Gordon and Ryu’s figures are a little dodgy; they suffer from the typical academics’ delusion that official inflation figures overstate true inflation, when it is painfully obvious to any careful observer that they understate them. Without their spurious “price correction” (which makes productivity growth rates entirely implausible in the earlier period – even Japan in 1890 was not getting prolonged 5% productivity growth) manufacturing productivity growth has slowed from 3.6% annually in 1987-2010 to minus 0.3% annually in 2010-23 – they have an entirely reasonable point that 2009 was a funny year, distorting the figures, but don’t give unadjusted productivity growth with a 2005 break.

Given the God-awful U.S. economic management of 2010-23, Bernanke, Obama, Biden and all, I would be very surprised if annual manufacturing productivity growth was as high as minus 0.3%, even accounting for Trump’s blessed first term. A blizzard of idiotic “climate change” and other regulations were combining with Ben Bernanke’s ziggurat-encouraging negative real interest rates to make it very difficult to do anything productive at all.

Gordon and Ryu outline several mechanisms by which outsourcing can reduce productivity. Invasions of imports produce stagnation in domestic industry growth, which reduces its margins and starves it of the investment funding needed to modernize and retain its customers. A second mechanism is the outright closure of domestic producers, whose survival is made impossible by foreign competition. A third is the compounding negative effect of reduced investment in firms being subjected to increased foreign competition. Finally, offshoring renders domestic engineers unfamiliar with the manufacturing process, hugely reducing their ability to make improvements through a process about which they lack knowledge.

The Gordon/Ryu thesis makes perfect sense and exposes the fallacy of several myths we have been sold for the last quarter-century. The “Apple Strategy” proclaimed by Tim Cook in 2015 of offshoring all manufacturing, while keeping product development in California is completely idiotic. Once manufacturing is offshore, the product developers in California will know nothing about how products are made or what changes are practical, and so will spend abundantly paid person-centuries debating the color of the next model and dreaming up epic surges of wokery to inflict on the unfortunate buyers of their products. It would make much more sense to return the actual manufacturing to the U.S. and outsource the product developers to some idyllic spot like Democratic Republic of Congo, where they could learn a little about the strictures of real life.

Another disastrous free trade effect, which Gordon/Ryu have not covered, has occurred in the rapidly expanding field of software, which is mostly excluded from manufacturing statistics, being “research and development.” Around 2000, we were told that IBM and other large users of U.S. software could outsource the less complex lower tiers of software development to Bangalore, while keeping the more skilled levels entirely in the U.S. Much was made of David Ricardo’s 1817 Comparative Advantage principle, whereby low-wage countries should produce goods and services for which their comparative advantage was greatest – in Ricardo’s example, Portugal should produce port wine, while Britain should produce cloth, in which its already mechanized industry was more efficient. The example gained additional force from the respective quality of the goods exchanged – have you ever TASTED British port?

We know what happened. Far from low-skill software being confined to India, the Indians both in India and through the damaging H1B visa program in the U.S., swarmed up the value chain and ate American software companies’ breakfast, depressing wages for highly-skilled U.S. computer scientists to a Third World level. This caused all the brightest U.S. students to head to law school, to enter a career where legal barriers made such competition impossible. The result has been a massive U.S. shortage of STEM graduates, caused entirely by insane government policies and the actions of dopey corporate behemoths. Of course, the H1B low-wage-lobby scammers now want to increase the number of H1B visas, to make the problem even worse.

This miserable chain of events has happened before – in 19th century Britain, which abolished tariffs unilaterally in 1846-60 and to everyone’s surprise watched Britain’s industrial lead disappear as if by evil magic, while the British workforce after 1870 or so watched its wages steadily descend down the international comparisons. Also like today, late 19th century Britons were subjected to spurious environmental homilies from William Jevons about how their coal was about to run out and unpleasant moral lectures from William Gladstone and others claiming that, however damaging free trade appeared to be to their welfare, it was for Britons’ moral good.

