(In)Stability…Adventures in Capitalism
This weekend, I watched in baffled amazement as our President and his entire administration went on vacation, abandoning tens of thousands of Americans, along with allied citizens, to their fate in Afghanistan. America has done some embarrassingly dumb things during my lifetime, but this one displayed a special sort of arrogance and incompetence that can only develop through years of hubris, gross negligence, and dereliction of the basic tenets of governance.
Let me state categorically that we should have gone home from Afghanistan long ago. What started as a mission to track down Osama bin Laden, morphed into an impossible adventure with nebulous goals, many of which were unobtainable and quite ludicrous. That said, four Presidents and countless generals all had time to strategize and plan our exit. This weekend’s events were truly a colossal klusterfuk of the highest order, overseen by the most senior leadership of our nation. Despite two decades to strategize and war-game this inevitable event, these assholes literally had no plan to extract our people and send them home safely. It seems that our leadership was as baffled and mesmerized by the events as I was.
An educated observer of world affairs will craft their own opinion of things. I don’t think anyone expected the corrupt Afghan government to hold things together once the American military went home. Everyone knew the situation was highly combustible. However, after two decades of stability, everyone close to the situation had chosen to ignore the true facts on the ground. Sure, they all assumed that when the military went home, it would collapse, but it was expected to take years, not days. Then again, after two decades where a highly unstable situation remained stable, everyone in leadership grew numb to just how unstable the situation really was.
I bring this all up because the whole world is on the Federal Reserve standard. All of us intuitively know that markets, in general, are highly unstable. The current market is particularly unstable—only held aloft, at stratospheric valuations, by excessive money printing. Every time there’s been a whiff of reduced QE or a threat of rate increases, the market has melted, and the Fed has ridden to the rescue. As a result, we have all implicitly accepted that the Fed will always be there to protect the market should things get more than a bit out of hand—much like the Afghans expected the US military would be there backing them up forever. We just saw how rapidly an army can melt away when their protector leaves the field. What if the Fed does the same to the markets?
Jack Dorsey celebrates the Taliban victory…
Of course, no one can conceive of an event where the Fed is forced to step away. That outcome seems so far outside of our recent experience, that it is assumed to be impossible. What if it isn’t? Just because the Fed has been there for the past two decades, roughly the same period overlapping with our occupation of Afghanistan, doesn’t mean that it will be there for the next two decades.
One of the scariest market-related black swans I can think of, is a situation where the Fed cannot intervene—especially as everyone assiduously expects that the Fed will always be there. Am I crazy to think that as inflation accelerates, the Fed will increasingly be boxed into a corner? The Fed has never really been independent of political action. What if the voters begin to complain about their cost of living? Do you not expect for the politicians to step in and demand a fix? What if the Fed suddenly needs to show a backbone and pretend to tame inflation for political reasons? Is anyone positioned for that? I know I’m not. Instead, I’m positioned for them simply ignoring the accelerating inflation that they’re causing.
I’m not here making a market call—I’m actually quite long a bunch of inflation assets. Rather, I’m pointing out that unstable things can go bad in a hurry. If the Fed were ever forced to step back, even for a moment, it would be cataclysmic for the markets—much like the US military stepping back in Afghanistan. Unstable situations inevitably implode—they can only be propped up for so long. Sometimes, we grow numb to something that’s unstable and assume that since it’s gone on for a long time, it will continue.
The vast majority of Afghans came of age during the US occupation. Nothing else seemed possible to them. Then came the shock. Most market participants today only know of the Fed’s ability to prop up markets. Is anyone prepared for a Fed that has to fight AGAINST escalating inflation?
While I anticipate that we’re on a path called “Project Zimbabwe,” I also realize that this isn’t a linear path. Unstable things tend to crumble. What if the Fed needs to step in and fight inflation—rather than ignoring it? What if it is the Fed that’s suddenly draining the punchbowl, instead of refilling it as was expected? I realize that it’s unlikely, but I always keep this in the back of my mind. You should too.
I like to remind people that if you’re going to panic, make sure to panic first. Artificial systems are unstable—when they turn, it’s sudden and violent. Don’t get caught on the wrong side by assuming that an unstable system will forever remain stable.
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Article by Adventures In Capitalism