DISCRETIONARY COMPRESSION AND THE VULNERABILITY OF ASSETS
One of the more striking trends in a shifting consensus appreciation of economic issues has been an increasing focus on what’s being called a “cost of living crisis”.
There’s no doubt that this is serious – but is it, as the public is assured, only temporary? And, if it’s not, what are its implications?
Though the seriousness of this situation is gaining recognition, its implications – not least for asset markets – remain generally unappreciated.
Properly understood, what we’re witnessing is part of a broader dynamic, long discussed and calibrated here as the erosion of discretionary prosperity. As prior growth in prosperity goes into reverse, and the cost of necessities rises, consumers are losing the ability to afford non-essential (discretionary) purchases.
Governments, businesses and the markets are profoundly mistaken if they assume that this is some kind of passing phase, caused by nothing more than the temporary consequences of ‘unexpected events’, such as coronavirus disruption, and war in Eastern Europe.
Will the consensus of opinion – only now, and belatedly, catching-on to the pressures on discretionary consumption – also recognize what’s happening to affordability? And will it then move on to re-define the concept of “stranded assets”, realizing that this term applies, not to hydrocarbon projects after all, but to a far broader range of investments?
Moreover, will asset markets start to recognize the broader implications of deteriorating affordability, particularly where property is concerned?
Hidden in plain sight
As regular readers will know, downwards pressure on the affordability of discretionary goods and services is one of the two most critical issues identifiable through interpretation of the economy as an energy rather than a financial system.
The other is the unbridgeable gap that now divides the ‘financial economy’ of money, credit and asset values from the ‘real economy’ of material output, labour and energy.
Current events may be leading towards a moment at which issues of affordability collide with an over-inflated financial system to trigger far-reaching negative reactions.
The much-discussed “cost of living crisis” means, not just that households are struggling to cope with the rising cost of necessities, but also that their disposable incomes are under severe, indeed unprecedented, downwards pressure.
In short, if people have to pay more for necessities – such as food, heat, power and essential travel – they are left with less to spend on all of those many things that they may want, but do not need.
This extends far beyond non-essential purchases, having equally serious implications for the affordability of credit.
If you’ve been visiting this site for any length of time, you’ll know that these trends have long been anticipated here. SEEDS-based analysis has been warning, over an extended period and with increasing urgency, of a worsening squeeze on discretionary (non-essential) prosperity.
This expectation has been based on recognition of two critical trends, neither of which is accepted by conventional economic interpretation, and both of which are related to the way in which prosperity is defined by the availability, value and cost of energy.
First, relentless increases in ECoEs – the Energy Costs of Energy – have been undermining the prosperity-determining availability of surplus (ex-ECoE) energy.
Second, and just as top-line prosperity has been trending downwards, the real costs of energy-intensive essentials have been rising remorselessly.
What this means is that the indicator known in SEEDS terminology as “PXE” – prosperity excluding essentials – is on a pronounced downwards trajectory. This trend is illustrated in the following charts, which compare prosperity per capita with the estimated cost of essentials in America, Britain and China.
You’ll note that, as in Britain and China, it’s perfectly possible for PXE to turn down well before the zenith of top-line prosperity has been reached.
This trend is, in fact, by no means new, but has hitherto been disguised, where consumption is concerned, by the availability of ultra-cheap credit.
This ability to use credit to provide artificial support for discretionary consumption is now being eliminated by an acceleration in inflation, driven by the rising cost of necessities and, again, long predictable through energy-based analysis of the economy.
“Stranded”, but not as we know it
Even as the energy basis of prosperity has been deteriorating, techno-utopians have taken to describing big investments in fossil fuel projects as “stranded assets”.
The argument has been that, as renewable energy sources (REs) displace fossil fuels, demand for oil, natural gas and coal will slump, causing energy companies to lose money on investments “stranded” – cut off from consumers – by this supposedly-inevitable revolution in energy markets.
In reality, this has always been unlikely, not least because we cannot expand and maintain RE capacity without recourse to legacy energy inputs from oil, gas and coal. This means that the ECoEs of REs are linked to those of fossil fuels.
As energy costs rise, so, too, does the cost of everything – including steel, copper, cobalt, lithium and plastics – required, not just to expand RE generating capacity itself, but also to advance the use of technologies powered by electricity rather than by oil and gas.
A simple example is that, just as rising fossil fuel prices make conventional vehicles more expensive to run, so battery and hydrogen alternatives become costlier to produce, as does the RE infrastructure by which they are supposed to be powered.
A proper appreciation of actual rather than hypothecated trends reveals that we need to re-define “stranded assets”.
Instead of oil and gas projects, the investments cast adrift by decreasing demand are likely to be aircraft, hotels, leisure complexes, broadcasting rights contracts, and anything else predicated on the false assumption that consumer discretionary spending will increase indefinitely.
The circumstances of the ‘average’ household or individual illustrate this unfolding process. As increases in the costs of necessities outpace incomes, people have less to spend on everything from holidays or a new car to subscriptions for television and internet services.
At the same time – with rates rising, and levels of debt already highly elevated – they can no longer resort to cheap credit to finance non-essential purchases.
Just as customer affordability is falling, businesses providing discretionary goods and services are subject to relentless increases in their own costs of operations.
These trends are likely to have adverse implications for a string of business models, including the ‘high-volume, low-margin’ template used in some sectors, the ‘streams of income’ model popular in many others, and the widespread dependency on revenues from advertising.
Unfortunately for businesses supplying discretionary products and services, the conventional over-statement of past trends has provided misplaced comfort, often to the point of inducing complacency.
As we have seen in a recent assessment, the same fallacious methodologies which overstate real economic growth have created the misleading impression that nominal increases in activity in discretionary sectors translate into robust trend growth which can be relied upon to continue into the future.
This is illustrated in the following charts, in which conventionally-calibrated trends, shown in black, are compared with SEEDS analyses shown in blue.
What SEEDS interpretation reveals is that discretionary affordability, having already decelerated, has now entered a pronounced down-trend, completely contrary to the expectations on which so much investment and planning in discretionary sectors is based.
It’s always possible, at least to some extent, to reallocate assets, and to modify or replace business models – but not if you don’t know what to expect.
As a rule-of-thumb, discretionary goods and services account for roughly 60% of Western consumer spending, a proportion that includes swathes of durables including, most obviously, domestic appliances and vehicles.
The ‘average’ consumer is now finding that his or her ‘disposable income’ – the mainstream term for what SEEDS calls discretionary prosperity – is subject to severe downwards pressures.
The essentials still have to be purchased, and are now costing more. This means, first, that unpalatable choices have to be made.
The consumer may need to spend less on leisure activities, take fewer holidays, and cut back on outgoings such as subscriptions. He or she may also need to put off making ‘big ticket’ (consumer durables) purchases, such as a new washing machine or a replacement car.
A second implication is that the affordability of all forms of credit (and continuing payment commitments) is being undermined. The more that people have to spend on essentials, the less remains for the servicing of debt and the upkeep of obligations.
