Random Thoughts from the Frontline

By John Mauldin 

Readers often ask how these letters appear so regularly. The answer is we have a process. Normally, I talk to my associate Patrick Watson on Monday about the next weekend’s letter. We both go into research mode, verbally outlining a letter, and by Thursday I have an outline and some background research. This gives me plenty of time to flesh it out, so to speak.

This week was different. Patrick lives in the Texas Hill Country outside Austin, where unusual things were happening. Power failures, impassable roads, bursting water pipes, giant ice-laden tree limbs crashing, to name a few. He and his family are safe, but we didn’t have much time for collaboration this week.

However, this gives me a chance to do something I have mentally toyed with for a long time.

Rather than going deep into one theme, this week we will do a “Random Thoughts” from the Frontline. Today we will cover several topics in shorter form: valuations, infrastructure, the debacle in Texas, and a lot more.

Let’s jump in.

What Is Fair Value?

Many analysts contend that current stock valuations resemble the dot-com era. You can see it visually at Current Market Valuation. Here are just a few of the many charts on the website.

Let’s start with the classic “Buffett Indicator.” It certainly seems to be in nosebleed territory. Notice that the valuations in 1966, the beginning of a long-term bear market, were also high.

Source: CurrentMarketValuation.com

Then there is the ever-popular price-to-earnings ratio. Notice by this measure that valuations were not all that stretched in 1966. Yet there still followed a 17-year bear market, as measured from the peak back to where it started.

Source: CurrentMarketValuation.com

This next one is unusual: valuation as measured by mean reversion. Mean reversion is the fairly unsophisticated concept that "what goes up must come down."

While the market’s day-to-day movements are chaotic, long-term stock market returns tend to follow somewhat predictable upward trends But they can also deviate from the trend for years or even decades.

This isn’t a trading strategy. But it's still a useful indicator of overall market valuation relative to the past.

Here, we see that in 1966 and early 2000, the S&P 500 was two standard deviations from the mean. As of last Friday, it is almost back to that level.

Source: CurrentMarketValuation.com

But this is not your father’s or your grandfather’s (if he was alive in 1929) overvalued market. 

There are two major differences between today and those previous periods.

First, in the dot-com era, the Federal Reserve had let loose the dogs of easy monetary policy going into the Y2K event. 

That was appropriate given the uncertainty, but it clearly helped send already overvalued markets to extremes.

We had day traders piling into anything that looked like an Internet stock, speculations, really easy money, and so forth. Then after January 1 passed uneventfully, Greenspan appropriately reversed the Fed’s monetary policy. Oops.

And now we have enormous federal government stimulus, soon to be about 25% of GDP in less than a year. 

That money ends up somewhere, but its impact is still unclear. 

There is no historical parallel to consider.

Which of These Is Not the Same?

For those of us with children a few decades ago, and I assume the same today, there were educational books (often coloring books) showing a series of pictures and asking which of these is not the same?

We can also ask this about our current stock market situation. Jerome Powell is not Alan Greenspan.

Powell and his colleagues have made it very clear they will keep monetary policy loose and rates low for a very long time. Inflation is well down their worry list. 

Their top concern is unemployment, which is indeed a real problem.

The Fed is telling us it will let inflation get to 3% or more. 

They are looking at the average inflation over time, which means they can justify doing anything they want.

What they want is low rates, even if it overheats the economy, until unemployment returns to where it was before the pandemic.

If they really mean that, then we are going to have low rates for a very long time, as unemployment is a bigger problem than most people think.

It also means, maybe not coincidentally, the US Treasury will find it easier to refinance an ever-increasing federal deficit.

But persistent low rates might mean stock market valuations are actually in the fair value range.

Look at this next chart showing S&P 500 value relative to interest rates. Interest rates are 1.6 standard deviations below the trendline.

That suggests that the S&P 500 may not be so overpriced.

Source: CurrentMarketValuation.com

Where’s Your Edge?

Four years ago (January 2017), I was behind the camera watching Bob Pisani on CNBC interview Steve Cucchiaro.

Bob calls Steve the most successful ETF strategist ever. His previous 20-year track record surely confirmed that.

Steve and I are quite close, and I understood his old model intimately. We talked about it a lot. He agreed with me that his old model would not carry him into the next decade.

