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Musings Report 2023-40 9-30-23 The Forces Already in Motion
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The Forces Already in Motion
Readers have asked me for my opinion/forecast about the economy and markets--where stocks, bonds, yields, etc. are likely to go. I am not an expert, of course, but I read a lot of forecasts, and can identify forecasts that have been accurate and those which were less accurate.
As we all know, timing matters in forecasting. A forecast can be right in direction but not in timing.
The place to start is to differentiate market forecasts from forces that are already in motion. Markets are based on human perceptions of risk, loss and gain and the emotions of uncertainty, confidence, greed and fear.
Markets reflect the herd's perceptions and emotions, and if these are misaligned with actual conditions, then the market can veer into irrationality and stay there longer than seems, well, rational. So traders can keep bidding up investments at the top of what is later recognized as a bubble, and sell investments at the bottom in a panic to escape bigger losses.
Perception and emotion are amplified in markets priced on the margins, where dynamically shifting supply and demand have outsized impacts on price movements. The oil market is an example of a commodity priced on the margin that is notorious for swinging between highs and lows. It's difficult to forecast such markets, and so we see predictions of $30 per barrel and $300 per barrel. Both are plausible at peaks and troughs.
Forces that are already in motion are not mere perception or emotion. Demographics, for example, is a statement of statistical fact. We can have an emotional response to the facts and make forecasts based on our interpretation of the facts, but demographics are not markets: demographics don't fluctuate with the emotions of the participants; demographics influence the economy and society in ways that are not matters of perception or emotion.
These long-term, systemic forces may not influence markets for quite some time, for the herd can cling quite confidently to magical thinking / euphoria / greed and support this confidence with a great many plausible rationalizations.
What we can forecast with some confidence is the forces already in motion will impact the economy and society, and these impacts will likely influence markets once they are undeniable.
Here's an example: commercial real estate (CRE). The transition to remote work was in motion for years, as the technology came online to enable it. The pandemic lockdown accelerated this from a techie lifestyle to the mainstream, normalizing remote work in a brief period of time. Prescient owners of commercial office space may have sold their properties as soon as the pandemic lockdown ended. The less prescient did not grasp this systemic repricing of CRE until defaults and soaring vacancy rates forced a reappraisal of value, risk and loss.
Magical thinking is now in play, as those with little construction experience cling to the hope that empty office towers can be converted into residential units. This conversion is horribly costly and complex, and simply isn't financially viable unless prices for the converted units are at nosebleed levels.
Remote work has gutted CRE which is in turn gutting banks and downtowns. The market value of all these dominoes is still in flux, but the losses are already immense. What was considered rock-solid value is now melting into air. This repricing of value is disruptive, and while fortunes have been made to replace those that have been lost, this replacement of one fortune by another is not guaranteed.
Here are some of the forces that are already in motion that will influence the economy and society and that will eventually influence market valuations.
1. Remote work: CRE, bank losses, hollowing out of downtowns.
2. AI and the automation of white-collar work.
2. Demographics: declines in the birth rate and workforce, rise of elderly retirees.
3. Rising debt and the cost of servicing debt.
4. Rising cost of living: scarcity and inflation.
5. Currencies, bond yields, capital flows: currencies are the foundation of economies and market-based wealth.
6. Asymmetric power relations: elites have concentrated too much wealth and power, destabilizing the financial, political and social orders.
7. Profitable stagnation: incumbents are favored/protected, inefficiency is rewarded, administrative bloat, planned obsolescence.
8. End of infinite expansion / growth of consumption-production: the decay of energy surpluses available to drive immortal expansion.
9. Electrification of transport and light industry.
10. Definancialization: commoditization, debt and zero interest rates have reached diminishing returns.
11. Deglobalization: the shift of production to reduce dependency on China / political-economic rivals / monopolies.
12. Global imbalances in the distribution of resources, capital and losses.
13. The deflation of the global debt-funded bubble economy.
14. Scarcities of the FEW resources: food, energy, fresh water.
15. The decline of global health: unhealthy diets, rising metabolic disorders, rising rates of disability, aging populations, soaring costs of healthcare.
