NATO Expansion

"Suppose this is a move against NATO!"
--Member of Joint Chiefs of Staff (The Hunt for Red October)

The North Atlantic Treaty Organization is a military alliance formed after WWII. It currently holds 30 member countries--28 of them from Europe in addition to Canada and the US. The agreement is based on a system of shared security where members pledge to protect each other in the event of attack from external members. 

Each member also pledges to spend at least 2% of GDP on military resources. In actuality, some countries fall far short of the mark while others (read: the US) spends significantly more.

The high European country membership coupled with the provincial headquarters (Brussels) suggests dominant Euro influence. However, because it brings more resources to the NATO battle ground than any other member (by far), the United States exerts considerable leverage in the pact.

What enemy could be so great that it necessitates such a collective protection system? NATO's founding period provides the obvious answer: Russia. When the NATO treaty was signed in 1949, the Soviet Union loomed just east of the Berlin Wall. NATO's military resources were clearly configured and positioned to guard against Russian incursion.

When the Wall crumbled in the late 1980s, however, NATO didn't. Instead, it kept expanding. Membership gradually increased from the 12 founding countries to today's 30. In addition, partnerships with countries add more than a dozen 'shadow' members.  

A quick glance at a world map reveals that NATO sustaining and shadow members virtually surround Russia with little or no land buffer at the border. 

Now, let's suppose that a China-led interstate military alliance was formed. Membership grows to include Canada, Mexico, islands in the Caribbean, etc such that the United States was surrounded by a collective highly influenced by the CCP. 

Would the US stand idly by? (hint: see Cuban missile crisis) 

Neither has Russia. Rightly or wrongly, it perceives NATO expansion as a threat to their sovereign 'sphere of influence.' If countries such as Ukraine were to join NATO, then an important chunk of remaining buffer between Russia and this external threat disappears. 

Experts have been warning about the consequences of NATO expansion for years--as have Putin and other Russian authorities. Moreover, Putin explicitly cited NATO expansion as a driving force behind his military actions last week.

To those claiming that NATO expansion has little to do with Russia's actions in the last few days, they either haven't been paying attention or are purposely looking away. Why the latter may be true is an interesting question to ponder.

Here's another question, one for the NATO expansion deniers: Why not offer guarantees of no further expansion as a quick way to end the conflict? Here's your chance to prove experts wrong and Putin a liar.

Why not, indeed.

Russia Ukraine History

"Music should flow like a language. Changing a single note can turn joy to sorrow."
--Dusan Gavrich (The Peacemaker)

Media coverage of the Ukraine situation leaves an impression that the invasion happened out of the blue. That Russian president Vladimir Putin suddenly decided to attack an innocent border country in an aggressive land grab.

Any message conveyed by a broad range of Western media should be cautiously considered--particularly when it concerns acts of war against members of the West. Not only is there surely to be a tribal bias in the messaging, but any student of war understands that large scale campaigns are rarely initiated on a whim. Instead, there is probably a history, often a long one, that over time drives political leaders to be believe that their hand has been forced, and that the use of military force is justified.

In the case of Ukraine and Russia, there is a long shared history. Prior to the Russian Revolution, the land that is modern day Ukraine was split between Poland and the Russian Empire. Post revolution, the Ukranian People's Republic emerged as an independent state in 1917 that subsequently became a founding member of the Soviet Union in 1922, with its name changing to Ukranian Soviet Socialist Republic. When the Soviet Union dissolved, the country regained its independence in 1991 as today's Ukraine.

A couple basic geographical features of Ukraine are worth noting. It shares a nearly 1500 mile border with Russia. It is also the second largest country by landmass in Europe (Russia is first).

Since it became an independent state, Ukraine's relationship with Russia has been a rocky one. Central to this conflict has been Russian concerns about the expansion of NATO. Russia has long viewed NATO as a threat to its sovereignty. Given the geopolitical features of Ukraine noted above, it is straightforward to grasp Russian fears about Ukraine being used as a NATO pawn.

In the early 2000s, political corruption in the Ukraine brought about the Orange Revolution. Partly backed by Western sources, including the US State Dept and Soro's Open Society Institute, the revolution resulted in the installation of pro-Western politicians in Ukraine's government. To counter, Russia began supporting Ukraine political movement that it liked. 

The following few years were marked by a series of protests, revolutions, and contested elections in Ukraine, undoubtedly spiced by outside influence from both Russia and Western entities. In 2014, instability and revolution prompted Russia to occupy and, ultimately annex, land in southern Ukraine that became known as the Republic of Crimea. Although the annexation was claimed to be the choice of an autonomous, pro-Russian state, its legitimacy has been contested per United Nations resolution.

