The Bear’s Lair: Biden has killed the Exorbitant Privilege

It was French President Charles de Gaulle who in 1965 referred to the dollar’s position as the world’s leading international reserve currency as conferring “exorbitant privilege” on the United States. De Gaulle’s words represented his usual mixture of deep and subtle wisdom and fierce resentment of the Anglo-Saxon powers. For forty years after he spoke, the “exorbitant privilege” seemed real and unassailable, with huge benefits to the U.S. economy. Now thanks to a succession of inept administrations and the missteps of President Biden, it is fast disappearing. There are limited possibilities to replace it; but replaced it will be. Continue reading

The Bear’s Lair: Riding the tides of interest rates

Much has been written about the end of the bond bull market of 1981-2021 and the return to higher interest rates in the future. In this environment, conventional long-term bonds are a poor investment – their value is eroded by inflation and their prices will fall if interest rates rise. However, there is now an alternative, available in large quantities: Treasury Inflation Protected Securities (TIPS) and their equivalent in Britain and several other countries. Their pricing eccentricities have only recently established themselves, and there are some investment rules that may be helpful. Continue reading

The Bear’s Lair: The G in ESG is as bad as the E and the S

The ESG movement, whereby companies follow centrally approved directives in the areas of environmental activity, social activity and governance, has seen some setbacks recently. Environmental and social goals have been criticized as reflecting leftist political wish-lists not compatible with fiduciary duties to shareholders and others. Yet the “G” – governance – which had been seen as an anodyne mildly benign set of requirements — may be even more damaging to general prosperity than the other two goals. This was demonstrated this week by OpenAI’s firing of its founder Sam Altman, which if upheld would have destroyed tens of billions of dollars in value and endangered the nascent Artificial Intelligence industry. Continue reading

The Bear’s Lair: Is the West adopting China’s model?

Under Xi Jinping, China has moved away from its previous mixed economy to one in which all major decisions are taken by the state and are subject to the Five-Year Plan. Business leaders must toe the party line, while foreign investment is allowed into the country only on terms that involve ceding most intellectual property to Chinese interests. All media are censored, payment systems are used for a controlling “social credit system” and rebellious spirits are liable to find themselves in a labor camp. Continue reading

The Bear’s Lair: The decade of debt restructuring

The 1930s saw a major global recession and a decade of debt default and restructuring, sovereign, corporate and personal. The 1970s saw a series of mild recessions, accompanied by inflation; debt defaults and restructurings were far less severe. Today we are likely due for a recession of uncertain length and depth (though unlikely to match the U.S. 1930s) and inflation that seems likely to match the 1970s. However, for structural reasons I shall explain, the pattern of debt restructurings seems likely to resemble the 1930s rather than the 1970s. Continue reading

The Bear’s Lair: World central banks are wimping out

The Fed’s decision this week to hold the Federal Funds short-term interest rate at the 5.25%-5.50% range mirrored recent actions in other central banks worldwide. That is a pity; inflation is by no means conquered yet and real interest rates are well below their levels of the United States in 1969, the last time interest rates began to take off and reached current levels. As predicted in this column for two years: central banks worldwide are wimping out before they have conquered inflation — which means we will have it all to do again, while inflation and interest rates will rise much further in the long run. Continue reading

The Bear’s Lair: A property franchise would work better.

We have just seen what is probably yet another failure of universal suffrage, admittedly in Argentina, where such failures have been themselves universal. The reformist Javier Milei, who had a good handle on the pretty robust reforms Argentina desperately needs appears to have been defeated by the government Peronist, who assisted his campaign with massive government handouts (sending the country further bankrupt) and was swept to power by the shirtless and propertyless mob in Buenos Aires. One man, one vote does not work. One man, one vote with the left stealing all the close elections works even less well, but election security is a separate albeit important question. Continue reading

The Bear’s Lair: Suffolk Bank beats Bankman-Fried

Two groups of people from elite backgrounds, Boston merchants of the early 19th century and Stanford professorate alumni of the early 21st century, founded institutions that made important changes to the U.S. financial system. Yet the financial institution founded by the Boston merchants played an important stabilizing and constructive role, while that founded by Stanford alumni was intrinsically destabilizing and ended in a record-breaking disaster. The structural differences between an unregulated yet sound financial system in the early 19th century and an over-regulated yet utterly unsound one in the 21st century explain the differences in outcomes. Continue reading

The Bear’s Lair: The further right, the better

Janan Ganesh, in a recent Financial Times column, described Britain as “Europe’s haven from the hard right.” In doing so, he crystallized why the last 13 years have been ones of gentle, increasingly annoying decline. In all Western societies, policy is bedeviled by a kind of creeping “woke” socialism representing the centrist consensus; that brings only accelerating decay. As a believer that the correct governing policy is the Toryism of Lord Liverpool, never fully followed since the Tories lost power in November 1830, I posit the “hard-right” or “far-right” is thus the only way of escaping this morass. Continue reading

The Bear’s Lair: Investment crowds are mad, not wise

Kabosu, the Shiba Inu dog made famous by the cryptocurrency Dogecoin, died recently at the age of 18 – a good run for even a famous dog. Dogecoin itself is far from its April 2021 market capitalization of $50 billion, although its current $8.8 billion ranks it a very respectable ninth on the cryptocurrency league table. A new movie “Dumb Money” celebrated the GameStop/ Dogecoin retail-driven stock and crypto- boom of 2021; a blistering review by hedge-fund manager Clifford Asness in the Wall Street Journal denounces the movie vitriolically, mostly for its assumption that amateurs could beat the “People who have spent their entire careers committed to the practice” of investing. However, institutional investors have always underperformed the market on average and the “wisdom of crowds” is generally wrong. It is worth trying to explain why. Continue reading