Credit deflation and the reflation cycle to come (part 2)

[janch]

He's a bit of a nutter but I quite like Max Keiser and yesterday's RT piece was interesting wrt China.  According to the guest Dan Collins who has a lot of experience in China, they are streets ahead of the west in all things IT/AI related and stuff we don't hear much about such as landing on the moon and planting  a flag on it:

 

https://www.rt.com/shows/keiser-report/509820-potemkin-economy-china-moon/

 

[Bobthebuilder]

25 minutes ago, Cattle Prod said:

things are getting properly mental now.

Great posts @sancho panza and @Cattle Prod.

I am finding that I really need to bite my lip now as I go around and do my small business. Half the population seem to have gone potty with nothing based in fact to back up the fear.

[Harley]

33 minutes ago, Cattle Prod said:

I really hope you're right, things are getting properly mental now. Meeting a friend for a pint tomorrow and I have to sit outside like a plum, knowing full well there is no reason to. Testing in schools, more lockdowns, they've lost the plot. I'm trained to spot the signal in the noise, a drop of oil in a vast amount of data that means a big field. That graph is the signal, and everything, I mean everything else that is being bandied around on testing, cases and deaths is noise. Pure and simple. All of it is contaminated data. Comparing all deaths this year to all deaths in previous years is uncontaminated. That curve does not lie: you cannot have an epidemic without excess deaths. It is impossible. I can't fathom why people can't see it, I've sent it to my MP etc etc. It's maddening, frustrating, f'n crazy making. What you've said has given me a glimmer of hope!

All of 2020's remaining reps for that one!  Think I will send it to my rubbish MP!

[Harley]

33 minutes ago, Cattle Prod said:

Please do, mine actually engaged with me on it, and couldnt refute what it meant. If everyone harassed their MP with it, the penny might eventually drop.

Cheers Harley.

You are clearly a rare data type and I respect your ability to decipher and present.  I should also add an ethical data scientist as this has been one of the biggest crimes this year.  I'm reasonably OK.  2020 has been a lonely and frustrating year.  I had no idea just how so many and how far people are illiterate, malleable, and lack an inquiring mind.  I shouldn't be but I am and that tells me a lot, including how all sorts of nonsense managed to kick off in history, from tulips to brown shirts.  Maybe we are in part a self selecting audience given finance punishes those who do not respect the data (or rather to be cautious with it), especially as the best of the CV analysis this year has come from the finance community, the MoneyWeek interviews being some of the best (e.g. https://moneyweek.com/economy/uk-economy/601989/james-ferguson-how-bad-data-is-driving-fear-of-a-second-wave-of-covid-19). This place has often been an oasis this last year. 

[Harley]

There are many (all!) great posters on this thread and more have joined this year from lurking on the sidelines, even if just to say hi, and that's been really great too.  I've listened to everything this year and this has been a great way to break the isolation often inherent in this work.  The overall narrative has been excellent too and of great value for me.  I've learnt and matured.

So a suggestion.  Maybe in the last week of 2020, as we ramp up for 2021, people would like to reflect and bullet post their top thoughts, lessons, etc from this crazy year.  No rush, several days left and time to distill thoughts down to some focused points.  Every thought matters.  Time to put it all together and look at the big picture, thus also reaffirming the fundamentals of this thread? 

Maybe a flurry of posts in the last week of the year?

[Sasquatch]

20 minutes ago, Harley said:

There are many (all!) great posters on this thread and more have joined this year from lurking on the sidelines, even if just to say hi, and that's been really great too.  I've listened to everything this year and this has been a great way to break the isolation often inherent in this work.  The overall narrative has been excellent too and of great value for me.  I've learnt and matured.

So a suggestion.  Maybe in the last week of 2020, as we ramp up for 2021, people would like to reflect and bullet post their top thoughts, lessons, etc from this crazy year.  No rush, several days left and time to distill thoughts down to some focused points.  Every thought matters.  Time to put it all together and look at the big picture, thus also reaffirming the fundamentals of this thread? 

Maybe a flurry of posts in the last week of the year?

Great idea. Maybe start a new thread for this?

I have a very dim view regarding the future of the human race. However, I have two daughters in their early 20's and I have to try to stay positive for them. They need an equal amount of mind expanding exposure to the madness of the world (covering a multitude of topics) and positivity because of their relatively young age. Hopefully they can ride through the coming turmoil and come out the other side intact.

I have had some truly bizarre and frankly terrifying discussions with friends and family this year. Lots of people are so deep in the rabbit hole. 

[Harley]

2 hours ago, sancho panza said:

In the matter of excess deaths.Year end approaches and the truth will hit home.From Dr Clare Craig (fellow fo the royal College of Pathologists no less)

 

I was chatting to someone about the chart and was dismissing this year being in the upper boundary given Covid is real (if overstated), and then thought how many of this year's deaths were actually due to the reaction to covid (cancers, etc) rather than covid itself?  There are going to be two shocks to those seeing this chart - a long fuse and much anger unless the spin and general malleability continues.

