumed was godlike power was in large measure merely an extended run of remarkably good luck.
It's human nature to confuse good luck and great power, just as it is human nature to confuse investing genius and a tide that raises all boats.
In the current euphoria, the rising odds of a reversion to the mean are ignored, as participants reckon that one of their godlike powers is recognizing the top and exiting gracefully, 99.9% of their profits in hand, just before the house of cards collapses.
We cannot generate good luck on demand, or force an extended run of good fortune to last forever. What we can do is prepare for the cycle to turn and the good luck to run out by anticipating such a reversal and planning accordingly, taking to heart Louis Pasteur's dictum that "Chance favours the prepared mind."
Extremes reverse, cycles turn, luck runs out. That's a formula for global crisis in 2021 in my view, and there is little downside in pondering how best to employ the wisdom of "chance favours the prepared mind" in our own lives.
Highlights of the Blog
Podcasts:
MACRO ANALYTICS 12-17-20: Buying the Narrative (35:41)
Posts:
The Most Hopeful Scenario for 2021 12/26/20
Give Yourself a Gift Next Year: Agency 12/25/20
Our Phantom Middle Class 12/23/20
Big Media: Selling the Narrative and Crushing Dissent for Fun and Profit 12/21/20
Best Thing That Happened To Me This Week
End-of-year potpourri: a double-rainbow (a positive omen IMO), lilikoi chiffon pie, homegrown kale-tomato salad (with heart-of-palm gifted by a neighbor) and our first Malabar spinach harvest. (One of the Malabar spinach recipes I reviewed was from someone who grew it on a balcony in Harlem NYC, so it's very adaptable.)
From Left Field
Unhinged... And Then Some! David Stockman deconstructs the everything bubble...
The 'Hannibal Trap' Will Crush Global Wealth--sobering analogy....
What's Wrong with Wind and Solar? (5:35) -- every EV battery requires moving and processing 250 tons of earth--with fossil fuels...
A New Population of Blue Whales Was Discovered Hiding in the Indian Ocean-- their "song" is unique...
These Coronavirus Trials Don’t Answer the One Question We Need to Know-- why isn't the NYT banned for publishing this?
Why the world is running out of sand-- yes, sand... the right kind of sand...
New whale species discovered off Mexico
How Japanese People Stay Fit for Life, Without Ever Visiting a Gym -- no gym equipment, no personal trainers, nothing other than a walkable urban environment....
2020: The Year Things Started Going Badly Wrong -- Gail Tverberg in top form...
The objective economy, part three: Crafting the future -- excellent roadmap of the future...
Big Pharma Beware: Dr. Montagnier Shines New Light on COVID-19 and The Future of Medicine
Archaeologists uncover ancient street food shop in Pompeii -- ancient Rome was brightly painted...
"When a system is far from equilibrium, small islands of coherence have the capacity to shift the entire system." Ilya Prigogine
Thanks for reading--
charles |
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