By Kevin Duffy
“Threats to freedom of speech, writing, and action, though often trivial in isolation, are cumulative in their effect and, unless checked, lead to a general disrespect for the rights of the citizen.” ~ George Orwell
In early December I asked Jim Grant how to reconcile exuberant financial markets with economic reality that reads like dystopian fiction. He responded,
I’m not sure there’s much distinction. To me, the current form of dystopia is the bubble form. So I think this is the year of the dystopian bubble.
The opening pages of the new decade feel like we’re living through a combination of George Orwell’s 1984 and Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds. On the day the 2020 election results were to be certified in the Senate, a mob from the losing side surrounded and actually breached the Capitol. The outgoing president was accused of inciting a riot, threatened with impeachment, and banned for life on Twitter. Despite the chaos, stocks shrugged it all off and rallied to new highs.
The following weekend cover of Barron’s, “The Case for Optimism,” captured the manic side of the dystopian bubble perfectly. Its editorial staff sees a silver lining in practically every cloud:
[T]his is a market determined to march higher, and it’s not about to be derailed—even by historic mayhem in the nation’s capital. Stocks are rallying on the trillions of dollars in stimulus that may only be accelerated under the new administration. A chaotic political season is winding down, while the economy is gearing up for a postpandemic reopening.
Investors need to keep their eyes forward and look ahead to a Joe Biden presidency: to more-predictable domestic policies, smoother trade relations, and additional efforts to revive the economy. Now might not be a good time to own anything defensive.
Still, Barron’s acknowledges a new set of political risks:
That’s not to say that a Washington controlled by the Democrats…will be entirely friendly to investors. The Democratic agenda includes corporate and individual tax increases, heightened regulatory oversight, and such ambitious social and economic policies as a Green New Deal, health-care reform, and student-loan forgiveness.
With bigger government on the way, what could possibly go wrong?
Making America Great Again
During the first presidential debate in September 2016, citizen Donald Trump trashed the 7.5-year Obama-Bernanke-Yellen bull market, calling it “a big, fat, ugly bubble.” The Fed’s balance sheet has since expanded 63 percent, the national debt grown 41 percent (tacking on $8 trillion), and the budget deficit multiplied 5.5 times. Meanwhile, US stocks, as measured by the S&P 500, have percolated another 80 percent.
Former president Trump may or may not suffer from narcissistic personality disorder, but he clearly doesn’t lack for confidence. One of the symptoms of NPD is grandiosity; “Make America Great Again” was always a delusion.
While the incoming administration promises to “build back better,” a betting man should expect more of the same; in fact, much more of the same.
Filling the Political Swamp
American politics has been a quasi-one-party system at least since the days of Camelot (1960 election of JFK), with Democrats pushing the envelope toward big government and Republicans offering little principled resistance while providing the illusion of healthy debate, acclimating themselves to the political swamp in the process. The two-party system officially died in 1964 when Barry Goldwater was defeated in a landslide by Lyndon Baines Johnson. Goldwater was the last of a dying breed cast in the mold of the Old Right: an anti–New Dealer with a Cold Warrior streak, a classical liberal who called himself a conservative.
Richard Nixon was the first in a long line of establishment Republicans. While ending the Vietnam War, his administration consolidated the gains of LBJ’s Great Society programs, created the EPA (Environmental Protection Agency), OSHA (Occupational Safety and Health Administration), and ERISA (Employee Retirement Income Security Act), declared wars on cancer, drugs, and inflation, and on August 15, 1971, severed the last ties of gold to the US dollar. The Watergate scandal ended Nixon’s political career, but it was Goldwater’s threat to back the impeachment process that sealed his fate.
The upward march of statism has continued unabated with some brief pauses to catch our breath: Ronald Reagan was a throwback to Goldwater and Trump perhaps a less couth version of Reagan, each a watered-down version of his predecessor. Neither was willing or able to stem the tide of debt, deficits, and money printing.