Post Crimea, tensions have continued to escalate. Eastern Ukraine provinces (those close to Russia) have been susceptible to violent uprisings between nationalists and separatists. Repeated calls by Putin for formal agreements that would keep Ukraine out of the NATO scheme brought not action. Over the past couple of years, Russia began to amass troop strength and conduct military drills along the Ukraine border.

The suppression of this history in current media coverage makes it easy to be suspicious of the dominant narrative. We'll connect past to present in an upcoming post.

Stuck on Stupid

"You're beginning to believe the illusions we're spinning here. You're beginning to believe that the tube is reality and your own lives are unreal. You do. Why, whatever the tube tells you. You dress like the tube. You eat like the tube. You raise your children like the tube. You even think like the tube. This is mass madness, you maniacs. In God's name, you people are the real thing. WE are the illusion."
--Howard Beale (Network)

The answer to Herschel Walker's question is, of course, "yes." The mainstream media firmly believes that you are that stupid.

The media serve as conduits for the distract and deflect tactics of their political allies. They believe that you will buy it hook, line, and sinker.

Indeed, they bet their business models on it.

Distract and Deflect

Guy de Lusignan: Give me a war.
Reynald de Chatillon: That is what I do.
--Kingdom of Heaven

When politicians need to wiggle out of jams, they often seek to distract and deflect. 

Distraction diverts public attention away from political problems. For example, when an investigation reveals evidence of a domestic political scandal, begin squawking about growing geopolitical conflict in far flung lands. Or perhaps create a war to veer public hounds off the scent.

Deflection means shifting blame for a political problem somewhere else. For instance, when foreign conflict jeopardizes flows of economic resources due to battle damage or trade sanctions, blame that conflict for rising domestic prices or shortages.

The current administration is clumsily employing both tactics currently.

Ukraine Invasion

I must've dreamed a thousand dreams
Been haunted by a million screams
But I can hear the marching feet
They're moving into the street
--Genesis

After Russia formally recognized the independence of two eastern regions of Ukraine, and officials from those regions requested assistance in defending against Ukraine national forces, Russian forces invaded the country last night. Both air and ground attacks focused on military targets and affected several cities, including the Ukraine capital of Kiev.

As is the case whenever war begins, a 'fog' engulfs information pools that blurs what is going on. Emotions also run high as feelings of nationalism and sovereignty reinforce tribal bonds.

Markets have been thrown for a loop, of course.

Let us pray for those involved, and that peace quickly reasserts itself as status quo in the region.

Gas Pump

My friend the communist
Holds meetings in his RV
I can't afford his gas
So I'm stuck here watching TV
--Sheryle Crow

Rocketing gas prices are not just the result of bad energy policy, but bad policy overall. Monetary, fiscal, economic, trade, etc...

When government regulation obstructs peaceful cooperation and exchange, outcomes will be compromised.

Strategic Behavior in Institutional Environments

One doubt
One truth
One war
One truth
One dream
--Peter Gabriel

In a previous post, we proposed that the strength of institutional environments depends on preference among individuals for legitimacy and on the legitimacy that individuals accord rule making entities and processes. When these factors are present in high degrees, then more isomorphic behavior should be expected. At lower levels of these factors, individuals should act more strategically, meaning that they will circumvent institutional pressures in pursuit of personal interests.

Oliver (1991) elaborated several antecedents likely to influence the extent to which organizations act strategically in response to institutional processes. These antecedents are linked to five institutional factors: cause, constituents, content, control, and content.

Cause concerns why organizations are being pressured to conform to institutional rules and expectations. Some pressures may cause organizations to become more socially fit (e.g., pollution and health regulations) while others improve economic fitness (e.g., accounting and budgeting norms). The greater the perceived fitness to be obtained, then the more likely that organizations will acquiesce to institutional pressures. More isomorphism and less strategic behavior should be expected.

Constituents are the entities who exert institutional pressures on organizations. Various constituents can impose laws, regulations, and expectations, including the state, professions, interest groups, and the general public. Passive acquiescence should be difficult to achieve when multiplicity (i.e., the degree of multiple, conflicting expectations) is high among constituent groups is high. Strategic behavior that seeks to compromise, avoid, defy, or manipulate institutional expectations is likely. The extent to which organizations depend on these constituents also influences resistance to institutional pressure. High levels of dependence discourage strategic behavior.

