Things Fall Apart (Part 3) – Markets

41+ Viktor Vasnetsov, “Four Horsemen of the Apocalypse” (1887) Our story so f
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Victor K
Victor K
1 year ago

“A risk is something where we can assign some sort of reasonable probability to its occurrence…”
Three of the Horsemen are “risks”. Two of them, maybe all three, are non-recurring. How do you assign a probability to a non-repeatable event, or do you mean guesstimate as a process? You can assign probabilities to guesstimators. Do you use a coterie, either public or private, to assign the ‘reasonable probability’?
(I realize this is not about your main point.)

Jane VanFossen
Jane VanFossen
1 year ago

You just keep upping your game, Ben! When you say “there’s an argument for Bitcoin here” aren’t you really talking about Blockchain Technology broadly? Doesn’t this reaffirm what Neville Crawley wrote about on September 24 in his guest post re an Alternative Data Infrastructure System?

Howard Wetsman
1 year ago

I filled out an online form today and one of the fields was country of residence. I had to scroll a lot to get to United States, and I realized that it’s usually at the top. I had a kind of frisson that this was what it was like living in a country that didn’t have the world’s reserve currency. I don’t know if it’s gold, SDRs, Bitcoin, or moonbeams, but if the world picks another reserve currency, American life changes fast.
I was asked once what really backs the US Dollar, and I said, “12 aircraft carriers.” You want an out of the blue, unimagined, unknown-unknown? Someone even gets close to putting a dent in one of those ships, and common knowledge that America rules the sea lanes will change quickly.

Mark Kahn
Mark Kahn
1 year ago
Reply to  Howard Wetsman

I agree, I always thought that Wall Street and economists underestimate (ignore? / don’t even think about?) the military component supporting the world’s reserve currency.

Since the last world war ended in ’45 and the Cold one in ~’90 (and the Soviet economy and political structure was never going to support a reserve currency anyway), the military-might aspect has gone from being taken for granted to being almost forgotten about. It’s no coincidence that the British pound gave way to the US dollar as the reserve currency at the same time that the military fortunes of the two countries were moving in opposite directions.

Ben – thoughts on Gold? If, as you’ve noted, it’s insurance against CB failure, I have to assume you see it as part of the strategy when the Fourth Horseman arrives (carrying the 1970s economy in his saddle bag) and undermines CB credibility?

Howard Wetsman
1 year ago
Reply to  Ben Hunt

I get that Ben, and I get the idea of dead money if one moves too soon, but I have insurance every day on my house because I can’t know the actual chances of it burning down from day to day. If something sudden happened, I wonder if I’d be able to get gold then. I’m not taking about all in, but shouldn’t we have a little already?

Enchanted Broccoli
1 year ago

“God help us, but there’s an argument for Bitcoin here.”

Looking forward to more in-depth discussions on this!

We actually just published a 100-page long thesis on what’s really driving the cryptocurrency phenomenon (https://iterative.capital/thesis/). This traces back to the origin & cultural context of open-source software, cypherpunk movement, and how Bitcoin coordinates around human & machine consensus. We spent a lot of time on this. Promise this is not marketing/shill. I genuinely want to hear feedbacks from Epsilon Pack.

Keith
Keith
1 year ago

Interesting allegory of the four horsemen, especially where China and Inflation fall in order (War & Death).

Does it change the outlook if the three horseman arrive together or just lengthen the recovery timeline. At present all 3 narratives seem to be in play.I

Biblically speaking the four horsemen arrive together, with Hell following. Can we imagine a scenario where markets and participants encounter your four horsemen at the same time? Would certainly seem like Hell for asset managers.

Mark Kahn
Mark Kahn
1 year ago
Reply to  Ben Hunt

I grew up in the ’70s and stagflation was hell as nothing worked.

I had no economics/market experience then, but I did know that many people were unemployed or employed in desperation jobs ’cause they couldn’t get jobs in their fields like teaching or factory work (I knew several unemployed or underemployed friends and family), prices of the stuff you needed – clothes, food, household basics – all went up, all the time (your parents talked about inflation and worried about money ALL. THE. TIME.) and the adults were always mad, sad and/or frustrated.

And it just went on year after soul-crushing year.

Looking back, the only investment that really worked was gold, but the catalyst was Nixon taking the US off the gold standard (which had forced a massive underpricing of gold) – so, to Ben’s point a few comments above, it might not work the same / as well in the next stagflation.

Ashu Rao
Ashu Rao
1 year ago

I noticed a certain just-so story asset was not mentioned in the discussion…

Ampf
Ampf
1 year ago

Only one quote!?!?!?! And at the end no less! Ugh, I’m going to have to rethink my subscription.

In regards to your comments about getting closer to actual cash flows, what is your opinion of ETFs that utilize dividends as a factor?

Peter
Peter
1 year ago

My gut feeling is that the Horsemen coalesce in daisy-chain fashion, resulting in a global deflation that may make 2008/2009 seem like a walk in the park. Then we get high/hyper-inflation. I’ve seen some comments on this thread about gold. Gold is great as a store of value and unit of account, but it is poor as a medium of exchange. I suspect that bag/junk silver (pre 1965 non-numismatic coins) will prove better than gold due to its “medium of exchange” characteristics. You can’t shave the corner off a gold bar to buy a gallon of milk, but a pre-1965 silver dollar just might do. To that end, we should not be surprised to see prices published for the “real” value of such coins…like stranded bank deposits were during the Great Depression. Then again, coins maybe outlawed in favor of digital currency so that no one can protect him/herself from inflation…similar to FDR’s making personal owning of gold illegal in April 1933. Just sayin’.

Victor K
Victor K
1 year ago
Reply to  Peter

Agreed. Physical gold has always had divisibility/purity problems. I would take it a step further to include nickels and many ’82 pennies and earlier (3 gram or copper-ish). Of course, some would say ammo, opioids, and antibiotics. Then there’s always foraging. Hopefully, the real reason to hold the above is the umbrella strategy (regret minimization).

Mark Clark
Mark Clark
1 year ago

Sometimes intellectual property has a limited shelf life. Think Polaroid, Xerox, or Blackberry among others.
There’s a pretty good chance farmland won’t become obsolete and there was never a better time to be a farmer than the
inflationary 70’s. But like most booms, people bid up prices too much and it all came crashing down in the 80’s when Paul Volcker came to town.

Peter
Peter
1 year ago

As I keep thinking about this series , the one thing that seems to be missing is the connection of long term valuation and the (four) horseman .

That is an important context that is missing in your framework, it seems to me.

For one doesn’t need the Fed to continue to tighten to create a downturn, since they explicitly printed Trillions of dollars to drive rates lower and by their so called “portfolio effect “ force/encourage portfolio managers and individuals into risk assets and drive up financial asset prices.

All the Fed has to do is to stop doing that and over time markets revert to historical long term valuation .
Clearly roughly 0% real yields on the 10 year treasury doesn’t suffice, especially with Trillion dollar deficits “as far as the eye can see”.

The same point can be made about equities. Valuation was intentionally goosed higher by the Mandarins at the Central Banks. Now that this is ending, reversing, long term valuations for equities will revert to historical levels.
Presumably much lower than today.

Any thoughts on this?
Is the lack of commentary based on uncertainty over what valuation measures to choose?

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