16. The substitution of debt for productivity and finance for the real world no longer generates real growth.
Climate change manifests in many of these forces, as do the system dynamics of diminishing returns, perverse incentives and unintended consequences as the status quo doubles down on "doing more of what's failed."
Each of these topics deserves an essay of its own, of course, but for now, let's note that the confident prognostications being issued about currencies, finance, growth, etc. ignore feedback, and are prone to recency bias: the majority are confident the future will follow the same trajectory as the recent past.
I am skeptical of this confidence, for where others see a smooth, painless path of technology-driven Progress, I see extremes piling up distortions that will result in unpredictable social and financial criticalities.
An economy is a dynamic mechanism for distributing resources, capital, risk, gains and losses. Those in power seek to accumulate the resources, capital and gains and distribute the risk and losses to others. The greater the asymmetry of the distribution, the greater the eventual instability as the asymmetries are unwound in chaotic criticalities.
Much of what is considered valuable today will be revealed as valueless as these extremes unwind in a disorderly rebalancing.
Islands of Coherence in a sea of incoherence will become valuable. These islands are scale-invariant; meaning nations, regions, counties, cities, towns, neighborhoods or homesteads can all be islands of coherence.
Highlights of the Blog
Now Hiring: The Ministry of Failure 9/29/23
The Psychology of Inflation: What Makes You Say, "No Way Am I Paying That"? 9/27/23
When Shelter Becomes a Speculative Asset, Society Unravels 9/25/23
Best Thing That Happened To Me This Week
Finished installing a new aluminum screen door on our back door. This may seem like a simple project but it was anything but simple. The door is a kit to allow for sizing the door width and height to the existing doorway. It took three custom-made lengths of wood trim to fit snugly against the existing threshold, and more carpentry to fashion a clean surface to mount the door and trim to finish it off. The hinges were inset and covered with thin rectangles of painted plywood. And so on. Digital is easy, the real world is hard. Anyway, it works--whew.
From Left Field
NOTE TO NEW READERS: This list is not comprised of articles I agree with or that I judge to be correct or of the highest quality. It is representative of the content I find interesting as reflections of the current zeitgeist. The list is intended to be perused with an open, critical, occasionally amused mind.
Many links are behind paywalls. Most paywalled sites allow a few free articles per month if you register. It's the New Normal.
How China’s ‘broke ghosts’ are keeping up appearances during straitened times-- I'm a big fan of the "Broke Ghosts" lifestyle...
‘Serious hurdles’ to motherhood worsen demographic crisis in China-- few mention the implicit burdens on married women to care for their aging in-laws as well as their own aging parents...
Watching the Real-Estate Bust From the Streets of San Francisco
Even China's 1.4 billion population can't fill all its vacant homes - former official--let's say this is off by a factor of two--it's still a big number...
10 Books Everyone Starts but That No One Finishes-- click-bait I fell for... only book I read is Cervantes and I finished it quite enjoyably.
The Great Macro Dreamscape Part 1 (via C.A.)
Fossil Fuel Subsidies Surged to Record $7 Trillion
How Many Cars Are There in the World? As of 2022, there are about 1.446 billion cars that call planet Earth home.
Carbon emissions of richest 1 percent more than double the emissions of the poorest half of humanity--yup....
Downtowns are dead, dying or on life support, says expert with over 50 years of researching urban policy
New York Times writer draws ire for blaming Biden’s economy for $78 airport meal--knocking back three whiskeys with the burger is gonna cost you....
Screens Negatively Impacting Kids' Brains, Fueling ADHD Epidemic: Experts--confirming what we already knew ...
"People tend to forget their duties but remember their rights." Indira Gandhi (via GFB)
Thanks for reading--
charles |
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