The compounding factor here, of course, is the rise in the cost of borrowing.
False confidence might be drawn from the fact that, in overall terms, rates are rising less rapidly than inflation, reducing the ‘real’ (ex-inflation) cost of debt.
But nominal rates matter, too. If the rate of interest on a mortgage increases from, say, 3% to 6%, the resulting increase in outgoings is very ‘real’, albeit in a different sense, to the borrower.
It’s of little or no comfort to the borrower to be told that the rise in rates is less than the increase in inflation, particularly where the inflationary effect on incomes lags, or is less than, the rate at which the cost of necessities is increasing.
This raises two questions about the affordability of credit. First, can the borrower carry on servicing existing debts at higher nominal rates of interest?
Second, can he or she really be expected to carry on financing otherwise-unaffordable non-essential spending by going still further into debt?
The far greater likelihood is that we’ve reached that point of “credit exhaustion” after which consumer purchasing and debt servicing capabilities can no longer be inflated to ever-higher levels on a tide of cheap credit.
Although rates are clearly heading upwards, property prices have enjoyed a boost provided by borrowers rushing to lock-in rates in anticipation of rising mortgage costs. It may seem illogical to pay over-inflated prices in order to keep borrowing costs low, but this is exactly the behaviour that has helped drive house prices upwards.
In the aftermath of this ‘anticipatory blip’, questions of affordability may now put enormous downwards pressures on real estate markets, defying the extrapolatory assumption that ‘prices can only rise over time’.
If investors – and lenders too – start to recalibrate affordability calculations, and accordingly to view property markets with more caution, there’s every reason why they might look at a broad swathe of discretionary-dependent businesses in a very similar way.
What, after all, are the prospects for companies supplying non-essential goods and services to increasingly hard-pressed consumers?
This takes us to an observation, set out in #222: The Forecast Project, that the ‘financial’ economy now stands at an unsustainable premium to a faltering underlying ‘real’ economy. This excess varies between countries, with China particularly exposed to a process of forced restoration of equilibrium between the financial and the material economies.
What this analysis indicates is that apparent economic “growth” has been inflated artificially by the injection of credit which, whilst boosting recorded activity, actually adds very little incremental value. In the business sector, this has created a trend towards unproductive complexity.
The SEEDS taxonomy of de-growth identifies many steps – including de-layering, and product and process simplification – which companies are likely to take in order to bolster profitability, and protect themselves against utilization risk and loss of critical mass.
But we need to be clear that there are limits to how far any business can counter a relentless erosion of demand for its product or service.
The onset of deterioration in discretionary sectors creates a serious risk that investor and lender confidence might erode when forward expectations are revised from growth to contraction. The pivotal issue is likely to be the extent to which forward commitments cease to be regarded as viable.
In short, the financial system could be driven into disorderly contraction by a dawning recognition that both affordability, and the viability of discretionary sectors, are being undermined by trends which cannot be explained away by short-term setbacks.
An insightful view on where the world (especially the west) is currently at economically.
It perfectly explains the situation we find ourselves in and shows the onset of what most economists and other thinkers in society are not commenting on and that is………..
We would have likely had it form 2008 onward if the financial crisis was dealt with more responsibly. The system needed to cleansed of the dead wood. That’s what nature does. Natural disasters allow the environment to renew itself. Natural cycles.
Instead, we had QE and bailouts of bankrupt and incompetent businesses which subsequently has exacerbated our system to the point you mentioned aptly labelled “credit exhaustion”.
Policy response has been INFLATION to offset or hide/disguise the DEFLATION.
Now the Fed and other central banks are pretending to reverse course and raise interest rates to a paltry 0.25% so still behind the official figures of 7-8% annual inflation.
Here in the UK I think we are about to experience the repercussions more severely than other western nations with the soon to be increased energy prices from April 2022.
Martin Lewis is claiming that many people here will be forced to choose between feeding themselves or their children and almost begging the government to intervene and help these people that will be suffering immensely. An unforgivable & inexcusable situation for any nation let alone what is supposed to be a first world country.
This brings us to the dilemma we find ourselves in.
Assuming the government does intervene and helps we have obviously more borrowing to pay for it increasing the deficit and subsequently debasing the currency further which in turn will make energy prices even more expensive.
The flooding of currency into the economy combined with closing coal fired stations and subsidising wind farms has created here in the UK a potential disaster coming this winter.
The lack of leadership is astounding. Nigel Farage has obviously seen the lunacy and has got involved in a new movement aimed at focusing more on fossil fuel energy production.
Whilst this is not going to save what is to come it is at least a step in the right direction and I think more movements like this will arise in the west to oppose the lunatics in politics pushing these green agendas that will just push us back into the stone age more swiftly.
But I am not buying the interest rate rises. They will not last long before they go back to QE.
Maybe a year or so. The damage to the housing markets, bond markets and stock markets will be catastrophic as you allude to. They won’t allow this to occur. You don’t sit back and allow the chips to fall where they may when they have clearly shown over the last 10 years that what they want is more control not less.
But regardless of whether they do or don’t, the damage has already been done (reckless QE) so if the road is inflate the problems away or raise interest rates to their free market rate (highly unlikely) we are going to feel the pain one way or the other.
We have passed the point of trying to resolve this with minimal casualties.
It didn’t have to be this way.
Thank you for your most interesting analysis, which essentially describes what should normally happen uniformly all over the global economy as the Energy Cost of Energy relentlessly rises, but if geopolitics is left out of the picture.
However, as we can all readily appreciate these days in light of the Ukrainian conflict, geopolitics is not simply an abstraction and it can have far reaching effects, particularly in a « global last man standing scenario ».
With all the Occidental oil firms having recently exited Russia, russian oil production will shortly inevitably collapse, as will russian oil exports. The IEA goes so far as to predict in the FT that 2.7 million b/d of russian oil exports will be missing on the international market next month and has called a meeting of its top member states to assess how this will be « practically handled ».
Among the messures suggested by the IEA to save oil are mandatory cuts in air travel, preventing cars from reaching city centres, free collective transports and 3 days a week work from home, whenever possible.
What happens next when russian oil production further falls down will be interesting to observe given that Russia currently exports at least 5 million b/d.
As for the now inevitable short term russian natural gas production collapse… Well, Germany is rumored to be desperately attempting to secure a deal with Qatar for LNG and the rest of the european countries, including the UK, are reported to be tempted to launch themselves into a new « African Adventure » to secure exclusive supplies…
But all these initiatives take time to bring in concrete volumes of the precious gas and some high level circles are reportedly thinking about implementing various forms of rationing for the next winter, all this with the general objective of attempting to minimize cases of mass hypothermia…
Hence, it might be a good time to accelerate fusion related research but for electricity production purpose only…
Today, Powell delivered a hawkish message about half point raises in the Fed Funds rate. The stock market ho-hummed in response: down small. It looks like it will take predictions by big name corporations of little growth prospects to produce a serious bear market (I doubt they’ll say shrinkage at first)
Another great assessment.
