The G20 Finance Ministers and Central Bank Governors get warned by the international Financial Stability Board.
By Wolf Richter for WOLF STREET.
The Financial Stability Board (FSB), an international organization that among other things sends reports to the G20 Finance Ministers and Central Bank Governors, sent a stark warning to the G20 today, ahead of its two-day meeting about the risks that have built up in the global financial system, and this time, AI, leverage out the wazoo, sky-high asset prices, driven in part by AI and leverage, and interconnectedness of everything were on top. Government debt globally – with all eyes on the US – was also on top.
Everything was on top of the list, so to speak, but AI got special treatment in the letter: AI is a risk to the global financial system in terms of cyber risk and in terms of leverage, asset prices, and “cross-investments” (circular financing) of the entities involved.
In the letter, FSB chair Andrew Bailey, Governor of the Bank of England, warned of a “potentially disorderly correction” in the markets that “could spread across borders.” And it boils down to leverage:
“As we have seen multiple times in the past, rising leverage is a feature of a maturing financial cycle. While it can reinforce rising markets, it can also intensify declines when sentiment turns, as recent weeks have demonstrated.”
“The issue is not simply that investors are borrowing more, but that leverage is interacting with high valuations and market concentration, in particular the increasing cross-investment between artificial intelligence (AI) companies and hyper scalers, in a way that could amplify a future market correction.
“I remain concerned therefore that a large shock or combination of shocks could concurrently trigger multiple vulnerabilities.”
The letter listed “fragilities” in government debt markets, such as:
- “Elevated issuance” (the US alone issues $1 trillion in additional debt every three to five months that have to be absorbed by investors).
- “Shortening maturities” (we think about Bessent’s efforts to shift some of the debt to short-term Treasury bills via issuance and buybacks; a larger share of T-bills makes the bond market riskier as increasingly huge amounts of T-bills have to be sold at massive auctions every week, now in the $500-600-billion-a-week range).
- “Leverage” (we think about the highly leveraged Treasury basis trade where hedge funds buy Treasuries and create and sell Treasury futures. They’re long Treasuries and short Treasury futures. The last time this blew up was in March 2020, and it locked up the huge Treasury market).
Bessent, who is in charge of the Treasury debt, today added his two cents to the focus on government debt: “The world is awash in debt post GFC, post COVID, and the only way for us to get out of this is to grow our way out of this,” he told reporters ahead of the G20 meeting. This is the principle of letting the economy run hot: higher inflation, higher nominal economic growth, and higher long-term interest rates. But that doesn’t address the other risks listed in the letter from the FSB.
The FSB’s letter listed “vulnerabilities in private credit,” such as:
- “Levels of interconnectedness” with banks (banks took some big hits last year when several private credit deals blew up).
- “Liquidity mismatch” (referring to the recent runs on private credit funds, when investors were trying to yank their money out, after the issues became more apparent; funds promised these investors daily liquidity within small-print limits that no one read, while the funds’ investments are illiquid questionably-valued loans made to riskier companies).
- “Opacity” (in addition to regular opacity, such as what these loans might be really worth, we think of the instances of fraud that have caused some private-credit deals to blow up in the US last year).
The letter listed “stretched” and “elevated” asset valuations, such as:
- “Particularly artificial intelligence-related investments” (here we’re thinking about stocks involved in the AI trade, including semiconductor stocks, and anything that shot up due to the AI infrastructure investment mania, and the valuations of AI-related startups, now measured funnily in the trillions of dollars each).
- “Risky assets” whose valuations are “elevated.”
He listed increased “leverage in equity markets.”
- “Leveraged exchange-traded funds (ETFs) and correlated momentum-driven investment strategies” (alas, they have become favorites for retail investors, and they blow up routinely).
- “Growing footprint” of leveraged hedge funds in the stock market, some of which are also exposed to government debt (such as those in the basis trade or highly leveraged directional Treasury bets), which “increase the scope for contagion risk” from the stock markets to government debt markets.
