Get ready for upheaval and a more turbulent future

Tuesday, 3 October 2023 — Gold Coast, Australia

[7 min read]

Dear Reader,

Earlier this year, Ray Dalio (billionaire investor and founder of Bridgewater Associates) wrote an article titled ‘Where We Are in the Big Cycle: On the Brink of a Period of Great Disorder’.

It’s almost six months since Dalio alerted us to the imminent danger ahead.

Now, with long dated US Treasury Bond (10-year and 30-year) yields moving to higher levels, we’re approaching the brink.

In an interview last week with CNBC, Ray Dalio warned of a pending debt crisis
(emphasis added)…

‘Billionaire investor Ray Dalio is watching closely the “risky” U.S. fiscal situation.
“We’re going to have a debt crisis in this country,” the founder of hedge fund Bridgewater Associates said in an interview with CNBC’s Sara Eisen that aired Thursday.

‘The two were speaking at a fireside chat at the Managed Funds Association. “How fast it transpires, I think, is going to be a function of that supply-demand issue, so I’m watching that very closely.”

‘U.S. debt levels surpassed $33 trillion for the first time this month as lawmakers negotiate a U.S. spending bill before the Oct. 1 deadline. A failure to reach an agreement could mean a government shutdown and raise the perceived risk of the country’s debt.’

A stay of execution on a US government shutdown was reached…but, only for the next 45 days. Political gridlock continues. The debt keeps mounting. And interest rates show no signs of retreat.

But does anyone in the street really notice this stuff?

Not really.

Why?

Because in our minds ‘life goes on like it always has’, so why sweat the small stuff?

Well, this ain’t the small stuff, this is...HUGE.

We’re on the brink of a period of significant dislocation.

In the 20th century there were two periods of contrasting social and financial conditions.

The first was when The Roaring Twenties gave way to The Depressing Thirties.
The other one was after The Second World War.

Let’s travel back to a time when life was a little less complex.

To an era when markets were free to be markets…a time when the scales of price discovery were not overtly distorted by the heavy hand of central bankers.

Post-Second World War prosperity

After The Second World War, the US knuckled down to the business of rebuilding its economy.

Energy costs low.

Lots of babies were born.

Homes constructed.

Whitegoods and automobiles were in demand.

Consumers were awakened from two decades of slumber…but, with the lessons of The Great Depression still fresh, credit was used with caution.

All in all, the middle class prospered in an era of high productivity and shared prosperity.

From the Wikipedia page ‘Economic History of the United States Post-World War II’…

‘The period from the end of World War II to the early 1970s was a golden era of [US] economic growth. $200 billion in war bonds matured, and the G.I. Bill financed a well-educated workforce. The middle class swelled, as did GDP and productivity. This growth was distributed fairly evenly across the economic classes…’

Wall Street reflected these prosperous conditions. From 1945 to 1966, the S&P 500 increased five-fold.

But, as they say in the classics, ‘all good things come to an end’.

The cycle turned in the late 1960s/early 1970s.

Inflation. The ‘temporary’ removal of the gold standard. Oil crises.

All these factors combined to put the S&P 500 into a sideways (zigging and zagging) holding pattern for the next 17 years.

Then came the next period of (artificial) prosperity

In the early 1980s, with confidence in equity investments at its lowest ebb, the seemingly grounded S&P500 taxied down the runway and took flight on a four-decade (and at times, bumpy) journey to an unimagined height…peaking around 4,800 points in January 2022.

When measured against the S&P’s post-Second World War decade, five-fold gain (achieved against a backdrop of genuine prosperity garnered from real advancements in productivity), you can appreciate just how astonishing this 40-year (1983 to 2023) 48-fold gain has been (achieved not from productivity gains or shared prosperity, but from a never-ending supply of credit).

Since 1983, Total US Debt has increased by a whopping…US$90 trillion.

Amassing debt on this scale was made possible by a 40-year downward trend in cash and bond interest rates…

These two charts tell the story of what propelled (an unprecedented level of) asset price appreciation during our adult (investing) lifetime.

However, it appears the 40-year downward pressure on cash and bond rates has reversed.

Is this a permanent trend change or will interest rates once more be pushed by central bankers to the zero line?

Best guess is it’s a trend change…

Why?

The current situation invites comparison with the 1970s…a decade when interest rates rose from 4% to over 18%, shares fell out of favour with the investing public and gold soared in value.

In the mid-1960s (just like the late 1920s) very few entertained the prospect of an abrupt change in a trend they had come to believe was their friend.

Could we be on the brink of another abrupt and disruptive change in a long-term trend?

I think so.

Get ready for upheaval and a more turbulent future.

Until next week.

Regards,

Vern Gowdie,
Editor, The Daily Reckoning Australia

Dear Reader,

Headline report at Bloomberg:

‘If the US Exits Niger, the Terrorists and Russians Win

‘Emmanuel Macron, announced on television that he will pull out the roughly 1,500 French troops stationed in Niger, as well as the French ambassador. France, as the region’s former colonial power, has long played the lead for Team West in the Sahel, with the US in the unaccustomed role of understudy.’