On reflection, I can’t think of any sector of the economy that is not going to be hit by inflation.
A rising ECoE is going to make everything more expensive (regardless of previous QE) and with no end in sight or at least until energy supply hits sustainable levels. God only knows what a “sustainable level” will look like!!!???
People’s savings are going to erode away.
Another thought I take from your comments is. How are banks going to function if people can’t afford to take on more debt? Their whole business model is in jeopardy.
Everywhere I look, I see dominoes falling.
Somebody (I’d need to look it up) once called inflation “the hard drug of the capitalist system”, and it’s taking on addictive and harmful characteristics right now. History shows that taking risks with inflation verges on criminal insanity.
What I’m getting at in this article is the widespread failure to think this through. Discretionaries are, as a rule-of-thumb, roughly 60% of the economy, and larger proportions of stock market value and employment. In an age of what we might call ‘corporate entitlement’, too many businesses might think themselves exempt from the hardship being experienced by what we might call ‘ordinary’ workers and consumers, whose ‘standard of living’ is falling sharply.
If investors and lenders were to turn cautious on discretionaries, things could get very nasty indeed. Monetary policy might inflate the stock prices of companies in ordinary times – ‘priced at $40, worth $20 on fundamentals’ – but nothing can prop up the stock prices of companies whose underlying business is being crushed.
A personal view is that the energy interpretation of the economy, applied at this site using SEEDS, can tell us things that conventional economics can’t. I have an increasing sense of urgency about this, hence producing detailed forecasts in article #222.
I guess I’m trying to figure out how people are going to afford essentials “stuff”?
Provided that money remains as the means of exchange, which I can’t see changing any time soon, how are people going to get access to the money they need to purchase the essentials they need? Especially as the “purchasing power” of money is falling all the time. They will need more and more of it.
(I never really understood what is meant by,
Inflation is “the hard drug of the capitalist system”??? We all get hooked on it and crave more of it all the time?)
Zero Hedge on their interpretation of the US stock market have already stated the market has priced in a Fed policy error and will restart QE and subsequently lower interest rates sometime into 2023. That’s why it has not declined yet.
However, now that the Fed has officially ended QE this should remove a large amount of liquidity from the market so we should start to see the market falling very soon despite “buy the dippers” and other morons playing this rigged casino.
Charles Nenner thinks around mid-April the stock market should start its long term cycle of major decline along with increasing interest rates.
Many other people are saying similar things.
It becomes a question of:
How far does the market drop?
And at what percentage drop does the Fed intervene?
I am sure by year end or going into 2023 we will know the answer to both those questions.
I felt a certain sense of deja vu writing this, as it reminded me of a research note I wrote in, I think, autumn 2007, recommending a shift from cyclicals into contra-cyclicals.
My calculation, which is very much a scoping exercise rather than a detailed number, is that the financial system faces real-terms compression of 40%.
This refers to the scale of commitments – debt, leases, explicit and implicit pension promises and so on.
Asset prices are leveraged to this, suggesting a fall of at least 50% in valuations, again in real terms. This is likely to cover everything from ‘hardly affected’ (boring stocks, profitable, conservative, with low leverage, selling necessities) to ‘wiped out’ (over-leveraged, cash flow-negative, hyped, and dependent on assumed future growth in discretionaries).
When this happens is likely to be a matter of ‘when reality sinks in’. At that point, the Fed and other CBs can’t prevent this from happening.
The best we can hope to do here is produce a better, and an in-advance, appraisal of what that “reality” is.
Tim – For me, inflation is a most salient confirmation of your model because it is a predictive trigger for bringing the financial economy back to the real economy.
I don’t recall if it has been discussed here, but is inflation now around “for good” – until very major changes occur, such as redirection of surplus energy from discretionary areas into the most essential (along with the wiping out of discretionary areas, reduction in the class of “essential”, entry into GFC2, etc) ?
Obviously the introduction of more “money” can only inflate inflation.
According to your modeling, where does “total surplus energy per capita” stand, compared to the peak?
What kind of change in that metric might we anticipate over the next few years, and is it mostly due to increased ECoE?
Fine writing. I hesitate to add “as usual”, as if you just roll these out!
I certainly believe that inflation is a critical indicator. I’ve always believed that we need to draw a conceptual distinction between a ‘real’ or material economy (of goods, services, labour and energy) and a proxy or representational ‘financial’ economy (of money, credit and assets).
Inflation is important because prices are where these ‘two economies’ intersect.
On your specific point, surplus energy per person was 1.71 tonnes of oil-equivalent in 2019. SEEDS projects it at 1.49 toe in 2030, and 1.31 toe in 2040.
This particular article I would describe not so much as difficult but as ‘complex’ – trying to tie together a lot of moving parts with reasonable brevity.
I must admit to being not altogether sure where we take this from here.
SEEDS has its limits, of course, as all models do, but I’m sure it works a lot better than the conventional economic models on which so many decisions and interpretations still rely.
I’d point to three conclusions as of greatest importance:
– The connection between energy, ECoE, surplus energy and material prosperity
– The roles played by essentials and discretionary prosperity
– The quantifiable divergence between the ‘real’ and the ‘financial’ economies.
Do the figures include the rising demand for energy from developing economies?
I can see a squeeze from both directions. An exponential increase in demand and a exponential decrease in supply.
“Inflation is not exploding out of control and interest rate rises will not help” ?
Bill Mitchell (Modern Monetary Theory) concludes in the blog post @poatkey linked to : “There is no suggestion inflation will ‘rage out of control’. It will remain at elevated levels for as long as the disruptions persist.”
Mitchel thus admits that inflation will become embedded (as SEEDS predicts) if fossil fuel “disruptions persist” even if his focus isn’t long term depletion of fossil energy nor on their impacts as the ‘master resource’.
That’s what I got from the article.
Bill Mitchell doesn’t see oil price inflation as a long-term problem. Possibly because it scuppers his position on MMT.
I’m an advocate for MMT as an explanation of government finance, but it only applies to an economy that is growing.
I think Bill doesn’t want to contemplate a world of de-growth.
Thank you again, Dr Tim, for the superb piece. Although it has been mentioned by you and others in the past, there is another, deeply significant, ‘issue’ now gaining a head of steam, and that is the “retirement income riddle”. We know that the generation with index-linked defined benefit pensions in the private sector are nearly all retired (or will be in the next five or so years) and ‘enjoying’ pension incomes that are, to a certain extent, linked to inflation. Public sector workers are, to a certain extent, rather better protected from cost of living increases through their pensions at the moment.
These DB pensions have fast been replaced by defined contribution (DC) arrangements which are really just tax-advantaged investment accounts where the member, not the employer, bears all of the investment risk and fees, although the latter are really rather modest today thanks to the advances in technology in recent years. Often, these schemes offer ‘lifestyling’, which is an automated program of changing the investment choice from, say, all-equity in the earlier years, towards all bonds and/or cash in the run up to retirement. Setting aside as to whether such default funds are fit for purpose, the real problem comes when the members reach retirement.
