2024 Macroeconomic Update
Let’s try to understand what is happening. We'll explore our current status using the Energy, Economy, and Environment lens popularized by Dr. Chris Martenson.
We are witnessing a sustained, rising trend in the prices of two major energy products: oil and electricity. In the aftermath of the coronavirus pandemic, both oil and electricity have surged, displaying an apparent step function.
Electricity per Kilowatt-Hour price (blue) and WTI Oil price (red)
As presented by Mike Green, energy consumption per capita has stagnated and even declined from its high watermark around 1974. Additionally, reports from Jim Rickards (and others) indicate that the BRICS nations, representing a large percentage of world oil production and a significant portion of global agricultural commodity production, are increasingly holding their surpluses from trade in gold and other non-dollar assets.
Energy relationships worldwide are experiencing volatility, in part from sanction risk, input cost increases and evolving supply chains. This is occurring against a backdrop where energy companies have prioritized accessing their most profitable reserves first, leaving the deeper, and harder-to-bring-to-market resources for the future. Both Geopolitical and Geological headwinds exist.
Turning to the economy, crosscurrents have confounded many forecasts, including my own. In 2023, several key economic signals decelerated to levels typically signaling an imminent recession (yield curve, PMI, bankruptcies, M2, etc.). However, we later learned that programs like the Fed’s BTFP and the Treasury’s Employee Retention Credit, along with the spending tone of the TGA and liquidation of the Reverse Repo facility, acted as levers of stealth liquidity. These measures delivered the necessary flow of dollars to keep asset prices high and prevent the initiation of the insolvency feedback loop that tends to define recessionary episodes. Also noteworthy, is how the lowest interest rates in 5,000 years of recorded history, drove a refinancing cycle- pushing maturities for mortgages and other forms of debt several years into the future.
As inflation rose, so did economic activity. This was an execution of the financial repression strategy. The inflationary wave however, presented the risk of a lasting psychological change, prompting policymakers to pull back their stimulative stance (stopped writing checks to households, raised policy interest rates), successfully slowing the growth rate of inflation. Lynn Alden seems to have forecasted the Fed’s behavior accurately, anticipating a precision approach to each policy response, in contrast to the pandemic’s spray-and-pray response.
Are the rising net liquidity dynamics sufficient to hold off the recessionary forces? I don’t know. However, I am employing a Bayesian overlay: My base case is that the currency will be debased sufficiently and with adequate frequency to prevent the mathematical failure of the financial system. If debts become unpayable and a wave of bankruptcies implodes the coherent functioning of the system, elite managers of the system will be open to scrutiny and a loss of status that would likely be unacceptable to them. Moderately high, sustained levels of inflation serve to spread the pain more evenly across users of the currency and are generally more acceptable to society at large than depression or rapid declines in living standards.
Finally, the environment should be considered. Environment captures a range of system inputs that are highly important. Some of the dynamics include technology, social factors, and ecology.
Technology is a lead character in today’s narrative. Artificial Intelligence is presented as a tool to solve the problems of the hyper-complexity our society has created. Thanks to Joseph Tainter, we know that complexity has a metabolic (energetic) cost. As discussed earlier, we know that energy has become more expensive, meaning that rising complexity is costing us more to manage. The hope of AI evangelists is that AI reduces the cost of operating our very complex system. There is potential for this outcome: AI-designed fusion reactors, AI-designed therapies for human health, and AI-designed solutions for managing human behavior.
This may be where we are going in the long-term (10+ years). However, in the short run, AI training runs cost tens of millions of dollars (in electricity alone), and nations around the world are subsidizing their corporations' acquisition of computing power so that this great hope can be built out.
We are also seeing the emergence of a new type of money technology. It's not the first time new money networks have emerged, of course. However, the speed of adoption is remarkable, and it is also noteworthy that some of the protocols are extra-governmental. Their geographic presence is diversified, and their function is secured by energy, compute, and encryption. This, in turn, renders them apparently censorship-proof and durable. So far, governments have allowed some proliferation, and these decentralized digital ledger assets create the potential to change how governments actually function, offering an alternative to the funding, saving, and transaction features of our current money networks. Finance as a mechanism for control may be under contention.
Socially, it’s probably fair to say that we are living through a great social crisis, reminiscent of the Industrial Revolution: New communication technologies are changing the speed and availability of information, causing cultural and moral upheavals. Huge segments of the US population express distrust in institutions. Earlier, we talked about how per capita energy has been in persistent decline, and that dynamic recently accelerated, widening the gap between the rich and the rest, which is arguably more visible than ever.
I use Neil Howe’s Fourth Turning framework to inform what to expect here. The general thesis is that legacy power structures and institutions will be under assault until they are reformed or replaced. Historically, this introduces volatility into social cohesion and increases the odds of the tails on an outcomes distribution (strong men leadership, loss of faith, conflict).
The natural world is simultaneously undergoing a period of very rapid change. Insect and bird biomasses are declining, the composition of the atmosphere is changing, global temperatures have increased, and fertility has declined. These dynamics contribute to both social and economic uncertainties.
In essence, we are living through a time of swift change, confronting energy limits precisely when the natural world and social dynamics inject volatility into our vision of the future.
Nevertheless, despite these challenges, humanity possesses an innate drive to adapt to change, solve problems, and manage predicaments. And so, we will. I anticipate that the collective "We" will identify and pull any lever that we believe enhances our chances of success. Thus, I am relying on policymakers to continue the debasement policies to fund research, development, and the build-out of strategies and infrastructure that hold the potential to lead us to prosperity.
I expect corporations that offer technological solutions will enjoy revenue growth, real/scarce assets (gold, property, stocks) to rise in price, and networks that are widely adopted and record-keep purchasing power (Bitcoin, ETH, $DAPP) to see their market capitalization rise. I also expect intense volatility along the way.
My hope, as a human being, is that we can navigate this path while avoiding the most existentially cataclysmic outcomes.
As a reminder to readers of the blog, I employ Dr. Martenson’s 8 Forms of Capital framework to identify risks and make plans on how to increase resilience. Financial Capital is one of the forms, arguably with very high utility because of how, currently, it can be converted into some of the other forms, like Material and Living Capital.
I hope this message provided you with insights into how CRB is viewing the world and formulating strategies to navigate potential outcomes. Please consider sharing this message with a friend or sending me a message so that we can apply the framework to your life and goals.
