Tuesday, 24 January 2023 — Gold Coast, Australia

By Vern Gowdie Editor, The Daily Reckoning Australia

[8 min read]

Dear Reader,

‘History doesn't repeat itself, but it often rhymes.’

Mark Twain

Shopping is one of my least favourite ways to spend time.

Retail therapy…who are you kidding?

It’s ‘retail torture’.

But, in acknowledging the reality of ‘happy wife, happy life’, I know mental strength must be summoned to endure the anguish of visiting stores (plural!).

And our quest for new furniture begins.

Expecting to be confronted with too many choices, I steeled myself for a long day.

But no (to my pleasant surprise), this wasn’t the case.

Why?

Because almost every furniture store had chairs covered in Bouclé fabric…like this one:

In the end, we would ask the salespeople, ‘have you got anything NOT covered in Bouclé?’.

Everything old is new again.

Bouclé was invented in the late 1940s by the Finnish American architect and industrial designer, Eero Saarinen. The fabric was used on the ‘Womb chair’ he designed.

If you’re old enough, you may recall Bouclé made a resurgence in the decade of flared jeans and long hair…the 1970s.

Then, it faded from our consciousness.

Now Bouclé is back and, it’s…everywhere.

Furniture. Fashion.

Every decade has a new ‘in’ thing.

But it isn’t really new…just a revamped version from an earlier era.

Trends come and go and come again.

Much like…finance.

To borrow from John Denver’s hit song…‘some decades are diamonds, some decades stone’.

The decade that was, is not the decade that is…

The decade from 2010–21 was an exceptional one in the world of finance.

Definitely a diamond.

An era of ultra-low rates made it fashionable to own…cryptos, tech stocks, IPOs. NFTs, meme stocks…anything you touched went up.

Believing you could turn the investment equivalent of ‘cows’ ears’ into ‘silk purses’ was so on trend.

The ‘worthless’ were considered ‘priceless’…heck, even NFTs (for a moment in time) became ‘collector pieces’.

But that era of delusion — or as Harvard Finance Professor Mihir A Desai calls it, ‘Magical Thinking’ — is over:

To quote from the article:

‘The end of magical thinking is upon us as cryptocurrencies and valuations are collapsing — and that is good news…Hopefully, a revitalization of that great American tradition of pragmatism will follow.’

While recent action on Wall Street and the ASX 200 appears to be signalling, ‘business as usual’, DO NOT be deceived.

The narrative is ‘the worst of inflation is over’.

Time to party again.

Perhaps.

But could we see history rhyme again…bringing back the inflation fads of the late 1960s and 1970s?

Low inflation followed by higher inflation.

Phew, inflation tamed.

Wrong. The inflationary pressures within the system are too great:

Global conditions today are vastly different to the 2010–21 period of rampant speculation.

How so?

1. Persistent low inflation replaced by the potential for higher inflation (more on why this could be the case shortly).
2. Prolonged period of ultra-low interest rates replaced by longer periods of higher (compared to what we had) interest rates.
3. Globalisation replaced by localisation and covert trade wars.
4. Just-in-time supply chains replaced by just-in-case warehousing.
5. Decades of relative peace replaced by outbreaks of ‘hot’ and ‘cold’ wars.
6. Jobs gradually replaced by artificial intelligence (machine learning, robotics, and automation). Increased social tension and political instability (on the left and right) is likely.
7. Over the past decade, global debt has ballooned to US$350 trillion (in 2008 it was US$140 trillion). How is this ‘mind-blowing’ level of debt going to be serviced in a higher interest rate world? Something will have to give. And, when it does, we might see a temporary fall in inflation. Possibly even deflation.

However, it’s unlikely to remain there.

Why higher inflation is a likely fixture

Recently, I wrote, ‘we’re facing “wars” on three fronts’.

I was wrong. There are four wars:

1. Geopolitical War

• Russia versus Ukraine and NATO.
• China versus Taiwan and its Western Allies.
• Middle East…Israel versus Iran.

As noted Economist Nouriel Roubini recently stated (emphasis added):

‘… the US, Europe, and NATO are re-arming, as is pretty much everyone in the Middle East and Asia, including Japan, which has embarked on its biggest military build-up in many decades. Higher levels of spending on conventional and unconventional weapons (including nuclear, cyber, bio, and chemical) are all but assured, and these expenditures will weigh on the public purse.’

2. Climate War

A war against ‘climate change’ is being waged.

This is also a costly war.

