The Good, the Bad, and the Bubble - Fat Tail Daily

Can you really get ‘there’ from ‘here?’ Here we are… a late, degenerate empire sitting on a debt bubble that is ready to blow sky high… run by people who benefit from inflation and deficits.

‘There’ is a peaceful, ‘soft landing’… bringing debt under control without a depression… avoiding a meltdown and controlling inflation.

Javier Milei, in Argentina, seems to be headed ‘there.’ Inflation has been reduced by 90%. Government payrolls have been trimmed by 30,000 employees. And the nation ran its first budget surplus in 123 years.

But Milei did not start from ‘here’…he started from a much different place, with 250% inflation and half the population living in poverty.

It would be nice to think that earnest leaders could follow him. But things do not happen just because you want them to.

Empires, for example, rise and fall. There are no exceptions. They get ‘good’ leaders…and ‘bad’ leaders…but mostly they get leaders who do what they have to do to take the Empire where it needs to go.

The Roman Empire was the most successful political organisation since humans left Olduvai Gorge. It lasted 450 years. Emperors generally expanded the reach of their power until Trajan died in 117. Thereafter, the best they could do was to hold it together…which…finally, they couldn’t.

The big loss was obvious. The Visigoths sacked Rome in 410… 66 years later Rome was finished.

Where was the Big Gain?

Broadly, the centre of gravity for Western Civilisation shifted to Northern cities — first to those of north Italy — Florence and Venice…and then over the Alps to Paris…London…Amsterdam…and New York. A tiny patch of ground in Manhattan, not worth anything in the 15th century, today sells for millions…

But we don’t have a millennium for our investment guesses to play out. Our look-ahead period is only 10 years. And to make a guess about where you’re going…according to our cosmology…you have to know where you are now.

And here in the USA, 2025, things are getting weirder and weirder… but not yet desperate.

We saw on Friday how non-weirdness works. Asset prices go up. Then they go down. The Primary Trend gave us only three major highs in the 20th century – ’29, ’66, and ’99. Each one was followed by a predictable sell-off. Up, down, up again; that’s the way it works.

But after a short collapse in 2000-2003, stocks went into a weird and unnatural phase. They dyed their hair green and said they were neither bull nor bear…but something preposterous and strange. They were ‘market fluid,’ they said, asserting a right to use whichever bathroom they wanted.

After the huge run-up of the stock market – 1982-1999 – the logical, historically determined, Primary Trend should have been down…and should have taken the Dow all the way to five ounces of Dow/gold.

Instead, the Fed manipulated interest rates — cutting 500 bps to try to reverse the sell-off — and managed to get stocks moving up again. Thence, the trajectory was up…up…up… with only a brief pause in 2008…followed by another 500-basis point cut…and more than ten years of negative real interest rates (below the rate of inflation).

Real interest rates—the Effective Federal Funds Rate minus the official year-over-year change in Consumer prices, have been negative for most of the 21st century.

During that period, too (2000 to today), the feds added over $30 trillion to US debt — the biggest stimulus ever. Even those extreme interventions could not stop the Primary Trend…which, in terms of gold, cut the value of the Dow stocks in half. But in trying to stop ‘normal’…the feds made things very weird.

As Tom says, it was as if they had suspended gravity. Asset prices floated freely, untethered to the real world of the main street economy, goods and services, earnings, or costs.

Without maps or compass, investors got lost. They didn’t know if they were coming or going…climbing up or tumbling down. Cryptos, NFTs, fractionalised assets…and then came MicroStrategy (whose only real value is the bitcoin it owns…but whose stock price suggests its BTC is worth twice its real market value)…Fartcoin…and even a new coin from a dead man, John McAfee.

And who would have imagined that a man preparing to take on the gravest responsibility known to humans would launch a new crypto currency named after himself, just hours before taking office? You’d think he’d have other things on his mind.

The Fed inflated asset prices. Then, the inflated assets created distortions of their own. At current prices, stock owners feel they have gained nearly $50 trillion worth of stock market capital so far this century (US stocks had a total market value of $15 trillion at the end of 1999…and close to $63 trillion today). And out of the blue, crypto holders have a claim on another $3.3 trillion.

There is little connection between this new wealth and any real earnings in the real economy. But having made so much, they are eager for more, awaiting the next Fartcoin like children watching the chimney on Christmas Eve.

Regards,