[Yellow_Reduced_Sticker]

3 hours ago, Cattle Prod said:

I really hope you're right, things are getting properly mental now. Meeting a friend for a pint tomorrow and I have to sit outside like a plum, knowing full well there is no reason to. Testing in schools, more lockdowns, they've lost the plot. I'm trained to spot the signal in the noise, a drop of oil in a vast amount of data that means a big field. That graph is the signal, and everything, I mean everything else that is being bandied around on testing, cases and deaths is noise. Pure and simple. All of it is contaminated data. Comparing all deaths this year to all deaths in previous years is uncontaminated. That curve does not lie: you cannot have an epidemic without excess deaths. It is impossible. I can't fathom why people can't see it, I've sent it to my MP etc etc. It's maddening, frustrating, f'n crazy making. What you've said has given me a glimmer of hope!

 

TOP post!

 

I really worry about going forward and the next year, the only way I can see us going back to some 'NORMAL' ...is with MASSIVE PROTESTS!

 

IF ONLY people did a bit of research they would soon discover there is a wealth of scientific evidence from credible institutions.

 

For example World Leading virologist John Ioannidis has published a study approved by the W.H.O which reveals Covid has a fatality rate of 0.05% for people under 70 years old and for those over 70 it's as deadly but no more deadly than regular flu. 

 

Thousands of DR's & Professors worldwide have stated that lock downs are counterproductive to national health despite the so-called-pandemic.

 

Anyhoo...I'm trying to spread/hint in my village that what's going on is all BS!

 

My TIGHT-WAD neighbors have NO access to the Internet (but owned a laptop), so today i popped around and pasted from my flash-drive a video that i downloaded before it was BANNED by YT.

 

IT's well worth an hour of your time, I'd say the BEST info I've seen regarding this BS Covid.

Oh and Professor Sucharit Bhakdi is NOT a conspiracist.

 

ALL we WANT is to go back to NORMAL and experience the "ROARING TWENTIES" with our inflation fun-loving oiles/miners etc ...and a bit of the 1970's throw in ...in the form of the LOVEY ENGLISH Rose Judy Geeson ...now i won't get a bollocking from @DurhamBorn for being OFF-TOPIC!

 

 

[Harley]

2 hours ago, Sasquatch said:

Great idea. Maybe start a new thread for this?

IMO should be fine here if we focus on the macro financial.  Plenty of other threads for covid specifics.  It's been so turmulous from a macro finance POV, regardless of cause, to warrant a retrospective. 

PS: Talk about your kids as a parent makes this soulful and reminds me, at the end if the day, this finance stuff we focus on is but our servant, not our master.

[UnconventionalWisdom]

12 hours ago, jamtomorrow said:

Another crossover of interest ... (don't want to come over all Macleod, but it does seem like a very big deal for a supposedly global reserve currency). It's already being called "The Dolphin":

 

Seeing as foreign countries like to buy treasuries to keep their currencies weak and dollar strong, this could be a shift in priorities. Could China be saying they don't want to be just an exporting country any more.

[DurhamBorn]

@Harley a quite amazing year,and i think history will be very kind to the thread,indeed i think it has proved the talent engaging here.There is no doubt we all learn from it,and gain far more than simply profit in money terms.

If this year has taught me anything its to trust your skills.Focus,hold your nerve,tread careful,but dont fear the crowd.

For myself i fear no future.Im a contrarian.I learned that,and the skills to figure out the macro picture in 93/94.

Two seminal things happened to me in a 12 month period.First i met and clicked with a someone from a complete different world from me and developed a close friendship.He was one of the best,probably the best macro strategist of his generation.I was always good with numbers,i got the 2nd highest score on the maths test for GSK when i worked there out of 4800 people who took it.

Now that would sound like the most important thing in gaining my contrarian skills.However it wasnt.Something else happened the same year.

I was in my early 20s and my partner cheated on me and it seemed id been ripped in half,the pain was horrific.I thought the world was ending.

4 months later my friends dragged me to Ibiza,a broken mess.In a bar around 10pm i dropped a pill,the DJ put a song on,it was Show me Love by Robin S.At the same time a dark haired Irish girl latched eyes with me,walked over and her smile washed away everything in a second.

Its then i put things together.The macro and the contrarian.Bad things have to happen for new days to come.The future isnt to be feared,you need to learn from the past to drive yourself forward.Hardship and pain should be faced down and seen as a learning experience.One thing has to have an opposite reaction,its how the universe works.Its so simple,yet we need to really dig down to understand it.

In simple terms,a partner cheating on me wasnt going to stop me being happy,even though that is how it seemed.It was actually going to deliver me amazing times,with amazing people.I then saw the contrarian side of life is where the opportunity lay.When everyone expects an outcome,what if they are wrong?,what is the opposite?