The fact that this has happened twice, in two different countries more than a century apart, indicates that these are not random examples, but represent a firm economic law, one of the many so far undiscovered by the conformist and socialist-oriented economics profession. Free trade only works between countries of roughly similar wage and technological levels; outsourcing large portions of manufacture, software or any other high-skill activities to countries with much lower labor costs, risks losing one’s technological lead and even the capability to perform the activity at all, as students retrain to enter other activities and the low-wage country acquires mastery of the value-chain tidbits one had attempted to keep for oneself.

Today the disadvantage of free trade is seen in AI; as I remarked three weeks ago, China has acquired a highly competitive position, mostly through the United States outsourcing most of its capabilities relating to this new field, which bids fair to resemble electric power in its contribution to human welfare. Now the U.S. is lumbered with a gigantic collection of regulatory detritus that leftist governments have imposed on it, which makes it very difficult for the U.S. to compete even in this new field that it invented, since it cannot build new data centers without fighting crazed NIMBYism and cannot build new power stations in less than a decade or two.

Again, we have been here before. Britain’s Locomotives on Highways Act 1865, passed in response to the noble Goldsworthy Gurney’s steam road carriages, already thirty years in the past, provided that any such device must move at no more than 4 mph, with a man with a red flag walking in front to ensure compliance. As a result, despite Britain having invented the steam engine, being the world’s leader in textile machinery through Platt Brothers, and inventing the turbine in 1884, the German Benz/Daimler invention of automobiles produced no British response. Ten long years were allowed to pass before the 1865 Act was repealed, at which point a typical witless stock market bubble ensured that innumerable British automobile companies were financed, nearly all of them scams devised by the swindler Henry John Lawson, who satiated the market’s thirst for automobile companies through his worthless promotions. Regulation likewise delayed and restricted Britain’s entry into electric power, electric lighting and telephony.

The solution to the productivity decline and to China’s competitive threat is a mass bonfire of regulations, at Federal, state and local levels – local regulations such as California’s electric vehicle mandate that regulate imports to the state are attempts to police Interstate commerce; a wise Supreme Court would declare them unconstitutional. Repealing no more than four especially foolish pieces of 19th century British legislation in the economic sphere – even without bringing back the Corn Laws — would have allowed Britain to compete effectively in electric power/light, telephony (they only got radio because Guglielmo Marconi ignored the Telegraph Act of 1868 and did a quick IPO to gain public investors and supporters) and automobiles, in all of which the country should have held a premier position. Similarly in the United States today, repealing regulations that can delay construction for a decade and multiply its cost fivefold would enable it to regain the productivity growth levels of 1987-2005 and thereby assure its citizens a permanently brighter future.

Free Trade is a demonic Pied Piper, leading to perdition. Don’t follow it!

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: The Whig Free Trade Myth is Baloney appeared first on True Blue Will Never Stain.

Fifty years ago, the 1973 Arab oil crisis awakened the world to the importance of the Middle East. Previously, colonial regimes had installed puppet monarchies in the region, although even by 1973 those puppet monarchies were in the process of being ousted by leftist or military coups. Israel had been installed in 1948, arbitrarily for the Palestinians already living there, and that had already caused a succession of wars, notably in 1973 itself, but there seemed no reason why the West should get involved, beyond supplying Israel with enough arms to defend itself.

This changed because U.S. oil production had gradually been declining, and the environmentalists inserting glue in the works of Alaskan and other oil development made the U.S. and the West in general dangerously dependent on Middle East oil – by 1979 less than half the oil consumed by the United States was produced there. Had the Middle East been a reliable supplier, there would have been no need for oil prices to rise as much as they did, but by 1980 the oil market only cleared at a dollar price roughly ten times that of 1972 (though inflation and the dollar’s decline had eroded some of that gain).

