After a long time of ultra low interest rates, the lowest recorded in history; the central banks are raising them while telegraphing their intended way in advance. The Federal Reserve is leading the trend (which is ironic since it has not reserves), but Europe seems not to be far behind, especially the Bundesbank, that warned markets just recently.
One might ask the question – why now? It is my opinion that the rates are going up to address the looming pension crisis. The fixed income markets need a higher return to meet their obligation.
But the regime of low interest rates brings up something interesting – it means that inflation expectations are low (you can still buy a 10 year Treasury bond with a yield of less than 3%).
So here is the question – what happened with the massive amounts of money created by the FED and the European Central Bank as part of quantitative easing and asset buying programs? The answer is quite simple – the money sits as “excess reserves” at the Fed earning interest. And every European bank worth their salt is placing their money there through US subsidiaries to avoid negative interest rates back home.
The truth is that inflation can come only from labor. Tight labor markets encourage people to move around and demand higher wages, which in turn mean higher prices. It all spirals up.
This was the order of the world after the second war, with relatively closed national economies. Then, after inflation got out of hand in the 70’s, we experienced what Mark Blythe calls “capital friendly revolution,” or globalization, for short.
Labor lost its power – a wage increase demand has been met with production moving to lower cost countries. There has been no inflation and capital rules the day. Labor has been beaten into a bloody submission. They take increasing amounts of debts to make up for stagnant wages; just hardly anybody wants to admit that.
But you can’t stop human nature – something has to give. And give it does – we see it with Brexit, the Trump phenomenon, Spain debacle, Greece and more.
Balance must be restored.
So globalization is the real train wreck, but reality will eventually re-assert itself. I thing we’re starting to see it now, however slow the process to be sure, it is underway.
So where did all the money go? It went into gains that are not counted as inflation. If the S&P500 goes up 20% percent a year is that inflation? The earnings of the companies that compose it surely didn’t go up that much. Hell, some of the hottest ones are not even capable to make a buck (I am looking at you Amazon and Tesla).
If real estate flies high it doesn’t count either, it is the “rent equivalent” that goes into statistics. And the fortune just sits at the Fed earning interest.
Be very careful people, this is the stuff revolutions are made of. There is a term in psychology called “preference falsification”. People tend to display it lot, but at some point they stop - it’s all good until it isn’t. And the unrest spreads like a forest fire.
Night is a good time to reflect, it brings comfort, detachment from routine. Anytime I find myself on a night flight across the Atlantic, I take sometime to reflect, with many different thoughts and ideas scattering my mind.
Like in Kurt Vonnegut’s “Mother night,” one of his best works, in my opinion. There is some pleasure in just reading the title - it puts you at ease.
In the book the protagonist goes through hell and back. The book takes an interesting perspective, where the main character speaks in the third person, providing a feeling of distance, slightly detached from reality. In the final scene, sitting in the prison cell, he is offered a chance at vindication.
It turned out that he was an American agent during the war, not just a Nazi collaborator.
He holds in his hands a letter from his US Army handler, offering him freedom. Freedom. Freedom is something we all strive to attain, but our main character was tired. Tired of the life he had lived, he said “the very thought of (freedom) made me nauseous.”
It happens, so thanks for the mother night.
But there is more to it – in times of stress, your brain shortens its attention span, to a week, a day or even less. It does this to maintain sanity, to maintain control and it’s the only way for your mind to cope with the situation at hand.
Focusing on problems one by one, you begin to disconnect yourself from the noise, the distractions. That’s how you survive. That’s how you achieve freedom.
One of the best minds of our times, in my opinion, Nicholas Taleb, posed the question on how to be successful in life. His response: first, you have to survive.
Everything else comes after that.
I admire people who don’t watch the daily news; unfortunately, I cannot bring myself to this level of discipline just yet. There is a scientology book, titled ‘A new slant on life,’ which refers to news outlets as ‘merchants of chaos’, and they nailed it.
It’s way better to turn off TV and think for yourself. And it is difficult, because thinking requires you to hold in your head two opposite sides of the argument simultaneously.
It’s not comfortable for most, but some people are just wired that way. Like electricity – thinking only happens if there is charge difference between two points in your brain.
Well, bringing it to practical terms. The Italian election was held on March 4th and no political group or party won an outright majority, resulting in a hung parliament.
No surprise there. Italy has a strong anti Euro sentiment after realizing that they are beginning to lose control of their own currency. This is not a good sign, obviously. In the years past, if imported goods were killing the domestic producers, the Italian Government could simply devalue the Lira until balance was restored.
Under the Euro regime, that freedom is removed. They are being held hostage by the Union. There is a growing sentiment to get out.
But, there is the ‘Hotel California’ problem – you can check out anytime you’d like, but you can never leave.
The Italian banking system is weak in its knees, on life support, all because of the European Central Bank, and the policies enacted by ‘Super’ Mario Draghi. Now what would happen in Italy if the Five Star Movement comes to power and they want out of the Euro?
Every rich Italian would open an account in a German bank.
How do you say “disaster” in Italian?
So, as it stands, nothing will happen, the ‘merchants of chaos’ have their field day once again, they seem to be the ones really winning.
It will be a “muddle through” forever, so be it.
The only way to help these people is to let them be.
Night is good and then the stars lost the war and the morning came.
“The Traveler” ends with Vladimir Putin’s ascent to power. Recent events may suggest that we’re approaching a moment of deflection in the man’s career.
Let’s start with the nerve agent attack on the former spy and GRU (Russian military intelligence service) colonel Sergei Skripal and his daughter in Salisbury, UK.