So the reason this thread exists is because of a few minutes in a bar in Ibiza,a dove,a girl,a song and a smile.

Robin S is still incredible now,here she is this year banging it out.The bit at 1.14 still gets me every time.Every single time.

 

 

[DurhamBorn]

Sell at £1.70 they are going to be cut in half said Credit Suisse

https://www.ig.com/uk/news-and-trade-ideas/royal-mail-shares-set-to-trade-higher-lower--says-credit-suisse--200623

@Yellow_Reduced_Sticker 

More to come?

https://www.telegraph.co.uk/business/2020/12/18/royal-mail-strikes-landmark-union-deal/

 

 

[Hardhat]

4 hours ago, Harley said:

So a suggestion.  Maybe in the last week of 2020, as we ramp up for 2021, people would like to reflect and bullet post their top thoughts, lessons, etc from this crazy year.  No rush, several days left and time to distill thoughts down to some focused points.  Every thought matters.  Time to put it all together and look at the big picture, thus also reaffirming the fundamentals of this thread? 

I'm likely to log off completely over Christmas, so I will say a couple of things now:

I have seen portfolio returns this year of 25%. I have a small 5 figure sum invested, which is the large proportion of what I've managed to save from working over the last five years (since my wage got to a level where I actually had spare money each month!). 25% growth on it in one year now is essentially equivalent to what I saved in a year when I was 25, when I would work overtime, weekends and even holidays to try to get ahead. 25% may not seem amazing to some, but the way I look at it, in terms of my personal wealth it's like me working that year when I was 25 again. That's a year of labour gained.

I do my own research, but the bulk of the investments I've made have come from ideas I've seen on here first. I am very grateful to have found this thread, but in fact it was almost like it found me a few years back, as so many of the ideas here were things I'd half-realised myself. But this place has really helped me to draw it all together.

I'm a bit younger than most of you - I think! - and I am mostly here to listen and learn, but the insights we get here are giving me a lot of hope of being able to live a more financially independent life.

We are all anonymous on an internet forum - but I want to thank you all for being so generous with your time and insights. We may never know who each other is - we may even pass each other every day in the street - but we are building an amazing resource together. 

P.S. Best stock this year for me has been Ceres Power Holdings (LON:CWR) - part of the Hydrogen sector in this country. I reckon it will go to £20 from here. I have a friend who works in the Hydrogen sector and she says the investment is huge behind the scenes. This is not investment advice 

[Harley]

1 hour ago, Hardhat said:

I'm likely to log off completely over Christmas, so I will say a couple of things now:

Good point and since DB has rightly cut the ribbon......."pool open"?

[Harley]

3 hours ago, DurhamBorn said:

The future isnt to be feared,you need to learn from the past to drive yourself forward.Hardship and pain should be faced down and seen as a learning experience.

Amen to that.  I've drawn on my past training and grunt experience (including psyops) this year and am feeling a bit like a misfit again!  Never give up, never sit down, do look over every hill and around every bend, but above all never ever get in the Land Rover!

[JMD]

8 hours ago, Cattle Prod said:

I really hope you're right, things are getting properly mental now. Meeting a friend for a pint tomorrow and I have to sit outside like a plum, knowing full well there is no reason to. Testing in schools, more lockdowns, they've lost the plot. I'm trained to spot the signal in the noise, a drop of oil in a vast amount of data that means a big field. That graph is the signal, and everything, I mean everything else that is being bandied around on testing, cases and deaths is noise. Pure and simple. All of it is contaminated data. Comparing all deaths this year to all deaths in previous years is uncontaminated. That curve does not lie: you cannot have an epidemic without excess deaths. It is impossible. I can't fathom why people can't see it, I've sent it to my MP etc etc. It's maddening, frustrating, f'n crazy making. What you've said has given me a glimmer of hope!

CP, great post. I remember early on that some experts said that the excess deaths figure would reveal how serious this virus was. What's the betting that come end of year no such discussion will be had?                                                                                 However when you say 'theyve lost the plot' are you referring to the government? If so i would disagree - although I might have misunderstood your position? Anyway mine would be more along the lines of 'never let a crises go to waste'. I know that sounds conspiratorial but to explain allow me to reference Michael Green who for me has a refreshingly(?!) dour view of the financial industry, despite being one of its much respected macro strategists (eg he critiqued and called out the etf bubble). His take on the chaotic global virus policy responce is that mere incompetence does not adequately explain why most governments have responded in the same way. Apparently the topic is 'banned' in his own household because he and his wife hold opposing views, but he does say he continues studying it and once he has formed a cogent and useful investment position he will go public. I do look forward to that because Green seems a particularly grounded and honest finance guy, they do exist I guess!!