That when complex decisions about whether to adopt the ‘safety-first’ approach of using insurance contracts in the form of annuities to provide retirement income is ‘better’ than the ‘probabilities-based’ approach of drawing on the investment fund, with all the attendant risks and costs of doing so.
It strikes me that most people have real difficulty in distinguishing between ‘nominal’ and ‘real’ returns, as can be demonstrated by the fact that the overwhelming majority of privately purchased annuities are for fixed amounts, rather than escalating at a fixed percentage or linked to the RPI. I’m fortunate in that many clients have been able to afford the much more costly ‘real annuity’ (RPI linked) over the years, but they still tell me that ‘my pension has gone up again’ when, of course, it has merely maintained its ‘buying power’ when referenced to RPI!
If inflation becomes embedded, which I fear it will based on your analysis, there will be millions who might soon regret having the majority of their retirement income on a fixed basis.
Re: “On your specific point, surplus energy per person was 1.71 tonnes of oil-equivalent in 2019. SEEDS projects it at 1.49 toe in 2030, and 1.31 toe in 2040.”
I am curious how you are doing the supply side modeling. Are you using rising ECoEs to net out some projection of yours or someone else of the various primary energy sources? Or do you lean more toward physical limits on fossil fuels such as Seneca Cliffs or declines below critical levels of EROEI or Hubbert curves or some other mechanism. In other words, I see two primary mechanisms working: physical supply and the ECoE of that physical supply.
Or do you have some sort of thermodynamic model which uses simultaneous modeling of both supply and demand which both depend on ECoE and also depletion?
As one additional thought. Main stream Climate Modelers try to put the pieces together from the bottom up. But there has always been a skeptical minority who hold that the way to model sea levels, for example, is to look at the sea levels the last time CO2 levels were where they are now. Such methods yield sea level rises of 30 meters or so, rendering almost all of the sea-coast investment around the world as “stranded”. The advantage of the modeling is that it takes into account a vast amount of complex interactions, without the necessity of building a model of that complexity. The disadvantage, of course, is that the timelines have nothing much to do with political or news cycles or even the lifespan of corporate executives. In personal terms, I am being asked to think about my great-great grandchildren.
But it would be interesting to run this math, if you have it:
*The last time surplus energy was at 1.31 toe, the size of the real economy was A and the size of the monetary economy was B, for a “growth premium” of C percent.
*If we have been trending down to 1.31 for several decades, the general assumption will be that the “growth premium” should be zero.
*Which yields a current “fair value” of D in today’s dollars.
*The shrinkage in the ” current growth premium” is likely to be E percent over the next few years.
Remembering that these tonnes oe numbers are per capita figures – and hence relate to per capita rather than aggregate prosperity – my number for 2030 takes us back to 2000-02, and that for 2040 takes us back to the early/mid 1970s.
I’m loathe to draw too many inferences from these historic comparisons, because so much else has changed.
I’d grant, though, that this is ironic, at a time when some in the media are drawing comparisons between today and the oil crises. Not too flippantly, if someone said to me that “we’re back in 1973!”, my reply might be: “not yet, we’re not – but we’re getting there!”
Limits to Growth Limits to Growth Limits to Growth
Hi Tim, curious why you selected broadcasting rights above as an example. My job involves writing about the value of these deals. Many have been going down in value for several years, with a global downturn in the cable & satellite TV business.
Thanks, and welcome.
These were just examples, but rights fit in with what I might call ‘capitalizing future income streams from discretionaries’. I wasn’t aware that these had been falling in value.
If we look at, say, sports financing, huge sums are paid for current and future media rights, sums which seem to dwarf other forms of income (ticket sales, merchandising etc) to sports organizations, such that they have become media franchises. I’m not clear on the details of how sponsorship/ad deals fit in with rights contracts.
My point here fits in with what I term the ‘streams of income’ business model, where signing up customers is prioritized over current sales. An example might be artists selling music rights for sums which the buyers, presumably, expect will be exceeded by forward revenues from subscribers and purchasers.
This ‘streams of income’ model seems to me unduly dependent on assumed future growth (or, at the very least, continuity) in consumer discretionary spending. Much the same might apply to dependency on ad revenues.
My background makes me particularly interested in business models.
I too found the “streaming” channels angle interesting.
I have a friend working in the set-building industry, here in the UK
He says it’s gone crazy. The likes of Netflix, Amazon Prime, and Dysney are pumping huge amounts of money into new content/productions. The studios can’t get enough workers. New buildings/studios are popping up all over the place.
(Incidentally, the waste in film production is unbelievable. It all ends up in a skip!!!)
Be interesting to see what happens. Sounds like it is heading for a “re-set”.
In 1965 I went to work in lower Manhattan…but not in the financial industry. But the little world down there was consumed by the Dow Jones average and other financial matters. The Dow at that time was 2000. One “heroic” assumption is that it may be headed back to 2000 when all of the inflation is wrung out. As you point out, much has changed since then. But my observation is that much of what has changed is the addition of frivolous complexity, which generates a lot of GDP when money is expanding, but becomes dispensable “discretionary” expenditures when there is no real growth.
And in 1965 people still took this book seriously:
Click to access Benjamin_Graham__David_Dodd_-_Security_analysis.pdf
Now it’s mostly about front-running the Fed and reliance of “yet to be invented technologies”.
I’ve always been fascinated by capital market theory, and even built my own valuation model.
Don’t forget the large scale impact of passive investing (401k’s on regular purchase schedules, regardless of price). This was a new issue to me in 2021 but the impacts are staggering. Michael Green does some of the best work on this:
His thesis on the impact of 40% of the total market and 50% of the managed market being passive finally helped me understand why there seems to be no limit to speculative heights.
Re: stranded assets in the discretionary sector:
“Host Hotels & Resorts has agreed to sell its Sheraton New York Times Square hotel for $365M, Real Estate Alert reported, less than half the $738M it paid for the 1,780-room property in 2006.
. . . . The 51-story hotel is New York City’s third-largest by room count.
Host was struggling to sell the property at the price it purchased the hotel for long before the pandemic, asking for $550M in 2018, according to REA. In 2020, Host admitted that the Times Square Sheraton’s value had sunk even lower, to $495M.
The Times Square Sheraton sale adds Host to the list of several NYC hotel owners to sell their properties at a discount. Hotels in the city have yet to return to their pre-coronavirus occupancy rates, and the omicron wave in December and January suppressed tourism’s nascent return to NYC.”
I suspect that they overpaid.
I wonder if we might see a discretionary prosperity “death spiral”. As discretionary product and service purchases decline, a proportional percentage of workers supporting those products will lose their jobs. Once unemployed, their financial precarity will mean they are no longer purchasing as much discretionaries as they were before. More discretionary sector workers then lose their jobs, rinse and repeat.
