Unthinkable Changes

Hurtling Toward Oblivion, by Richard A. Swenson, M.D., was written in 1999. He had the following to say about exponential change. First in the early 1970s, we were warned about exponential curves. Then we thought better of the situation and decided to exploit the global markets implicit in such dramatic change. But we have not been careful enough—and we are about to be blind-sided by our own neglect. 

Change is not wrong—but not all change is created equal. Exponential change is a class apart. Such a hyper-dynamic environment presents us with a perpetually moving target. Our intuition is seldom sufficient—correct that, never sufficient—to inform us on issues of this nature. This is why we fail to realize the historically unprecedented changes we are experiencing even though they are happening all around us. 

It is my contention that we are living in the middle of an irreversible and exponential “nuclear” explosion with profusion instead of plutonium. In weaponry terms, this is perhaps happening in relative slow motion. But in historic terms, it is happening in the mere blink of an eye. 

I mention Dr. Swenson’s remarks about exponential growth given the exponential curves we have been seeing for COVID-19 and because of the devastating projections for our economy. I can’t help but think if I at my age of 73 am destined to live through a depression, we are now at its doorstep. The fact that U.S. equities have now lost value more rapidly than what was lost in the 1929 crash also harkens back to the days that my now deceased arents experienced as young adults.  

Dr. Swenson, who was not only an M.D. but also a futurist who worked for the CIA, stated that from his human perspective he did not see how human life on earth could last more than 100 years. What would trigger the end? It’s impossible to say, but several principles were laid out in his thesis: (1) Profusion, meaning there is more of everything and it is growing faster and faster; (2) The irreversibility of progress and new technologies; (3) Exponential growth; (4) Profusion not only of positive technologies and ideas but also profusion of lethal ideas and technologies; (5) The fallen nature of the world we live in, or entropy; and (6) The threshold of lethality, meaning that a point of no return is reached in which it is impossible fix a system. An example he gave is the human body: every organ may be working very well but if a little cancer cell begins to multiply in the liver or some other vital organ, the entire system is shut down. That example stuck with me on a personal note because my father passed away with liver cancer. And I believe the idea of a threshold of lethality may very well be applied to our current fiat monetary system. The recent massive unconventional stimulus that is being applied by the fed is now seeming to have little or no impact. In fact, day by day illiquidity in the financial markets appears to be worsening and no matter how much money is pumped into the markets, stocks continue to decline as the exponential growth of COVID-19 is advancing and we humans seem to have no way to stop it.

In a later chapter in his book titled, “The Triggering of Lethality,” Dr. Swenson suggested four issues that have the potential to bring down the final curtain on humanity: war, weapons of mass destruction, infectious pandemics, and ecocatastrophes. But whichever of those unfortunate events does the job on us, he stressed that economics will be found somewhere in the middle of it. Here is what he wrote regarding economics: Who can doubt that if we experience a terminal event, economics will be found somewhere in the middle of the final scrimmage? Electronic money is flying around the globe like mad, and the resultant levels of volatility are custom-made for crisis. International relations specialist Walter Russell Mead explains how it has been our expressed policy to make economic activity flow ever faster and unfettered. Yet, he warns, “The faster capitalism goes, the more dangerous it gets.” His sober prediction about our current dangerous state of international economic plight: “It does not, frankly, take a rocket scientist to predict that this will all end in tears.” 

Global economic integration leads to tight-coupling (a condition of extreme interdependence where linkages are inseparably connected). And tight coupling leads to falling dominos. As seizures pass through the world markets at the speed of light, even experts have lost the ability to predict—and it is unnerving. This year’s “economic miracle” turns into next year’s economic debacle—and nobody knows exactly why. The truly frightening part is how often these changes are not even considered in the realm of plausibility. “What happens in one part of the world eventually will affect everything,” explains Jeffrey Garten, dean of the Yale School of Management. “But it might not be in the way that we expect, because the links are almost beyond human comprehension.” 

