The Unraveling Web, Depression vs Inflation and Living Longer

April 24 2020

"That's how history unfolds. People weave a web of meaning, believe in it with all their heart, but sooner or later the web unravels, and when we look back we cannot understand how anybody could have taken it seriously."

- Yuval Noah Harari

What story could unravel that we have believed for decades ?

A. US vs China.

One of the stories that is changing is about the relationship between US and China. The narrative is going from how the rise of China is good for the world (consumer and producer), to how we need to constrain & contain China.

Two-thirds of Americans now view China unfavorably, up from 47% two years ago, according to data from Pew.

Reproduced from Pew Research Center; Chart: Axios Visuals

Politically, it is now better to run against China, the WSJ had an article title: Trump’s Best Re-Election Bet: Run Against China

Quoting from the article:

The U.S. failure to recognize and respond to the danger posed by rising Chinese power was, Mr. Trump can plausibly say, one of the greatest strategic blunders in world history. The president’s supporters can concede he sometimes get the details wrong, while arguing that on China he—and not the establishment—got the big picture right.

Clearly supply chains will be restructured, and production will be brought home to the US. Why would we continue to rely on China to produce our essential products ?

This is probably not great for return on equity and will increase inflation but likely leads to a more resilient, less fragile world.

On the hawkish side, a book that comes up often when people discuss whether US or China will go to war is Graham Allison’s Destined for War: Can America and China Escape Thucydides's Trap?

You can watch him discuss this with Kyle Bass below:

Whether we see a hot war or not, I think it’s likely that the world will split into at least two spheres of influence: US and China. You could also call it the New Cold War.

Quoting H.R. McMaster, former US National Security Advisor from this Atlantic piece titled: How China Sees The World:

Without effective pushback from the United States and like-minded nations, China will become even more aggressive in promoting its statist economy and authoritarian political model. For me, the state visit to Beijing—and exposure to China’s powerful combination of insecurity and ambition—reinforced my belief that the United States and other nations must no longer adhere to a view of China based mainly on Western aspirations. If we compete aggressively, we have reason for confidence. China’s behavior is galvanizing opposition among countries that do not want to be vassal states. Internally, the tightening of control is also eliciting opposition. The bravado of Li Keqiang and other officials may be intended to evoke the idea of China as sovereign of “everything beneath heaven,” but many beneath heaven do not, and must not, agree.

What will the unraveling of this story mean to the world and you ?


B. Depression or Inflation ?

The fact is that the steepest and deepest recession since the 1930s is underway, and because of cascading destructive effects, the global economy could take months if not years to restart and return to anything like a “new” normal. .

Whether it works or not, the FED will claim victory if financial markets go up for a while. I found this chart comparing the S&P 100 index with the S&P Small Cap 600 index insightful.

An important part of the policy response to the virus is asset-buying by central banks (with newly printed money). It is not only government bonds, but also corporate bonds and equities that are being purchased in very large size in Japan, the U.S. (so far not buying equities, but reportedly buying junk bonds) and Europe.

This asset-buying and associated yield curve control is known as financial repression.

Despite all the central bank buying, bonds will not hold up near 0% yield if inflation starts accelerating and rises from 2% to 3% to 4% or higher.

“But how can inflation possibly move up? It is a depression out there.”

But there are aspects of this peculiar crisis that could produce upside inflation surprises.

There are significant disruptions in the global food supply chain, and those disruptions (which could include or produce export controls, labor disputes and outages, border issues preventing labor workers from harvesting crops and other disruptions) could cause significant pockets of high food price inflation and limited availability, which in turn could cause social unrest and further disruption.

Nobody is prepared for this kind of inflation, and if it develops, financial repression is not going to hold bond prices up at the stupid yields currently prevailing.

This is a perfect environment for gold to take center stage.

In recent months, gold has gone up in price to some degree, but a number of people I speak to think that it is one of the most undervalued investable assets existing today.

There is nothing else that has its historical and fundamental characteristics. The fact that it is so under-owned by institutional investors is astonishing to them in light of the inflationary policies being pursued by central banks around the world.

