The pool of speculative fervor will be drained, as impossible as that seems in this moment in history.
2025 may go down as The Year When Everything Happened in No Particular Order, tracking William Gibson’s famous line that “The future is already here, it’s just not very evenly distributed.”
Those expecting inflation will find it, those expecting deflation will find it, those expecting a stock rally will get a rally, those expecting a crash will get a crash, and so on.
The forces that drove reliable trends have all weakened or reversed:
1. ever-lower interest rates lowered the cost of credit/capital to near-zero.
2. the deflationary forces of globalization: everything got cheaper and disposable.
3. expanding workforces increased income and consumption.
4. credit/asset bubbles created wealth without productivity improvements or sacrifice.
5. energy supply kept up with rising consumption.
6. the external costs of the “waste is growth” Landfill Economy (pollution, depletion, etc.) were ignored / not priced in.
These titanic forces still have the momentum of recency bias: most people expect the rest of the 2020s to be an extension of the 40+year Bull Market in Everything.
Feedback (doing more of what’s failed) and buffers (print more money and everything will be fixed) are working to maintain the status quo sand castles as the tide rises.
Those castles closest to the sea will dissolve first (the periphery I often refer to). Those with resources will be shoveling sand to build walls around their castles.
But the tide is relentless and so we’re in a period of flux where those benefiting from the status quo are fighting the erosion of all the forces that enabled the status quo to reach such heights.
As they lose ground, they redouble their policy efforts, pushing policies to new extremes–extremes which further destabilize the system.
The global economy is a complex self-organizing adaptive system, and so blunt-force policies intended to protect the status quo stability end up generating unintended consequences which have their own consequences (the second-order effects I often mention).
Those trying to control the system find their control is imperfect.
Long cycles are now in play. Interest rates fell for 40 years–the longest such run in recent history. Now interest rates will rise for some period of time, likely culminating in a financial crisis with no easy resolution, because printing money–the solution for the past 40 years–will be the problem, not the solution.
Demographics are also in play. Workforces are shrinking, retirees living off the earnings of the workforce are soaring.
The world desires ever greater quantities of energy and consumption, but the cheap, easy to exploit materials have already been exploited. Now everything will become more expensive, regardless of technological improvements.
Physical, chemical and cost limits will matter.
Whatever we seek, we can find–but that may prove ephemeral.
Everyone’s on the lookout for Black Swans, but that’s not the way Black Swans work.
Speaking of swans, the tremendous speculative fervor that has become the dominant force in global markets is now so taken for granted, perhaps it is a Gray Swan nobody recognizes.
Huge fortunes have been made by betting on speculative bubbles rising higher than prudence suggested was possible.
These gains fire the imaginations of speculators large and small, and so any rally in a speculative asset–which now includes every asset–will be chased with great confidence.
The desire to speculate on something, anything, is still immensely strong. That desire will manifest in one asset after another, inflating new rallies and pulling in punters far and wide.
But the tides are relentless and any such speculative frenzy is unlikely to last as long as the proponents expect.
Machiavelli’s wisdom applies here: “The wise man does at once what the fool does finally.”
In other words, perhaps there will be no sure things anywhere in the speculative universe.
It may take multiple crashes to whittle away at this speculative fervor. The forces building sand castles will gain the upper hand for a short while, and spectacular gains will be reaped, and then the tides will erode the sand castles and the valuations will fall.
The process of draining the pool of speculative fervor takes time. If there is anything that’s a sure thing, it’s that the pool of speculative fervor will be drained, as impossible as that seems in this moment in history.
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