Steve later left his firm to build a completely new model based on multiplayer game theory. I traveled to Boston more than a few times, staying at his home, discussing his new model, and looking at a flowchart of over 200 global factors.

His whiteboard looked like a bowl of colorful spaghetti. He wrote his own code for a strategy.

You have to understand that Steve is an MIT-certified math genius, as well as Wharton. IHME, the international health data organization, asked him to join the very prestigious international board just to get his modeling insights. (More on that below.)

Steve’s new firm, called 3Edge, now runs $1.3 billion and growing. 

Full disclosure: He anchors my own blend of four ETF traders, and he is also separately on our CMG platform.

He released a new white paper this week. It is appropriate that he starts with a nod to the Grateful Dead, as he still plays in a very good rock band in his 60s with his childhood friends. Quoting:

 “When life looks like Easy Street, there is danger at your door.”

Grateful Dead

Signs of market euphoria are everywhere. Speculative “story” stocks, penny stocks, IPOs, SPACs, millennial “stonk” trading, mar­gin lending, CCC junk bonds, sports trading cards and other col­lectibles, Dogecoins and investor sentiment surveys are all show­casing extreme market froth. Animal spirits are running hotter now than during the last market peak just before the coronavirus-induced lockdowns began.

His argument touches on the interest rate chart above. Once again, since that is what he does, he built a model on assumptions about valuations and interest rates. 


Employing an equity valuation model that discounts the S&P 500 Index’s earnings stream many years into the future, we have calculated that the only way to conclude that today’s U.S. stock market is fairly valued is to assume that today’s ultra-low corporate bond yields (among the lowest in history) re­main at current levels forever. 

Given the unlikelihood that corporate bond yields remain at ultra-low levels forever, if we make what we believe is a more reasonable assumption that interest rates remain at ultra-low levels for the next 20 years then revert to their long-term mean, we estimate that the S&P 500 Index is about 50% overvalued today (see Figure 2 – S&P 500 Market Valuation 1900–2021).

While valuations tell us nothing about short-term markets moves, they are actually pretty good at longer-term returns.

What Steve didn’t say in the paper but told me is his model goes back 700 years, using various proxies. He says that you have to assume rates will stay low for at least 100 years to come to the conclusion that the market is fairly valued today. How likely is that?

That being said, he sees pockets of undervaluation (at least relative to the US) in more than a few places. When Steve Cucchiaro talks, you should listen.

Where Are We on COVID-19?

The coronavirus is today’s single most economically important factor. I have maintained for two months that, at least in the US, we are in a race between how many people can be vaccinated versus how fast the B117 variant can spread.

Last month, I was very concerned but recent data is looking more optimistic. 

We’re not really out of the woods until the second week of March, but we are making tremendous vaccination progress.

The Institute for Health Metrics and Evaluation, a go-to source for public health authorities all over the world, now projects that—absent a B117 breakout—we should see decreasing cases and deaths until flu season begins next fall. 

By that time, enough vaccinations will have been done to minimize another outbreak.

Now, they’ve qualified that statement with concerns about the South African variant. The vaccines we’re using may be less effective against that one. 

But creating a vaccine for that variant should happen faster than the last one, which was (pardon the pun) created at warp speed.

It’s too early to take a victory lap, but this would not have been possible even one or two decades ago.

Steve sent me the latest IHME projections this morning. Here’s a screenshot from their comments:

Here are the IHME projections through June. What they call the reference scenario is roughly their base case, the reduced number of deaths if there was universal mask use; their “worse” case scenario is if B117 spreads and there is less mask use and social distancing.

I know that some think that masks are pointless and don’t help. Scientific studies say they do, but the anecdotal evidence from a conference that my good friend Peter Diamandis (medical doctor, research scientist, futurist, and founder of the X Prize) just finished showed otherwise.

They had a small group of live participants (along with hundreds of video participants) who were tested before anyone came and were tested every day during the conference. By the end, a significant portion of the attendees had acquired COVID-19, including Peter. He wrote a moving mea culpa.

Interestingly, they had 17 production staff, who all wore masks and intermingled with the unmasked participants. They were tested, too, and not one came down with the virus. This is as close to a laboratory experiment as you’re going to get.

What Do We Do About Infrastructure?

