The Changing Economic Regime

on differentials, energy, and an evolving world

Some thoughts on the differentials between experience, data, and emotion

Okay three things-

1. I sometimes feel a bit indulgent with this newsletter - It’s been a true source of joy in my life - and I just wanted to thank you for being here.

2. After some requests, I am going to start publishing my links here on Substack as (likely) a Saturday post.

3. Finally, this newsletter specifically is indulgent. It’s a philosophical exploration of the emotions behind the economy. I want to respect your time (and it is a relatively short piece, for me) - but just a heads up.

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The Differentials

On differentials -

• Experience: A difference between what we are used to and what is happening.

  • There are inherent expectations that are being challenged by supply chain malfunctioning, higher cost of production, and shortages, etc etc.

    • The Amazon Effect morphed us into 2-day demanders, and that worldview is forced to change now. It’s a derivative of what Derek wrote about in “The End of the Millennial Lifestyle Subsidy”

  • But it’s also the idea of ‘The American Dream” being challenged too - expectations for what we could/can achieve are changing

• Data: A difference between information, measurement, and interpretation.

  • There are the qualitative and quantitative parts of numbers, how it represents one thing but means another

    • When we talk about CPI, mortgage rates, oil prices, etc - numbers are numbers, but they carry different meanings for different people

  • If you see inflation at 9.1%, but personally feel like it’s 20%++ because of your lived experience of shortages at the grocery store and your rent going up $1,000, that creates a fair amount of pain.

• Emotion: There is no difference between grief and love. As Jamie says -

Grief is really just love. It’s all the love you want to give, but cannot. All that unspent love gathers up in the corners of your eyes, the lump in your throat, and in that hollow part of your chest. Grief is just love with no place to go. - Jamie Anderson

The reason I want to highlight these three (seemingly random) things is because they all boil down to emotion caused by something happening (there is a better way to describe this, and i promise i have a point)

• ‘Things that should be’ are broken by ‘how things actually are’

• Numbers represent Things, but *mean* different things to different people

• Some emotions are essentially the same thing, but are expressed differently

We live in a world where everything is not what we thought it was going to be (which I think is just life) - so the differentials described above matter, because they influence how we experience the world.

• It’s like this Mario game - things can be the “same” (inflation is 9.1% for everyone) but it’s actually completely different (9.1% *means* a lot of different things to a lot of different people).

Cheesemeister 😷💉💉💉 @Cheesemeister3k

"Mario games teach us that even if something is essentially the same, psychologically it can be completely different. This example is very easy to understand."

I also think we are speedrunning a lot of problems right now - a pandemic, a war, shortages, supply chain break downs, etc. I really loved the way that not quite framed this - things are happening faster because we are so tapped in, time is a loop and we’ve been here before - but it’s still painful.

There is still a pretty big differential between what we are used to and what is happening - the energy crisis for example.

Energy Crisis

There are a few important points to make about the energy crisis:

1. What happened? Europe became really reliant on Russian gas indirectly-ish because Europe had decided to shift to renewable energy and shut down nuclear plants, leaving Russia as the energy source of last resort.

   • You cannot have green energy policy without green energy investment.

2. What is happening now? Russia now has Europe in a chokehold. Nord stream, the main pipeline from Russia into Germany was shut down for maintenance this week, and is expected to reopen. However, flows have been down to “less than 30% of the average from 2016 to 2021” - meaning there still isn’t enough gas. Also Europe needs to diversify away from Russia, sooner rather than later.

   • Russia also has China and India (and the U.S. just because of how the dominoes all tip) in some sort of squeeze - with oil deliveries to China and India 30% below peak

3. Why is this bad? Europe needs more gas for winter. This is really what is concerning - that there won’t be enough energy to keep people warm. Gazprom, the main Russian gas company, declared force majeure and basically was like “one day, we might not deliver this gas, and that’s that.” There are two main impacts here -

   • Money and economic growth

     • This will impact Europe’s economic growth (with estimates a 1.5% GDP drop) - and a knock-on effect to growth in the United States.

       • The world is dominoes

     • It will also impact how companies fund themselves, as European companies cancel debt deals.

   • People’s lives

     • This also creates a fertilizer shortage - natural gas prices increase, fertilizer prices increase because of that and that compounds into a food shortage as less fertilizer hits the fields - which has obvious consequences

The IEA came out with a 5-step plan to help manage the energy crisis that basically boiled down to - “stop demanding so much, everyone” and “let’s coordinate” but it's a putting out a fire with a toy bucket.

The whole energy crisis is challenging how we normally operate - speaking with a broad brush - we are used to having energy prices be tolerable (and gas prices are going back down here in the United States) but this energy crisis is a big deal. It’s a challenge to the common denominator of *everything*.

• OPEC says that they are going to produce more but like, will they?

• Russia says that they are going to reopen Nord stream, but we need alternatives (like nuclear, as Japan is doing and Germany is considering) immediately

It’s a combination of stepping backwards - realizing that we need to prepare for a changing economic world, but that doesn’t mean completely abandoning the idea of progress. The differential between what we are used to and what is happening has to close a little bit as we reconcile with reality.

The Microcosms

There are other examples of this differential too -

• Bread prices spiking contrasted against discounting from retailers.

  • What this underscores well is the consumeristic hole that we’ve nudged ourselves into - where we have endless GAP sweatshirts, but might struggle getting necessities. That’s a bizarre world.