AI risks get special treatment. A big part of the letter was reserved for AI, which represents a pile of risks layered on top of each other, including:
- Ability of frontier models to hack financial institutions across borders: “cyber disruption can spread across jurisdictions through common technology providers, shared infrastructure, and cross-border financial activity.”
- This cyber risk “could undermine market confidence system-wide, especially due to highly concentrated third-party service providers” (we think of this market confidence being the only force that keeps asset prices “stretched,” and when this confidence fizzles, it could lead to that “potentially disorderly correction” that “could spread across borders” that he’d warned about.
- “The increasing cross-investment” between AI companies and hyper scalers “that could amplify a future market correction (we think about the vertigo-inducing amounts and complexities of circular financing and opaque off-balance sheet liabilities).
- The sky-high stock prices and valuations of companies associated with AI that could add or cause that disorderly correction.
The G20 Finance Ministers and Central Bank Governors will have a lot to mull over – not that they didn’t already know all this and saw it develop over the years, and encouraged it to happen, or made it happen. And in terms of the central bank governors at the meeting: These debt levels, leverage, asset valuations, and risks were the inevitable results of many years of their central banks’ free-money policies of QE, ZIRP, NIRP, and forward guidance since 2008. They did it. Including Bailey (BOE governor since March 16, 2020).
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Again, none of this is going to sneak up on anyone.
This isn’t Michael Burry figures out behind the scenes that MBS / CDOs are systemically risky.
The Greed will be punished with losses though.
Losses to regular retirement funds too. Especially if 8 out of 10 AI companies go the way of the dinosaur and de list off the exchanges.
Your money goes Poof! Gone. So the indexes get cut at the knees. And it takes a lot of time (10-20 years) to make that back.
Even investing in the S&P at these weights right now and this shiller index seems cookey.
People want their returns! Just not any losses.
I rotated out of the S&P 500 into international and value funds. Wish me luck.
Everybody will be ranked in order of voting power/political influence and ‘sharing’ of the losses will start at the lower end, going up. Choose carefully where you hold which IOU’s. Or get out.
Michael Burry was only one of many millions who knew what was coming.
The real surprise in 2008 wasn’t that there was a crisis, it was that it took so long! The writing was on the wall since at least early 2006.
Bubbles don’t pop just because some wise people learn a crash is coming. The essence of a bubble is the herd mindset. Humans don’t want to face reality if it’s gonna be painful. The consensual hallucination is a form of denial, and it only ends when the big crowd sees the game is over.
The crash of 2008 didn’t start in 2006 when housing rolled over, and it didn’t start in 2007 when loans started going bad and banks started failing. It only started in mid-2008 after EVERYONE finally figured out that EVERYONE ELSE knew the game was over, and thus the only winning move was to quit and take your profits before someone else did.
Blurry has been calling and predicting crash for last 8 years. But he is more wrong more times than he was right.
He was right and able to predict 2008 crash because he expected FED to play by some rules.
After 2008, FED is not playing by any rules. Did Gigantic QE, did ZIRP for almost 15 years. 15 years of Interest rate suppression. Took All assets to sky high levels. Still holding 2T MBS on its books. 6.5T in balance sheet.
Slow to raise rates, very quick to cut the rates. You name it.
Sure. One day that crash will come in future… I am sure FED will do it whatever it takes to protect Markets. Because if FED wanted to protect American’s who they claim to serve, they would have acted to contain Inflation Monster. Last 45years Powell told us long term inflation expectations are well anchored. That was bi BS he fed. Even after 5 years, no end in sight for Inflation.
The first thing the new United States gubermint did after the Revolutionary war was to adopt England financial system…funny how that all turned out… history is told by institutions, gatekept…everyone with a brain knows who owns the FED, it’s not the people…
Burry has been calling and predicting a crash for the last 8 years. But he has been wrong far more times than he has been right.
He was right and able to predict the 2008 crash because he expected the Fed to play by certain rules.