I talked last night with one of the most successful hedge fund managers in the country (in terms of returns over the last four years). He will not allow me to use his name. But I can tell you he is a raging bull.

He believes the stimulus that we already had plus what we will get—coupled with a major infrastructure bill, plus extraordinarily easy monetary policy, combined with significant new technology innovations—adds up to a new bull market.

This is someone with 5X returns over the last four years with a very diverse portfolio, so you have to pay attention. (My biggest investment mistake of the past few years was not giving him more money at the beginning.)

But let’s talk about that infrastructure. It seems there is bipartisan support to do it, so let me throw out an idea or two.

While everyone knows that I am not a fan of more debt, we clearly need to fix our ailing infrastructure here in the US. (Most recently seen in Texas, which we will discuss below.)

In my mind, there are two different categories.

One is the portion of our national infrastructure that has some type of revenue attached to it: electricity, water, airports, harbors, etc. Many older cities have terrible water systems that waste up to 20% of their supply. They need to be replaced. Cheap money amortized by a slight increase in water bills could repair all those. In fact, replacing leaky pipes might actually reduce water prices.

As for electricity, we’ve been talking about a “smart grid” for decades. It’s not that expensive and would actually reduce costs over time. 

Further, if we really want to convert to electric cars over time, which I would consider a good thing, not to mention the increased need for electricity to power all of our new technology, we are going to need more capacity. 

Solar and wind, hydroelectric and thermal, are wonderful. But it will be many years before we can rely on them for all our daily needs.

I’m as much an environmentalist as anyone. I don’t want to see the air I breathe and I don’t want anything in my water but scotch. But I also want my power to work when I flip the switch.

Those Texas wind turbines that didn’t work? Seems like they didn’t buy the heating option because they didn’t think it necessary. It would have raised the cost of electricity. Texas is the largest producer of wind energy in the country. Oops. It just cascaded from there. 

Nor was wind the only problem. Much of the natural gas infrastructure wasn’t sufficiently winterized, either.

Texans (like me) think they have a God-given right to cheap energy. That attitude is so 1900s and will not work in the 2020s. 

We must build excess capacity to handle extreme events, which means electricity will cost more. 

Texas power generation was geared to, as one professor put it, work 99.9% of the time. But that 0.1% can bite you in the derrière, as we all learned.

Congress should create a program to issue infrastructure bonds similar to Ginnie Mae: government-guaranteed debt that can be bought by the private market, and then even by the Fed. 

Thirty-year bonds yielding around 2%, as they do today, can finance a lot of self-amortizing, sorely-needed infrastructure to (finally) take us into the 21st century.

China is eating our lunch infrastructure-wise. They are building new coal plants with scrubbing technology that supposedly makes it 90% clean. We’ll see. They are also building fourth-generation thorium nuclear reactors. 

The difference between these and older plants like Chernobyl and Fukushima is the difference between the Model T and the Tesla.

The US needs to come to the party. Nuclear energy is the cleanest there is, in terms of carbon footprint. It takes a lot of carbon use to build wind turbines and solar panels. 

Yes, nuclear is more expensive than coal and natural gas. We need to get over our obsession with cheap energy.

I hear many of you asking about how we can charge the poor higher rates for energy? Why not break the income profile in the US into quintiles, charge the lowest quintile 25% less and add that cost to the highest quintile? 

It would be a rounding error on the highest quintile’s electric bills.

Yes, I know that is income redistribution and quasi-socialism. This libertarian boy recognizes reality when it’s coming at him. Let’s try to control it rather than having it run over us.

Then there are infrastructure needs like roads and bridges that don’t have associated revenue streams. 

We will just need to pony up the money to fix them, perhaps in cooperation with the states. 

But it has to be done or we are going to have bridges collapsing just like the Texas electric power system collapsed.

Thoughts on the Biden Stimulus Plan

First, let me do something unusual and agree with Paul Krugman. 

He wrote on Twitter:

Goldman Sachs joins the campaign against nonsense output gaps, saying that there's much more slack in major economies than official estimates indicate. Obvious implications for Biden relief plan.

Here is the chart he was referring to:

This makes remarkable intuitive sense. 

If the official estimates of the output gap were correct, we would have been seeing inflation everywhere in 2015–2020. 