Say what you will about Trump, as Lew Rockwell remarked after his improbable 2016 election victory, his most endearing quality is that “all the right people hate him.” The political left and establishment right are giddy over his defeat and both want to drive a stake through his heart and the populist movement he represents.
The 2020 election formalizes the transition to one-party rule in the United States.
The Pursuit of Truth
“A society becomes totalitarian when its structure becomes flagrantly artificial: that is, when its ruling class has lost its function but succeeds in clinging to power by force or fraud.” ~ George Orwell
All (or nearly all) politicians lie, but those on the left take the art form to a new level. To understand why requires examining the mind of the progressive.
After the Capitol breach on January 6, a progressive on Facebook said of conservatives, “We’re going to drag them into the 21st century kicking and screaming if we have to.” The Left envisions a socialist utopia, the inevitable slope of human progress. Their role is to bring this about by any means necessary…and to run things, of course. Truth is a fuzzy concept, only to be bent and twisted to serve the state. Justice does not apply to the individual, but instead becomes an arbitrary concept used to advance the state under cover of the “common good” or “social justice.”
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Progressives tend to deny objective truth yet hold the belief that central planners know what’s best for the rest of us. But how can they know without the existence of truth? Orwell referred to such holding of two contradictory ideas at the same time as “doublethink.” Another example is the notion that political power ought to be concentrated and wealth dispersed. Democracy is yet a third example: the people are seen as ignorant rubes but can be relied on to choose omniscient and caring rulers. Democracy was as feared as monarchy by the founders, another reason why the Left is tearing down statues and obliterating history.
“The people will believe what the media tell them they believe.” ~ George Orwell
What exactly happened in Washington, DC on January 6?
Whenever a major event like this takes place that attracts national attention, I go through a process: What can be proven with minimal effort and a high degree of certainty? What is highly suspicious, but harder to prove? Who benefits? Who is willing to bend the truth to promote their agenda? (The study of history follows a similar process.)
Did President Trump incite a riot? This should be the easiest question to answer, yet received the least scrutiny. The media simply repeated the accusation over and over with little evidence until it became accepted as truth.
In the initial rush to judgment, how many people actually took the time to listen to Trump’s speech? Ann Althouse, an emerita professor of University of Wisconsin Law School, read the full transcript and listed the seven most violence-inciting statements. Ranked #1:
Together we are determined to defend and preserve government of the people, by the people and for the people.
Trump mentioned the Capitol just three times in a speech that lasted an hour and thirteen minutes, including:
I know that everyone here will soon be marching over to the Capitol building to peacefully and patriotically make your voices heard.
Is this why Trump’s allegedly incendiary tweets were so quickly erased? Once the Capitol trespassers went home, why not put the incriminating evidence back up for all to see?
Other questions are more difficult to answer with hard proof. Was the election stolen? Was the Capitol breach a false flag operation? There is plenty of evidence in support, but the left media has no interest in following leads that don’t fit their narrative. Standard practice is to either dismiss promoters of such theories as conspiracy nuts or repeat the lie that the claims have been disproven.
During his speech at The Ellipse in DC, Trump spent a good half hour going over his allegations of election fraud and unlawful behavior from states in their rush to set up mail-in voting. My father is a constitutional expert (five years a regular on a weekly radio show on the subject). After countless hours of research, he felt the Trump legal team had a strong case, especially regarding Pennsylvania Act 77’s conflict with the Pennsylvania Constitution.
These claims never saw the light of day, consumed by the political swamp. If the Democrats were so certain there was no impropriety, why not give Trump’s baseless charges a hearing? The last opportunity for Republicans to air their grievances was at the election certification on January 6, conveniently interrupted by the mayhem in the Capitol that day.
“Applying the classic legal question ‘cui bono?’ (‘who benefits?’), it is clear that Democrats, anti-Trump establishment Republicans, the leftist media, and TDS-sufferers all are victorious,” observed Lew Rockwell.
