Some say the world will end in fire,
Some say in ice.
From what I’ve tasted of desire
I hold with those who favor fire.
— Robert Frost, Fire and Ice (1920)
I think most of us are like Robert Frost. I know I am. When I think about how bad things might happen, how our world might end, I tend to imagine it in a series of mighty events like market crashes that explode like bombs and result in a blaze of destruction. That’s the romantic in me and Frost, imagining that we perish in fiery excitement.
I suspect, though, that the far more common end is that we die in the bathtub.
Certainly that’s what stagflation is, economic death in the bathtub. Economic death by slow, ignominious ice rather than quick, heroic fire. It’s not a crushing recession where everyone loses their jobs and a great wailing erupts across the land. It’s a long, gray slog where meager real growth feels like death, but you keep up appearances as best you can. Stagflation is a long gray slog where every day you feel more and more stretched … attenuated … because nothing is getting cheaper and every now and then you’ll be hit with a new price or an unexpected bill that literally takes your breath away. You can manage it. For now. But damn. Stagflation is a long gray slog where you read about people in the news making lots of money or riding some big financial win, all smiles, but in your own financial life and the financial lives of everyone you know the smiles are increasingly wan and forced. Everyone you know is bleeding. Not yet bleeding out. But damn.
Sound familiar?
A big part of my job, and probably my favorite part of the job, is that I get to talk with a lot of people about money. Not money in the aggregate or the generic, and not money in the sense of this stock or that stock, but about their real-life money or about other people’s real-life money that they manage or advise. I get to talk with people inside the US and outside the US. I get to talk with people of modest means and with crazy rich people. I get to talk about what they’re doing in the real world and what they’re doing in the market world. Usually there’s a fair amount of difference in what people are doing, even when everyone is nervous about the future. Not today. Not for the past 2 months or so.
Nothing has changed in people’s consumption behaviors. Nothing. Everyone is doing everything that they did before. Maybe a little more nervously and maybe a little more on credit, but no one has changed the way they live their lives. The one exception to this is that non-US people are no longer consuming US travel. They’re still consuming US education for their kids, but they’ve cut back on travel to the US in a really major way.
Everything has changed in people’s risk-taking behaviors. Everything. The non-US people are bringing their money back home, wherever home is. They want to eliminate their risk exposure to the US, period. The US people are doing nothing in a profound way, by which I mean they are of course eliminating their risk-on behaviors like buying a new house or expanding their company or bankrolling nephew Gary’s start-up, but they are also NOT doing the typical risk-off behaviors like selling their stocks and going to cash or slashing the price on that rental house that’s been on the market waaay too long or telling little Johnny or Jenny that $100k for another year of ‘higher education’ at [[checks notes]] the University of Miami is just not in the cards.
I talk with so many people who are frozen in place, for whom ‘risk’ is less and less a meaningful concept. They’re extremely unsure about the future, so they don’t want to risk investing in anything new. But they also don’t trust the traditional safe havens like Treasuries or (for the more monied crowd) the yen, so they don’t want to risk selling anything old. They’re domestic US investors, so a falling dollar doesn’t hurt them like it does a non-US investor with US assets, and there’s only so much gold you can add to your portfolio before you start to look at yourself askance in the mirror. So they do nothing in a profound way. They don’t increase risk but they don’t diminish risk. They’re averse to risk and they’re averse to risk-aversion! It’s a word without much meaning any more, and that’s why I titled this note The Death of Risk.
It’s a very weird place for an economy to find itself, where the entire idea of ‘risk’ gets obliterated because of an intentional erosion in the full faith and credit of the US government, and I think that all of our economic models and projections about what happens next are going to be wrong.
Let me show you just how weird a place we are in, where no one trusts the US government (or to a lesser and related sense the Japanese government) as a safe place to preserve their wealth when the world gets squirrely.
10-Year “Investors are Fleeing to X” Semantic Density (Raw Density)
This is a 10-year chart of the semantic density of investor narratives (what we call semantic signatures) concerning five “safety assets” — gold, money market funds, US Treasuries, the Swiss franc and the Japanese yen — across millions of financial news articles, blogs, research reports and transcripts. Semantic signatures are linguistic markers not for sentiment, topics, or keywords, but of a specific meaning that the author is trying to convey regardless of the specific words chosen to say it. Basically this technology gives us the ability to read everything in the world for meaning and then measure the mathematical density of that meaning-distribution across replicable linguistic structures. Lots of ten-dollar words in that last sentence, but if you want a more discursive introduction to the idea of semantic signatures please see The Four Horsemen of the Great Ravine, for a great brief note on the technology and the signals as shown through the topic of tariffs please see Narrative Shopping, and if you really want to dig into this we have an hour-long webinar Semantic Factorization Demo for Epsilon Theory Professional on our Professional site. All graphics shown here are from the Safety Asset Storyboard, one of six such semantic signature explorations also found on our Professional site.
What you’re seeing in this chart is that whenever there’s a market crisis or event that provokes risk-off and safe haven-seeking behavior, financial news media talks a lot about where that money is going. You see a lot of dark blue in that 10-year chart, which is gold, and you see a lot of tan in that chart, which are US Treasuries. Depending on the crisis, you see a fair amount of green, which is the Japanese yen. These are the go-to safety assets over the past ten years, especially gold and US Treasuries. The clear exception to this rule is our current risk-off, safe haven-seeking moment, where gold makes its usual appearance but US Treasuries and the Japanese yen are noticeably diminished from prior and similar risk-off moments.