We didn’t, and part of the reason is the economy has more slack than the official estimates suggest.

If this is true, it means that even though I don’t like the current stimulus bill as it is structured, it is unlikely, even coupled with easy monetary policy, to produce anything other than transitory inflation.

We need a stimulus bill. 


People who have lost jobs and businesses that are closing doors need help. 

We don’t need to load up the debt of the entire United States to help a few selected constituencies. 

I hope they focus on the real needs of those hit hardest in the COVID recession. Just saying…

(By the way, you should follow me on Twitter where I often share charts like the one above.)

Sic Transit Gloria Mundi Silicon Valley

I recently discovered a cool site called Investor Amnesia

The link takes you to an article on SPACs and IPOs. 

But about halfway down they talk about the history of Cleveland, which from the 1870s to the early 1900s was the Silicon Valley of the time. 

Seriously, great story.

We’ve all heard of the high-profile tech titans like Elon Musk leaving Silicon Valley. 

Many lower-profile companies are leaving as well. 

It turns out there are other places in this country that have the necessary infrastructure and collective brainpower, like Austin or Denver or Raleigh or Dallas, even Birmingham and certain parts of Florida. And they are friendlier to businesses.

No one today thinks of Cleveland as Silicon Valley, although the city fathers and the state government are actively working to change that. I am even trying to help. 

The point is that we as human beings project not just the current interest rates decades in the future, we also project current circumstances into the future.

Reading the history of Cleveland, it would have been hard to live there in 1900 and think it wouldn’t all continue. 

You can’t take success for granted. 

You have to constantly strive to improve… and you certainly can’t overburden the ox that is pulling the wagon.

By the way, there are 197 SPACs as of a few weeks ago. I actually like seeing private companies with great technologies get into the public marketplace.

The number of public companies has been shrinking for too long. 

Maybe this SPAC innovation can reverse that.

Yes, I am sure there will be some disasters, but overall I think it will be good for investors.

Puerto Rico and New Information on Vaccines

I am hoping to get my vaccine shot this afternoon. 

I have no idea which one is on the island. But I read this morning in The Wall Street Journal that the Pfizer vaccine is 85% effective after one shot and can be stored with regular refrigeration.


That is great news but it would’ve been nice to know earlier. It certainly makes the UK’s decision to reach more people faster with the first shot seem prescient.

And with that I will hit the send button. 

Have a great week, call a few friends around the country, and stay safe.

Your looking forward to having dinner with friends around the world analyst,

John Mauldin
Co-Founder, Mauldin Economics

The Biden stimulus is admirably ambitious. But it brings some big risks, too.

Opinion by Lawrence H. Summers

President Biden in the White House in Washington, D.C., on Jan. 27. (Evan Vucci/AP)

President Biden’s $1.9 trillion covid-19 relief plan, added to the stimulus measure Congress passed in December with the incoming administration’s strong support, would represent the boldest act of macroeconomic stabilization policy in U.S. history. 

Its ambition, its rejection of austerity orthodoxy and its commitment to reducing economic inequality are all admirable. 

It is imperative that safety-net measures for those suffering and investments in vaccination and testing be undertaken rapidly after the indefensible delays of the last months of the Trump administration.

Yet bold measures need to be accompanied by careful consideration of risks and how they can be mitigated. 

While the arguments for providing relief to those hurt by the economic fallout of the pandemic, investing in controlling the virus and supporting consumer demand are compelling, much of the policy discussion has not fully reckoned with the magnitude of what is being debated.

I agree with the general consensus of progressive economists that it would have been much better if the Obama administration had been able to legislate a much larger fiscal stimulus in early 2009, in response to the Great Recession. Yet a comparison of the 2009 stimulus and what is now being proposed is instructive. 

In 2009, the gap between actual and estimated potential output was about $80 billion a month and increasing. The 2009 stimulus measures provided an incremental $30 billion to $40 billion a month during 2009 — an amount equal to about half the output shortfall.

In contrast, recent Congressional Budget Office estimates suggest that with the already enacted $900 billion package — but without any new stimulus — the gap between actual and potential output will decline from about $50 billion a month at the beginning of the year to $20 billion a month at its end. 

The proposed stimulus will total in the neighborhood of $150 billion a month, even before consideration of any follow-on measures. That is at least three times the size of the output shortfall.