After 2008, the Fed stopped playing by those rules. It did gigantic QE, kept ZIRP for almost 15 years, and suppressed interest rates for an unprecedented period. It pushed all asset prices to sky-high levels. It still holds around $2T in MBS on its books, with a balance sheet of roughly $6.5T. Slow to raise rates, extremely quick to cut rates. You name it.
Sure, one day the crash Burry keeps predicting will come. I’m sure the Fed will do whatever it takes to protect the markets when it happens.
Because if the Fed really wanted to protect Americans—the people it claims to serve—it would have acted much earlier and much more aggressively to contain the inflation monster.
For the last 4–5 years, Powell kept telling us that long-term inflation expectations were well anchored. That was BS.
Even after five years, inflation is still proving to be much more persistent than the Fed led us to believe, and there is still no clear end in sight.
Well, sure, but he’s one of the few that made hundreds of millions of dollars.
Again, my point stands that none of this is going to sneak up on anyone.
I guess the big winners this time around are the ones who properly time shorting all of these private credit companies.
HO Hum. Trillions of new fiats (or their equivalent in bank credit) were produced during Covid. Only a few people were producing goods & services, but everyone was still able to pay their mortgages, rents, and put groceries on the table.
Where did all of that new money go ? It eventually turned up with the 1%. The government made no attempt to claw any of that money back (taxes destroy fiats).
What does the 1% spend their money on ? They can only eat so much, buy so many million dollar yachts ( or yachts with yachts), and after buying six or seven second homes some have been know to lose track of how many residences they have.
What is a poor Billionaire supposed to do with all of that money ?
Of course the wealthy are going to buy assets (or something they perceive to be an asset). They are going to buy crypto coins, stocks, land, gold, etc etc. And if you are looking to buy anything viewed as an “asset” you had better have the $$$ to bid against them.
So no one should be surprized if their is rampant speculation happening.
Exactly why Warsh should implement some Volker style hikes. The speculators need to feel real pain, even if it starts an avalanche.
Agreed
There’s no way that man will do ANYTHING the treasury secretary doesn’t want him to do.
No hikes, ever.
Like the article says, they’re going to burn their way out of this with 8% inflation or some craziness. Buckle up.
He’s one of them. You expect him to turn the gun on himself? Surely you jest….
Warsh will never do anything drastic to hurt the markets .
Fed has been fantastic at service the people they want to serve..ie the rich people
It really pisses me off to see that someone thought Volcker was tough on inflation.
Monetarism has never been tried. Monetarism involves controlling total reserves, not non-borrowed reserves as Paul Volcker found out. Volcker targeted non-borrowed reserves (@$18.174b 4/1/1980) when total reserves were (@$44.88b).
After the “time bomb” (widespread introduction of NOW accounts), inflation wasn’t subdued until Volcker installed a required reserve ratio on these accounts. I.e., nominal national product hit 20.1 in the 1st. qtr. of 1981.
old ghost,
And with step up basis they can leave their stocks in place, borrow against them, never realize capital gains, and those who inherit get a step up in basis so basically the government never sees a dime in those gains. Once upon a time there was a double taxation reason for this but basically irrelevant now so wealth just flows perpetually from offspring to offspring. The rest are stuck with their bootstraps.
Those bootstraps are tough eating.
The system was always designed to be gamed by those who designed the system… fuedalism 2.0 cleverly disguised by the hierarchy…well not too clever anymore….the numbers always win, that’s how math works…look at who is the face of this culture or leadership…
Interesting read. Using leverage to chase yield, and inflation to fix debt, I picture someone running up a down escalator. We’ve all done it as kids and it works okay until something/someone gets in the way. Toss in some extra issues, sayyyyy a spike in energy prices, a stuck war, trade wars. supersize egos, and deteriorating relationships, let alone competing countries like China and Russia actively working against solutions……a very dodgy situation, indeed.
It would be interesting to listen in behind the scenes at the G20 and record what was really said.