Skripal was a double agent, working for MI6 for about 10 years before being arrested in Moscow in 2004.
It appears that he was held as an asset for a potential spy swap, which came to pass in 2010 when he was exchanged for a group of Russians arrested in the US. As I write these lines Skripal and his daughter are still in critical condition and relations between UK and Russia have been seriously strained, with both sides holding the other responsible for this assassination.
Yet, the question that is not asked in the debacle is this: who benefited from it?
The answer is far from easy. If an exchanged spy is assassinated by his own country’s secret service, then what sense have spy swaps going forward? This event doesn’t make any sense for any side involved.
So the common narrative is that Putin personally ordered this attack, out of anger or just to make a point. But this is a weak explanation, an easy way out of a bigger question.
There is a third possibility, namely that this is an episode in a power struggle within the Krelmin. After all, Putin holds power for 20 years and certainly there is pressure from other group(s) to take him down. Putin, a cold player as he is, seems to be getting desperate to project power, as shown in his recent speech about Russia’s new array of nuclear weapons that are invincible and can strike anywhere in the world.
The interesting fact is that we simply don’t know what is going on inside the Kremlin, except for official Russian information.
We don’t know who is fighting whom, only glimpses into the struggle. Recall how Yuri Ivanov, the Major General, second in command of the GRU, was washed up on the shore of the Mediterranean in 2010, a mysterious accident that was never resolved.
Moving on to Germany - the 2017 September election results have led to unprecedented difficulties in forming a new government there. After the longest government building process in modern Germany, Angela Merkel was re-elected as chancellor of a 'grand coalition' of Conservatives (CDU/CSU) and Social Democrats (SPD) just this month. The SPD took power for both parties, as Merkel has realized that going back to the people would result in both parties losing even more ground.
What I do not think most people outside of Germany understand is - Merkel has lost control. In my view, the coming years will bring a rise in nationalism in Germany between the Catholic South and the Protestant North.
These are certainly interesting times.
Skin in the game.
For most people this concept is a no-brainer - whatever we do in life, we perform best if we have a stake in it. This is when we care most about what we do and how we do it. We put our souls into it, and every little thing matters.
I believe the best definition of success is to live an honorable life. To achieve this one needs to care deeply.
In life, micro works better then macro. It could be that, as a society, we’re slowly zeroing in on a next stage of how humans will function – and it will be a massive decentralization.
Let me put this into perspective.
We had libertarianism in the 19th century, where upholding liberty of an individual was a core principle.
Then, communist thought placed the importance of a class, specifically the working class, above that of an individual. Or, as it is taught at many universities still - it is an emphasis on cohesiveness among individuals and prioritization of the group over one’s self.
And if your b.s. detector just acted up, you’re not alone.
The most vulgar definition of society is national socialism – that it has to be dominated by race.
So now, given the good human nature, unchanged since the beginning of civilization, the craziest ideas had to go first to the garbage can of history. And so it was – Nazi Germany lasted only 12 years really. With horrific damage inflicted, human nature spit them out with distaste like a spoiled schnitzel.
The communist regime lasted longer, about seventy years, depending which final events are considered.
So the natural question is – what will come next?
We have pretty much killed libertarianism, with regulations and the governments being the biggest business there is.
So really – what’s next for us?
It is my strong belief that what is coming is a decentralization of sorts. A focus on community, on the people you know, and the locality of business. The big box stores will eventually go away and nobody will miss them.
Life will become focused again – just like we are designed to live it.
We will have skin in the game being a part of society – not bothering to do something that may affect people half way across the world, of whom we don’t know much more than an e-mail address. Let alone how they think and what is important to them.
Local interaction brings the best in people.
Globalization, in contrast, is a train wreck.
But hey – we gave it a try, and now everyone has a strange taste in their mouth, “like the father or the dog just died”, to quote the great Leonard Cohen.
It’s time to go back to basics.
The presidential election will take place in a couple of weeks in Russia.
This is a topic of interest because the rebuilding of the Russian empire and raise of Vladimir Putin to power is a main driver The Traveler’s setting in the 1990’s.
Putin is widely expected to win again this year; the only question is by how much? The results will serve as an indicator to any potential political fractions in Russia and whether Putin’s power is weakening or if he still has an iron grip of the country.
In this sense, not much has changed in Russia from the times of Catherine the Great – only a strong ruler can govern the nation. Whether it’s a tsar, general secretary of a party (Stalin) or a president, like now, one governing head is better than the collective.
And Russia is by no means an exemption – the Chinese communist party just changed the country’s constitution making Xi Jinping a president for life. This event prompted president Trump to say – “I think it's great. Maybe we'll have to give that a shot some day."
While I don’t think this will happen in the US anytime soon, these events bring to mind a bigger question: is democracy sustainable? This system is an unnatural concept to the human mind, after all, for most of humanity’s existence there has always been one leader in a society (with very few short exceptions). Historically speaking we’re living through an experiment.
In business, church or in the army, there is always one leader. It would be unthinkable to have it any other way. And yet, the idea that a country, a sum of hierarchies, can be govern based on a majority’s vote persists.
Perhaps the western democracies are better suited for this system than many other places in the world? Or are people’s preferences here managed more efficiently? Isn’t the European Union governed by the “unelected troika”, which consists of representatives from the European Commission, the ECB, and the IMF? Hardly anyone seems to be bothered.
In The Traveler, the empire is rebuilt like a business: using influence, knowledge, power and determination.
The traits of humanity will make the world move forward. The more things change, the more they stay the same.