In other words, whereas the Obama stimulus was about half as large as the output shortfall, the proposed Biden stimulus is three times as large as the projected shortfall. Relative to the size of the gap being addressed, it is six times as large.

A calculation like this can only be very approximate for many reasons. Most important, estimates of potential gross domestic product may be inaccurate, and it may be that the CBO is underestimating potential GDP and the output gap. 

On the other hand, this crude calculation actually underestimates the difference between what was done in 2009 and what is proposed now.

First, unemployment is falling, rather than skyrocketing as it was in 2009, and the economy is likely before too long to receive a major boost as covid-19 comes under control. 

Second, monetary conditions are far looser today than in 2009 given extraordinary Federal Reserve policies, the booming stock and corporate bond markets, and the weakness of the dollar. 

Third, there is likely to be further strengthening of demand as consumers spend down the approximately $1.5 trillion they accumulated last year as the pandemic curtailed their ability to spend and as promised further fiscal measures are undertaken.

Looking at incremental deficits relative to GDP gaps is only one way of assessing the scale of a fiscal program. Another is to look at family income losses and compare them to benefit increases and tax credits. 

Wage and salary incomes are now running about $30 billion a month below pre-covid-19 forecasts, and this gap will likely decline during 2021. 

Yet increased benefit payments and tax credits in 2021 with proposed stimulus measures would total about $150 billion — a ratio of 5 to 1. 

The ratio is likely even greater for low-income individuals and families, given the targeting of stimulus measures.

In normal times, a family of four with a pretax income of $1,000 a week would take home about $22,000 over the next six months. 

Under the Biden proposal, if the breadwinner were laid off, the family’s income over the next six months would likely exceed $30,000 as a result of regular unemployment insurance, the $400-a-week special unemployment insurance benefit and tax credits.

Judged relative to either the macroeconomic output gap or declines in family incomes, the proposed covid-19 relief package appears very large. 

The Biden administration is right that it will never have a progressive window of opportunity like the present one. And I share its judgment that the risks of insufficient fiscal stimulus are greater than those of excessive fiscal stimulus. 

In many ways, an overheated economy in which employers are desperate to find workers and push up wages and benefits would be a very positive thing.

Yet as a massive program moves toward enactment and implementation, policymakers need to ensure that they have plans in place to address two possible, and quite serious, problems.

First, while there are enormous uncertainties, there is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability. 

This will be manageable if monetary and fiscal policy can be rapidly adjusted to address the problem. 

But given the commitments the Fed has made, administration officials’ dismissal of even the possibility of inflation, and the difficulties in mobilizing congressional support for tax increases or spending cuts, there is the risk of inflation expectations rising sharply. 

Stimulus measures of the magnitude contemplated are steps into the unknown. For credibility, they need to be accompanied by clear statements that the consequences will be monitored closely and, if necessary, there will be the capacity and will to adjust policy quickly.

Second, long before covid-19, the U.S. economy faced fundamental problems of economic injustice, slow growth and inadequate public investment in everything from infrastructure to preschool education to renewable energy. These are at the heart of Biden’s emphasis on building back better.

If the stimulus proposal is enacted, Congress will have committed 15 percent of GDP with essentially no increase in public investment to address these challenges. 

After resolving the coronavirus crisis, how will political and economic space be found for the public investments that should be the nation’s highest priority?

Is the thinking that deficits can prudently be expanded longer and further? Or that new revenue will be raised? If so, will this be politically feasible?

Fiscal stimulus for covid-19 relief can be a landmark achievement that helps the American economy turn the corner. But despite its scale, the limited scope of the Biden plan means that it must be a beginning and not an end. 

As its final details are crafted, it will be essential to carefully consider how the choices we make now may constrain what we are able to achieve in the future.

The Biden plan is a vital step forward, but we must make sure that it is enacted in a way that neither threatens future inflation and financial stability nor our ability to build back better through public investment.

Bitcoin is not a hedge against tail risk

Elon Musk may be buying it, but that doesn’t mean everyone else should follow suit

Nouriel Roubini

Nouriel Roubini © Joe Buglewicz/Bloomberg

Claims that bitcoin is the new “digital gold” are feeding a new bubble in it and other cryptocurrencies. 

