The geopolitical strategist George Friedman (author, most recently, of The Storm Before the Calm) has a short (14 minute) piece on YouTube here, part of a panel in December 2020 in Korea. It is well worth listening to. He is discussing China, and the popular media perception that China is a growing power and will eventually displace the U.S. In that context he talks about teaching his research staff to “be stupid”. In other words, not to get all wound up in sophisticated analysis, but just look at the implications of the plain facts before them.
That certainly applies to China. The media and the professional talking heads love to wave the China bogyman around, and many are apparently gullible enough to buy Chinese propaganda about its growing might. Yet in fact, as Peter Zeihan, Stephen Kotkin, Ian Brenner and other geopolitical experts keep reminding us, China is where it is today only because of the US, because we provide a vast export market to feed their economy and worldwide security to ship their products anywhere. If the US walks away from that, China is in deep trouble. And as far as a military threat, China depends heavily on oil shipped thousands of miles by the ocean from the Middle East, in waters dominated by India, Japan, South Korea, Taiwan, Australia (all U.S. allies) and the U.S. Start a war and we cut that on day one and by day 10 China can’t fuel their ships and planes, let alone keep the lights on at home.* And of course the US export market which undergirds their entire economy would disappear.
But it seems to me this idea of “being stupid” – not getting lost in elegant analysis or listening to media “experts”, but just looking at the plain facts in front of us – applies in many other fields as well. The excellent 2015 movie The Big Short, based on a real-life story, which I discussed in several posts back in October of last year, is another example. Anyone who was ”stupid” enough to just look at the craziness in the housing market could have seen the danger that eventually brought on the 2008 market crash.
And so I wonder what “being stupid” right now might suggest.
Bitcoin, a virtual currency with absolutely nothing backing up its value, has risen from less than $1000 to $60,000 per coin recently. Median home prices in San Francisco are about $1.6 million, and a 500 square foot studio condo rents for about $4000 a month. Amateur day traders are taking out loans on their houses to play the market and try to outsmart the professional hedge funds. The stock market has risen to astronomical heights, with a price-to-earnings ratio (~40) more than double the historical average (~15). There are companies floating IPOs that make them worth (on paper) more than General Motors, yet have never yet produced a product.
And in the midst of this the federal government is falling all over itself (for the best of reasons, to be sure) to pass one multi-trillion dollar “stimulus package” after another, all with borrowed money, while the national debt as a percent of GDP is now higher than as it was during World War II. The fed is pumping new money into the system at a great rate (35% of the money in circulation has been “created” in the last 12 months), which ought to bring on inflation, yet inflation (thus far) remains low and the economic experts freely admit that they have no idea why it isn’t behaving as they think it should.
If I were sufficiently “stupid” I would think that this can’t last, that this is all a series of bubbles waiting to pop, and someday, probably soon, there is going to be a very painful “readjustment”. I keep remembering the story that Joe Kennedy in 1929 decided to sell off his holdings in the market when a shoeshine boy started giving him market tips. I wonder if we haven’t reached that stage today.
------
* China currently consumes about 14 million barrels of oil a day in peacetime. In wartime that would vastly increase. China’s domestic production is about 4 million barrels a day, so even in peacetime it has to import about 10 million barrels a day (about 5 supertankers per day), almost all by sea from the Middle East. There is an overland oil pipeline from Kazakhstan, but at maximum flow it supplies only a relatively small amount, about 120,000 barrels a day.
Posts
