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December
27
2018

Certainty Is Fraying
Charles Hugh Smith

As we look ahead to 2019, what can we be certain of? Maybe your list is long, but mine has only one item: certainty is fraying.

Confidence in financial policies intended to eliminate recessions is fraying, confidence in political processes that are supposed to actually solve problems rather than make them worse is fraying, confidence in the objectivity of the corporate media is fraying, and confidence in society's ability to maintain any sort of level playing field is fraying.

When certainty frays, capital gets skittish. Predicting increased volatility is an easy call in this context, as capital will not want to stick around to see how the movie ends if things start unraveling. The move out of stocks into government bonds is indicative of how capital responds to uncertainty.

The coordinated efforts of global central banks to backstop and boost markets also backstopped confidence in the banks' monetary policies. Regardless of the long-term impact of the policies of quantitative easing and repression of interest rates, capital could count on the policies remaining in force and act accordingly.

With the Federal Reserve apparently ending the Fed Put and normalizing interest rates after a decade of near-zero rates, certainty about global central bank policies and the impacts of those policies has dissipated.

With valuations at historic highs and real estate rolling over, confidence that gains are essentially permanent is also fading. Buying at the top and holding onto the asset as it loses value is a predictable way to destroy capital, and so capital's willingness to exit is rising, as is its preference for deep, liquid markets such as U.S. Treasury bonds, markets where big chunks of capital can be safely parked until clarity and confidence return.

But clarity and confidence might become scarce for an extended period of time. Capital will remain skittish until there is some clarity and confidence, not just in official policies but in the political and financial contexts of those policies.

This generates a self-reinforcing feedback loop: capital seeks safety and gains, and seeks to avoid catastrophic losses. As markets become more volatile, capital becomes increasingly skittish and risk-averse. This generates the very volatility that is making capital skittish.

The net result is capital is impaired in eras of uncertainty. Uncertainty also leads to polarization, as people cling with irrational certainty to ideologies and policies that are failing.

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At readers' request, I've prepared a biography. I am not confident this is the right length or has the desired information; the whole project veers uncomfortably close to PR. On the other hand, who wants to read a boring bio? I am reminded of the "Peanuts" comic character Lucy, who once issued this terse biographical summary: "A man was born, he lived, he died." All undoubtedly true, but somewhat lacking in narrative.

I was raised in southern California as a rootless cosmopolitan: born in Santa Monica, and then towed by an upwardly mobile family to Van Nuys, Tarzana, Los Feliz and San Marino, where the penultimate conclusion of upward mobility, divorce and a shattered family, sent us to Big Bear Lake in the San Bernadino mountains.

The next iteration of family took us to the island of Lanai in Hawaii, where I was honored to join the outstanding basketball team (as benchwarmer), and where we rode the only Matchless 350 cc motorcycle on the island, and most likely in the state, through the red-dirt pineapple fields to the splendidly isolated rocky coastline. In 1969-70, this was the old planation Hawaii, where we picked pine in summer beneath a sweltering sun.

We next moved to Honolulu, where I graduated from Punahou School and earned a degree in Comparative Philosophy (i.e. East and West) at the University of Hawaii-Manoa. The family moved back to California and I stayed on, working my way through college apprenticing in the building/remodeling trades.

I was quite active in the American Friends Service Committee (Quakers) and the People's Party of Hawaii in this era (1970s).

I next moved to the Big Island of Hawaii, where my partner and I built over fifty custom homes and a 43-unit subdivision, as well as several commercial projects.

Nearly going broke was all well and good, but I was driven to pursue my dream-career as a writer, so we moved to the San Francisco Bay Area in 1987 where I worked in non-profit education while writing free-lance journalism articles on housing, design and urban planning.

Within a few years I returned to self-employment, a genteel poverty interrupted by an 18-month gig re-organizing the back office of a quantitative stock market analyst. I learned how to lose money in the market with efficiency and aplomb, lessons I continue to practice when the temptation to battle the Monster Id strikes.

Somewhere in here my first novel was published by The Permanent Press, but alas it fell still-born from the press--a now monotonous result of writing fiction. (Seven novels and I still can't stop myself.)

I started the Of Two Minds blog in May 2005 as a side project of self-expression, and in an unpredictable twist of evolutionary incaution, that project has ballooned into a website with about 3,500 pages that has drawn almost 20 million page views.

The site's primary asset may well be the extensive global network of friends and correspondents I draw upon for intelligence and analysis.

The blog is #7 in CNBC's top alternative financial sites, and is republished on numerous popular sites such as Zero Hedge, Financial Sense, and David Stockman’s Contra Corner. I am frequently interviewed by alternative media personalities such as Max Keiser, and am a contributing writer on peakprosperity.com.

 

www.oftwominds.com