• Home prices spiking (but slowing) contrasted against The American Dream™️

  • The American Dream is to have that white picket fence, two-story house with a lawn (that should be more biodiverse, but the HOA won’t allow it). That dream is no longer achievable in the way that it used to be.

  • Home prices are up 41% over the past two years, mortgage rates are up 50% since the first part of this year, and the cost of building a home is still really high. There are signs of recovery - with a record number of homes under construction and higher inventory levels, but it’s still… oof.

  Rick Palacios Jr. @RickPalaciosJr

  Not much relief on builder construction cost creep through 2Q22. Sounds like it's coming though.

  

There are other microcosms too - the contrast between what we are used to and what is happening. I liked how Jason laid it out -

Jason Furman @jasonfurman

If you're not a little confused about the economy you're not paying attention. Three of many historically large disconnects in the data: 1. Jobs growing & GDP contracting 2. Price growth rising & wage growth falling 3. Consumer sentiment plummeting & consumer spending rising

And other things that will eventually widen the aforementioned differentials like -

• The lack of capital investment - both from companies (hello, share buybacks) and from the government - where we are afraid to invest in our future for fear of taking away from the ~mad gains~ of today. We’ve already seen the consequences of a lack of investment sparked by the pandemic - inflation is caused by a lot of things, including not preparing for the future.

• China - China is going through their own property crisis, compounded by financial instability and social unrest, but there are calls to diversify trade away from them, which has it’s own consequences. Janet Yellen calls it “friend-shoring” - but she also is trying to get China to participate in a price cap on Russian oil. Friendships and alliances might be two different things.

• Strong dollar - There are some reverse currency war actions going on, where every central bank is just ripping rates to battle inflation - but also to provide a backdrop of strength to their currency. The dollar is flexing on everyone as a “safe haven” and also because Everything is Scary.

• Big tech stalwarts - Big Tech has been a driving force for the stock market over the past many years, but that regime is shifting as these companies slow hiring and face a world with ‘limited money’. That combines with the changing face of venture capital too - this is no longer the era of infinite cash burn.

Final Thoughts

The world is always changing, always moving, always doing something. It’s good because then there is more to build - a stagnant pool is not the best place to be - but it’s bad because the expectations are no longer reality, which creates cognitive dissonance.

Going back to the point about grief and love being the same thing - there are a lot of ways to *think* about what is happening. Just like how we all process grief and love differently, even if we are expressing the same *emotions*, we all process the *emotions* that arise from all of this Economic Stuff differently too.

• Our brains are built to process the negative first, because that is what helps us plan for future survival. We remember the threats because they are threats to our existence - and the animalistic part of our brain ruminates on that.

One of my favorite books is Dancing After Hours by Andre Dubus. It’s an exploration of normalcy - how people Exist in the world. There is one section that talks about the shopping cart theory -

“There’s something about taking the cart back instead of leaving it in the parking lot.” she said. “I don’t know when this came to me; it was a few years ago. There’s a difference between leaving it where you empty it and taking it back to the front of the store. It’s significant”

“Because somebody has to take them in.”

“Yes. And if you know that, and you do it for that one guy, you do something else. You join the world… You move out of your isolation and become universal."

I think we are increasingly forgetting about our commonalities.

Many have explored the disintegration of communities that has come with suburbanization and social media-ization, but it’s becoming increasingly stark. I was reading The Strange Disappearance of Cooperation in America, a piece from 2013, and so many parts of it still ring true.

What we have then, is a ‘strange disappearance’ of cooperation at all levels within the American society: from the neighborhood bowling leagues to the national-level economic and political institutes. What’s worse, it is disappearing from our lexicon:

We are breaking away from each other. This is not a novel thing - as the piece outlines, this has happened in ancient and medieval empires too. Polarization is bad, it leads to less progress and eventual stagnation (and so on and so forth).

I wish I had a long list of solutions to fix all of this, but obviously, I don’t know right now (and I will continue writing about it in this newsletter to find solutions). I think there is a world where consumer spending isn’t a core driver of our existence, a world where participation is incentivized and encouraged instead of us living in a zero-sum individualistic culture, and focused on innovation that truly makes the world better.

e—a @angelofuture

we can solve gen-z nihilism by doing genuinely real things, not marketing the image of doing real things

But it can’t be some ephemeral idea of progress, it has to be *progress*.

There is an element of figuring out how to tap into what people are passionate about (and giving them the space to explore that) -

Find out what makes you kinder, what opens you up and brings out the most loving, generous, and unafraid version of you - and go after those things as if nothing else matters. Because, actually, nothing does. - George Saunders

There is an element of realizing that there is both good and bad, always -

Of course we will hurt each other. But this is the very condition of existence. To become spring means accepting the risk of winter. To become presence, means accepting the risk of absence. - Antoine de Saint-Exupéry

And finally, an element of realizing that bad things are good in a way that we don’t always understand - that they carry lessons, albeit painful -

“You’re not a monster” I said. But I lied. What I really wanted to say was that a monster was not such a terrible thing to be. From the Latin root monstrum, a divine messenger of catastrophe, then adapted by the Old French to mean an animal of myriad orgins: a centaur, griffin, satyr. To be a monster is to be a hybrid signal, a lighthouse: both shelter and warning at once - Ocean Vuong

Grief and love are the same emotion, expressed differently. We are living in a world of increasing differentials, where our base case is becoming less probable, and we are having to build out new models of thinking. That is exciting but scary - we might be all experiencing the derivative of the ‘same thing’ as our economic world changes around us but it shows up for all us differently. And that is important to remember.

Thanks for reading.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.