In The Road Less Traveled, author Scott Peck claimed that mental illness consists of “an interlocking system of lies we have been told and lies we have told ourselves.” As those on the political left become further empowered and unhinged from reality, they increasingly make Freudian slips, accidentally revealing their methods and intentions. After the events of January 6, president-elect Biden accused Trump’s acolytes of the Big Lie over election fraud, even citing Nazi propagandist Joseph Goebbels. “The degree to which [a lie] becomes corrosive is in direct proportion to the number of people who say it,” Biden explained.
Psychological projection is the Big Reveal.
“We know where you are. We know where you’ve been. We can more or less know what you’re thinking about.” ~ Eric Schmidt, Google CEO, 2001–11
In the lead-up to the election, Facebook and Twitter censored conservative users, forcing them to leave in droves for alternative platforms like Parler. According to CNN Business, “The platform became the most downloaded app on the weekend of November 8—the day major media outlets called the election for Joe Biden.” A month later Parler had 2.3 million active users which exploded to 15 million after the Capitol breach. (Twitter reported 187 million daily active users as of September 30.)
Twitter initially put Trump’s account in the penalty box for twelve hours but two days later banned him permanently. That weekend brought a wave of purges from social media companies in which Twitter suspended seventy thousand “far-right” accounts. Parler shot to #1 in Apple’s App Store on Saturday but by Sunday evening had been kicked off the Apple and Android (owned by Google) platforms. Meanwhile, Amazon suspended its cloud hosting services, effectively turning out the lights.
“Don’t Be Evil”
How did Silicon Valley, which was largely apolitical and libertarian leaning during the personal computer and networking waves of the 1980s and 1990s, become a virtual appendage of the surveillance state in a single generation?
From the turn of the millennium, the internet has been an incredibly disruptive force, replacing the old personal computer-centric tech trees with aggressive young saplings in online search, e-commerce, social media, cloud computing, etc. The new generation of founders leaned much further to the left and became fabulously wealthy, especially during the liquidity-driven bull market of the past twelve years.
November 22, 1999
Envy was also a factor. Microsoft had been relentlessly accused by competitors of acting “unfairly” and being a monopolist, leading to a landmark antitrust case in 1998 brought by the Department of Justice. Bill Gates quickly learned that sending an army of lobbyists to Washington, DC was well worth the investment. Today, Big Tech is a major contributor to political campaigns (overwhelmingly funding Democrats).
A third factor was the war on terror, whose fuse was lit on September 11, 2001. According to Ron Paul,
“Big Tech” long ago partnered with the Obama/Biden/Clinton State Department to lend their tools to US “soft power” goals overseas. Whether it was ongoing regime change attempts against Iran, the 2009 coup in Honduras, the disastrous US-led coup in Ukraine, “Arab Spring,” the destruction of Syria and Libya, and so many more, the big US tech firms were happy to partner up with the State Department and US intelligence to provide the tools to empower those the US wanted to seize power and to silence those out of favor.
In short, US government elites have been partnering with “Big Tech” overseas for years to decide who has the right to speak and who must be silenced. What has changed now is that this deployment of “soft power” in the service of Washington’s hard power has come home to roost.
Big Trees Fall Hard
Will the technology forest rejuvenate itself as it has so many times in the past? Jeff Deist, president of the Mises Institute, sees green shoots:
The underlying ideology, the impulse towards freedom which includes free communications and speech, is not so easily quashed. And for that reason, I’m actually quite optimistic about a highly decentralized future where we don’t have these huge gatekeepers like Google search, or Amazon Web Services, or Facebook and Twitter and Instagram as the only big 800 lb. gorillas in social media.
The business models of the tech giants could be in for a rude awakening. Huge swaths depend on trust, especially social media and cloud services. If censorship and cancel culture intensify, privacy will become a growing issue!
As a Big Tech contact tells me, the free market is already working to solve this problem:
Tim Berners Lee [known as the inventor of the World Wide Web] is well on his way to creating a Facebook called MeWe that is social media with paywall communities, no bots, no censorship other than by a channel owner. Dave Rubin has his own version called Locals.com that is backed by Peter Thiel protégé and Palantir CEO Joe Lonsdale. Tulsi Gabbard just announced a channel, joining Andy Ngo, Scott Adams and WalkAway star Karlyn Borysenko.