Content involves the norms or requirements that organizations are expected to conform to. Institutional norms or requirements that are inconsistent with the internal goals and objectives of an organization encourage resistance and strategic behavior. Rules that restrict discretionary decision-making should similarly reduce passive conformance and isomorphism in favor of defiant behavior.

Control is about the means or mechanisms that exert institutional pressure. Legal coercion is likely to drive acquiescence because organizations will be reluctant to break laws and face the strong arm of the state. Institutional pressures can also be diffused voluntarily through non-legal means. Oliver posits that high voluntary diffusion should similarly drive more acquiescent behavior--primarily because their broad acceptance should drive a 'contagion of legitimacy.' Perhaps, but I believe this proposition is contestable. If diffusion is voluntary, then organizations face less aggressive pushback for nonconformance. More theoretical nuancing seems appropriate here to tease out the role of violent sanction on strategic response.

Finally, context concerns the general backdrop within which institutional pressures are exerted. Environmental uncertainty, defined as the degree to which future states of the world can be anticipated and accurately predicted, is one element of context. Oliver proposes that high uncertainty discourages strategic behavior. This proposition is also contestable. Oliver argues that uncertainty causes organizations to relinquish illusions of control. Moreover, uncertainty fosters more mimicry as organizations copy the behavior of others hoping to achieve more stability. 

While some of this resonates (think mindless imitation of masking policies during the pandemic), there is an argument to be made that uncertain situations stimulate novel behavior that enables adaptation in changing environments. Perhaps both perspectives should be combined temporally, such longer periods of uncertainty cause organizations to be less imitative and more innovative in search of behavior that allows them to stabilize resource flows.

Another dimension of context is interconnectedness. Interconnectedness refers to the density of interorganizational relationships among occupants of an organizational field. Here, the proposition is much more intuitive. The greater the degree of interconnectedness, the higher the likelihood of passive acquiescence. 

My suspicion is that interconnectedness may constitute the key factor in explaining the high levels of institutional isomorphism observed during the CV19 pandemic. Technology has driven tighter coupling among organizations. Coupling drives more groupthink. Interconnectedness may have created a pandemic network of conformance.

I wonder whether high degree of interconnectivity might render many of these other factors moot.

Reference

Oliver, C. (1991). Strategic responses to institutional processes. Academy of Management Review, 16: 145-179.

War on Dissent

Trim life shadows flicker and fall
But you still can't turn away
Get up and run before you stall
Before the edges fray
--Ric Ocasek

Glenn Greenwald nicely frames the growing war on dissent. Dissent is disagreement with collective norms, particularly as they apply to politics. 

In any social environment, there will be institutional pressure to conform to norms, resulting in movement toward sameness in behavior (a.k.a. 'isomorphism'). Pressure to conform can be peaceful, taking the form of public opinion/persuasion or threat of exclusion from group activities.

However, pressure to conform can be coercive and involve force. For example, dissenters who gather in protest could be assaulted or arrested.

Greenwald suggests that government action against dissent, which is by definition forcible, has been increasing in western societies. Western societies are grounded in political frameworks that, at least on paper, tolerate dissent. In the US, for example, the Constitution guarantees that no law will prohibit or abridge freedom of speech.

Government-sponsored coercion against dissent is easy to spot in other countries. Thus, when Russia moves to freeze bank accounts of political dissenters, headlines in western countries howl in uproar.

However, when western countries do the same thing, as is currently happening, among other places, in Canada, the response is much more muted.

What Greenwald fails to mention is that this inconsistency is explainable by social identity theory. Simply stated, bad behavior by outsiders is punished or berated, while similar behavior by insiders is condoned or rationalized. 

As such, dissenting speech by insiders is legitimate protest to be respected, while dissenting speech by outsiders is disinformation or sedition to be silenced.

Greenwald's main point, however, is that war against dissent in western societies is increasing. He posits that  heads of western governments are stepping away from rule of law in favor of discretionary rule. By definition, discretionary rule is prone to inconsistency and hypocrisy, and requires violence to keep behavior in check.

Fortunately, citizens (read: voters) wake up politically when their freedoms are being trampled. Consequently, as western governments wage war on dissent, the dissenters appear to be organizing their own campaign aimed at ballot boxes.

Spreading Out

We

So tired of all the darkness in our lives

With no more angry words to say can come alive

Get into a car and drive

To the other side

--Joe Jackson

Spread between high yield bonds and stocks has been widening.