Redistribution of wealth and income might help support laid off workers, but it won’t be able to create much demand for non-essential stuff. Money can be created and handed out, but that can only work in the very short term, as increasing inflation catches up with money creation. So, real prosperity can only rise in step with surplus energy, but prosperity can decline much faster than the energy supply if potential consumption is limited by labor or financial issues (or war, of course). The Great Depression was a prime example. There was plenty of surplus energy available, but prosperity plummeted everywhere anyway.
I think that expecting prosperity to decline gradually with energy surplus is optimistic. We should all be prepared for prosperity decline “tipping points” to wreak havoc on the global economy and cause very rapid declines in prosperity.
I agree with all that.
I would just add, that economic “tipping points” have been happening more frequently in recent years, though not in a global manner.
the pattern is clear, that smaller weaker countries are tipping into economic havoc, it’s real and I think easy to see that some of these countries are rapidly declining.
the pattern could change, but for now it’s Peripheral countries that are in the direct path of the consequences of declining net (surplus) energy, though all that remains is the Core countries which are next in line.
So do I. Joe’s comment that “Money can be created and handed out, but that can only work in the very short term, as increasing inflation catches up with money creation” is a particularly apt (and frightening) statement of where we are.
My PXE (prosperity ex-essentials) curves are looking very dramatic. Up to now, prosperity per capita has been declining relatively gradually, and the rising cost of essentials, too, has been fairly gradual.
But the combination of the two produces a disturbingly rapid (and accelerating) rate of deterioration in PXE.
If we stand back and look at trends – trying to “see through” effects like war and the pandemic – there’s a compounding rate of deterioration which might indeed point towards a “death spiral” in discretionaries, with the acceleration effects that Joe describes.
I’m having similar thoughts.
“Death spiral” or private sector “freefall” seems inevitable to me.
How are all those effected, going to procure the essentials? How are they going to get the money???
I can see only 3 (legal) options.
1. Get a job. (But the economy will be shrinking, so where will the jobs be coming from? The private sector will be “hemorrhaging” jobs not creating many new ones. Public sector?
2. Borrowing money from the private sector (banks). (But who will be able to taken on more debt if they haven’t got a job and for how long???)
3. Government hand-outs. (But the value of money will be decreasing all the time due to inflation. Government created money will just increase the inflationary pressure unless it is taxed out as quick (if not quicker) than it is spent in.
Non are viable options, but people will still need to eat and live somewhere.
I’m not sure that money in its present form will function as the means of acquiring “essentials”.
Money’s value is going to erode due to inflation (and keep eroding) which doesn’t make it a stable means of exchange.
People are going to need to acquire increasing amounts of it to keep abreast of inflation.
Peculiar to the US
is the current crime wave and self-destruction. Miami Beach imposes a curfew, Austin ends its annual SWSX with several people dead. Vehicle crashes are up. And so forth. What is the explanation? There doesn’t seem to be any increase in crime in many other western countries. Polls in the US find:
“By many measures, Americans are feeling frustrated with their government, their economy and their fellow citizens. Nearly 80 percent are dissatisfied with the country’s direction, according to Gallup. People spend hours screaming at one another on social media. Many Americans consider people with opposing political ideas to be so wrong that they don’t deserve the right to express their views. Polls also show an alarming degree of skepticism about democracy and openness to political violence.
Along with these signs of alienation, a wide range of behavior has deteriorated. Alcohol abuse and drug overdoses have increased. Americans’ blood pressure is up, and measures of mental health are down. Vehicle crashes have surged.”
Certainly the declines in discretionary income may have something to do with it. Why is it focused in the US? Perhaps because, up to this point, Americans have considered themselves exceptional among all countries in the world. Perhaps the dim realization is dawning that we are not exceptional. And that is frustrating because it goes against all the carefully orchestrated messaging. Unfortunately, there won’t be any randomized trials with statistical power to prove or disprove the hypothesis.
Don, I wonder whether the current manifestation of anger has not been fermenting for quite some time. I remember around 1998-99 reading Gavin Esler’s book ‘The United States Of Anger’ with a sense of some foreboding – Esler was BBC Senior Foreign Correspondent.
Don, I believe that humans, like other animals, have an environmental sense, in our case also a social environment sense, of impending doom. As birds sense when it is time to migrate, as animals can tell an impending whopper of a snow storm and hunker down (this winter I say squirrels bolstering their tree nests right before a predicted huge snowstorm and cold spell, even though they didn’t have access to the Weather Channel) or as they sense an earthquake is coming etc., we collectively sense an impending earthquake in our social environment – the social and economical ground about to shifting beneath our feet. Perhaps this is just a metaphor, I certainly can’t back this assertion up. I think the best articulation of this “mass mind” phenomenon is Tolstoy’s epilogue to War and Peace.
And let’s not forget the timeless human wisdom captured in Herman Wouk’s ditty (Caine Mutiny), “When in danger, when in doubt, run in circles, scream and shout!”.
Sorry for all the typos, this is what happens when you try to post while at work!
Another stranded asset, see today’s Wolf Street Report:
“Another older office tower is going to cost lenders an arm and a leg, after it already cost PE firm Blackstone an arm and a leg. Blackstone is walking away from the 26-story 621,000-square-foot office tower at 1740 Broadway in Midtown Manhattan that it had bought in 2014 for $605 million. The two biggest tenants moved out well before their leases expired: L Brands, occupying 77% of the rentable area (lease expires March 31); and law firm Davis & Gilbert, which had 15.8% of the space. Now the building is mostly vacant.
The property, built in 1950, is the collateral for a $308 million loan that was originated by Deutsche Bank and securitized into a single-asset single-borrower CMBS in 2015. This CMBS is backed by only the loan on this building, and there is no diversification within it. Now Blackstone is letting the holders of the CMBS have the building and eat the losses.”
It occurs to me that the erosion of discretionary spending will be concentrated at the “bottom end” of the discretionary spectrum. That is, wealthy people whose incomes are tracking or exceeding inflation will still be able to purchase discretionary goods and services as usual. Those of modest means, however, will be squeezed. So sales of Gulfstream jets and luxury yachts will continue apace, while sales of Wrangler jeans and ticket sales on Disney’s Big Red Boat may suffer.
The biggest impact, however, may be that “affordable” housing will be bought up by those of means, while those of modest income will be forever relegated to the ranks of renters.
Yes, those at the bottom will feel the squeeze first.
But a domino of collapsing discretionary businesses will effect people in those businesses who are on good salaries. They will not have jobs. If 60% of jobs are in the discretionary sector, then the effects will be across the social/economic spectrum.
The case of the P&O ferry contracts could be a taste of things to come. It’s hard for the government to spin it positively but it is the “free market” in action. It makes perfect sense for P&O economically but the social consequences are there for all to see.
I feel a change of language in the MSM here in the UK regarding the “cost of living crisis”. The people at the bottom aren’t being vilified as before, as scroungers or lazy or reckless or “thick”. There is an understanding that their predicament isn’t of their own doing. This is quite a departure from previous depictions of the less well off.
I’m not sure how long the government can keep telling people that their incomes are increasing when those people’s experiences are very different???