I doubt they say anything about it, other than to say some things will need to be dealt with “some day”. Nobody likes talking about elephants when they are in the room.
During the GFC, the powers that be talked about addressing urgent symptoms, not recognizing or correcting root problems.
It’s more like increasing the gravity on earth 2x, 3x, 4x.
So if a pinecone falls off a tree, it splits you in 2.
🌲
The cyber disruption risk makes me want to withdraw all my money from the banks and brokerages, and stuff it into a fireproof safe.
Ok, place it in a modestly sized envelope inside a fireproof safe.
A woman in line Saturday at the grocery store told me she was heading to Lowe’s after the market to purchase a safe. Then was going to the bank and taking money out. Then, next week, same thing until all of her money is out.
Any losses due to cyber disruption at banks will cost the banks and bank investors, not the depositors (they have government guarantees if within the FDIC limits).
These are precisely the people (paper dollars in a safe) that are going to get run over by higher inflation and higher interest rates. For capital preservation, if that’s their goal, they need to try to out-earn inflation (either through yield or capital gains or both).
Good thing the FSB can worry about it. We don’t: invest in just about everything, stay out of debt, get the kids to school, and go to work, agree with the above comment. Just another Monday men… God bless you all.
She prob shouldn’t be telling strangers she is going to have loads of Cash at her house.
What a moron!!
did you follow her home?
My neighbour read/saw something on youtube this winter and dashed off to town to stock up on canned food. He has never brought it up again.
Deposits at banks are insured, and so are deposits at credit unions. If they were not backed by Govt the pitchforks would come out. It’ll be covered.
No debt, have some cash at home for emergencies, food tools and supplies, and get along with your neighbours. Be helpful to others. This works when the power goes out after a storm. Pretty universal fix.
Burry wasn’t the only one who saw that coming. Anyone paying attention could see WHAT was going to happen. But to make money, one also has to get the WHEN right, as well as find a vehicle to take that position. It worked out for Burry in the end, but he almost got wiped out, even though his analysis was 100% correct.
The only thing I’ve learned over the y ears of watching this stuff is that the WHEN typically takes a lot longer to occur than a purely rational observation would suggest.
right on David! You can be “right” 100% of the time but if it takes 5 or 6 years to be proven correct, you’ll go broke waiting. In the meantime, I’m being ultra-conservative.
Nobody cares about making risky bets. You have every right in the world to make bets but you have no right to make yourself whole at the expense of everyone else. That happened in 2008 and again in 2020. If these people lost when the bets went south i wouldn’t even come to comment here. Its the fact that they don’t and most here don’t even seem to be bothered by that, that i come here to comment.
“but you have no right to make yourself whole at the expense of everyone else. ”
It has a name: “Privatize the profits, socialize the losses”
David in Texas – Bang, you nailed it. Smart, experienced people can predict WHAT is going to happen, but predicting WHEN it is going to happen is an order of magnitude more difficult. You hear exciting stories about the winners who got their timing right, but you don’t hear so much about the much larger number of losers who knew what was going to happen, but not when.
What’s the saying, something like “People can remain stupid longer than you can remain solvent.” Sometimes what happens next is super obvious, the bubble bursts, but dammit if you could timed it right and extracted your funds at just the right time…of course, it’s that type of thinking that allows bubbles to happen in the first place, lol.
On the day the market bottomed, I repeated myself 3 times:
That’s B.S.
Bottom’s in.
Mar 23, 2020. 10:34 AM
Link
Margin Call: The Story Of A Historic Week – The Heisenberg
Bottom for stocks, not the economy. It will decouple.
Mar 23, 2020. 10:33 AM
Link
We Likely Saw The Bottom – Michael A. Gayed, CFA
The bottom’s in.
Mar 23, 2020. 10:28 AM
Losers disappear and go silent. Winners write books, get interviewed and occasionally get movies made about their exploits (like The Big Short).
When was the last time a lottery looser was interviewed about his “strategy”?