But classic 'credit spreads,' i.e., difference between 'risk free' Treasury rates and bond rates, are in early stages of widening.

Interpretation: spreads have a ways to go before reaching 'blow out' levels. But they bear watching.

Crisis Management

"Some of you have to depart immediately. We have a crisis situation."
--Lt Mike 'Viper' Metcalf' (Top Gun)

Nice graph showing how many past Fed rate raises have ended in financial crisis--which subsequently causes the Fed to reverse course and lower rates.

This should be expected. Lower interest rates reduce borrowing costs, thus driving more debt and leverage into the system. Raising rates stresses the leverage. 

After lowering rates, the Fed can never get rates back up to where they were before. If they did so, the additional leverage accumulated during the easing phase would rupture the system when taxed by higher rates.

This is why rates have trended lower for decades, and why the Fed is now cornered.

Maple Distress

Kelly Youngblood: Don't take any shit from them Canucks. To them, you're just another wetback crossing the border to play their game.
Dean Youngblood: They'll never catch me.
Kelly Youngblood: Oh, they'll catch you.
--Youngblood

Canada is trying to outdo Australia in its beatdown of CV19 protests. Currently it is unleashing police and what appear to be paramilitary personnel to stop freedom convoy protests across the country.

The pandemic continues to bring out authoritarian rule at its worst.

Betting on Disorder

Oh, a storm is threating
My very life today
If I don't get some shelter
Oh, I'm gonna fade away
--The Rolling Stones

Gold touching $1900 on both inflation and Russia/Ukraine war fears.

Gold is a bet on disorder. Increasingly, investors appear to be sensing more of it.

position in gold

Inflation Tsunami

Ben Harp: Now, for chrissake, does either one of you have anything even remotely interesting to tell me?
Johnny Utah: Caught my first tube today, sir.
--Point Break

Peter Schiff suggests that we're headed for an inflation tsunami. Well reasoned, incorporating many points made on these pages.

An important point that he makes is that, despite hawkish rhetoric, the Fed's actions remain accommodative. They are still buying bonds (QE).

In other words, with inflation at 40 yr highs, the Fed is still printing money.

And real rates are still way negative.

As such, how can anyone believe the Fed is truly serious about fighting inflation?

Weird Science

From my heart and from my hand
Why don't people understand
My intentions?
--Oingo Bingo

As these pages have noted, authoritarians have moved from claims that the science is settled to claims that the science has changed.

What's really changed, of course, is the polls.

Politics fosters weird science.

Freedom Convoys

Sometimes the light's all shining on me
Other times I can barely see
Lately, it occurs to me
What a long, strange trip it's been
--Grateful Dead

Truckers around the world are joining Freedom Convoys. Originating in Canada, the conveys involve lines of semis driving slowly or stopped on highways in protest to COVID-related mandates. Some of the convoys stretch 20+ miles long.

As Rand Paul observes, Freedom Convoys reflect the time-honored American tradition of civil disobedience. "Peaceful protest, clog things up, make people think about the mandates."

Honk to show your support. 

Scandal Escalating

You run, run, run away
It's your heart that you betray
--Scandal

The Durham investigation into possible spying of the Trump campaign and presidency has filed a motion in which it was divulged that contractors and tech experts essentially spied on Donald Trump during his presidential campaign and while he was in office.

According to Durham, a tech company gained access to Trump servers and "exploited this arrangement by mining [Trump domain] traffic and other data for the purpose of gathering derogatory information about Donald Trump." Who precisely benefitted from this information was not specified in the filing, but dots can be readily connected between the tech firm and Hillary Clinton.

The implications were not lost on the former president, who issued a 'vindication' statement of sorts.

On in lead in to her Sunday morning program, Maria Bartiromo stated that she hopes "Donald Trump will sue them all for everything because they damaged his reputation throughout his four years in office. So much so that he was constantly on the defense...Every American should be outraged by this."

Of course, only some Americans will be outraged by this. Others will choose to look the other way. 

But as Durham continues to pile up the evidence, the scope of this scandal is growing toward proportions that will be difficult for all but the most partisan to ignore.

Maria made another nice point this morning. She wondered whether all of the noise being made by the Biden administration about a Ukraine invasion by Russia might be more fiction than fact--i.e., a distraction to keep public attention away from an escalating political scandal. 

Interesting speculation, particularly as new trickles out that Ukraine and Russian officials claiming that war is not imminent.

Dambusters

Downpour on my soul
Splashing in the ocean, I'm losing control
Dark sky all around
I can't feel my feet touching the ground
--Jars of Clay

Not a bad symbolic portrayal of the current dynamic. 