I’d like to see more generosity of spirit towards the very poorest, but this crisis is hitting those far higher up the income scale. I’ve read that anywhere from 1/5th to 1/3rd of UK households are in financial danger because of what’s happening. The hit to discretionary incomes reaches still higher up the scale.
It’s the biggest hit to living standards since records began in 1956. That was only four years after war-time rationing finally ended.
Maybe we are heading for rationing again.
After all, aren’t Foodbanks a kind of rationing for the very needy?
In a sense, the rationing of 1939-52 was an alternative, required by circumstances, to the more normal rationing operated by markets (we might all like a Ferrari, but we can’t all have one).
In Heart of Oak – the second volume of his autobiography: the first is A Steady Trade – Tristan Jones reflects on how shopkeepers and others ‘lorded it’ over rationed customers.
I guess I’ve answered my earlier question about how people are going to get access to the money they need to buy essentials. The answer is that they aren’t going to get the money, they are going to be given the food direct.
It’s already happening through Foodbanks.
I guess Foodbanks are a kind of coupon system where those eligible, are allocated a fixed amount of food for a given time period.
At the moment, most of this is through charitable organizations or Church groups.
How long before the task is administered by government?
The future is already here for some.
What you’re describing is a very different system from one in which, in theory, everyone purchases essentials using incomes, with the incomes of the poorest supplemented by benefits, at least to the point where essentials are affordable. That, at least, is the theory.
I cannot see how a fundamental change of system can be avoided. De-growth lies outside all prior experience, whilst we are heading for (arguably already experiencing) hardship to an extent worse than anything in living memory.
This situation imposes stresses that point towards a change of system. I notice that, in the UK, the chancellor (finance minister) is presiding over the highest incidence of taxation since the war, but wants to promise tax cuts in the future. The reality is one of higher taxation (on those who can afford it), with discretionary consumption at the higher end of the income scale reduced to fund the provision of essentials at the lower end.
My approach to this is to measure government spending in relation to prosperity, and not to GDP. Government spending in turn divides into two categories, which are (a) public services and (b) transfers from some people to others.
SEEDS fiscal charts are showing an unfolding collision between affordability and government activity. During the coronavirus, the affordability issue was tackled using QE, i.e. running enormous deficits funded by monetization of existing government debt. In the UK, for example, the injection of this newly-created liquidity converted an underlying 20% decline in the economy into a 10% fall in reported GDP. But, where inflation is concerned, QE isn’t the solution, but is part of the problem. This flatters reported ratios (such as deficit/GDP) without changing the underlying problem.
It seems to me that reality is emerging more rapidly than political leaders can adapt to it.
Hopefully, there will be a ‘new politics’ with the emphasis on ensuring that everyone has access to the essentials. Not even opposition parties seem to realise that the provision of the essentials will be the political battleground of the future.
A current situation in the UK which may shed light:
“The Government immediately went into a panic, and came to the rescue of one of the factories with an undisclosed amount of taxpayers’ money. This ostensibly was not through concern for fertiliser supplies, but because the carbon dioxide that is a by-product of producing nitrogen fertilisers is used for slaughtering animals and preserving food, and hence is a vital element in the UK’s just-in-time supply chain.”
Simon Fairlie is a veteran British farmer who has analyzed the island’s food system for decades. There ARE reasonable solutions to keeping Britain’s supply of ESSENTIAL foods flowing from domestic sources while greatly reducing reliance on the synthetic nitrogen made from natural gas. But it requires a restructure of the entire British food system (and very probably a lot more labor on farms).
When push comes to shove, the British government always seems to vote for the status quo propped up with more debt and blame bad outcomes on Russia. The willingness to restructure seems to this outsider to be nearly zero.
“When push comes to shove, the British government always seems to vote for the status quo propped up with more debt ”
Few countries do otherwise. It’s the politician’s dilemma. Their careers are continually dependent on the next election, on campaign contributions from the power elite, and satisfying their lobbies.
Foodbanks are allocating “essentials” without the need for “money”.
It’s interesting that Foodbanks are run by charities and church groups and not by government. This kinda makes sense, because, if the government took over the operation, it would be become obvious that it is part of the government’s economic strategy. By keeping it in the voluntery sector, it disguises what’s actually going on.
As you say, a “benefits system” that no longer uses the distribution of money as the means of support, is s real shift in policy. But as I’ve said before, in a de-growth situation, money as a means of exchange, will be too unstable. Giving people money to procure “essentials” will just push up the price of those essentials, which will increase the need for more money. A vicious cycle will kick in.
Looking at things with my “MMT head” on.
Kids are going hungry in the UK. They are hungry not because there isn’t enough food to go round.
Supermarkets throw away millions of tonnes of food every year.
Kids go hungry because they (or there parents/carers) don’t have access to enough money to buy the food.
Government can create the money (via the Bank of England) and give it to the kids/parents/carers.
Taxation does not need to go up (as was demonstrated with the furlough scheme). It won’t make other people poorer. (Robbing Peter to pay Paul)
It won’t cause inflation either, as there isn’t a shortage of food to spend the money on.
All that would happen is that supermarket profits would go up.
If inflation was seen as a problem, then tax the money back out of the economy by tax increases on supermarket profits.
BUT……BUT…….BUT……this only works in an economy that is growing. In a de-growth situation, food surpluses may be in short supply.
Inflation will be rippling through the economy as energy becomes scarce. Subsequently, money’s purchasing power will be decreasing all the time.
Any money that the government spends into the economy to help support people struggling to acquire essentials, will need to be taxed straight out again or it will fuel inflation.
That’s why I can see that the procurement of “essentials” for those out of work, will be through direct allocation of resources and not by money.
And there are going to be an awful LOT of people out of work!!!!!!
” as there isn’t a shortage of food to spend the money on.”
Globally? In England only? There are shortages of some items in many countries and in parts of the US and Canada. Prices are up by 8% in the last 12 months in the US.
Biden warns of shortages (yesterday):
World shortages looming:
Just to add.
Tackling energy scarcity driven inflation with interest rate rises, is just going to hit people’s discretionary spending even more. It will just accelerate the collapse in jobs in the discretionary sector of the economy.
Final thought for today!!! I promise!!!!!
I agree with you that the new political battleground will be over the delivery of essentials.
Politics, here in the UK, hasn’t reached that reality yet. Both main political parties are still talking in terms of delivering more growth (and by definition more prosperity).
Interesting times ahead.
“I agree with you that the new political battleground will be over the delivery of essentials.”
the final political battleground will be over the delivery of essentials.
Perhaps as an interim stage, we have the ‘battleground of entitlement’.
There are many ways to complete the following statement:
“I know the economy is in trouble, and people’s living standards are falling sharply, BUT
…..my company’s profits mustn’t decrease”
….the value of my stocks/property mustn’t fall”
…..I shouldn;t have to pay more tax on capital gains”
…..nothing must impair my discretionary consumption”
@Steven B Kurtz.
“Globally? In England only?”