With their additional market leverage, the oil producing Middle Eastern countries started asserting themselves, while the non-oil producing Middle Eastern populations developed a resentment of the West that led many of them into terrorist groups. The first and most damaging change was the rebellion against the Shah of Iran’s rule – the Iranian population thought oil wealth was so automatic that even the rule of fanatic Islamist mediaeval clerics could not stop it. How wrong they were! Those clerics began by fighting an impoverishing eight-year war against an equally oil-producing neighbor, Iraq, ruled by a secular despot and carried on squandering oil money without the slightest regard to the welfare of the people they ruled.

Meanwhile the neocons had been trending politically rightwards – only a few of them lived past 90, but the hereditary element in their leadership allows us to treat them as one movement, despite its 80-year duration. The 1948 Progressive Presidential candidate Henry Wallace emerged from the same American left milieu as many of the neocons’ intellectual forebears; at that time many of them were not merely socialist but Communist-adjacent. Wallace himself was more interesting. Not so much politically – he had never really understood capitalism and as Agriculture Secretary was responsible for the expensive and economically damaging agriculture subsidy programs that still disfigure the U.S. economy and fiscal position. Then as Vice President he had been seduced by a visit to the Soviet Union in 1944 into believing that Communism worked, a belief he foisted on the U.S. public, whether it wanted it or not, for the next five years. As a politician, he was both a failure and thoroughly pernicious, as is well brought out by Benn Steil in his excellent 2024 biography “The World That Wasn’t.”

Wallace, however, had a life beyond politics, as few politicians do. As a young man, he had edited “Wallace’s Farmer” a family-owned journal for the agricultural community and had become interested in the possibilities of breeding hybrid corn varieties. He founded a hybrid seeds company “Pioneer Hi-Bred” which eventually became a Fortune 500 corporation. Then as Vice President he had visited Mexico in 1943, taking hybrid seeds with him and explaining how Mexico could raise the yield of their maize crop using hybrids. Since he was Vice President of their northern neighbor and a man with whom the socialist Mexican government felt comfortable, they took his advice and planted Wallace’s seeds widely. The following year Norman Borlaug arrived in Mexico, spent the next two decades spreading hybrid seed technology there, and from the middle 1960s took it worldwide as the “Green Revolution.” Wallace meanwhile was not done; in retirement he revolutionized the breeding of U.S. hybrid chickens.

The neocons, alas, did not follow Wallace into plant or chicken genetics. Instead after the 1956 Hungarian uprising they turned against Communism and became especially militant in pushing U.S. attempts to overthrow it, calling themselves “neo-Conservatives” — to distinguish themselves from those lonely souls who had been Conservative all along — and remaining leftist Big Government supporters on domestic policy. President Reagan’s U.N. Ambassador Jeane Kirkpatrick was a notable acolyte. Once Soviet Communism fell in 1989-91 (almost completely independently of any neocon efforts) they looked around for other wars to start and found the Middle East.

Initially, the neocons had only moderate influence on U.S. policy, but the 9/11 attacks and George W. Bush’s hysterical over-reaction to them gave the neocons essential control of much of the U.S. government, especially the security services. Any attempt to reduce the size of the U.S. government was abandoned, and instead legislation such as the Patriot Act was passed to increase the neocons’ reach. Unsuccessful and very prolonged wars in Iraq and Afghanistan, neither with a comprehensible casus belli, gave them control of the U.S. government, whether Republican or Democrat, for the next 15 years.

Two factors combined to dent their control. First, from around 2000 fracking became feasible to extract oil and gas, of which the U.S. became an exporter in LNG form. The Left tried hard to forbid it (and succeeded in some of their “rotten borough” jurisdictions such as New York state) but by 2020 it had made the U.S. self-sufficient in oil. The Biden administration threw all the roadblocks in its way that it could think of, but once Trump was re-elected in 2025, U.S. self-sufficiency in oil was assured and it was able to supply LNG to the Europeans whose Russian supplies had been cut off.

Second, much to the neocons’ horror, a Republican maverick candidate appeared, Donald Trump, smashing the neocon favorites Jeb Bush, Marco Rubio or in emergency Ted Cruz. Initially, this was not too much problem; the neocons were able to control Trump’s cabinet appointments (since he knew nobody in Washington) and, aided by a great deal of chicanery, thereby ensure that his first term made little dent in their overall control, even if no new wars could be started.