Not just in terms of the trillions of dollars being spent on renewable projects, but also the cost to economic productivity from disrupted and intermittent (and increasingly more expensive) energy supply.

3. Pandemic War

More public money is being spent on preventative measures and healthcare systems to cope with the prospect of future pandemics and the impacts on an ageing society.

If history is any guide, the combined cost of these ‘wars’ (measured in tens of trillions of dollars) is destined to be inflationary:

Funding geopolitical wars is an expensive exercise.

It’s no coincidence US inflation increased during periods of conflict.

The switch from low-cost to high-cost energy — oil crises in the 1970s — also created significant inflationary pressures.

The future we face has…geopolitical war/s, higher energy costs, AND the political pressure to fund greater demand for first-world healthcare.

Plus, there’s a fourth war:

4. Social Inequality War

Placating the disenfranchised. Quelling social unrest. Making sure ‘idle hands don’t do the Devil’s work’. And calming the nerves of retirees by topping up pension funds decimated by a collapse in asset markets. Those ‘temporary’ pandemic stimulus payments (which, in our nation’s case, inflated our public debt to more than $1 trillion) are likely to be reintroduced as permanent welfare fixtures.

How do governments the world over pay for all these ‘wars’?

No country collects sufficient tax revenues to fund these ‘wars’.

Any talk of balanced budgets is pure fantasy…not going to happen.

Financing these various ‘wars’ will be tasked to the central bank printing press.

We know what happened to inflation in the US when Money Supply (M2) and Public Debt went almost vertical after 2020.

US M2 money supply has increased by US$6 trillion in just three years:

US Public Debt has now hit the debt ceiling with the addition of US$7.7 trillion in three years:

The same story is being told in Australia, Europe, Canada, NZ, etc.

Politically there is no way out of these ‘wars’.

Does NATO and its allies say, ‘we can no longer provide financial and military aid to…’?

Do the political class (and all the climate change hangers-on) say, ‘we were wrong. It was all a con. Let the markets sort this transition to cleaner energy out’?

Do the politicians say, ‘we no longer have the capacity to fund a modern, well-resourced and professionally staffed healthcare system’?

Do we accept a growing level of social unrest from those who feel left behind and/or have too many idle hours to spend on social media looking for ‘fellow pi*sed off tribe members’ OR do we buy social harmony with hush money?

Do increased debt servicing costs force governments to default on debt obligations OR do they print money to keep their AAA credit ratings?

If, like me, you think the political class will do what it always does — take the soft options — then inflation is going to be a persistent issue…much like the 1970s.

If so, the new financial fashion trend is stone.

Get used to seeing it everywhere.

Check out my ‘Digger Defence’ strategy if you’re wanting actionable solutions for safeguarding your wealth from what is to come.

Regards,

Vern Gowdie,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

It was a very cold weekend. The temperature fell to four below zero, centigrade, each night.

Our house in Poitou — old, drafty, large — is almost impossible to heat. So we turned up the radiators full blast…and still shivered underneath the covers.

To bring new readers more fully into the picture, we bought our house in very rural France in 1994. It was a ramshackle place. We like fixing up old houses and restoring old gardens. We had plenty to do on both counts.

We needed a large house for our six children, mother, aunt, and a tutor who came with us to France to work with the children until they learned enough French to attend local schools. As it happened, the tutor almost died of a chest tumour, and the children were forced into the local school with hardly a word of French. Fortunately, children adapt to new languages quickly, and it was only a few weeks later that we were asking them to help translate.

28 years later, the children have lives of their own. And there’s still a lot of work to do — much of it redoing the repairs and renovations we made 25 years ago.

And there are always surprises.

Tout casse…tout passe

‘It happened around noon’, explained Patrice, the farmer across the road.

‘I came back from putting out some hay…and I knew something didn’t look right. And then I realized that the roof had fallen in.’

The old clay tile roof leaked. Over many years, one of the oak beams that held up the roof had rotted. Two weeks ago, it gave way and came down on the cattle inside.

‘It was almost a miracle. One calf was trapped in the wreckage, but otherwise none of the cows were hurt’, Patrice explained.

We made a quick visit over the weekend to check on rebuilding the barn.

Tout casse…tout passe, say the French. Everything breaks up and goes away.

Poor Patrice. At 60 years old, he got kicked in the knee by a cow. This seemed to trigger a bad case of osteoarthritis. He limped, favouring his good leg. Then, the extra stress on the good knee caused it to go bad too. Now, he’s an invalid, waiting for operations on both knees…and wondering if he will ever be able to go back to work.