[Harley]

3 hours ago, DurhamBorn said:

So the reason this thread exists is because of a few minutes in a bar in Ibiza,a dove,a girl,a song and a smile.

[Harley]

The most important thing I've learned this year is to have a macro everything plan backed up by conviction, else you'll drift, miss opportunities, and "they" will fill the void with their own.

[JMD]

9 hours ago, sancho panza said:

As ever hattip to @Democorruptcy for bringing Dr Tim to the thread.I've reprinted in full for those who want the nuance but you can read the bits in bold for a speed read.

Where we are,where we're going.Posing the question of how far service orientated economies have to fall..........???Also posing the question of what happens when the demand for credit starts dropping?

decomplexification,loss of critical mass,falling utilization  rates etc etc

https://surplusenergyeconomics.wordpress.com/2020/12/08/186-the-objective-economy-part-three/

#186. The objective economy, part three

Posted on December 8, 2020

CRAFTING THE FUTURE

Behind most complex issues lies a stark simplicity which, once grasped, imposes logic on seemingly-baffling situations. That’s certainly true of our economic and broader predicament.

Ultimately, the economy is an energy system, and energy, though abundant, cannot be ‘had for free’. Whenever energy is accessed, some of that energy is always consumed in the access process. This input-output equation – known here as the Energy Cost of Energy (ECoE) – has now turned against us, undermining the dynamic which has driven economic growth ever since the late 1700s, when the invention of the efficient heat-engine first enabled us to harness the power of fossil fuels.

The fossil fuel dynamic worked in our favour for far longer than it takes to become complacent, and to assume – on the basis, not of analysis, but simply of past experience and extrapolation – that economic growth must continue in perpetuity. 

A second stark simplicity is that we cannot ‘fix’ an energy problem with monetary tools, any more than one could ‘fix’ an ailing house-plant with a spanner. If we switch our metaphors and picture rising ECoEs (and dwindling surplus energy) as an oncoming truck, our responses over the past quarter-century have amounted to throwing the financial system under the wheels.

Since the economy is a product of the energy dynamic, changes in that dynamic affect not just the size of the economy, but its shape and character as well. Having spent more than two centuries building an energy-profligate dissipative-landfill system, we now face reversion to a more energy-frugal economy in which the relationship between (a) exogenous energy inputs, and (b) the human component tilts back towards the latter. A useful shorthand term for this human component is ‘craft’, a word which captures skills as much as, or more than, it references physical labour.

This tilt in the equation does not portend a return to some romantically-imagined past, and neither does it imply that we can make ‘by hand’ products supplied today by energy-intensive mass production.

Rather, it means that the production and purchasing of these products will dwindle, a process which is already under way. As we’ve seen, demand for discretionary (non-essential) goods and services has already become dependent on a necessarily finite process of credit expansion.

Changes in consumer purchasing will be accompanied by changes of supply processes. These changes – which will include de-layering and simplification, and will be spurred by falling utilization rates and progressive losses of critical mass – can be summarised as “de-complexification”, which involves the reversal of the economic and broader complexity that has been created by abundant, ECoE-cheap energy.                  

Introduction

At the very start of his 1929 novel The Good Companions, J.B. Priestly puts the reader high above the Pennine hills in the northern English county of Yorkshire. From there, we descend gradually, concentrating first on a town, then on a street, then on a sea of cloth-capped men walking home from a football match, and finally on a single man, Jess Oakroyd, one of the central characters in the narrative.

Looking down from a similarly elevated position, the World economy has become a dissipative-landfill system, using energy-profligate processes to transform raw materials into products which, for the most part, are rapidly abandoned to landfill or other methods of disposal. This is in stark contrast to the craft model which prevailed before the Industrial Age, when the balance between energy-derived inputs and human skills was very different, and in which the quality of goods, and certainly their durability, was rated a lot more highly than it is today.

Three hundred years ago, people were far likelier to maintain, repair and reuse artefacts than they are now. These are skills that we’re going to need to re-learn.

Properly understood as an energy system, the economy has reached the end-point of a phase in which material prosperity has expanded massively because of the abundant availability of cheap energy from oil, gas and coal.

One of the factors which is bringing this long chapter to an end is the dawning recognition that the environment can no longer tolerate the further expansion, or even the continuity, of a system based on the profligate use of fossil fuels.

The other factor, as yet largely unrecognized, is that oil, gas and coal have ceased to be ‘cheap’ in the only meaningful sense, which is the Energy Cost of Energy (ECoE). After all, abundance of energy supply would be completely meaningless if we were ever to find ourselves using 101 units of energy to access 100 units.  

Where supply systems are concerned, the fundamental issue at stake is the changing relationship between exogenous energy inputs and the human contribution.

This human contribution has always had two components. In past times, human physical labour, sustained by farming and augmented by the use of wind, water and animals, supplied the bulk of the energy used by the economy.

