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Zoltan Pozsar’s Fairy Tale
Zoltan Pozsar scarcely needs to exalt himself.
The financial media does that for him. In 2019, for example, Bloomberg's Tracy Alloway accorded Pozsar the kind of respect the ancients reserved for the Delphic Oracle which, considering her unrivaled ability to secure interviews with Zoltan, makes her a modern day Pythia, I suppose. Zoltan linked to one such interview last month.
Although he doesn't play it up, Pozsar does seem to revel in the almost mythical reputation he happened into. It helps
Please ensure any comments are based on an assessment of the thesis. In other words: Make sure the discussion is about the macro and the geopolitics. This isn’t an article about Credit Suisse.
I’ll caveat this with an ‘Im not sure if I’m reading this correctly.’
De dollarization aside, per Zoltan’s previous note: if the fed choose to inject volatility into assets in a bid to reduce the amount of tightening ultimately necessary (and increase the labor force participation rate) they may have to slam the door on plain English. An opaque, optionality preserving fed leads to increased risk premium. In such a case, using commodities flows/reserves as a gauge/means to measure inflation and short term interest rate policy makes sense to me.
He sounds like he is somewhat living in the echo chamber of his ego, developing the narcissistic tendencies after a few great calls. Note, however, that even Michael Burry seems to have been knocked back down to Earth.
Thanks, H, for an entertaining Saturday afternoon read.
This is all very interesting and a great thought experiment. But, I feel like the thesis has numerous flaws/holes/unknown variables.
Without regurgitating what H covered in regards to his criticisms, which I believe are well founded and supported. I’ll try to share a few additional weaknesses I see.
First, Zoltan is spot on, his thesis is exactly the current track we are on.
However, his thesis fails to anticipate the reaction function of markets/institutions to become self aware and shift/alter.
It also presumes the myth of Chinese infallibility is true, a theme Western analysts/economist nearly always misunderstand.
It also fails to take into account that in a world where significant inefficiencies exist across the global supply chain, free markets/capitalism are far superior in resource/asset allocation compared to control economies. USA+Western Europe vs USSR+Eastern Block circa 1980.
China’s very existence as a economic power is only possible in a world in which all (as much as possible) inefficiencies are removed from the global supply chain, meaning the world we’ve just lived in for the past 20-30 years. The highly efficient global supply chain has benefited all nations and firms, but it benefits control economies more as it removes the economic variable in which the Control System is weakest: resource/asset allocation, as a variable.
Finally, IMO, the greatest weakness of the thesis is that the transition period would be incredibly destructive, probably to the point that China’s economy would collapse during this transition phase. I would even go so far to say that if all stays on the current track, Zoltan just laid out how the Chinese economy will fall into a Great Depression and the eventual end of CCP rule in China.
Ok, one last criticism, along the lines of one of H’s criticisms: the idea of commodities as reserve currency is a fallacy. The carrying cost to store and maintain the commodities make the whole idea economically impossible over any longer time horizon. Add to that spoilage, theft and corrupt (which tends to be high in control economies), it’s just not sustainable for any period that is not a global war. It would cause it’s own version of demand destruction once the controlling entity (usually a nation state) determined the carrying cost was too high.
BTW- this all dovetails with my commodities super bubble crash thesis I’m expecting in the next 6-24 months.
Wouldn’t mind reading your super bubble crash thesis.
Lots of good points across those two comments.
If I was in charge of writing fairytale Kabuki plays about this historical drama, I’d make sure I had the one and only true Oracle of Omaha seated at the head of the table.
To sit, before being sat at a table of high princelings and lesser Fed like diplomats and a scattering of heads of states, etc., Warren will be wheeled into the room in a Stephan Hawking like computer aided AI contraption, assisted by his centurion aid Charlie.
The theme here is to go beyond central bank thinking or economic gurus and tv charlatan wall street media friendly quacks.
A Warren like figure with undisputed wealth has to become a symbolical leader that has respect. Although Warren doesn’t fit this role, he can be a stand-in.
Warren will have a script, which will be delivered by his robotically enhanced voice box, speaking to a global audience, who will listen in translated awe.
The thrust of this speech will essentially say no one is to blame for the pandemic and actions related to create economic stabilization, however, as the camera pans to the burning wood in the fireplace, he will suggest that this global economic problem can’t be solved by using the same tools that created this mess, thus channeling Albert Einstein’s a priori thoughts.
At this point, Zoltan s chair will fall into the trapdoor it had been sitting on.