‘When I was working, I thought how nice it would be to take some time off. But now that I can’t work, I’m miserable. I’ve spent my whole life outside on the farm. I don’t like being cooped up at home. Christine doesn’t like it either.’

Patrice nodded towards his long-time companion, who rolled her eyes slightly.

Later in the day…

An absolute mess

‘If I were you, I’d stay in Ireland’, suggested a friend.

Our neighbours are very sociable. They invite us to dinner…or cocktails; they come over to chat; they bring us up to date on things.

‘France is an absolute mess. There are too many people getting too much money from the government for doing too little.’

‘Sounds familiar’, we replied.

Earlier in the day, we attended mass at St Pierre in Le Dorat. It’s a magnificent church in a charming medieval town. The church is huge…built of heavy grey granite in the 10^th century. It has tall columns and soaring arches…and paving stones worn smooth by 30 generations of believers.

The sky was the colour of lead. Light snow fell in occasional flurries. Unheated, the church felt like the inside of a freezer. In the centre pews, there were radiant heaters focused down on the faithful. But on the wings, where we and other sinners were seated, there was no heat at all.

In the Middle Ages, masses were given in Latin. The people didn’t speak Latin. That was a language reserved to the educated elite, who treated it as a sacred knowledge and used their access as a source of power. The clergy, back then, knew the secrets of the Bible. The masses did not. They needed priests to intercede, to explain, to mediate between Heaven and Earth…to bridge the mysterious gulf between their hard, everyday lives and the promises of everlasting paradise in the hereafter.

It was not until the 16^th century that the Bible was made available in local languages. Then, people could read it themselves. In England, Holland, and Germany — but not so much in France — they disintermediated the priest class.

In today’s jargon, the printing press and local language translations ‘disrupted’ the monopoly power of the Catholic church. People could read the words themselves and decide what they meant. Out of this disruption came the ‘protestant’ religions — Methodist, Baptist, Quaker, Presbyterian — and so forth. By contrast, the Church of England, known as ‘Episcopalian’ in the US, is not a ‘protestant’ religion; it is a catholic religion with someone other than the pope at its head.

Ignorant masses

‘The elite always pretend that they have some special knowledge’, continued our learned friend.

‘Today, it is not the Latin Bible that keeps the elite in power; it is their claim to know “The Science”.’

Our friend was on a roll. In the remote countryside of France, she had found a sympathetic ear. Two of them.

‘We didn’t know — when the Covid first appeared — what it meant. The authorities said it was like the plague that wiped out a third of the population of Europe. We, the ignorant masses, didn’t know any better. We were at the mercy of the scientists.

‘But then we realized, the scientists didn’t know any more than we did. And it turned out it was just another virus…more dangerous than some, less dangerous than others. And it didn’t matter if you stayed at home, put on a mask and got three shots…you’d still get it. And you wouldn’t die.

‘And it’s pretty much the same thing with the war in the Ukraine. We have foreign policy “experts” who tell us that they know best. They know that Russia must be stopped, or our democracy in France, such as it is, will be put in danger. Soon, Russian troops will be goose stepping down the Champs Elysee.

‘So, we send billions in aid…to keep the war going. US defense industries…and US energy companies…make a lot of money. But here in Europe we pay higher prices for everything. I don’t think we’ve seen the end of the protests. [She was referring to the ‘manifestations’ against pension reform.]

‘And anyone who pays attention to the news knows the whole thing is a fraud. The Russians can barely hold onto the Eastern provinces of the Ukraine…There is no way they pose a threat to Western Europe. And those areas that the Russians control now are full of Russians, not Ukrainians. Democracy has nothing to do with it; the people there voted to break away from the Ukraine.

‘And I saw your Al Gore on TV the other day. He was almost coming apart at the seams, giving a speech to Davos. He said the oceans were boiling…and that “rain bombs” were coming down on our heads. He’s been warning for the last 20 years.’

Al Gore’s movie, An Inconvenient Truth, came out in 2006. He drew on ‘The Science’ to warn that the world would be a dreadful place by now. The inconvenient thing is it’s not.

‘It’s the same sort of thing. Today, people worship “The Science” the same way they used to worship the Latin Bible. They don’t know what’s in it, but they are sure it holds the key to salvation.’

Regards,

Bill Bonner,
For The Daily Reckoning Australia