What is causing the dam to crack? Political pressure from people who are increasingly waking up to the truth.

Still Printing

I fear I'll do some damage

One fine day

But I would not be convicted

By a jury of my peers

Still crazy after all these years

--Paul Simon

This article raises an excellent question. With inflation soaring, why does the Fed continue in Quantitative easing?

Stated differently, how does printing money to buy assets do anything but add to the inflation problem? Indeed, classically defined, inflation is money printing.

The answer seems obvious.

Postscript: The Fed just released its POMO schedule for the next 4 weeks.

It plans at least another month of QE-related money printing and asset buying.

COVID Revisionism

"It's the old Potomac Two Step, Jack."
--President Bennett (Clear and Present Danger)

It's not just politicians doing the COVID pivot. Their partners in arms, the mainstream media, are turning their hats around as well.

The science has changed, they're saying. It's time to open up.

Even the censors are lightening up, relabeling content previously deemed to be misinformation...

...to something that might be contested by some people.

As the media embarks on a revisionist campaign, it demonstrates understanding that the 'Potomac Two Step' is not just for politicians.

Poll Death Cross

If you think I didn't know
About the little tricks you played
And never see you when deliberately
You put things in my way
--The Who

What driving the COVID pivot? The poll death cross. Disapprovals crossing above approvals.

Approval ratings crossing below those of the previous administration.

How politicians get religion.

Now vs Then

There are things we won't recall
And feelings we'll never find
It's taken so long to see it
'Cause we never seemed to have the time
--Phil Collins

The CPI printed above expectations once again. The annualized 7.5% increase is the highest since March 1982. Yes, the era of 15% APR certificates of deposit.

Interest rate markets are discounting more hawkish Fed policy in the near term but more dovish a couple yrs out.

Two interpretations being floated. 1) the Fed quickly gets inflation under control and engineers a soft landing. 2) The Fed makes a 'policy error' by raising rates and crashing the economy, which subsequently forces them to lower rates in attempt to pull the economy out of the abyss.

These pages have been pondering a scenario that fits door number 2 pretty well.

Despite rocketing prices, the Fed is behind the curve when it comes to 'fighting inflation' like the Paul Volcker-led Fed did in the early 1980s. Compare now vs then in the above graph.

It may be a while before we see those 15% CDs again.

Mandate Pivot

"My, my, my...how hell doth quicken the spirit."
--William Strannix (Under Siege)

With poll numbers and prediction markets indicating a bloodbath coming for Democrats in the upcoming midterm elections, memos from party leadership have surely been circulating to ditch increasingly unpopular CV19-related mandates. Blue states and cities have been tripping over themselves over the past few days to announce that they will be rescinding mask mandates and ditching vaccine mandates. 

Leftists rhetoric is also pivoting away from lockdowns. The Biden administration has even had the audacity to claim that it has never supported lockdowns and that it was the Trump administration that gave them the green light.

Lesson: fear of being dethroned can drive even ardent authoritarians to become supporters of freedom and choice.

At least through election season...

Dividends Bid

So much for your promises
They died the day you let me go
Caught up in a web of lies
But it was just too late to know
--Johnny Hates Jazz

Rising interest rates should put pressure on dividend paying stocks, as market participants swap out of riskier equities for fixed income streams perceived as more secure. So far, however, it hasn't been working out this way from where I sit. In fact, quite the opposite.

Most dividend-paying stocks that I follow have been catching bids and are at/near their highs.

One possible explanation is that higher rates are causing many fund managers to sell bonds in order to manage risk (bond prices decline as rates rise). To recoup some of the lost cash stream, perhaps some managers are plowing the proceeds into dividend-paying stocks.

Far fetched? Maybe, as one would think higher coupons of new bond issues would entice the opposite trade: sell stocks in favor of higher yielding bonds. 

But am have trouble coming up with plausible rival theories that explains the current bid underneath dividend payers given the current field position and macro backdrop.

Backwardation

Don't look back
A new day is breaking
It's been too long
Since I felt this way
--Boston

Backwardation is an unusual situation in futures markets where front month contract prices exceed those of out-month contracts. Usually futures curves slope in the other direction, with out-month prices higher than front month prices (due to carrying costs, etc). This condition is known as 'contango.'

Commonly, backwardation occurs when demand exceeds supply in the near term, leading to shortages. Shortages cause traders to bid up prices of front month contracts but leave farther out futures contracts relatively unaffected. This lends an atypical downward sloping shape to forward futures contract curves, and positive price spreads (i.e., the difference between front month contract prices and out month prices).