Burry is likely right again, but the million question is when?
But you sit in cash there’s 2 problems: 1. Inflation 2. Wealth is relative and everyone in the s&p has been doing around 20% annualized.
Also never underestimate the govt put. AI will be bailed out. They’ll see it as essential for national security. Hard to know how that will impact shareholders though.
Right. The real bubble bursting is coincident with the gov’t no longer being able to fund the bailout because of spiking interest rates. That one hasn’t happened yet, at least not in my lifetime.
If open models can do top notch AI for “free”, the AI companies won’t ever “bounce back”. If that happens, the net effect of mal-invest can only be delayed, i.e. spread over time. It can’t be repaired.
They won’t be able to do it for “free”, someone still has to pay for the data center usage, but in an over supply situation who knows what rates will be.
@MM,
Hence the quotes. The cost of electricity, equipment, and maintenence is on the order of pennies per CPU hour, amortized over time. You don’t get much freer than that.
To be clear, there are 6144 computational cores in just one Blackwell RTX GPU. The Cerebras WSE-3T AI chip has 900,000 AI computational cores.
The top is in when short-term money flows, the volume and velocity of means-of-payment money supply’s rate-of-change rapidly decelerates. I.e., we usually get a recession. This is hard to predict because you have to know how the Federal Reserve is going to respond.
Somebodies just now figured this out? Amazing. Better late than never!
Don’t worry, AI will solve all our problems.
This is both the plan and the backup plan.
Just another Monday then, eh?
I’m certain the current administration regards this FSB with as much respect as it does for say the International Court of Justice.
Bessent- Let this baby run hot….and hope we can out run all those problems slowly chasing us down.
These “AI” companies are lying about the cost and effectivity of the expensive frontier models. There’s always the promise that it’s going to get better with more data but there is no more data. They are chopping up old TV Guides and Betty Crocker Cook Books for the 70’s in hopes that some old chocolate cake recipe and summary of Oprah’s weekly hit is going to magically push ChatGPT into sentience. It’s laughable that it’s going to get much better.
The improvements they do make are at the hidden token/compute costs. All of which is more unsustainable prices requiring more over priced GPUs. Instead of $200k worth of GPUs making my Garfield Fan Fiction, it’s $2 million and it’s still not going to make me pay more than $20 a month. Meta and Xai are all leasing out to Anthropic and OpenAI who are not profitable despite the scale they have. Nvidia is promising to undercut both by either giving the Chinese software away for free, or simply banning them to prop up the American gravy train.
All of which points to the bubble imploding. Add in the failed Trump admin destroying short term treasures and the war push that is about skyrocket oil with way to alleviate the costs and we are going to be in for a long deep stagflation.
It’s not about if, it’s about when. OpenAI and Anthropic are not profitable. They need to quadruple their revenue without incurring losses (impossible when more usage costs more electricity). They don’t release their actual numbers because it looks way worse then expected. It’s not even profitable now, and the major companies who use “AI” have been telling employees to stay away from it. Most major companies can’t find uses that justify a non profitable income for OpenAI and Anthropic.
The uses cases where people can point to, are not trillion dollar use cases. It’s not replacing jobs, it’s making managers think they can replace jobs while their companies sink with 20% new costs at a 5% performance increase.
I’ve already seen people spend $100k to make $1k worth of code but tell me it’s worth $1 billion. What has “AI” done in the last 5 years? Make a surveillance state? Help children ruin their ability to learn? I have used it once at work and it gave me wrong answers just last week! The wrong answer machine gives wrong answers all the time compared to simply reading a book with correct answers.
The bills become due in 2027 along when our projected fuel reserves give out.
Really great article, wolf. Many thanks again.
The reason I like this site is the Mr. Richter stated what FSB chair Andrew Bailey said, but did so months ago!
