Celebrating one year of Contention

What we’ve learned from a year of following the money

This week marks one year since we started publishing Contention.  Our mission then and now was to follow the money to see what the people who own the world are really up to, and after one year of steady observation some clear themes have emerged. We wanted to take a moment to outline some of what we’ve come to believe about the global economy’s trajectory and where it might be headed next.

The Big Three

We came into this project believing that three long-term forces define our economic moment:

This year has only confirmed these trends, with the coronavirus crisis a special condition of each -- an environmental disaster made worse by sclerotic states and fragile business communities driven to a frenzy by China’s superior response. This only ratchets up the stakes for the next round of crises to come.

State planning, Fed-style

Market dissidents have long predicted that contradictions like these would mean increasing need for state planning and intervention. The last year has only deepened our awareness of this phenomenon, specifically from central banks, led by the Federal Reserve

Even the faintest hint that the Fed might possibly in a year or two let the markets figure out interest rates for themselves drove markets down sharply two weeks ago. Last autumn was dominated by “will they/won’t they” speculation about new rounds of fiscal stimulus, with the Fed abandoning all but the barest pretense of independence along the way -- nudging policy makers in its preferred direction. 

Except for central bankers, Western economies probably would have shattered last year. How policymakers, business, investors, and the public adjust to the fact that they now live in centrally-planned systems will shape much of the news in years to come. 

Bubbles bubbles everywhere

The most immediate consequence of this interest rate suppression: speculative frenzies across a wide swath of asset classes. Cryptocurrency (and NFTs), SPACs, and meme stocks are obvious beneficiaries, and these markets have stayed irrational all year. The feedback loops fueling parabolic rises are just forms of market contradictions now at stress points nobody anticipated this time last year. 

It’s impossible to predict exactly when or how these bubbles burst or what kinds of extraordinary bailouts come up in their wake, but we are certain that gravity will take hold sooner or later. The shape of that rise and fall will guide our future coverage.

Prices already breaking

The Fed can’t rely on the status quo much longer as pricing chaos deepens, forcing its hand. Current inflationary pressures are a big deal. On the most obvious level, multi-decade high-water marks indicate a shift in economic regimes, the end of the pricing stability of the globalization era.

More subtly, prices are the language businesses speak with one another, and high inflation indicates significant static in the market. We’re seeing deep miscommunication about capital allocation past, present, and future. The possible solutions: capital destruction or new interventions to protect major investors, i.e. doing the same thing again and hoping for different results. 

Nowhere is the emerging crisis more evident than in the short-term lending and labor markets. Just yesterday the Fed’s reverse repo operation hit $992 billion, meaning that the central bank now controls much of the daily liquidity for the financial system, with nobody really sure how this ends up. The Fed has to choose between nationalizing this market or normalizing it by tightening monetary policy -- the very pin the bubbles fear the most. 

As for labor, the bank points to high unemployment as a reason for continued market support, but previously unimagined market tightness begs for a policy response. We have come to believe from our observations that the main forces at play are: 

  • Long-term declining returns on labor encouraging workforce attrition

  • Mass worker deaths from COVID creating excess demand for labor

  • Reallocation causing a structural mismatch between open positions and available employees

  • Simultaneous demand creating fierce competition for the attenuated labor pool

  • Rising nominal wages encouraging a wait-and-see attitude from workers

Again, the solution to a pricing crisis of this sort is capital destruction: businesses going under or cancelling expansion plans, withdrawal of the excess demand driving up prices. That’s called a recession, and we’ll be watching over the next year to see if that materializes.

Most people: worse than ever

Finally, this brings us to the vast majority of humanity, now experiencing the most rapid de-development in history. Rich country governments and their financial enforcers at the IMF and World Bank have forbidden poor countries from using the same fiscal tools the Global North has enjoyed this last year. But the same inflation is hitting the South hard, driving hunger and rising political chaos. 

Closer to home, the desperation that spilled over into U.S. streets last summer is only getting worse, especially as millions of families face homelessness this summer. Any anger they express is likely to trigger a reactionary political response from classes desperate to avoid a similar fate. How these interactions play out will also demand our attention in the year to come. 

The bottom line: it hasn’t been an easy year to start writing about these topics, but it has been an important one. We don’t see things getting much calmer or better over the long-run, and we’re learning more every day to better serve you as you work to change the world. Thank you for reading, and stay tuned!

Disclaimer

Our only investment advice: Have a happy fourth. (NSFW)

Let us know what you’ve learned from us over the last year, or what you’d like to see over the next!