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Musings Report 2024-43 10-26-24 Where to Invest 2025-2032: Where's the Global Economy Heading?
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Where to Invest 2025-2032: Where's the Global Economy Heading?
A longtime correspondent recently asked where I would invest in the coming years, 2025-2032 and beyond. The question isn't interesting to everyone, of course.
Not everyone has funds to invest, and others are happy with their current money manager or strategy.
But one level down, the question becomes cogent to everyone: where is the global economy heading? What are the trajectories of the US/global economies?
Another level down, the question becomes existential: is the present an accurate guide to the next decade? Will the global status quo remain stable or veer into instability?
To answer all the variations of the basic question--what does the future hold--I turn to the concept of keystones, which I've referred to in previous essays.
In an ecosystem of dynamic, interactive organisms, everything looks stable as the various organisms have established an equilibrium: things go up and down, but within a band of rough equilibrium.
Casual observers may take this stability as permanent, and the various roles played by organisms as more or less equal. This stability masks the reality, which is revealed when a keystone species is eradicated or dies off: the entire ecosystem collapses and devolves to a much different equilibrium, generally a much more fragile, threadbare state.
The roles played by each organism are not equal; keystone species hold a unique position much like the keystone in an arch: remove the keystone, and the arch collapses.
The global economy is not a single arch, but a system of interlocking (i.e. tightly bound) arches. The system can survive the collapse of one or two arches, but beyond a narrow band, the loss of keystones destabilizes the entire structure in ways that are not conceivable to the casual observer.
The Titanic offers an analogy: if the ship's first three or even four watertight compartments had been breached by the iceberg, the liner could have limped to port. But the breach of the fifth watertight compartment guaranteed a watery grave at the bottom of the Atlantic.
The consensus holds that the system is stable and will remain so. Central banks will maintain the Goldilocks Economy--not too hot, not too cold--and Big Tech and AI will be reliable winners, along with uranium (nuclear power), the electrification of the economy, healthcare, credit, and so on.
This consensus is based on the belief that central banks can eliminate recessions: growth can be managed such that it is always expanding in a completely sustainable fashion.
Those of us who look at cycles and keystones have a different conclusion: pushing imbalances and excesses into the future as various cycles reinforce each other is a recipe not for stability but for a facsimile of stability, a facsimile with costs and consequences that cannot be pushed forward forever.
This is where the keystone analysis comes in handy: should one keystone reverse trend / give way, then we best be alert for another one to reverse / crumble, for that is a sign of disequilibrium / disorder to come.
Here is an off-the-top-of-my-head list of keystones in the global economy. The loss of any one keystone could destabilize the entire system. If several give way, the collapse becomes inevitable.
1. The long cycle of yields and interest rates (i.e. bonds and credit). Yields / interest rates tend to run in long cycles and reverse trajectory slowly, unlike stocks which often have sharp peaks and troughs. In the last cycle, interest rates and yields trended down from 1982 to 2020. Now the cycle will be up. Credit will cost more and be tighter. This chart of mortgage rates illustrates the roughly 40-year decline in rates and the reversal.
In an economy dependent on borrowing / credit for its growth, interest rates/bond yields are a critical keystone. Now that global debt is 350% of global GDP, there are limits on how much debtors can afford to pay to service debt without collapsing consumption and the global economy.
The US economy had relatively low debt in the late 1970s / early 1980s, and so the economy survived the deep recession of 1981-82 caused by skyrocketing rates, which were raised to crush inflation and the expectations of inflation.
Some analysts think the global economy cannot survive interest rates above 6%, while others see an eventual rise in rates to 10%-12%. The keystone here is historically low interest rates /yields: if that keystone crumbles, the global economy crumbles.
2. Since rates rise in response to rising inflation, inflation is also a keystone: should it soar, it will destabilize the economy if left to run amok or if it is crushed by pushing rates to 10%+.
Inflation was tame from the late 1990s not because central bankers are godlike in their wisdom; the reason inflation was tame was that China "exported" deflation for the past 25 years by drastically reducing the costs of production. Now that China's costs of production have risen, China is no longer exporting deflation, and there are no replacements for China's one-time gift of 25 years of deflationary forces.
3. Wealth inequality has reached extremes that typically precede financial crashes and social disorder. Wealth-income inequality is one of those things that doesn't matter until society shatters under the unrelenting pressure. This aligns with the cycles of social order/ disorder, what Peter Turchin characterizes as cycles of integration (cooperation) and disintegration (collapse of middle ground / cooperation, rise of us-and-them, etc.)
This inequality has structural sources, sources that are reversing. Labor has lost ground for 45 years, capital has gained ground for 45 years. As strikes and unionization efforts increase, this is clearly reversing. Capital will lose ground as the vast imbalances are rebalanced (note the $149 trillion siphoned off of labor by capital).
4. Financialization has reached diminishing returns, and so capital can no longer reap enormous gains from collateralizing everything under the sun. Financialization is another keystone in the status quo whose loss will bring the global economy to its knees, as there is no replacement source of financial gains.
These reversals align with two other long-term cycles: the 80-year generational cycle (the 4th Turning) and the Debt Super-Cycle, which can be understood as the cycle of credit and speculation reaching levels that destabilize both the financial system and the real economy.
Another manifestation of this reversal of capital's dominance is rising anti-trust actions to break up monopolies and limit cartels.
5. The diminishing returns of "doing more of what worked in the past but is now failing." I often invoke the S-Curve to illustrate how authorities believe it is both low-risk and effective to respond to crises with the tried-and-true policies that worked in the past: for example, to reverse a recession, flood the economy with "free money" by lowering interest rates, increasing the money supply /liquidity, and ramping up fiscal spending.