How often does the FSB issue these letters? Thanks
There is one for each G20 meeting. You can see them all here:
https://www.fsb.org/content_types/reports-to-the-g20/
Nothing new under the sun. Humanity has been here before, and the outcome will be no different this time around. The numbers will simply be much, much larger.
hedge accordingly.
‘He listed increased “leverage in equity markets.”’
Speaking of, might we impose for an update of the FINRA Margin Debt chart? Wondering if Bailey’s words and the picture tell the same story.
The leverage isn’t only, or even mostly, in investor’s margin accounts.
It’s in the balance sheets and off-balance-sheet liabilities of the individual stocks.
It’s in the price/sales ratios that are so high that growth will never catch up.
It’s in the hidden vendor-financing and circular-ownership deals, like this:
My company drains its cash stash, and borrows money from the bank, so that…
I can lend to your company, so that…
You can buy my overpriced “in demand” server equipment, so that …
I can reap obscene ever-growing profits, and use them to buy shares in your company, so that…
YOUR stock price stays high (from my share purchases) AND
MY stock price also stays high (from your goosing my sales).
Correct. Where the “rubber meets the road” so to speak is in the actual doing and building of real things. Keeping the lights on, and HVAC on at home while feeding the family and keeping everyone healthy.
Sure, innovations happen, but speaking as someone who has worked in biotech and technology for 30+ years, innovation requires a tremendous amount of real resources, capital, time and RISK. Also the vast majority of “innovators” FAIL.
The only problem I have had with this is the fact that society has allowed that risk to be distributed to the general population, while allowing the profits to go to a relative few.
Look, you want to come up with new innovation, fine, you should reap the rewards if you succeed, HOWEVER, if you plan blows up in your face, then you, your investors, and the other founder/owners take 100% of the loss. All your assets/capital are sold to the highest bidders, period, and those funds pay back the creditors. No more bailouts of any kind.
All good points, Ghost. It’s just that rate of change in investor margin is somewhat easier to directly measure and seems to offer a glimpse at how wide the collateral damage will spread from the impact crater.
Yeah I noticed…like 8 years ago, especially the last 6 and 3 years.
Fool me once…! ??? Damn it, it’s too late.
G20 is in my backyard of Asheville NC.
At the Omni grove park inn a $600 a night resort hotel that is just magical at Christmas.
Cool huge double fire places, wandering halls on lots of floors. Ghosts! Oh my. A quaint golf course and sweeping views of Asheville down below.
I’m getting all my old cavities replaced with gold ones. Sure, more temperature sensitive and could be risky on a dark street but safe from cyber crime and with some pliers it’s an instant payment method. Desperate times…
Temperature is not a big problem. Just don’t lace them with a lot of big diamonds (like my wife).
Plunge Protection Team on call?
They’re on vacation.
Your take on who staffs the PPT and what actions they might or might not execute would be timely and relevant, considering the FSB report.
From Investodpedia:
_________________
“ Its original purpose was to report specifically on the Black Monday events of October 19, 1987—during that event, the Dow Jones Industrial Average fell 22.6%—and, what actions, if any, should be taken. However, the group has continued to meet and report to various presidents over the years, usually (but not always) during turbulent times in the financial markets.
In 1999, it issued a recommendation to Congress, requesting changes in the derivatives markets regulations. It convened during the global credit crisis of 2008. The Plunge Protection Team’s latest gathering (as of March 2019) was on Christmas Eve, 2018. Treasury Secretary Steven Mnuchin chaired a conference call with other members of the group, in addition to representatives from the Comptroller of the Currency and the Federal Deposit Insurance Corporation.”
__________________
Thanks
The PPP as an entity that buys stocks or anything else is a figment of people’s wild and wooly imagination, and I pour heaps of humor on top of them, which they deserve because it’s just funny BS.
But regulators do sit down together when markets get iffy to let markets know that the regulators a looking at it. It’s just a show of concern, that’s all it is. Sometimes they tweak some kind of rule. The Nasdaq continued to plunge all the way by 78% from Mar 2000 through Sep 2002 and the S&P 500 by 50%, despite numerous of those kinds of meetings by regulators. Same in 2008-2009 with S&P 500 down 50%. What ended that plunge was the Fed’s QE, buying Treasuries and MBS to bail out the banking system from the mortgage crisis.