But the second (and arguably the more important) human function has always been the direction and application of energy, however that energy is sourced. In pre-industrial times, skills known as crafts played a very important role in a context of resource and energy scarcity.

As the balance tilts away from energy profligacy, we should anticipate a greater reliance, not just on human labour itself, but even more on the application of craft, a term which needs to be understood as a combination of design and skill.

The importance of ‘craft’ is simply stated. Starting with the same materials, and expending the same amount of labour, one person might produce an artefact of quality and durability, whilst the efforts of another might result in failure. The difference between the two is the meaning of ‘craft’ as the word is used here.  

This tilting balance does not imply a return to some halcyon rustic age of craftsmanship, let alone to a bucolic existence which looks far better to nostalgic hindsight than ever it felt to the vast majority at the time. Rather, it suggests profound changes along lines which this article aims to explore.

Properly understood, we can anticipate some, at least, of the economic processes involved, and this should give us a reasonable level of visibility on what the post-dissipative economy is going to look like.               

Context – the end of energy profligacy

The necessary parameters here – which are familiar to regular visitors to this site, and can be stated briefly – start with recognition that the economy is an energy system, and not the financial one as which it is so often misrepresented.

All goods and services which have any economic utility at all are products of the use of energy. Properly understood, and although it is used for many other purposes, money operates primarily as a medium of exchange. This means that money has no intrinsic worth, and commands value only as a ‘claim’ on the goods and services produced by the energy economy. This interpretation was set out in more detail in part one of this series.

The critical factor in the energy economy is the observation that, whenever energy is accessed for our use, some of that energy is always consumed in the access process. This component is known here as the Energy Cost of Energy (ECoE), and the level of ECoE determines how much remaining (surplus) energy is available for all economic purposes other than the supply of energy itself.

Analysis undertaken using the SEEDS model indicates that sensitivities to ECoE are inverse functions of complexity. In the highly-complex Western advanced economies, prosperity per capita turns downwards at ECoEs of between 3.5% and 5.0%, thresholds which were passed between 1997 and 2005. Since then, the average person in these economies has been getting poorer, a trend which no amount of financial gimmickry can reverse.

The equivalent threshold for less complex emerging market (EM) economies lies at ECoEs between 8% and 10%, a band which the World entered in 2017. Accordingly, global prosperity per person has now turned down from a long plateau, and our efforts to use credit and monetary adventurism to disguise and deny (since we cannot change) this trajectory explain the increasingly surreal character of the global financial system.

Critically, and as we discussed in part two, the process of deteriorating prosperity takes place through a hierarchy of calls on incomes. First calls are made by taxation, and by the cost of household essentials. These prior calls leverage the way in which a deterioration in prosperity reduces the residual capability to make discretionary (non-essential) purchases. SEEDS analysis indicates that, in a growing number of countries, discretionary prosperity has already been squeezed almost out of existence within recent years.

Of course, this doesn’t mean that no discretionary purchases are made by the average person. But it does mean that such purchases are now, for the most part, financed using credit. Moreover, and reflecting deviations in income around the average, some households can still make discretionary purchases without resorting to debt, whereas others are already using credit to fund part of the cost of essentials. This is a variance which points strongly towards growing popular demands for redistribution.

Since debt is ‘a claim on future money’, whilst money is ‘a claim on energy’, debt can be defined as ‘a claim on future energy’. If, when credit falls due for payment, the presupposed level of applicable surplus (ex-ECoE) energy is found not to exist, neither conventional debt or other financial promises (such as pensions) can be met. At this point, the only choice which remains is between ‘hard’ default (where we renege on commitments) or ‘soft’ default (where commitments are met, but in money devalued by inflation). Historically, the preference has tended to be for the latter.

A further complicating factor is that the financial and corporate sectors have created liens on income which are the household counterparts of the streams of income on which so many business models now depend. Once confined largely to rent and mortgage payments, these liens have since extended into a gamut of payment streams which include credit, staged purchases and subscriptions. Additionally, many of these streams of income have been capitalized into traded assets, originally exemplified by the mortgage backed securities (MBSs) which became so prominent during the 2008-09 global financial crisis (GFC).

How it happens

These considerations form the essential context for how the transition from the dissipative-landfill model to a more craft-based economy can be expected to take place.

It is, of course, extremely implausible that we will start selling hand-assembled cars, and even less likely that we’ll switch over to man-made gadgetry, or craft-produced computers. But this isn’t the way that change is going to happen.

Rather, we will simply make and buy less of these energy-dissipative products over time. Since we know that the scope for discretionary consumption is subject to a relentless squeeze – a trend that currently is being staved off by credit expansion alone – we can further infer that transition will involve falling sales of consumer products manufactured along energy-intensive, dissipative-landfill lines. This can be expected to begin in discretionary product classes.

There are already several pointers towards such trends. First, hindsight seems likely to confirm that sales volumes in a string of product areas – including cars, smartphones, computer chips and electronic components – peaked during 2017-18.