From the world Gold Council:

“Gold is the only reserve asset that bears no political or credit risk, nor can it be devalued by the printing presses or extraordinary monetary policy measures. The yellow metal is insulated from income inequality, polarization of political parties, trade disputes, deteriorating government budgets, rapidly aging populations, massive growth in unfunded liabilities and counterparty risk.”


C. Living Longer

Some of us are lucky to live with a spouse, a partner or a room mate. But many of us live by ourselves. We face every single day of this quarantine alone.

This made me think about Dan Buettner’s “Blue Zones - Live Longer, Better” - it’s a study on how we can live longer happier lives.

About 15 years ago, Dan took an assignment from National Geographic, also funded by the National Institute on Ageing, to “reverse engineer longevity.”

He identified areas of the world where they are getting 8-10 extra years of life expectancy and, importantly, where they are living those years without heart disease, most cancers, dementia and diabetes.

It turns out that people in Blue Zones have no special genes, they have no special diet, they don't have any elevated sense of individual responsibility…the reason they're living an extra eight to 10 years is because of their environment.

What these areas have in common is a cluster of interconnected, mutually supporting factors that help them do the right things for long enough, so they do not develop chronic disease, you can read his 9 lessons in this World Economic Forum article. But I think the three big ones are:

1. They are eating mostly a plant-based diet, with 90 to 100% of their dietary intake coming from high carbohydrate, plant-based wholefoods. The “all-star food” is beans – about a cup a day – just that probably adds four years to your life expectancy.

2. There is a vocabulary for purpose. People are not waking up in the morning with existential angst about their lives and how they should spend their day. They have a sense of meaning and tend to belong to a religion. They also tend to put their families first and have sacred daily rituals that reduce the stress of the human condition (which otherwise leads to inflammation).

3. They take naps – a very powerful practice, that lowers your chance of heart disease by perhaps 30% – and take time for happy hour, to pray and to venerate their ancestors.

Coming back to the quarantine, one of the ideas from the book is that people who are lonely in this world lose about seven to eight years of life expectancy, making loneliness as bad for you as smoking.

“The antidote to loneliness comes not just from just being with people, it comes from being with people: (i) with whom you can have a meaningful conversation; and (ii) who care about you on a bad day.”

Please call me if you want to chat about anything.


D. A Few Things Worth Checking Out:

1. Great Kyle Bass interview (rant) on what Saudi and Russia are trying to do to US Oil production.

2. For the short sellers - lecture slides from Jim Chanos lecture at Berkeley University.

3. A lot of discussion around Tankers right now given Oil market contango. Here’s a good thread on the economics being enjoyed by Tankers.

4. A bit of mea culpa from Peter Attia on how and why, maybe COVID-19 isn’t as bad as he thought.

5. Great reddit thread with Q1 2020 hedge fund letters, including this one from Elliot Management on Gold.

6. This great National Affairs article "The Erosion of Deep Literacy" argues how technology and a lack of deep reading truncates our attention spans, the attention spans of our children, and deteriorates our ability to reflect on issues and even properly detect changes in our environment. The article quotes Henry Kissinger:

Reading books requires you to form concepts, to train your mind to relationships....A book is a large intellectual construction; you can't hold it all in mind easily or at once. You have to struggle mentally to internalize it. Now there is no need to internalize because each fact can instantly be called up again on the computer. There is no context, no motive. Information is not knowledge. People are not readers but researchers, they float on the surface....This new thinking erases context. It disaggregates everything. All this makes strategic thinking about world order nearly impossible to achieve.

I am going to try to not look at my phone for 5-6 hours this weekend (Thank you Benjamin for sharing the article).

7. I shared this last time, but doing it again, cause I listened to it again - it’s that good. Billionaire Chamath Palihapitiya (ex -FB and currently Social Capital) on How to Invest in This Crisis.


A Few Quotes I’m Thinking About:

“How we spend our days is of course how we spend our lives. What we do with this hour, and that one, is what we are doing. A schedule defends from chaos and whim. It is a net for catching days.”

- Annie Dillard

“The years teach much that the days never know.”

- Ralph Waldo Emerson

"The future has many names. For the weak, it means the unattainable. For the fearful, it means the unknown. For the courageous, it means opportunity."

- Victor Hugo