With their two impeachments, the first materially aided by the new Ukrainian President Volodymyr Zelenskyy, the neocons thought they had got rid of Trump, aided by the Democrat shenanigans in the 2020 election. Then a new playground opened up for them with Russia’s invasion of eastern Ukraine in 2022. Since their advent to power in 2001-02, the neocons had demonized President Putin, treating him as if the Soviet Union had never fallen and Russia was still Communist. During the Obama administration they had expelled Russia from the G7 group of leading nations, while their inexorable eastward expansion of NATO threatened Putin in the same way it would have threatened Tsar Nicholas I, the previous Russian ruler whom Putin most resembles. With their EU bureaucracy allies and the help of the Castroite dictator Zelenskyy, the neocons have been able to prop up Ukraine and prevent any kind of peace with Russia from being concluded.

The neocons’ latest stunt was to embroil the U.S. in war with Iran, despite President Trump’s base voters’ deep antipathy to yet another futile war in the Middle East. Israel’s Benjamin Netanyahu assisted with this, presumably seeing it as a unique opportunity to remove Iran as a threat to Israel; I would guess he now realizes his mistake. With no plan to restore the Shah, the only possible genuine governmental improvement in Iran, there was no upside to the war and very severe “tail risk” downsides for both the U.S. and Israel — one for Israel possibly being that U.S. public support of Israel could deteriorate from unwavering to equivocal.

The United States was unable to defeat either Iraq or Afghanistan, though it spent decades trying; Iran has a population larger than that of both those countries put together and terrain with the difficulties of both. Fortunately, President Trump and his advisors had the sense to realize that a ground invasion of Iran for an attempted “regime change” might very well not succeed, even given a decade, and that the American public’s patience would wear out years before victory was even conceivable.

The Middle East is now condemned to market a commodity that is in global surplus, given the possibilities of fracking, and that a large political faction in the West wants to taper out of using. They have wasted their wealth on conspicuous consumption of flashy, pointless monstrosities like the Burj Dubai, and have glutted their population with unwanted immigrants of two types: Third World helots to do the actual work and the sillier type of Brit, who think paying zero income tax and suffering through the occasional Iranian drone attack will make them rich. While Europe needs either the Middle East or Russia, the United States does not, and Vladimir Putin’s Russia is in any case a great deal easier to deal with.

With a bit of luck, it will soon be not merely twilight for the neocons, but the dead of night, and they can go back to being unheeded Communists, a political direction in which many of them appear to be heading. For the rest of us, long may President Trump and his rational advisors rule!

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: Nighttime for the Neocons appeared first on True Blue Will Never Stain.

Index funds currently own about 20% of the U.S. stock market and “passive” fund managers who track stock indices currently own about another 15% — most of these fund managers adjust their holdings at the end of each day to reflect the index they track, so are effectively also index trackers. (You may well ask why anyone would pay for that service – well, institutional investors are a fairly dopey lot!) We are therefore reaching the point where the index funds themselves affect the overall level of stock prices. In such a case, the index fund can become detached from the stocks it supposedly covers and index fund buying can itself affect the price of the underlying stocks, thus creating an upward price spiral that is fun for all concerned – until it isn’t.

To illustrate what I mean, suppose the world had already invented index funds in 1720, and one had been constructed on 1st January of that year to cover the major European Stock Exchanges in London, Paris and Amsterdam. The dominant holdings in that fund would have been the South Sea Company, with a market capitalization of £7 million at its share price of 125, the Bank of England with a market capitalization of £8 million at its share price of 150, the East India Company with a market capitalization of £7.5 million at its share price of 200, the Dutch East India Company, with a market capitalization of about 60 million guilders (£6 million) and the French Mississippi Company, which had reached a peak value of 10,000 livres per share and had a capitalization of 6 billion livres (about £240 million – three times France’s GDP.)