The last one in 2017-18 saw bitcoin go from $1,000 to $20,000 and then fall back to $3,000 by the end of 2018.

Since the fundamental value of bitcoin is zero and would be negative if a proper carbon tax was applied to its massive polluting energy-hogging production, I predict that the current bubble will eventually end in another bust.

Referring to bitcoin or other crypto as “currencies” is a misnomer. 

They are not a unit of account: virtually nothing is priced in them. 

They are not a scalable means of payment: with bitcoin you can do five transactions per second while the Visa network does 24,000. 

Bitcoins are barely used by legitimate companies as payment for goods and services, although Tesla said it planned to start accepting them.

Crypto is not a stable store of value: even some crypto conferences refuse to accept them as payment for attendance fees. 

The volatile price moves can wipe out any profit margin of a merchant within a matter of hours. 

They aren’t even denominated in a consistent way that allows users to compare relative prices of goods. 

This reliance on different tokens is effectively a return to barter. 

The Flintstones had a more sophisticated monetary system based on a benchmark: the cartoon cavemen used shells.

Even referring to crypto as assets is a misnomer. 

Most assets have a stream of income (stocks, bonds, commercial real estate) or a use (housing) or some other utility (fiat currency provides liquidity and can be used for payments). Gold has no income but it has industrial uses. 

It also has utility as a store of value and a hedge against inflation, currency debasement and tail risks.

Crypto has no income, no utility, no payment or other services. 

It isn’t even anonymous because the underlying blockchain technology makes it easy to trace payments. 

It is only a play on a speculative asset bubble, worse than tulip-mania as flowers had and still have utility. 

Its store of value against tail risks is unproven. 

And worse: some cryptos, dubbed “shitcoins”, are financial scams in the first place or debased daily by their sponsor. 

Bitcoin’s price is highly volatile, and claims of misbehaviour, including pump and dump, spoofing, wash trading and front-running by exchanges, are widespread.

Stablecoins claim to be superior. 

But New York authorities are already investigating whether one, tether, is being used to manipulate the price of bitcoin.

Vitalik Buterin, a co-founder of the cryptocurrency ethereum, argues that no crypto can be at the same time scalable, safe and decentralised. 

Traditional financial systems are scalable and safe: if your credit card or bank account is hacked or stolen, you are made whole. 

But they are centralised because participants and assets are verified by trusted institutions. 

Right now, crypto is neither scalable nor safe. 

If your private key is stolen or lost, the assets are gone for good.

It isn’t even decentralised. 

Oligopolistic miners control most bitcoin mining. 

Many are out of reach of western law enforcement in places such as China, Russia and Belarus, creating a national security nightmare. 

About 99 per cent of bitcoin trading occurs on centralised exchanges, which may be hackable. 

Furthermore, the original programmers retain outsized control over their creations. In some cases they act as police, prosecutors and judges, and reverse transactions that are supposed to be immutable. 

Nor is crypto equitable: a small number of “whales” control much of bitcoin’s value.

This undermines claims that crypto will decentralise finance, provide banking services to the unbanked, or make the poor rich. 

Blockchain claims to enable cheap money transfers to refugees, but crypto is much more likely to provide cover for scam artists, conmen, tax evaders, criminals, terrorists and human traffickers.

Our world is beset by financial crises, geopolitical risks and very loose monetary policy. 

There is growing demand for safe haven assets that are a hedge against inflation, currency depreciation and debasement and tail risks. 

Gold, inflation-indexed bonds, commodities, real estate and even equities are all reasonable candidates.

Risky, volatile bitcoin doesn’t belong in the portfolios of serious institutional investors. 

Many of its retail backers are suckers being manipulated by an army of self-serving insiders and snake oil salesmen. 

Tesla’s Elon Musk and MicroStrategy’s Michael Saylor may be betting the house on bitcoin. That doesn’t mean you should.

The writer is a professor of economics at the Stern School of Business, NYU, and host of NourielToday.com


How rising inflation could disrupt the world’s economic policies

The debate is hotting up

THE DEBATE about whether high inflation will emerge out of the pandemic is becoming more pressing. 

In January underlying prices in the euro zone rose at their fastest pace for five years. 

In America some economists fear that President Joe Biden’s planned $1.9trn stimulus, which includes $1,400 cheques for most Americans, may overheat the economy once vaccines allow service industries to reopen fully. 