(For now, at least. Likely to change with a rising ECoE though!!!!)
the final political battleground will be over the delivery of essentials.”
I think there will always be politics (something to disagree on).
Even hunter gatherers have/had politics to navigate through.
It’s just that the debates may be very different from now.🤔🙂
Jamie Diamond tells Biden the US needs a “Marshall Plan” to source supplies for the oil and gas industries.
Got that? The government will print money to develop O&G reserves and wells, and then the O&G industries will extract and sell it for profits. We’ll federalize the pre-extraction costs so that the O&G companies can continue as private, not public, for profit companies.
So we are moving from a business model that imposes excluded and consequential losses on society via property rights to one that also imposes hitherto included costs on society to preserve the for-proft corporation. Because nationalization would be socialism I guess.
Logically the additional move is UBI, so that society pays labor costs, further enhancing companies’ balance sheets and profits.
Sure, it will all end badly, but like the famous New Yorker cartoon, we sure will create a lot of shareholder value before utter destruction
The obsession with private wealth is a mental illness.
It’s an interesting twist on my scenario of the dogs fighting over the scraps. (People who hate conspiracy theories should leave the room now.). But I think it is a feint, concealing the knockout blow. Ukraine was the first patsy. They set up the rest of Europe to go to war with Russia. As those two destroy themselves, the US will then drop in to scoop up what it can glean from Russia and the Middle East, along with the icing on the cake from Venezuela. Canada, so far as I can see, is a bystander still believing tar sands can save it.
My prediction is that bombs will turn out to be cheaper than the Marshall Plan. The trick is, you don’t want to use bombs on anyone who might retaliate. Thus, the convoluted plot outlined above. The US Security State is plenty smart enough to figure this out. And I think the Russian leadership is smart enough to see where everything was going.
Will Europe get any crumbs (supposing it survive a head to head with Russia)? Well…the US refused to share vaccines during the Covid epidemic.
Aside from the lack of evidence, I have two main problems with conspiracy theories. First, they seem to credit supposed conspirators with far too much guile or, in an old English word, ‘nous’.
Second, there are more straightforward explanations. The incumbent system, at least in its extreme form, is failing. Whatever future historians might call it – ‘the liberal ascendancy’, ‘the Anglo-American economic model’, ‘the Washington consensus’, ‘financialisation’, ‘globalism’, ‘post-capitalism’ – the current era is ending.
Its advocates look ever more like Ancien Regime courtiers, isolated from what’s going on in the world outside the gilded palaces. Far from ‘marble halls of nefarious plotting’, this looks a lot more like ‘Versailles up a mountain’.
For ‘the divine right of kings’, just substitute ‘the perpetual right of wealth’.
In a sober moment I will agree that it is all either enormous incompetence or madness. But it is sometimes fun, and usually occurs in my sleep cycle in early morning when I am getting ready to wake up, to remember the old CIA adage:
“When we are successful, nobody will know that we were involved, or what our goals actually were”
So nothing is actually off the table so long as there is some shred of causal connection.
Perhaps it is because I enjoy gangster movies where some hidden genius has brought a bunch of gangsters together to do a job, but cleverly arranged it so they all end up killing each other, thus leaving him with the loot.
Another twist possible:
“Russia has been spotted doing naval research or exercises close to places where the cables are located”, said Bueger. Russian ships have carried out exercises near Ireland and Norway, where several submarine cables linking Europe to the United States run. Russian research boats were also spotted in 2014 off the coast of Portugal, again in an area where there are a dozen submarine cables.
…even if in theory undersea cables appear to be prime targets, “it’s highly unlikely that Russia would go down this route”, reassured Liebetrau. An attack of this level would be considered an act of war by the West, as confirmed by Radakin. And Moscow would probably not be willing to escalate such an operation, which would require a lot of resources without having any significant impact on NATO’s military capabilities.
I would assume that this exists, on both sides, as a contingency plan in wartime, not dissimilar in principle to attacks on satellites and terrestrial radio signals.
In that event, though, Russia could hardly have its ships loitering around cables.
I’m not sure how/if Russia could disable the SOSUS ASW sensor carpet which detects SSNs/SSBNs transiting from the Barents Sea to the North Atlantic.
Why would NATO and other allies ever consider disabling the internet? Their economies would collapse immediately.
Not the internet, but Russian cables
Russian people need internet to see global news which counters State misinformation. Economy is already in the dumps. Would be counterproductive in my opinion.
I can see some advantages to taking out submarine cables, but at that same time you may as well load up a flight of interceptors with ASAT missiles and take out everything. It would basically be a decapitation attempt.
I agree with Helix, dealing with a decline in discretionary income will be different for the rich versus the poor. Here is an example of how the rich think
Cluelessness of Elites or Madness of Elites or Cleverness of Elites?
One factoid to keep in mind:
Pew Research finds that a third of Americans want to go to war with Russia even if it means nuclear escalation.
Remembering the Bush era adage that no good crisis should be allowed to go to waste, what agenda might the Biden administration pursue given the level of hysteria? Everyone from Musk to Dimon agreeing that America needs more oil and gas. The Biden administration patting itself on the back for the new record production in the US.
Think about all the “unthinkable” changes in the wake of the Great Financial Crisis of 2007-8.
Gorozen and Company
How could so many people get it so wrong for so long?
Although the details and personalities may fluctuate, I come back to these basic principles in the geopolitics:
*Europe and the US consume way more fossil fuels than they produce. Europe especially so.
*A handful of countries produce more than they consume and export. Among them is Russia.
*In order for the high per capita consumption but low per capita production countries to survive as world powers, they have to use either some proprietary knowledge or some especially efficient manufacturing OR ELSE use military superiority.
*China and Southeast Asia in general have excellent manufacturing, but are not self-sufficient (and are becoming more deficient) in fossil fuels.
*The Middle East and a handful of other countries account for most of the “surplus” countries, and so are a prized colonial asset. At present, the colonial status is enforced by the Petro Dollar agreement.
*Because increasing per capita net energy from fossil fuels is a very dim prospect indeed, as is any short term technological solution (e.g., thermal energy from deep in the Earth), the high consumption countries have to reduce the “capita” in the Rest of the World. Having India, for example, lap up a lot of the available supply reduces what the traditional colonial powers get. Thus, we see the US threatening India with denial to the SWIFT system.
We might visualize this as a game of chess, rather than checkers. In checkers, the main influence on India is Pakistan and Thailand and, across the mountains, China. But in chess, it is the long distance moves across the board by the bishops and rooks and especially the Queen. It is the intricacies of the financial system which give the money center countries (foremost the US, but also perhaps London and some of the Asian financial hubs) their leverage. If the Petro Dollar and SWIFT system is managed as haphazardly as the oil industry has been managed, then oil and the financial system could both collapse more or less simultaneously. Which would leave a very different landscape for the future.
And From the Third World Point of View
PS. In my twisted way, I find the juxtaposition of Jen Psaki’s carefully sculpted appearances and the raw reality of the thermometers in Antarctica to be amusing. It’s a perk of being really old and having seen way more nonsense than most people.