Thus, an index fund across the stock exchanges of London, Paris and Amsterdam at that date would have had some percentage, perhaps 10% of the total market capitalization of the three markets of £280 million, or £30 million of which £24 million would have been Mississippi Company, £800,000 Bank of England, £700,000 South Sea Company, £750,000 East India Company, £600,000 Dutch East India Company and about £3.15 million a combination of all other shares in the London, Paris and Amsterdam markets. With 80% of the fund in the Mississippi Company, the portfolio would have been thoroughly unbalanced.

On July 1, 1720 Bank of England shares were trading at 230, for a market capitalization of about £13 million, East India Company shares were at 420, for a market capitalization of about £16 million while South Sea Company had exploded to 760 and in addition increased its capitalization massively by issuing new shares and by swapping its shares for public debt; its market capitalization was about £300 million – it reached a peak of £420 million in late July. The Dutch East India Company peaked in July 1720 at about £7.5 million. The Mississippi Company, on the other hand was trading at 4,800 livres and the livre had halved in value, so had a market capitalization of £58 million. Add in perhaps £5 million for the bull market value 10% of all the other shares in London, Paris and Amsterdam, and you have a total fund value of £44.5 million, up from £30 million in January. A very satisfactory performance, it would appear, but now the South Sea Company represents just over two thirds of the fund.

However, go forward another 6 months and the picture is very different. The Bank of England’s share price is 140, so market capitalization is £7.5 million. East India Company is at 150, so market capitalization about £5.5 million, and Dutch East India Company is down to about £5 million. South Sea Company has collapsed to 150, so a market capitalization of £50 million, though most of that represents about £30 million of government bonds the company now owns. As for Mississippi Company, its shares were now trading at 1,000 livres and the livre had halved again, so its market capitalization was £6 million. Add £2.5 million for all the other shares in the three markets, and you have a total value of £9.9 million – one third of its value a year earlier and 22.5% of its peak. The South Sea Company still represents more than half of the fund, but three fifths of the South Sea Company (roughly 30% of the fund) is represented by government bond holdings.

That value would decline further in 1721, bottoming out around £6 million and would then remain around that level for more than a century, with mild fluctuations, as the 1720 Bubble Act prohibited further company flotations in Britain and the Dutch East India Company lost ground to its English rival. In other words, an index fund constructed in early 1720 would, because of its holdings in the South Sea and Mississippi bubble companies, lose about 80% of its value within two years and would then stay depressed, although it would pay out dividends of a fluctuating 4%-5% on its lower capital from its Bank of England, South Sea Company, East India Company and Dutch East India Company holdings. By indexing a bubble, index-tracking investors in 1720 would have done far worse than more selective investors, even though Sir Isaac Newton is reputed to have lost £20,000 in the crash, presumably without indexing, since constructing an index required mere arithmetic, not his fancy fluxions.

If indexed investors would have lost money in 1720 by being forced to buy overpriced bubbles, the same must be true of index fund investors today. The three forthcoming trillion-dollar IPOs for SpaceX, Anthropic and OpenAI have all the South Sea Company characteristics, which were also shared by the dot-com promotions of 1999-2000, although none of them dared come to market at these kinds of valuations.

Anthropic for example, is a perfectly fine company, whose product Claude I sometimes use, but there is very little in the way of a “moat” to stop other companies, especially Chinese ones, from producing a better product, the cost of which is more than can be financed from a garage, but no more than about $10 billion (excluding the data centers, which in the long run are a commodity that can be rented). In other words, Anthropic (and OpenAI) are like the pioneering search engine AskJeeves in 1996, a brilliant new tool that at any time can be made obsolete by a couple of greedy Googlers.

As for SpaceX, part of it is another Anthropic; the rest is an attempt to send humankind to Mars, probably not a profitable endeavor in the first century or so since there is nobody on Mars to sell stuff to – it’s not like the Venetian merchant Marco Polo discovering China! If we were heading to C.S. Lewis’s Malacandra instead of boring old Mars, there would clearly be a market among the eldils for our AI technology, but alas as always, the dull rock-strewn reality snuffs out the charming Art Deco fantasy. Interstellar exploration would be a different story, but not even SpaceX’s $1.8 trillion will get us that.