Emerging bottlenecks threaten to raise the price of goods. Space on container ships costs 180% more than a year ago and a shortage of semiconductors caused by this year’s boom in demand for tech equipment is disrupting the production of cars, computers and smartphones.

Headline statistics on price rises will soon contribute to the sense that an inflationary dawn is breaking. 

They will go up automatically as the collapse in commodities prices early in the pandemic falls out of comparisons with a year earlier, and the recent rise in the oil price begins to bite—on February 8th Brent crude rose above $60 a barrel for the first time in more than a year. 

In Germany, the reversal of a temporary cut in VAT has already helped year-on-year inflation rise from -0.7% to 1.6% in a month.

For most of the past decade the world economy’s problem, judged by central banks’ targets, has been too little inflation, not too much. 

As a result it is easy to view the coming acceleration in prices as welcome. In fact, it is worth worrying about, for several reasons.

One is that it weakens the hand of those arguing for more fiscal stimulus in places that need it. 

There is little prospect of the euro zone sustaining higher inflation, for example. Its main rate of interest has not been cut during the pandemic and its deficit spending remains inadequate given its economic outlook and lack of monetary firepower. 

Much as the European Central Bank mistakenly raised rates in response to a temporary burst of inflation in 2011, the danger this time is that a temporary acceleration in prices emboldens fiscal hawks who are complacent about the dangers of a depressed economy. 

The same danger lurks in Japan, the archetypal low-inflation economy. 

Its prices started falling during the pandemic. 

Japan will probably escape deflation this year, but beyond that it looks destined to remain in a low-inflation trap, having seemingly given up on its brief attempt to spring out of it in the mid-2010s.

Higher inflation could also cause gyrations in monetary policy in America, where rising inflation expectations and a faster rebound mean price rises are more likely to prove persistent. 

Financial markets are priced for a one-in-five chance that consumer prices will grow by at least 3% per year on average over the next five years. 

The Federal Reserve has promised to keep interest rates low and to keep buying bonds because it wants inflation to overshoot its 2% target, in order to make up for today’s shortfalls. 

But its new “average inflation targeting” regime does not allow for an enduring or large overshoot. 

Eventually the central bank will want to raise interest rates to bring inflation back down.

The faster prices rise this year, the sooner that tightening could come. 

Richard Clarida, the Fed’s vice-chairman, has said that the central bank will make up only for inflation shortfalls that have occurred over the preceding year, meaning the point at which catch-up is complete could come surprisingly quickly. 

On February 7th Janet Yellen, the Treasury secretary, tried to reassure critics of Mr Biden’s stimulus by saying that America has the tools to deal with inflation. 

But higher rates are not without consequence, and if the Fed finds itself pouring cold water on an overheating economy, the risks of another recession will rise.

Higher rates also hold deep implications for markets. 

Almost everything about today’s financial landscape is premised on rates staying low for a long time. 

Cheap money lies behind the idea that the government can spend however much it likes—including, say, on Mr Biden’s planned infrastructure bill—and underpins today’s sky-high stockmarket values and abundant credit. 

An abrupt change in the interest-rate outlook would be painful, as it was in 2013 when the Fed’s hawkish comments led to what became known as the “taper tantrum”.

On Wall Street higher rates would be a shock. 

In emerging markets they would be painful. 

Many have been experimenting with unconventional monetary policy and bigger budget deficits, following the rich world. 

But their efforts assume global financial conditions will stay loose. 

Higher interest rates in America to see off inflation would mean a stronger dollar and capital outflows from emerging economies, as in 2013. 

This would imperil their finances and make it harder for them to fight the effects of the pandemic. 

There is a lot to like about the idea of escaping the low-inflation, low-rate paradigm of the past decade. 

But higher inflation will expose the world economy and financial markets to a bumpy ride.

Why the New Paradigm Was Inevitable

by Jeff Thomas

Just as people go through a lifespan that consists of different stages, so empires tend to follow a pattern of stages.

They tend to start off slowly, making progress as a result of industriousness, understanding that progress is dependent upon hard work and an entrepreneurial spirit.

This is important to understand, as it’s the one essential in the growth of a nation. No nation becomes an empire through complacency or a lack of productivity. Welfare states do not become empires, although most empires end up as welfare states.

