Headwinds: “a headwind blows against the direction of travel of an object . . . decreases the object’s speed and increases the time required to reach its destination.”
Rip Tide: “A rip is a strong, localized, and narrow current of water that moves directly away from the shore, cutting through the lines of breaking waves, like a river flowing out to sea. The force of the current in a rip is strongest and fastest next to the surface of the water. . . Swimmers who are caught in a rip current and who do not understand what is happening, or who may not have the necessary water skills, may panic, or they may exhaust themselves by trying to swim directly against the flow of water.”
Last week I wrote this about our current credit cycle:
The end of this credit cycle is going to include the following macro events: a credit crisis, a housing crisis, an energy shock, with the potential for massive failed deliveries necessary to third world nations creating famine on a biblical scale, at least one Too Big To Fail failing, as Lehman Bros and AIG did in 2008, and the AI bubble bust. All of these will happen. Locked in. Fixed. No way out.
Since then there, as is the way of the world, some things have changed. When facts change, I re-assess ideas and opinions.
First, the Fed, and the ECB, are caught between Scylla and Charybdis (I should not have to explain that reference to this readership, should I?): an imminent credit crisis necessitates monetary easing, whereas a looming energy shock necessitates rate hikes to forestall inflation. Right?
It’s the mother of all dilemmas for a Central Banker.
I think the Fed and ECB as per their dual remits—price stability— will hike rates fearing inflation more (and with some cogent reasons to do so, e.g., the ripple effects of skyrocketing diesel prices) and ignore the massive and imminent credit destruction—the notional value of all global private/shadow credit is about $4 trillion, yes, you read that right—that will force insurers and pensions funds into severe liquidity/solvency crisises that are both overexposed to the private credit shops and locked out of redemptions. That freeze in liquidity will cause morphine-necessary levels of pain on Wall Street, but Main Street won’t even get a Tylenol, granny won’t get her annuity payment and uncle Joe won’t get his county pension, auntie-Mae might even miss her teacher’s pension.
Meanwhile, diesel driven costs will surge through the real economy like a tsunami, destroying purchasing power more forcefully than we have ever seen. We could be looking at a real decline in economic order of 4-7% YoY.
BTW: doesn’t just in time delivery look like an idiot’s fucking fever dream right now?
Bond rates rolled over yesterday. Oil prices remain sticky. Repo fails are surging: $379 billion week as of March 18. Repos, repurchase agreements are the highest quality, safest corporate invetments in existence. Rising repo failures are a clear indicator that, although systemic liquidity exists, confidence is collapsing. Repo failures often have cascading effects on other corporate parties who cannot find the necessary funding for short-term obligations their cash flow is unable to support. Moreover, private credit redemption halts are increasing exponentially. Employment is cratering. Diesel prices are skyrocketing. Housing is in a nationwide free-fall. Systemic liquidity is perilously close to freezing up.
Folks, I hate to say it, but our economy isn’t facing headwinds, it’s facing riptides.
Headwinds are manageable. Riptides kill.
The domestic shocks are enough to call it plain: we’re in a recession. Of course, do not expect accurate or honest economic numbers from Trump’s government. The damage could be limited domestically except for the exogenous shocks resulting from Trump’s Iranian catastrophe.
The global effects are almost incomprehensible.
Consider the damage done to Gulf petrol infrastructure. When refineries get blown-up AVGAS, diesel, helium, urea and fertilizer become impossible to buy. Who cares if it can or cannot make it out of the Straits of Hormuz? If they don’t exist, whatcha going to do? These products are known as petroleum distillates. They are by-products of gasoline refining.
I can’t even begin to comprehend how deleterious and long-term this destruction will be and what kind of follow-on, cascading effects it will have. Consider that helium is essential in making chips. No one, and I mean not a single fucking Wall Street analyst I know of, is factoring in the loss of distillates from destroyed refineries yet. That it bodes very, very ill for the entire world economy is an understatement. It’s not hyperbole to say the economies of the Rules Based Order are in deep peril. Japan and South Korea are in deep kimchi too.
And India’s Green Revolution? Oh man, the carnage might be biblical in scale without access to Persian Gulf fertilizer. It could be like the impact of two failed monsoons. The human exodus? Of all that is holy, it makes me want to curl up in the fetal position.
Not a one of us–including myself–has any true inkling how dependent the modern industrialized and developing world is on petroleum and its by-products. Nor do we have any idea of the catastrophe unfolding in places like South East Asia in regards to food. For example, gas for cooking shortages have lead many people in South East Asia’s mega-cities to abandon the cities for rural home regions where cooking with biomass, primarily animal dung and wood, is practicable. Ponder that for a moment. Then consider the deforestation cascading consequences of those mega-populations reverting to 13th century feeding practices?
If you need it spelled out for you in brutal detail read this utterly demoralizing essay. We are well along the road to ruin.
I’m an historian and confess to a complete lack of a historical framework/reference to analyze and/or opine in any meaningful manner on how epic the shitstorm Trump’s war on Iran will turn out, except I know bone-deep that the Rules Based Order will collapse. The remainder of the world?
Gotterdammerung. Google it if you need explication. I’m too tired, too fucking sick with grief and too enraged to continue.
I saw an article today by the American Conservatives, who tend to be more sensible than most conservatives. It posits that peace can’t be made with Iran till Trump gets tough with Israel, because it’s Israel who keeps escalating.