Musk said in an interview recently that within 5-10 years nobody will work and we’ll all be on universal basic high income…. The thing that’s scares me is that it doesn’t seem that far fetched! WTF. I just can’t see how the elites would put up with being knocked down a rung. I think more likely we end up in the hunger games.
Right now there is a labor shortage in many professions. Musk is famous for saying whatever. Take him seriously at your own risk.
When was the last time Musk made a prediction that came true?
When was the last time one of his accurate predictions was neither of: (a) something about a product he planned to sell (b) already obvious to the rest of the world? (e.g., “The sun will rise in the east tomorrow”)
Those answers should give us some hints about how seriously to treat Musk’s musings.
I guess asset price inflation does eventually find its way into the broader economy.
Inflation should include primarily include food, water, shelter, transportation, and cell phones.
Note to young people: You will never be able to afford a house. You got totally f*cked by greedy billionaires and their political puppets.
I went to public school in one of the top rated systems in the US, couldn’t get into my state school with a near perfect GPA. I went to community college finally transferred in and was set to be valedictorian of a top 15 engineering school (studied Mechanical Engineering) in the US. I couldn’t get even an internship at a paper mill (I applied to 300 internships in one summer). Now I’m getting my masters and starting a company. I pray and hope to God I just might be able to afford to live where I grew up. My peers and I are frustrated and bitter. The resentment towards the current system is palatable.
“My peers and I are frustrated and bitter.”
wait a minute….
“couldn’t get into my state school with a near perfect GPA.”: It’s your “peers” that competed with you and that got in and kept you out.
“I couldn’t get even an internship at a paper mill”: It’s your “peers” that competed with you and that got the internships and kept you out.
“Now I’m getting my masters…”: Good for you! It’s YOU who got in and kept out one of your peers. Congrats.
“…and starting a company.” Good for you. Maybe you can hire one of your “peers,” or keep them out.
“My peers and I are frustrated and bitter”: Like everyone ever before you, you’re competing with your “peers” for everything, including dates, and you lose some battles with your peers, and you win some battles with your peers. Unless you were born with a silver spoon in your mouth (no one I know was), that’s how it works, that’s how it worked for everyone I know. Why do you think that somehow you have to be handed everything on a silver platter without competition with your peers?
Great post by Wolf, I try to get my kids and their friends to step back and not compare to their “peers” (the kids of the top 1% they grew up with that live here on the SF Peninsula) but to all college students in the US. I also tell my kids to remember that most successful people are smart and work hard but are also a little lucky (there are plenty smart people that work hard yet are not successful).
so well stated. Each point explained. It was the same in the 70’s, and we had massive inflation! Hard work and motivation was the salvation.
Is it just me or other sane people have been waiting for real world to catch up to the excesses and money printing during Covid and required to sustain US consumer machine with AI Boom – Cap Ex + Buildout to achieve positive GDP?
We live in a much more interconnected world – labor, equity/debt markets, counterparty risks, aging populations with government obligations with a broken political system to address the ongoing needs of its citizens here to reach common ground and setup a sustainable future for our future generations.
Wealth creation with each successive generation becomes that much harder to achieve to maintain equivalent standard of living. Its why there is frustration across the board and it will continue – middle age citizens whom have done everything right who are raising families worry what their children will step into given their experiences (47 yo male here) – maxed out tax deferred investment vehicles – 401k, IRAs, HSA, built taxable investment portfolio, taken care of his health, lived prudently little to no debt, moved cross-country for better opportunities and build decent amount of wealth effort. The playing field and ability to achieve that can tell you is 10x harder on balance to do then Boomer generation was growing up in relative terms, their time period in US is akin to living in China during its export boom and prosperity is abundant (little to no competition, stability – principles/values were shared, adhered, and rewarded, market growth, less successive economic/societal volatility, pace of change, pure asset inflation, SSA.