As this article reports, backwardation is happening in spades across commodities. While energy-related commodities have been the big headline grabbers, the phenomenon is occurring among other commodity groups. For example, most industrial metals have been in backwardation since late last year.

The glass half full interpretation is that backwardation-causing events are often acute situations that resolve themselves relatively quickly.

The glass half empty interpretation is that backwardation juices prices higher on the upstream ends of supply chains. If they remain persistent, then those pressures tend to work their way downstream to consumers.

Say it, Fed heads: backwardation rhymes with _____.

Yield Signs

When it gets too much
I need to feel your touch
--Bryan Adams

Ten year Treasury yields are now north of 1.9%. While not high by historical standards, T-note yields are beginning to challenge stock dividend yields. The yield on the S&P 500 is only about 1.3%.

Higher bond yields will slowly pry income-seeking investors away from stocks.

One more thing for the Fed to worry about...

Feelings vs Facts

I'll hold onto you

Till the stars no longer wink

I'll hold onto you

Till you figure out just what to think

--Ric Ocasek

Interesting paper that uses Google word counts to detect longitudinal changes in language related to rationality vs emotion. Rationality-related words such as fact, analysis, conclusion were counted and compared to counts of sentiment and intuition-related words such as feel, believe, and trust. Content of books, newspapers, and recent Google searches were examined.

Results indicate an increase in rationality-related words from 1850 until about 1980 yrs ago when trends reversed toward more emotional rhetoric.

The authors suggest that their findings help quantify existence of a post-truth era, where 'feelings trump facts.'

Hard to argue...

Padded Payrolls

They came at night leaving fear behind
Shadows were on the ground
Nobody knew where to find him
No evidence was found
--Phil Collins

Today's payroll number came in nearly 4x the consensus estimate to the upside. As is normally the case in these situations, one has to look under the hood to see what is going on.

As reported by ZeroHedge, the entire difference between the consensus estimate and the reported figure lies in 'adjustments' to the raw number.

The BLS secretary predictably "stands behind" the number, arguing that it is "credible."

Biden administration taps the secretary on the shoulder and says give us an upside surprise.

After all, what are government-controlled measurement systems for?

Woke Nightmare

Jared Cohen: This is bizarre. It's like a...dream.
Sam Rogers: Oh, I don't know. Seems like we actually may have just woken up.
--Margin Call

Facebook (FB) getting pounded after missing its quarter. Front and center was first ever decline in active users.

FB has been a vanguard in censoring and 'de-platforming' users for disinformation.

As Alex Berenson observes, censoring is not just un-American and, in the case of state-sponsored enterprises, illegal. It is bad business.

Discriminating against customer groups of any kind--based on skin color, political views, or what have you--restricts demand and market potential. It is liable to dent the wallets of the discriminators.

When permitted to function, markets become the bigot's nightmare.

This nightmare is currently haunting 'woke' bigots like Facebook.

no positions

Debt Parabola

Well, it's a marvelous night for a moon dance
With the stars up above in your eyes
--Van Morrison

Federal debt has crossed $30 trillion. Prior to 2008, the trend was bad enough.

Since then, the trend line slope has essentially doubled.

A new segment for our debt parabola.

Stagflation and Gold

You're calling my name
But I gotta make it clear
I can't say, baby
Where I'll be in a year
--Aerosmith

Stagflation is a period of economic malaise the combines stagnant economic growth with rising prices. The last major period of stagflation in the US occurred in the 1970s. Some will recall those gas lines.

Chatter about pending stagflation is getting louder.

Here is an interesting analysis that considers gold in a prospective stagflationary environment. The basic thesis is that, in a stagflationary environment, gold is one of the last commodities bought. As inflation picks up, businesses and speculators first buy consumable commodities that they need (e.g., oil, ags, base metals). 

However, as business prospects dim (the 'stag' part) and there is still worry about inflation, buyers turn to gold.

What about Bitcoin as an alternative to gold? As proposed in the piece, Bitcoin is likely to benefit more from 'risk on' environments with ample central bank money printing. In 'risk off' situations with tighter monetary policy, then the focus turns to gold.

We've certainly seen Bitcoin bid higher over the past few years of gargantuan central bank money printing. More recently, we've seen 'usable' commodities bid to the moon while gold has languished.

All of this is consistent with the above propositions, and suggests that gold's time is approaching.

This is an interesting thesis--one that I might put to work.

position in gold