My post was poorly worded, I agree.
Are you familiar with the gold carry trade?
There's a bigger carry trade going on, and that's the one between the fiat and the real (commodities, land, etc.)
To borrow some terms you're familiar with, the real is discontinuous with the fiat. But the leap from one to another is not made by a innovative shift in technology, it's made by a rethinking of investment philosophy.
The fiat carry trade is the financial expression of the idea of unending technological progress. Technology can extract more and more value from commodities, and this can go on forever - that is the central theme. So when oil was around $15/barrel, not only was it below it's inflation adjusted avg. price for the century, the value of the oil within it was far greater than what it was even 10 years ago. The same amount of energy within it can move us further, be transformed into more efficient products, etc. From the eyes of a commodity, that is the function of technology - to extract more and more value from the same amount of raw material.
The role of fiat in the process is clear. Fiat is the tool by which the growth of technology can be sustained. As long as technological innovation frees us from the limitations of the real, more fiat can be created to continue to do so. That is why I'm calling it a "fiat carry trade" - to contrast it with the real.
The fiat carry trade unwinds when the real gains an advantage over the fiat - which is just another way of saying that technology can no longer keep a commodity at bay. If such a commodity (there's really only one that can do this - we'll get to it shortly) is persistent in its challenge of the fiat, at some point the value of the fiat comes into question.
At this stage one begins to wonder, "hey, why isn't my dollar buying me more crude? Is there something wrong with my money, or something wrong with crude?" The answer is that there's something wrong with your fiat - because it's failing to do its primary mission. Again, it's mission is to enable growth beyond the limitations of a world denominated only by commodities. Once this doubt is realized, a shift begins. The shift is one where the fiat is revalued to reflect the appropriate value in relation to the commodity. The shift is one where the underlying economy's ability to withstand the limiting forces of a commodity are fully reflected in it's fiat. The shift is one that asks, "if this economy is being slowed by imported crude, at what amount of devaluation does the fiat reflect this slowing?"
As I hinted at, there is one, and probably only one commodity that can challenge the fiat, and that's crude oil.
In retrospect, the recent spike in oil prices will be seen as the necessary step to ensure that the world didn't hit a major oil problem in the year 2001 - when OPEC would probably run up against their absolute production capacity. A higher crude price now means that exploration and development (a 2-3 year process) can begin in earnest now, and delay a world which is brought to its knees by an oil shortage that would make the problems in the 70's look benign.
The shift that's occuring now is the leap from the fiat to the real. In the fiat, g&k investing was the ultimate tool - because it isolated and capitalized on exactly how technology defeated the real - by innovating in discontinuous ways.
This economy is heading for a big slowdown with or without the fed raising rates. The only reason AG raised rates was to defend the dollar - the fiat that is being challenged by crude. You see that the usd has momentarily begun to slide. If this slide continues more rate hikes will ensue (unless you prefer hyperinflation), and this economy will come a grinding halt very fast. The usd is the fiat that reflects the economy most challenged by crude because we consume more oil per capita than any other nation, and we're not going to stop until it's too late. In fact, per capita consumption of crude is exactly the same now as it was in the early 70's! It is dangerous to believe that we are insulated from the effects of oil - ask PG - similar stories will spread throughout the economy.
The shift is huge, you see, it creates a new life form that burns paper as it moves through the jungle looking for the real.
The new life form I'm referring to doesn't hunt gorillas specifically, everything you say about them remains true, it just doesn't mean their equity values will continue to appreciate. They'll burn like everything else. |