Talent will increasingly leave the rotting mature trees for vibrant saplings that offer creative freedom and opportunity:
I think there will be a financial price to pay for Twitter and Facebook if these alt platforms can keep a connection open. Already the CEO of Gab said that he had thousands of Silicon Valley insiders from high level executives to engineering talent contacting him asking him for a position. Gab is not reliant on any of the big cloud providers.
If high profile engineers and business people in Big Tech companies see this as the final straw then there will be internal pressure on those companies. It could be in the form of open dissent as pressure to reform or just silently leaving for a non-woke company.
I think there is a lot of pent up frustration at the wokesters who have ruled the roost for the past 12 years and we may see a talent drain which some smart and wealthy financiers will see as an opportunity to make a move and seize market share or start some cool new thing. This is the early innings of a shift that may turn out to be a second chance for those of us who have spent the past 10–12 years suffocating in the wokester’s soft tyranny of many software companies.
Promoting the state’s false narratives can be quite destructive to a company’s brand. College and professional sports in the US learned that lesson the hard way as they backed the BLM movement last year, only to see ratings plummet. “Get woke, go broke” has become a rallying cry of departing fans.
As I wrote last November, “Nature works against bigness. Species exhaust food sources, monopolies invite competition, empires spread themselves thin.” Big Tech appears to be destroying itself from within, a victim of its own hubris and toxic culture. Worse, it has tied its fortunes to the most termite-infested sequoia in the forest: the state.
By Hatchet, Axe, and Saw
Do the tech behemoths need to be regulated or broken up? Many think so, notably many who lack faith in markets.
According to Eric Savitz, who writes the Tech Trader column for Barron’s, “president-elect Biden, like Trump, has called for the elimination of Section 230 [the clause in the Communications Decency Act of 1996 which provides immunity from third-party content for website publishers].”
This would have a chilling effect on protected speech online and build a protective moat around the tech giants by drowning their upstart competitors in red tape and potential legal liability.
Interventions will only impede the market. As intellectual property lawyer Stephan Kinsella warns, “The only just solution is to shame them and build alternatives.”
So far, investors are unfazed by the growing number of black swans lining up against Big Tech. Since the Capitol breach, Twitter’s stock has taken a 10 percent haircut, while Facebook has rallied. With $3.7 trillion in market cap at stake at Facebook, Twitter, Amazon, and Google (10 percent of the S&P 500), could a lurch to the political left unwittingly pop the everything bubble?
As Charles Mackay so wisely stated 180 years ago,
Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.
Kevin Duffy is principal of Bearing Asset Management which he cofounded in 2002. The firm manages the Bearing Core Fund, a contrarian, macro-themed hedge fund with a flexible mandate.
Bearing gained notoriety during the Great Financial Crisis by betting against stocks like New Century Financial, Fannie Mae, Bear Stearns, and Lehman Brothers. Duffy wrote extensively on the housing and credit bubble, including articles, “Alan, We Have a Problem,” “Mr. Mozilo Goes to Washington,” and “Honey, I Shrunk the Net Worth.” In May 2007 he gave a speech in NYC titled, “It’s a Mad, Mad, Mad, Mad World,” identifying root causes of the bubble. A month later, he issued a warning in an op-ed for Barron’s titled “For Whom Do the Bells Toll?” The Bearing Credit Bubble Index was cited by Marc Faber in speeches and The Gloom, Boom & Doom Report.
Prior to Bearing, Duffy cofounded Lighthouse Capital Management and served as director of research from 1988 to 1999. He chronicled the excesses of the Japan and technology bubbles of the late 1980s and late 1990s, respectively. The firm was later sold to Fisher Investments.
Duffy bought his first stock at the age of thirteen. He earned a BS in Civil Engineering from Missouri University of Science and Technology and has a passion for financial history, Austrian economics and pithy quotes. He also publishes a bimonthly investment letter called the Coffee Can Portfolio.
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