Thermometers seem to end up in strange places, dear Don.
New article from Energy Skeptic
Can the petroleum industry operate if all gasoline gives way to EVs?
Moral: Rockefeller’s brilliant usage of the entire array of fractions made him rich. We have no current plan to use less than all of a barrel.
Tim and all, Re possible threat of cutting Russian undersea cables:
Seems Psyops is ongoing.
Bill Blain of Shard Capital is always worth reading. https://morningporridge.com/blog/blains-morning-porridge/the-crisis-approaches-energy-security-and-the-nuclear-option/#comments
Yes, excellent, as so often.
I also enjoyed his linked article on Renault, where I read that the original Lada had a heated rear window to warm the hands of those having to push it.
This one is a must-read:
Subsidies are like candles on graves; too little, too late.
The type of sand frackers need has tripled in price which is one reason fracking has not expanded much even with the high price of crude.
Peter Zeihan talking about sustainability and demographics.
Is anyone here familiar with this man’s work? Any thoughts or critiques?
I listened until he said “nuculer”. He is a pathetic moron.
Watched BBC news last night.
Article on fuel poverty in the Outer Hebrides.
Those isolate communities on the extreme edges are going to feel the squeeze before most.
Interviewed a farmer talking about going back to a crofter existence like his grandfather. Few sheep, carrots, beetroot, turnips. Burning peat for heat. All sounded pretty grim.
Those places are going to feel very isolated when oil is no longer an option.
That the BBC is thinking about the consequences of fuel inflation is interesting. Public awareness may not be so far behind?
The BBC has also published Electric cars: Five big questions answered.
It doesn’t ask whether EVs (or renewable energy sources) are really “green”, thus ignoring mining and other environmental consequences related to cobalt, lithium, silicon, concrete, steel and other essential inputs. It doesn’t mention that batteries are hard to recycle, and that neither solar panels nor wind turbine blades can be recycled. It doesn’t tell us that we’re only now approaching mid-life and end-of-life issues for EVs.
Neither does it tell us where the energy required to replace 1.1 billion ICE cars with EVs is supposed to come from, or how we can expand and maintain RE systems without legacy energy from FFs.
Your point about income streams dropping away for business is important. I was reading in my trade press in recent days that the ‘lapse rate’ for monthly-paid insurance policies and pension plan contributions are rising. The ‘crisis of affordability’ seems to be gathering pace.
Thanks. I’ve been highlighting the vulnerability of the ‘streams of income model’ for some time.
For instance, if someone needs to save money, why not cancel the sports TV subscription and watch The Big Match at the pub?
Likewise, the ‘high volume, low margin’ model is vulnerable, because it requires extremely high load factors.
How many pints per month = the sports subscription? 😉
Actually, the metric is pints bought in pub less pints bought in cans!
A friend of mine in the City – who wasn’t actually much of a drinker – used to collect phrases like “reality is an illusion caused by alcohol deficiency”, “there’s too much blood in my alcohol stream” and, of course, “work is the curse of the drinking classes”.
Demand destruction might be kicking in to the oil market. Price is down 4.5% this morning.
That’s possible, though the price dip might be no more than a mild post-excess correction – markets usually over-react to crises and then pull back a bit.
“… the ‘lapse rate’ for monthly-paid insurance policies and pension plan contributions are rising. The ‘crisis of affordability’ seems to be gathering pace.”
these are discretionary items, and it’s no surprise that “future” discretionary items would be cast off before present discretionary items.
humans usually discount the future.
the crisis is unfolding with its own internal logic.
G7 nations insist on the sanctity of contracts after ignoring the sanctity of currency reserves. They expect Russia to accept payment in Euros or dollars which the G7 nations have made unexchangeable I.e. worthless to Russia. Russia will cut off gas to Europe on April 1 if not paid in rubles. Who could have seen this coming? We are well and truly ruled by morons.
We are well and truly ruled by morons
“We are well and truly ruled by morons”
OR, maybe it is just human nature playing its self out on a very dangerous stage. I revert to my basic premise that it is a conflict between the resource consuming countries and the resource producing countries. Gail Tverberg at Our Finite World tells a somewhat similar tale.
As for the human nature part, I recommend reading this post from Sri Lanka:
He makes the point that the Empire really is dying, but everyone who benefits even a tiny bit is clinging to the failing empire to try to preserve their privileges. (Including himself).
In my opinion, the G7 are clinging to the Empire they think they still dominate. It is likely futile to talk to them about any other option. The Russians are clinging to the notion that having natural resources should afford them a certain amount of respect and wealth. Ukraine is clinging to the notion that they will become prosperous if they play along with Europe and NATO.
It was not until the summer of 2021 that the economic effects of the lockdown in March 2020 began to be felt. First in the form of the fake fuel shortage, but later in the very real surge in oil and natural gas prices. We might look back fondly at an oil price of $80 per barrel. But this time last year, there was concern that a rise above $80 would be enough trigger a global recession. In truth, recessionary indicators could be seen all over the place if anyone cared to look. Town and city centres were devastated by lockdowns. The entire travel and tourism industry is little more than a corpse waiting for a priest to arrive to administer the last rights. Hospitality businesses have closed in droves. Even Cardiff’s iconic Brains brewery had to be quietly sold off to the English – something akin to sacrilege in these parts – during the pandemic. All around the world, supply chains have been collapsing as shipping and transport costs rise far above anything the economy can afford in the long-term.
In the UK, as the winter of 2021-22 approached, people faced the biggest cost-of-living crisis since records began. What began as a series of eye-watering fuel and energy price increases, morphed into a generalised inflation as everything which depended upon energy and fuel in its manufacture and delivery became more expensive. The situation was not helped by central and local government tax hikes, nor by the central bank’s decision to raise interest rates.
A very thoughtful post. Thanks for the link….Don Stewart
Because of various travel restrictions, it’s quite a long time since I was in the UK, and longer since I was in GOC (Wales). I noticed, in the Midlands, a generally pretty miserable situation, even before the coronavirus lockdowns.
Hospitality, within the broader ‘leisure’ category, is obviously subject to the downwards pressure on discretionary affordabilty that we’ve been anticipating and quantifying here at SEE.
Relatedly, the ‘cheap fights’ business model looks untenable going forward, not just because of cost increases but also because decreasing affordabilty does not square with reliance on high utilization rates. Airlines might reduce the number of flights, scaling back activities in order to boost utilization rates. I would not be surprised if airlines introduced ‘premium’ offshoots, aimed at the reduced and reducing number of customers who can continue to afford to travel. Tour operators, likewise, might shift their focus from volume to margins.
I think the “cheap fights” business will still go ahead on a Saturday night in most UK towns 🙂.
In fact I can see it increasing as the ECoE goes up🤣.!!!!!
Does that mean that Brains is no longer the sponsor for Welsh Rugby???
What has the world come to if an English company is now funding Welsh Rugby!!!!!!!???????
The end is nigh!!!!!!!