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I’m thinking Canada, he said, looking up to judge my reaction.
It was an early morning breakfast at a diner off route 95. We faced neither food shortages nor violence. His parents had emigrated to the US from India fifty years ago; now he was considering leaving.
It was the second time I’ve had such a conversation recently, each one a flicker of fear. Of what exactly? If history is a guide, approaching violence and wealth destruction. So far, the flow is decidedly in the opposite direction. In 2019, 10,000 Americans emigrated to Canada, less than 0.1% of the US population, while more than a million people became US citizens.
Humans recognize deviation from patterns, like a sudden shift in wind that presages a summer storm. How vigilant people are varies. Some only notice when the wind is howling, some sense small shifts. Those groups that have experienced disruption in the recent past are likely more attuned.
The ideas that govern most Western countries date to the Enlightenment and center on human fallibility and the primacy of law to reinforce logic over emotion. Right now, people in many countries are simultaneously exhibiting just the opposite, a surge in emotion. The US, Poland, Hungary, Turkey, Russia, France, Brazil, India and China come to mind.
In the US, based on polling, the right believes the US presidential election was stolen (53%), Covid vaccines are a bad idea (43%) and the media is untrustworthy (90%). The left believes work ethic doesn’t relate to economic outcomes (80%). Most college students now self-censor (60%) despite widespread (90%) belief in free speech.
Said differently, significant parts of the population don’t believe in the integrity of elections, science, journalism or higher education. At the same time, party affiliation is weakening. Only around 30% of polled voters consider themselves left or right. About 40% identify now as independent.
No one knows for sure why this is occurring. That said, technology shifts that simultaneously disrupt income and information likely play a central role. Take media. This post you are reading reflects this very process. When I grew up, there were essentially three television stations and one newspaper, The Washington Post, which made so much money Warren Buffet bought into it. No more. We live in an informational whirlwind.
This change delights and distresses at once, amplifying both uncertainty and choice while accentuating the ancient tension between those who distrust change and those that embrace it. Conservatives favor preserving institutions, liberals in reforming them. The question is what is the acceptable rate of evolution.
As tensions build, systems either bend or break. The US has had a lot of bending— around Vietnam and Civil Rights and the Great Depression—and one near break, the Civil War. The economic swings in these periods were enormous. Stocks fell 90% in the Depression and inflation rose to 14% in the 1970s. Yet, wealth was never completely wiped out via asset seizures or hyper inflation and the basic system of government remained intact.
Big financial disruptions come when systems break, like Germany (1933 and 21-23), Russia (1917) and China (1912). The template was France (1789-99). The French Revolution was protracted, even as the rules they codified continue to be, more or less, the terms by which Western Democracies function. France lurched between left and right, accompanied by bloodletting against the highest members of government, financial chaos and a military coup. The chart below from Rose Technology shows what this looked like. Imagine this happening to the dollar.
In the US, the recent surge in emotion has resulted in limited violence, an attack on the Capital and significant shifts in economic policy. The Fed’s more lax stance toward inflation and Biden’s fiscal plans are well-intentioned efforts to rectify imbalances and restore confidence in government. So far, this looks like a bend, not a break.
Yet, the levers are tricky. Take monetary policy. Once the money is printed it is often difficult to target exactly where it goes. Inflation fueled by rising wages would help the poor; inflation led by commodities, particularly food, would hurt them. Fiscal policy (spending and taxes) allows more targeted spending but is also a more political process, which is why negotiations over infrastructure spending drag.
The House of Representatives gives weight to population centers—cities—which tend to be more liberal. The Senate gives disproportionate weight to the rural areas, which tend to be more conservative. Some of today’s divisions echo those in the past. The two states with the lowest vaccination rates—Alabama and Mississippi—had the highest percent of their population that were slaves (45% and 55%) and the Confederacy was created in Montgomery.
So far, I continue to bet on a robust US and global recovery, largely by being overweight assets that favor strong growth like stocks and commodities. I maintain hedges in case the Fed starts to print less money. I own bonds, but they are all foreign. While I own foreign currencies, most of my wealth is in dollars. I don’t own bitcoin. If there are signs of a break—rule of law in the US being eroded— expect disorderly asset flight, meaning a selling of dollar assets and a buying of foreign ones. If it comes to that, I plan on doing the same.
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