Dear readers may be wondering: what do we care?

But they may be the key to understanding our future. US foreign policy is controlled by a cabal of arms producers, glory seekers and useful idiots. It costs…all in…about $1.5 trillion per year to support them. That’s about a quarter of all federal spending. And $1 trillion of that cost could easily be cut — with no loss to US security.

That…and relatively minor adjustments to America’s runaway ‘transfer’ payments…could bring the federal budget into balance and prevent a catastrophic debacle of inflation, bankruptcy and banana republic-ism.

In preview…we don’t think it is going to happen. But today…we explore further; maybe we’ll see something we missed.

More Question Marks

In the Bloomberg piece above, we are urged to ‘do something’ lest we ‘lose Niger.’ Since Niger is neither something ‘we’ ever had…nor something ‘we’ ever wanted, losing it does not seem like a pressing problem…nor do we expect to spend a lot of time looking for it.

So, let us reach into our bag of question marks: why not let the Russians have it?

Talk about dogsh*t countries! Niger has a GDP of about 1/1000th the size of the US. In purchasing power parity, the typical citizen earns about $100 per month. And the government’s budget is about half made up of foreign aid (typically, much of that ends up supporting sellers of top end Swiss watches and German autos).

Let’s take out another question mark. What possible advantage would be bestowed on the US by throwing its money around in Niger?

Of course, the same question mark could be used elsewhere. Why does the US have military bases in Germany? The Germans can take care of themselves. Why in Japan? And why send billions to the Ukraine (much of that slips into Swiss bank accounts and Mercedes dealers too!)?

At one level, the question marks are unnecessary. We know the story. After the Iraq/Afghanistan misadventures wound down, America’s war industry needed a new enemy. Over a period of years, it goaded Russia into playing the part.

This was not an easy thing to do. Russia has always had an uneasy relationship with Europe…sometimes admirer and imitator…sometimes fighting for its life against ‘the West.’ A little history might help clarify.

From Russia With Love

At the end of the 17th century, Peter, Tsar of Russia, later to be known as ‘the Great,’ arrived in England. He came with four chamberlains (assistants), three interpreters, two clock makers, a cook, a priest, 70 soldiers, four dwarfs and a monkey.

Peter wanted to learn all he could about England and Europe (he stopped in Germany on his way home) so that he could apply the lessons in Russia. It is said that Peter wanted his mission to be secret so that he wouldn’t be bothered by diplomatic niceties. But it is hard for us to imagine how he — who was 6’ 8” tall — and his curious entourage could have remained very long in London without being noticed.

This was the beginning of Russia’s efforts to westernise itself, which continued off and on for the next 300 years.

During this time, the Russians’ affection for things European was interrupted thrice — each time by the Europeans themselves. Hardly had Peter returned to Moscow when Charles XII of Sweden fell upon the Baltic coast, marched through Poland and invaded Russia in 1708. Blocked by Peter’s army, the Swedes were unable to advance on Moscow, so they turned towards the Ukraine. Again, Peter was able to out-maneuvre them, and beat Charles XII decisively at the battle of Poltava in 1709.

The winning tactic was to withdraw in the face of the more powerful enemy and to destroy everything and anything that he might be able to use. ‘Scorched earth,’ it is called. It is not very popular with local populations, but was effective against the Swedes, and later against the French in 1812, and the Germans in 1941.

From the historical record, invaders come to Russia from ‘the West,’ about once every hundred years. And since the last invasion happened 82 years ago, it might make sense for the Russians to take precautions. This was, arguably, the motivation for Vladimir Putin’s insistence that ‘the West’ take seriously his security concerns.

Instead, NATO did a ‘drang nach osten’ of its own…bringing the immense firepower of ‘the West’ closer and closer to Russia’s front door. In 2014, the US helped a coup d’etat in Kyiv, which replaced an elected Russian-friendly president with one more in tune with the western agenda.

Bullies and Busybodies

This must have been a big disappointment to Putin. After the fall of the Berlin Wall, with assurances from western leaders that NATO would not advance a single inch towards Mother Russia, the Kremlin leadership had once-again wanted to join Europe, not to fight it. European countries were far richer and more technologically advanced than Russia. The Russians hoped to emulate them, not to make war on them. Former NATO chief, George Robertson even says that Putin asked to join NATO. The Guardian reports:

‘George Robertson, a former Labour defence secretary who led Nato between 1999 and 2003, said Putin made it clear at their first meeting that he wanted Russia to be part of western Europe. “They wanted to be part of that secure, stable, prosperous west that Russia was out of at the time,’ he said.

‘The Labour peer recalled an early meeting with Putin, who became Russian president in 2000. “Putin said: ‘When are you going to invite us to join Nato?’’

Russia was never allowed to join. Instead, ‘the West’ marched east. Every warning issued by Putin…and every attempt to find a non-violent solution…was rebuffed by the US.

Finally, the Russian speaking regions east of the Dnieper sought independence from the Ukraine (where their language had been outlawed)…and Russia felt it had to act.

More to come…

Regards,

Bill Bonner,
For The Daily Reckoning Australia