For index fund investors, the lesson is that indices that accept bubble companies too quickly risk severe underperformance in future years as the bubbles burst or merely deflate. The Standard & Poor’s 500 Index has the right approach, making the trillion-dollar wonders wait a year before entering, though bubbles often last much longer than that before reality returns.

Indeed, I would suggest an attractive investment alternative would be a new index the “Economic Solidity Index” that made new companies doing IPOs wait for five years before joining, thus weeding out bubbles and preventing insiders from selling their rubbishy stock into an index fund that is forced to buy after the IPO. A fund linked to such an index would have a great deal of attraction for investors who wish to profit steadily from the long-term growth of the U.S. or international economy, without losing sleep over fashionable ephemera. It would almost certainly outperform conventional index funds over the long run, because the new issues market is inevitably a cauldron of lies, dishonesty and hype, inflated by financial used-car salesmen.

Investing in bubbles is dangerous, which is why John Bogle gave us index funds. Putting all your money in index funds that invest in bubbles is however just as dangerous, and without the thrill of buying Elon Musk’s brainstorms directly.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: Bubbles Break Index Funds appeared first on True Blue Will Never Stain.

Relatively few technologies have required a major increase in power availability to deploy them fully. Steam engines obviously were one such and the railways after them – both required sources of coal that initially were readily available only in Britain. Later steel, when the Bessemer and Siemens-Martin processes had changed it from a specialty item to a product produced in bulk, required huge new sources of energy (initially mostly coal) to produce it. Aluminum also after the Hall-Héroult process had been invented in 1886 was impossibly energy-intensive until Alcoa, with Andrew Mellon’s capital, hit upon the idea of generating electric power for its production from Niagara Falls. Later, electric appliances required a huge scaling up of electricity production from the original application of light bulbs, and the automobile industry required a colossal expansion of the petroleum industry to supply it.

Since around 1960, as the U.S. and global economies expanded into electronics from “drop-it-on-your-foot” heavy technologies, the additional energy requirements for each new technology have been much smaller. That is why the last U.S. oil refinery was built in 1976 and the last nuclear power station until very recently went into operation in 1996, despite continued population and economic growth since then. Regulatory and “NIMBY” opposition have hugely increased the cost and delayed the completion of these assets, but only in an era of very slow increase in power demand could the idiot left have been indulged in this way.

We used to be a country! On November 7, 1973, in response to the first Arab oil embargo, the great President Richard Nixon unveiled Project Independence, which reaffirmed the Atomic Energy Commission’s 1967 goal of building 1,000 nuclear plants by 2000 (86 were actually built, with two more recently) and announced a goal of full U.S. energy independence by 1980, through Alaskan drilling and pipelines, as well as stepping up research on nuclear fusion power. Alas, Nixon succumbed to the media/Democrat Watergate conspiracy the following year, and by 1979 the U.S. was dependent on foreign imports for almost 50% of its oil. Only through fracking, a technology that the left tried incessantly to block, was U.S. self-sufficiency in oil finally achieved under President Trump. However, the environmentalist and NIMBY blockages on refineries and nuclear power were never removed.

We have always had environmentalist fruitcakes. The celebrated economist William S. Jevons, the father of econometric mathematical modelling, in his 1865 “The Coal Question” calculated that British coal output had grown at a compound rate of 3.5% for the previous 80 years, so would grow at a similar rate to 2.6 billion tons annually in 1965, exhausting Britain’s coal reserves of 90 billion tons. (In reality, British coal production peaked in 1913 at 292 million tons, barely a tenth of his projected 1965 production.) Technological advances substituted other energy sources for coal, while the efficiency of coal usage also increased. Thus, Jevons’ crude and simplistic projections were hopelessly erroneous.