Second, plans to replace internal combustion engine (ICE)-powered cars and lorries with electric vehicles (EVs) are likely to happen on a less than one-for-one basis, resulting in decreasing fleet sizes, with ICE vehicles disappearing more rapidly than EVs arrive to replace them.  

Third, various ideas are being canvassed that would see people renting items which, hitherto, they would have owned. These ideas raise important issues about ownership, about the distribution of income and wealth, and about income streams, but they do point towards reduced ownership, implying smaller quantities and falling sales in a gamut of product categories.

Because the economy is characterized by complex inter-connectedness, it’s not too difficult to describe how these processes will unfold. These have been discussed here before as part of the “taxonomy of de-growth”.

First, we should anticipate a reversal of the process by which, as the real economy of prosperity grew larger, it also became progressively more complex. Even an industry as seemingly basic as the supply of food has expanded from a relatively limited number of trades into a host of specializations, whilst whole sectors of the economy exist as service adjuncts of others.

As this process goes into reverse, we will witness both simplification and de-layering. Whilst the latter term is self-explanatory, describing the shrinkage and elimination of whole tiers of activity, ‘simplification’ refers both to products (with customer choice reducing towards more basic ranges) and to processes, where methods of production will become less complex, whilst supply chains are shortened.

Meanwhile, we should anticipate the compounding effects of two further processes. One of these is falling utilization rates. This can be considered using the example of a bridge, whose economic viability relies on spreading the fixed costs of operations over a large number of users. As user numbers decrease, the share of fixed costs needing to be allocated to each user increases, pushing prices upwards, and accelerating the rate at which user numbers fall. This effect applies to any activity whose viability relies on economies of scale, which means that exposure to this downwards pressure is going to be virtually ubiquitous across the economy.               

A second and related process is the loss of critical mass. This occurs where some of the many components or other inputs required by a production process cease to be available. Some such gaps can be worked around, and will indeed form part of the simplification process. But others either cannot be surmounted cost-effectively, or cannot be overcome at all. Accordingly, products cease to be made because some necessary inputs can no longer be sourced.

Importantly, loss of critical mass and falling utilization rates can be expected to interact in a compounding process (for which provision is now made in the SEEDS economic model). We can, for instance, picture a manufacturer ceasing to make a product because critical inputs cannot be obtained. This reduces the purchasing of other components, whose supply then ceases because suppliers’ own utilization rates have fallen below the threshold of viability.

Services – rapid shrinkage

It makes sense to pause here and recap what we’ve observed so far. Energy-based analysis indicates that, because of deterioration in the energy dynamic, past growth in prosperity has gone into reverse, which makes the average person poorer over time. We also know that, because of the hierarchy of calls on incomes, we’re witnessing a leveraged squeeze on the scope for discretionary purchasing, to the point where much, perhaps most, of the ‘discretionary economy’ has become hostage to the ultimately-finite process of credit expansion.

We can further note that, as consumer discretionary purchases contract, we will witness de-layering, product and process simplification, and the compounding effects of falling utilization rates and losses of critical mass. Together, these processes point towards a shift away from energy-profligate, dissipative-landfill production methods towards smaller, more local and more ‘crafted’ supply processes which rely less on exogenous energy inputs and more upon human skills.

Thus far, we’ve concentrated primarily upon physical goods, though it must be emphasized that the whole “de-complexification” process will affect services at least as much as (and probably more than) it affects the supply of goods. Service sectors are prime candidates for de-layering, are likely to be amongst the first casualties of simplification, and are particularly exposed to the adverse effects of falling utilization rates.

There is, though, an additional, quite fundamental point to be noted about the diminishing role of services in an economy transitioning away from the dissipative-landfill model to which we have long become accustomed.

Ultimately, service industries are adjuncts of the supply of goods, and are a product of the complexity and the efficiencies created by the energy-profligate system.

This is not a conclusion that a perusal of conventional economic data would reveal. Official statistics indicate that services account for 63% of World economic activity (as of 2017), and that the proportions are even higher in the United States (80%), Britain (79%), the European Union and Australia (both 71%).

Since ‘industry’ (of all kinds) accounts for 30% of World GDP, and for lower proportions still in the advanced economies, one could easily conclude that services are ‘at least twice as important’ to the economy as manufacturing, and all other production activities, put together.

This is a wholly misleading interpretation, in much the same way as similar statistics could be used to ‘prove’ that, since agriculture is ‘only’ 6% of World economic output, 94% of the economy could continue unscathed even in a situation in which the production of food had become impossible.

The reality is that, in the pre-industrial economy, services were few in number, and rudimentary in character, and a retreat from an energy-profligate system can be expected to drive their role back towards that situation. Historically, the availability of low-cost fossil fuel energy starkly and relentlessly reduced the numbers of people required for the supply both of food and of physical goods, which meant that the numbers no longer required for these activities soared. This was the dynamic which drove the expansion and proliferation of service activities, and the consequent reallocation of financial activity is reflected in statistics which seem to show that services are now ‘more important’ than production.