So, if that’s the case, what is the progression? 

And more importantly, what does this mean, considering the dramatic changes that are now unfolding in much of the world?


As stated, prosperity is created through a strong work ethic and an entrepreneurial spirit throughout a significant portion of the population. This is what brings about wealth creation – a condition in which people invest their time and money in a business enterprise that reaps profit. 

The profit is then re-invested to expand upon that success.

In the early stages of prosperity, those who create the wealth are revered, as the goods and services they create benefit all, even those who may be less ambitious or less imaginative and may never become business leaders themselves.

But inevitably, there will be those who seek to prosper to the exclusion of others. 

This trend was seen around 1900 in the US – a time when the country’s wealthiest entrepreneurs figured out that, if they banded together, they could buy both political parties. 

That would mean that, regardless of which party held power, the government could be counted on to pass laws that would protect their monopolies and make success increasingly more difficult for the competition.

Wealth Disparity

Of course, the objective of this would be that there would be a small number of individuals and corporations at the very top, who would be in a position to split up the pie amongst themselves and throw the crumbs to those beneath them.

Over time, this would lead to those at the very top becoming inordinately wealthy, well beyond what would be normal for their level of investment. And very few new individuals and corporations would be able to break into this cabal. 

Only those who could add to the size of the pie would be allowed in.


Not surprisingly, this, over time, would lead to resentment amongst those who were left out of the loop. 

When this became generational, with minimal change, the "greedy rich" would become the most hated segment of the population.

Those who come to understand that they will never be able to advance to the top layer would come to regard themselves as "disenfranchised."

This in turn results, eventually, in the awareness that the "little man" represents the majority of voters, which is then capitalized upon by opportunistic political candidates.

Increasingly, there are cries by political hopefuls for the one percent to be taxed. With every election these promises are renewed. And each time out, greater demands are made by the politicians.

Of course, the one percent are already running the show on both sides of the aisle and can make sure that they are taxed very little, if at all. But someone must be made to cough up, so politicians go after the middle class, taxing them increasingly until, after decades of increases, they are squeezed to the limit.

As Vladimir Lenin said, "The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation."

At this point the wealth disparity is at a peak and the resentment turns to anger. 

Those, who for decades have been promised a "fair share," realise that they have instead been sold out.

And here’s where it gets interesting.

Traditionally, once the population became resentful enough that the system was in jeopardy, those few who comprised the ruling elite were likely to essentially say, "Let them eat cake." This, ultimately, would lead to their downfall.

But today, we have the illusion of democracy, which allows for a different paradigm.


From the time of the French Revolution onward, we have had the construct of collectivism to work with.

Rather than defy the little man, defeat him by being seen to agree with him.

Create political figures who call out for a re-engineering of society: "An equal outcome for all. Take the wealth from the wealthy who stole it and give it back to the little man."

Such platitudes sell well when resentment has hit its peak.

But the secret benefit for the ruling elite is that the new breed of politician works for the one percent, just as politicians always have.

And collectivism benefits the one percent even more than any free-market system could. 

Under it, the little man is not raised up, as promised. 

Instead, the middle class is beaten down to the same level as the little man, creating uniform poverty.

As Winston Churchill stated, "The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries."

Therefore, it should come as no surprise to us that, when an empire such as the US begins to unravel, the ruling elite who actually own the country are ready and eager to create a transition that will appear to benefit the little man but will, instead, enslave him to a greater degree than he ever could have imagined.

So, it should come as no surprise to us that in recent months, the US has witnessed a carefully orchestrated drama in which the poster boy for the greedy rich – the US president – goes down in flames.

And the heroes of the play appear centre stage, providing a litany of collectivist promises that will bring cheers from the populace.

And so the trap is sprung. 

A totalitarian future disguised as a panacea.

As P.T. Barnum said, "There’s a sucker born every minute," and there is no greater sucker than a voter who actually believes that there’s a pot of gold at the end of the rainbow. 

His vain hope is that, even though every collectivist government in history has failed to deliver on its promises and has, instead, resulted in uniform misery, this time it will be different, and the new government will deliver on the now-hackneyed empty promises.

The new paradigm was as inevitable as it will be long-lived and ultimately destructive.