As we all try to figure out where this goes, we have to grapple with the reality that this is a 180 degree flip in investor attitudes about risk that prevailed in the post-GFC era. All of the capital (over)committed in the TINA era needed that era to persist, if not become more careless. A big part of the long, gray slog is the prodigious amount of capital that is frozen and searching for an exit that pushes the haircut on someone else.
“TINA” stands for “There Is No Alternative.”
Thinking about the suburban housing market. I’m not an investor, but I see people on all sides of this having troubles. It’s not the homes are over-valued per se, but there’s a big spread between what sellers “need to get” and what seems reasonable. The sellers tend to be people who don’t need a house (estate sale, flippers, etc), buyers are people who really need a house and have a lot of cash. So there’s a market, but it’s very small compared to the norm. And within that smaller market, there’s a bit of an air of desperation… I’m merely zillow stalking out of curiosity, so that is a rather artistic and non-professional take on one semi-frozen market that is accessible to mere mortals…
After reading the “Not-so-golden rule” post, I had some visitors who are successful investors from SEA (having US MBA background however). We discussed the trade wars, probs with USD system / debt, and China. I attempted to summarize your take, passing it off as my own, and was met with blank stares. “But what is the alternative to the USD? Other countries still even less responsible stewards of currency than US.
Gold? There’s not enough of it…” I too am a fire appreciator, but it does feel a bit like waiting for a big pile of wet brush to combust spontaneously. Of course even without a fire, it will rot in place… to extend the corny metaphor.
I agree residential housing isn’t immune. It has continued to appreciate while its affordability plummets. It is under-supplied, but the levers to make more shelter so it is more affordable aren’t being pulled. Most Boomers rely on this as the cornerstone of their retirement, either via a rent free place to live, or to provide the capital to live on after downsizing. For that sale to occur at these or higher prices; some young family starting out has to come along and qualify for the exorbitant mortgage, property taxes, insurance, and a six-figure down payment. Outside the top 10% of incomes, or substantial parental help that is a thin set of buyers.
I have observed my boomer peers building their “forever homes”, both to enjoy and with the not so subtle bet it is also a no lose investment. In the best markets and neighborhoods they will be, but probably not at the median. There is a much deeper market for $500k homes than there is for $5 million!
And TINA for the US Government…it has no alternative than to provide backstops and liquidity in any case of real or forecasted pain.
I just learned in Mauldin’s SIC that the FHA was backstopping mortgages - i can’t seem to find a total but directionally up to 1T or over…began under Obama and Biden floored it (number go up). Apparently these are checks to the individual and not the bank.
I joked with some of my friends over the years about the fed/treasury keeping an eye on sub prime auto delinquencies and exerting “regulatory oversight” to manage delinquencies before they are reported.
I have no idea where this speeding train goes or how long it stays on the track but I’m sure there are plenty of 'geniuses" laying new track to keep the train from hitting the mountain or going over the sea clifff.
Great post Ben. I’ve been trying to wrap my head around this ever since your “Snip” untethered post a while back.
It will be interesting, if not fascinating, to see what monetary and fiscal policies get thrown at the upcoming cold, gray, slog. I’ll be most interested to see the reaction from the younger generations (Millennial and Gen Z especially) because they’re already starting from a point in which they don’t believe Social Security or Medicare will be there for them. I think we already see their reaction today as they buy every dip – the markets are where they’re putting nearly all their eggs!
I do think the Death of Risk got reignited in the '07/'08 Crisis with QE, GM Bankruptcy. QE continued and in Covid the Fed basically backed excessive leverage and are now exploring ‘methods’ to cover hedge fund losses in UST.
One could argue that Risk has been dying a slow death for 18 years.
Where does this US patient go now? Hospice for another 18 years? Put to bed (major reset). Dunno, i just know that those in power don’t want it on their watch which leads me to believe we will have perpetual hospice until someone/thing puts the patient out of its misery.
It has become increasingly difficult to maintain the quaint fiction that modern financial markets operate as arenas of fair competition and rational price discovery. Rather, they resemble rigged casinos where the house not only always wins—it rewrites the rules mid hand. The largest banks, brokerage firms, and insurers, those self-styled stewards of fiduciary responsibility, have evolved into institutions whose true genius lies in the artful circumvention of risk, accountability, and the interests of their clients.
Insurance companies, in particular, seem less concerned with underwriting protection than with perfecting the science of claim denial. Brokerage houses, once imagined as dignified custodians of capital, now function chiefly as fee extraction machines, shearing the unknowing with a rapacity that would make a medieval tax collector blush. As for public equities, the notion that they float freely on market forces is charmingly anachronistic. They are, in truth, jerked about like marionettes by the trillion dollar strings of institutional titans whose trading desks wield more influence than any boardroom.
And looming in the shadows of this already lopsided contest are the legal loan sharks, private lenders masquerading as legitimate financiers, who encircle small businesses like vultures over carrion. Their rates are usurious, their practices opaque, their recourse swift and brutal.
The architecture of American financial services is overdue for a reckoning. Reform should not aim merely to restore transparency, but to break the oligarchic grip that has rendered free markets a farce for all but the most fortified. In a system increasingly indifferent to virtue and hostile to prudence, one begins to suspect that the invisible hand now wears brass knuckles.