The obvious corollary is that service activities will shrink more rapidly than the supply of goods as the economy moves away from the dissipative-landfill model.

A final conclusion – for now – is that many of the giants of the commercial and financial landscape will fade from prominence as the economy rebalances away from the dissipative-landfill system.

This, at least, should not cause undue surprise to anyone who has a knowledge of commercial history – after all, global trade is no longer dominated by businesses like the Honourable East India Company and the Hudson’s Bay Company, any more than the Dow Jones Industrial Average is populated by former stalwarts such as the Distilling & Cattle Feeding Co., the United States Leather Co., the Remington Typewriter Co., or the Victor Talking Machine Co..  

Thanks for posting SP. I really think the author should write a book to do proper justice to his ideas. His points about de-growth, loss of critical mass and failing utilisation, in regard to the economy are fascinating. And I think those concepts could equally be applied to other areas, like the social and political spheres, where loss of trust and institutional breakdown is happening... For example I note that the Manchester police force is now under government special measures, something once reserved for failing schools, but in recent years increasingly so for health authorities, etc. (Things are getting surreal, and I do wonder if that animated Monty Python boot is going to come down from the sky and crush us all!!)

[wherebee]

1 hour ago, JMD said:

Thanks for posting SP. I really think the author should write a book to do proper justice to his ideas. His points about de-growth, loss of critical mass and failing utilisation, in regard to the economy are fascinating. And I think those concepts could equally be applied to other areas, like the social and political spheres, where loss of trust and institutional breakdown is happening... For example I note that the Manchester police force is now under government special measures, something once reserved for failing schools, but in recent years increasingly so for health authorities, etc. (Things are getting surreal, and I do wonder if that animated Monty Python boot is going to come down from the sky and crush us all!!)

Likewise here in Victoria, two regional councils have been found to be so bad that the state government had to take over.  

My view is that in a system where facts are actively discouraged (such as fat is bad for you, kids should not be helped to change gender at at 15, etc etc), bad behaviour will always take over.  Kind of bad money drives out good but for management.

 

[dnb24]

6 hours ago, JMD said:

CP, great post. I remember early on that some experts said that the excess deaths figure would reveal how serious this virus was. What's the betting that come end of year no such discussion will be had?                                                                                 However when you say 'theyve lost the plot' are you referring to the government? If so i would disagree - although I might have misunderstood your position? Anyway mine would be more along the lines of 'never let a crises go to waste'. I know that sounds conspiratorial but to explain allow me to reference Michael Green who for me has a refreshingly(?!) dour view of the financial industry, despite being one of its much respected macro strategists (eg he critiqued and called out the etf bubble). His take on the chaotic global virus policy responce is that mere incompetence does not adequately explain why most governments have responded in the same way. Apparently the topic is 'banned' in his own household because he and his wife hold opposing views, but he does say he continues studying it and once he has formed a cogent and useful investment position he will go public. I do look forward to that because Green seems a particularly grounded and honest finance guy, they do exist I guess!!

I am in the Same boat JMD. Sancho and I had some good chats early on in the “pandemic”, as he and I both work in the NHS and both seemed to share some incredulity in what was happening. 
I do think an opportunity was seized, and I think the FED/BOE/ECB needed a black swan event.  Danielle Dimartino mentioned this in a recent interview - https://www.kitco.com/news/video/show/Outlook-2021/3139/2020-12-17/Economy-in-danger-of-contracting-again-in-2021---Danielle-DiMartino-Booth#_48_INSTANCE_puYLh9Vd66QY_=https%3A%2F%2Fwww.kitco.com%2Fnews%2Fvideo%2Flatest%3Fshow%3DOutlook-2021

I was always sceptical of the pandemic, sars cov2 is real and our hospital got its first case in early Jan. I expected it to behave like all other virus’s and that we would just live with it and manage as per usual. Our hospital in East london never copes in winter/spring, 2017/18 was bad- people of trolleys, ambulances couldn’t unload, etc.

20th of March comes along and suddenly panic is in the hospital - not due to cases, it was the message sent across the staff- we would be adding 775 ICU beds to our current capacity of circa 225. That shocked a lot of people as it was broadcast across almost staff. However I was fortunate to be on the inside of the messages and by the 23rd- the number was down to 500 extra bed, by 25th 250 extra and by 27th we were staying at what we had. That told me everything I needed to know! Our hospital peaked on the 3/4th April for icu demand - roughly 185 icu beds used, lockdown made no difference to this, but the narrative didn’t stop- which was when I got in touch with SP as I couldn’t quite believe what I was seeing.