Furthermore, compound the notion of giving up half income today at higher incomes to pay for government taxes and pensions of government employees to the detriment of your family finances and wealth building for what exactly whom agreed to those except themselves (not the private taxpayer), SSA solvency, etc.
Its apparent only way out is to own your own business to build true wealth. Pivoting to that now, from my lens it’s the only remaining path to achieving outsized generational wealth and taking control of your families future and outcomes in setting up my children/grandchildren for success in the new world.
Don’t overthink this; There are now over 8 billion people on this rock, all competing for the resources and energy that is REQUIRED for a decent standard of living. The laws of Nature and physics are re-asserting themselves, the “laws” of men are becoming irrelevant.
Plan, invest, and hedge accordingly.
Productivity has gone up quite a bit as well. With housing for example, there are more units today per capita, or any per-whatever group you want to view, than ever before. Prices ran up during the housing bubble 1 and after the burst, there were huge numbers of homes available. I think there are other factors than just more people vying for limited resources. There’s more everything today, yet it’s all still more expensive. I think one has to look at monetary policy and government policy as major drivers of the reallocation of wealth as well.
“More everything”
LOL, how much more? Details matter. Again, yes, innovation has happened, BUT population growth has been exponential. The increase in “everything” has not.
“The Greatest Shortcoming of the Human Race Is Man’s Inability To Understand the Exponential Function” – some famous physicist.
These numbers represent the rate-of-change in short-term money flows:
7/1/2026 0.247
8/1/2026 0.142
9/1/2026 0.056 big drop
10/1/2026 0.063
11/1/2026 0.059
12/1/2026 0.038
So, my guess is that stocks have had it as of the present data set (which always changes)
Spencer:
How did you obtain the money flow numbers for the next several months?
Could you also provide some winning numbers for powerball or mega millions?
What would stall a drop? The Fed lowering policy rates.
MW: The 10-year Treasury yield just crossed a key threshold that should make people ‘sit up and take notice’
But we sat up and noticed a long time ago.
MW: Global oil prices surge above $92 a barrel after report of strikes on two tankers in the Strait of Hormuz
As U.S. bond prices tumble, yields are jumping globally — from Japan to the U.K. and beyond
given these risks, what is a reasonable allocation across domestic stocks, international stocks, and bonds and money market funds, if your investment horizon is 10-15 years?
I am 55% domestic stocks, 25% intl stocks, with balance in bond and money market funds.
My $0.02: probably unknowable because outcomes will depend on how the Fed reacts to a big leverage unwind, which we’re are all just guessing about now. Maybe the banks are safe this time so they just sit back and let a dumpster fire of leverage burn. Who knows.
For stocks you might say there are two possible previews: 2000 and 2008. The Fed responded very differently (because banks) so the index recovery times were dramatically different. Just look at a 30-year NASDAQ chart.
*Not investment advice. My 2 cents are less valuable today than in the past because of dollar debasement.
So, there is a data center planned to go into my small city. How do I track the tax revenue that gets generated by the data center? My small city is adjacent to a not great neighborhood of a midsize city nearby and last Halloween the lower income kids pile into our neighborhood…I had ramen and candy…these kids were choosing the “noodles” as they called them. They are literally hungry and when they realize they can’t eat data center tax money or any other government promises and that they can’t get the socialists elected – shit is going to get real, real fast! I am going to ratchet down my 401k contributions but that is the only move I have. I’m calling that the FED will stall on hikes until December while hoping for a Santa retail rally to balance the immediate effects…then the global markets have lunar celebrations to lean on and a full year of data and new earnings calls to talk about… Please look over there while private credit and equity markets play the circle jerk and shell game. Again – How TF is borrowing against stocks actually legal but if I borrow from a 401k I have to pay myself back with interest – am I the only person furious at this injustice???