That’s as far as I got…
Here’s another take on Oracle mania:
The delphic oracle and the ethylene-intoxication hypothesis
J Foster et al. Clin Toxicol (Phila). 2007)
“An interdisciplinary team of (economists)* scientists–including an archeologist, a geologist, a chemist, and a toxicologist–has argued that ethylene intoxication was the probable cause of the High Priestess of Delphi’s divinatory (mantic) trances.
We conclude by observing that positivist dispositions can lead to the acceptance of claims because they have a scientific form, not because they are grounded in robust evidence and sound argument.”
(Seemed appropriate to add that)
You clearly had a fun time writing this, which has motivated me to take some time writing a fun response.
You cited a passage from Zoltan re: Egypt increasing Suez transit prices to compensate for grain inflation, and it reminded me of something. Specifically, it reminded me of the Statue of Westminster 1472. [Note, this is not an attempt to make a modern-day analogy or references current macro-defining events; rather, this is just a thing that popped into my head that I’m now sharing.]
You see, the English had a widely-known military advantage in the Welsh longbow. Bows are a truly ancient technology, and there was nothing new or special about using them in combat, but the English longbow was so feared that its impact echos today in the uniquely English two-finger salute. During the Hundred-Years War, which was the high-water-mark of the longbow in combat, it was rumored that the French would cut off the bow-pulling fingers of any captured archers. The back-handed V, thus, was an, “F-U, I still have my fingers!” gesture (actual historians completely dispute this origin story, but I like it).
What was special about the English longbow? Yew. Yew wood is unique. As an evergreen, it is a softwood, but the interior heartwood is as stiff as a hardwood. The harder the wood, the stronger the spring. Natural hardwoods like maple all share a common weakness: they are brittle. That doesn’t make for a good bow. Yew, however, has supple sapwood, typical of all evergreens. The sapwood reinforces and protects the heartwood, allowing for a hardwood-strong bow pull without the risk of snapping your bowstave. This is non-trivial. Modern compound bows (which use the mechanical advantage of pulleys to amplify the applied force) have draw-weights in the 60-80 pound range. A yew wood longbow could withstand draw-weight in the 120-160 pound range. They were relatively accurate well past 300 yards, and the arrows could pierce chain mail (popular fiction notwithstanding, an arrow can’t pierce plate).
WTF does any of this have to do with Egyptian Suez cannal levies? England completely stripped their native yew to make bows, but King Edward IV had a brilliant idea: require that every foreign ship that wanted to dock in England for trade bring 4 yew wood staves per tun of shipped material. King Richard III increased the levy to 10 staves per tun. Virtually all of Europe was stripped of wild yew just fulfilling this obligation. By the mid 1500s, the Holy Roman Emperor was being petitioned to do something about the one-way yew trade, but nothing was ever implemented because there wasn’t any yew left so it was pointless.
That’s it, hope you enjoyed the infodump.
This is a great post.
Another important aspect of the longbow is that it allowed the English to arm the farmers, who had already been trained to hunt. Therefore, with minimal additional training and at a relatively low cost, the English could defend themselves against the French knights because the arrows could pierce the knights, in spite of the 50 plus pounds of armor that the knights had to wear.
The knights were a revered, but very expensive class of people to train, outfit and maintain. On the other hand, the English (at much less cost) could arm the farmers with a long bow to create a stronger than expected military.
It is almost impossible not to see some parallels with the Russian invasion of Ukraine.
I would put it more simply. Commodity prices are too volatile to be used as reserves, regardless of their other disadvantages. China does not have the legal or political infrastructure for its currency to be a reserve currency, at least at present.
While Zoltan’s approach is intellectually entertaining, Occam’s Razor says that Russia- China trade ends up being settled through something akin to the old Comecon clearing accounts.
The Occam’s Razor approach says that China – Russia trade will more likely get settled thru an arrangement like the old Comecon clearing accounts. But China may set the rules.
Sorry for the repeat.
H-Man, Yikes and more yikes. Comments talking about English long bows tied to commodities I get. But back to Zoltan’s new world monetary order based upon commodities, I get the logic but what are we really talking about other than how to pay for commodities. I have oil or wheat which you need, you pay me in whatever you have that I deem has equivalent value. Rubles, bit coin, dollars, euros, or in a true barter system, anything I need. As long as the seller gets equivalent value (whether real or perceived) the deal gets done. So I don’t understand how there is going to be a “new world monetary order” when the basic rules of exchange never change.