Empty wards

ticktok videos all the time

ambulances parked up nothing to do

ALL operations cancelled

A&E empty - in fact at one hospital board meeting the A&e consultants said they were bored. During April/May part of June daily A&E attendances were 300, usually they are 1200-1500.
By of May everything was essentially back to normality but the lockdown continued- and this is when I knew that this was being used to turn the economy away from Consumer based businesses- an opportunity to put massive stimulus through government, ability to increase control over the population, to try and put China in its box, turn the left leaning urban populations attention away from Brexit and nationalism while they tighten the boarders and set the direction of travel for next 10 years or so.

I think the excess deaths will be higher this year, but the lockdown killed and is killing a large percentage of this excess. You wouldn’t believe the illnesses that were coming through A&E at around week 5 of lockdown- stuff that had festered for 3-4 weeks that essentially should have had treatment within hours. If your A&E runs at 1/3 demand for 12 weeks, whilst GP access is significantly reduced for 9 months, no speciality services or scans for 4 months, that’s going to kill people and it is doing so.

Though tell that to my colleagues and 99/100 will tell you we should still be locked down like lockdown 1!!🤦‍♂️

[jamtomorrow]

6 hours ago, JMD said:

Thanks for posting SP. I really think the author should write a book to do proper justice to his ideas. His points about de-growth, loss of critical mass and failing utilisation, in regard to the economy are fascinating. And I think those concepts could equally be applied to other areas, like the social and political spheres, where loss of trust and institutional breakdown is happening... For example I note that the Manchester police force is now under government special measures, something once reserved for failing schools, but in recent years increasingly so for health authorities, etc. (Things are getting surreal, and I do wonder if that animated Monty Python boot is going to come down from the sky and crush us all!!)

Signs of civic fraying becoming an unravelling are all around now.

Local council here recently re-let the waste contract, and accepted a bid so low the contractor can't afford to meet the service level. Bin lorry breakdowns and missed collections now happening more often than not. It's never been good, but this is a new low.

It's as if the system is literally starting to drown in its own waste. How apt, given the tenor of the article.

[Harley]

Take that graph of excess deaths and add in the death of money, democracy, financial freedom, etc to get the complete picture.

[MrXxxx]

The three things I have learnt this year from reading this stream of consciousness:

1. Finance/investing can be complicated/difficult to understand but doesn't have to be.

2. There is never a right time/always more to read, so get started now and `learn on the job`rather than waiting.

3. There is no right way to do things/share to buy only one that suits you, so read, consider, and then apply (if appropriate) to your circumstances.

....oh, and a fourth...

4. Never buy what @YRS has just bought unless its a reduced pork chop...and then treat it suspiciously! :-)

[Dogtania]

18 hours ago, sancho panza said:

As ever hattip to @Democorruptcy for bringing Dr Tim to the thread.I've repr

 

Well I read from @JMD so thanks to him for quoting you and reposting or I may not have read (quite slow reader and this thread so energy dense and I've rarely visited in recent times).

A lot to digest and think about as ever here.  I like some of the ideas and certainly we seem to be in peak something (cheap goods destined for landfill makes a lot of sense - yesterday at Sainsbury's, spent something like £23 and and ended up with more than £3 in nectar points... And used a pre paid card 5% discount too.  Common theme for me and Sainsbury's at the moment.  Bought a wooly hat that I may or may not return discounted to £2 something along with something I did need that were half price shirts.  Was tempted to buy a discounted pack of ham as would have made more in nectar bonus but probably would have gone in the bin and I'm not that desperate for what 20p although like the idea of free money just not the waste).

sorry digress but we're at peak something.  I don't know about the service economy getting decimated though in the future though.  I like how the author explains the cost of energy and how say the agriculture sector only X amount of GDP or jobs but clearly without we would be in mad max territory (ie crucial despite this maybe not being reflective in figures).

the other thing is the whole narrative that prosperity is decreasing globally.... Really?  It certainly has been in the West for decades.  But globally, I've heard if you include every country/ demographic then not so simple.  Masses and masses lifted out of poverty in last few years, albeit their prosperity not quite reached our levels.  

And maybe therein lies the issue... And problems on coming... It's not sustainable.  The non West (Africa/ Asia) dwarf the West in population count.   Despite what it seems.  And they can't just reach our level, especially if cost of energy keeps going up.  Although overall their prosperity has very much seen a net increase (opposite to us).

maybe some kind of magic can keep it going for longer... Increase in service sector.  More automation, greater efficiency.  But yes only for so long... Like they say energy in equals energy out, pretty fundamental and not hard to grasp.  

does all seem a bit malthusian these days.  Iirc I heard the US still consumes 25% of world energy (could be non factual but at least the sentiment correct and that's rightly not sustainable).

more localised, higher quality craftsmanship sounds better.  Not sure that completely is at odds with increasing service sector although I've probably missed some of the points in the above piece.