All these policies reach diminishing returns because they cause consequences that pile up: free money works great until it creates inflation and concentrates wealth in the top tier of the financial pyramid. Look at how little effect the unprecedented financial stimulus had on the bottom 50% of US households. meanwhile the top 0.1% added trillions of dollars to their net worth.
6. Polycrisis: apparently unrelated crises mutually reinforce one another, overwhelming responses designed to deal with an isolated crisis. The system has been optimized / tuned to handle one crisis at a time, maybe two for a short period. But faced with multiple challenges the system breaks down.
Add up all these cycle reversals and systemic rise in risks across the board, and it's hard to make any predictions that have a chance of being correct.
7. Weather extremes. Attribute the change to whatever you wish, but extreme weather events are weakening keystones such as agricultural yields and insurance.
8. Geopolitical destabilization /conflict. It's clear that the Rubicon has been crossed, in the Mideast and elsewhere. A return to uneasy stability is not in the cards. Wars will widen and / or intensify in the Mideast, threatening the keystone of oil / natural gas energy, which must remain 1) available in quantity (100 M barrels a day of oil and oil equivalents) 2) affordable to consumers and 3) high enough in price to generate the net income oil exporters need to stave off domestic unraveling / revolution.
9. Overconfidence, hubris, speculative fever: the confidence that the present will stretch, unchanged, into the future, growth is permanent, systems are inherently stable, solutions will be found, etc. The belief that "risk on" speculation is the path to easy riches is a keystone in all global markets. If this confidence is lost in a crash, the system will destabilize.
10. The future is predictable. The keystone to long-term projections of where to invest is the belief that the future is predictable, based on historical analogs: if inflation is rising, then buy gold and silver as a hedge is an example.
My sense of history is all the analogs lose predictive value when the entire system is unraveling. Authorities, faced with the failure of status quo policies, turn to expedient fixes that often make the situation worse or more precarious.
In many ways, the current era is unique. Yes, we're still running Wetware 1.0 (fear and greed, us vs them, grasping at delusional "solutions" to stave off collapse, etc.) and there are analogs that offer some alignment, but the fragility of the global economy's tightly bound dependency chains and the financial system's dependence on hyper-globalization / hyper-financialization, debt, speculation and central bank intervention are unique not in their basic configuration but in their scale and excess.
Where to invest in 2025-2032? My response is guidelines, rather than specifics:
1. Invest in yourself: income streams, skills and assets you control directly. Think of Mark Twain, whose chest of gold mining shares turned from a fortune into worthless paper overnight. The land / income stream if owned free and clear, with no debt, remained an asset. The financial abstractions dissolved into nothingness.
2. Everything is risky and could reverse. Until the speculative fever is beaten out of participants by years of losses, every gain is prone to reversing, no matter how solid it appears.
3. Looking back, it's easy to imagine making a fortune by timing the market gyrations would have been easy. But in real time, it wasn't easy, and it won't be easy in the decade ahead, either. Here's a chart of the inflationary / disruptive 1970s: wow, look at all the money that could have been made catching the peaks and valleys. Most punters lost and gave up, which is why the share of household wealth in stocks collapsed to historic lows at the end of the decade.
4. Preservation of capital / buying power might be a worthier and more realistic goal than trying to mint a fortune via speculation.
5. Extremes beget extremes. History has many examples of crises triggering policy extremes no one thought possible back in the heady days of growth and stability: the closure of the stock market, resetting the value of currencies overnight, confiscation of private gold, etc.
Humans normalize everything very quickly. Unprecedented extremes have been normalized to the point they're viewed not as precarious extremes but as "The New Normal," perfectly sound, stable, etc. because nothing's imploded yet.
In summary: if a couple if keystones crumble, all bets are off, and play the game accordingly.
Highlights of the Blog
A Contrarian Clarification of "Free Speech" 10/25/24
All The World's a Stage: Everything Is Fake 10/23/24
17 Indicators of Global Recession Are Clanging 10/21/24
Best Thing That Happened To Me This Week
The eggplant are producing aplenty, and the new Northeaster long beans are finally kicking into gear after a struggle to get established. We've shared ample quantities of the eggplant crop, as we can only consume a few ourselves.
What's on the Book Shelf
Salt Sugar Fat: How the Food Giants Hooked Us (via LJPrettyBird)
by Michael Moss
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.
Permafrost & lack of gravel will limit arctic natural gas, oil, and coal extraction
The Looming Shift: Oil Markets Signal a Structural Phase-Change
The Double-Edged Sword of Global Inequality: A Debt-Fueled Conundrum
30+ Prohibited foods in different countries
Mystery of America's 'Parkinson's Belt' where chemicals 'are fueling frightening spike in brain-wasting disease' (via Cheryl A.)
F.T.C. Study Finds ‘Vast Surveillance’ of Social Media Users
‘Catastrophe region’: Austrian city faces up to scale of damage left by deadly flooding
America’s Dairy Farms Have Vanished: US dairy farms are disappearing, down 95 percent in terms of numbers since the 1970s—milk price rules are one reason why
For-Profit US Healthcare System--Once Again--Ranks Dead Last Among Its Peers (via Cheryl A.)
Would astronauts’ kidneys survive a roundtrip to Mars?
Health & Biological Impact - Global Electric Circuit (2:33 min)
Net Worth by Age: How Do You Compare to Your Peer Group? -- does it really matter?....
"It is impossible for a man to learn what he thinks he already knows." Epictetus
Thanks for reading--
charles |
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