Speaking of the Asian collapse in the late 1990s, one economist observed: “This is like an earthquake. You can hear all the rumblings and see the sensors telling you that the plates are moving around. But no one can say what will trigger the earthquakes or when it will hit or how much damage it will do.” Former Treasury Department official Roger Altman called the global capital markets “The Nike of the 1990s,” that, when arrayed against any nations, can impose previously unthinkable changes.

It seems highly likely to me that we are about to see “unthinkable changes” heading our way that at the very least would mean the decline of the U.S. dollar as the world’s reserve currency. This would be the first very major tectonic switch in the global monetary system since 1971 when the removal of gold from the international monetary system paved the way for the kind of interlocking global economic interdependency that Dr. Swenson spoke about as noted above. It also made it possible for the U.S. to use its military force coupled with the U.S. alliance with oil dominant Saudi Arabia to abuse our privilege of owning the world’s reserve currency. Like a heroin junkie we have taken on so much debt that we have indeed reached threshold of lethality in the financial markets. J Powell’s pivot proved that point. And just like a drug addict we have ingested so much monetary narcotic that we can NEVER return to a true market rate of capital. In other words, we have allowed our capitalist system to reach the threshold of lethality. And waiting in the wings as our economy heads into depression are China, Russia, and other nations aligned with them that have been building up their gold reserves as they plan to enjoy America’s demise. I expect to touch on these themes next week on my radio show when I talk to Alasdair Macleod about his latest article, titled, “Payments, panic, and the ending of fiat currencies.”

So the markets are starting to quake with the underlying rumblings and it is very unnerving to say the least. This message came to me this past week from a subscriber named David. He wrote, Hi Jay I hope you are staying safe during your travels. Are you planning on selling everything to CASH, or do you still have faith in the companies you hold? So far I’m HODL’ing…(a bitcoin term I’m sure you’ve heard). I’ve been in the crypto space for 4 years now so I’ve learned how to HODL the projects I have faith in. But like you, I’m way down, in deep RED on all my mining stocks. God Bless you and your family.”

I think we need to learn from history regarding gold. History never repeats but, as they say, it rhymes. Because I believe we are heading into a period that may well be as severe as the Great Depression, John Hathaway’s recent article, titled, “Point of No Return,” reminds us of the following:  During the 1930s credit deflation, gold and gold mining stocks performed well in relative and absolute terms. When credit deflates, and counterparties cannot be trusted, gold is the ultimate safe asset. In the 1930s, the metal price rose, costs of producing gold declined and the miners generated strong earnings and paid handsome dividends. We believe that this is a sequence that will repeat. John then went on to say, “At the moment, mining company valuations appear extraordinarily cheap. It is one of the few industries that will report solid year-over-year earnings gains for the remainder of this year and perhaps into the next.” In support of John’s views on the gold mining industry, on your right is a recent analyst’s consensus of gold mining profits this year and next. I can’t help but think that there will be a large shift toward these names and then down market to those covered in this letter as investors observe the red ink for almost every other sector. And we don’t have to go back to the 1930s to see gold shares outperform nearly every other sector. It happened in spades from 2009 through 2011 after the financial crisis.

Regarding this week, the flow was back into Treasuries. Gold was down a bit but as the economic devastation in the U.S. unfolds and the Fed is unable to tame the massive illiquidity in the markets every day, Alasdair’s view that payment panic will end fiat currencies seems like a very real possibility. It will sure lead to major economic earthquakes but I think readers of this letter will be more prepared than most. From an earthly point of view, we trust gold bullion, but for the eternal, we can only trust God. As Dr. Swenson concludes in Hurtling Toward Oblivion, “Are we then to collapse in despair, move to the mountains, install perimeter fences, stockpile ammo for our Uzis, and put Prozac in the water? Hardly. Our only hope is that God is still God—and that He’s still interested. But then that has always been our only hope. It’s just that the conditions of the present are clarifying what progress has otherwise tempted us to forget.”

About Jay Taylor