Had Jevons been taken seriously – he was after all a much more eminent academic than most proponents of the “climate change” fantasy – regulations might have been passed banning the Bessemer and Siemens-Martin processes for producing steel, on the grounds that they threatened to deplete Britain’s coal reserves. If that had happened, the burgeoning Industrial Revolution would have been brought to a juddering halt.

The derailment fatality rate on railways as speeds and distances continued to increase while rails remained the softer wrought iron rather than steel would have been appalling. Electric power would have been stopped in its tracks, because the initial power stations were fired by supposedly scarce coal. Aluminium smelting, even more energy intensive than steel making, would have been prevented altogether. With these intermediate technologies blocked, there would have been no automobiles or aircraft, even though those transportation alternatives are powered by petroleum rather than coal. Agriculture would have remained powered by human muscle, with no steam-powered tractors or harvesters.

By 1900, the Industrial Revolution would have been winding down, with the pressure of increasing population subjecting the unfortunate urban working classes to a level of poverty worse than their grandfathers because of the increased urbanization. Only military conflicts would have overcome the universal technological blight, with machine guns and some heavy artillery invented on schedule, making World War I even more unpleasant than it was in reality, as the war’s disruption of unmechanized unfertilized agriculture would have driven the civilian population into starvation.

AI has started slowly, as new technologies always do (the Wright Brothers’ first flyer flew only 852 feet, at a height of less than 20 feet). Allowing idle students to turn in plausible essays (albeit with a few factual howlers if examined closely) is very far from being the ultimate case for the technology. Like aircraft in 1908-14, the technology will improve miraculously in capability, with the equivalents of speeds and heights soaring beyond anybody’s belief. Moreover, wailing predictions that it will put everybody out of work are already proving false; U.S. employment data are strong and AI’s reduction of programming costs to a tenth of their previous level has greatly increased the demand for AI-assisted programmers, as new applications appear. Yes, sociology and journalism graduates will have to retrain, but that was also true of buggy-whip manufacturers and crossing-sweeper horse-dung removers as the automobile took hold.

All we must do is remove the dead hand of regulation at all levels, Federal, state and local. It takes the Chinese about 4 years to bring a new nuclear plant into operation; the U.S. is unable to do it within a decade. The pathetic farce of California’s High Speed Rail system demonstrates that, with its post-1970 level of regulation, the U.S. is unable to build anything remotely complicated in a finite time or at a finite cost. We need oil refineries and nuclear power stations, and the latter need is extremely urgent – we need Nixon’s 1,000 nuclear power stations NOW, which will still be about 30 years late for 912 of them.

New York state has banned fracking, despite huge Marcellus gas shale deposits south of Binghamton, which has been given a casino license instead of its inhabitants being allowed to take fracking jobs. The state government is now proposing to put a 3-year moratorium on data center construction, despite the vast area beyond Albany having had no discernible economic function since the Great Depression hit. California is worse, and the country as a whole not hugely better. Climate Change be damned – AI will tell us the extent (minor) to which it is happening and how to re-train the lunatics who have made their career expounding it.

Apart from a global tragedy, it would be an appalling constitutional irony if the United States, given its history of freedom, lost the future to China through being Commier than the Commies. Though, while we’re at it, we might as well demonstrate the incredible joyful creative and artistic spirit of U.S. capitalism by putting tail-fins on the data centers we build!

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: U.S. risks losing the AI Cold War appeared first on True Blue Will Never Stain.

The previous finance “gipsy’s warning” was made close to the nadir of the 2002 bear market and so failed to see how much money could be made in the brief liquidity-fueled upturn that followed. However, it looked altogether more sensible after 2006, when almost all the major investment banks went bankrupt or had to be bailed out by a stronger partner. In the still longer term, if young Ms. Worthington after losing her job in 2008, had caught on somewhere else in 2009, she would have done very well in the next decade, probably with enough money to retire early by 2021. That’s what artificially low interest rates can do for the finance sector!

My crystal ball was especially clouded in that 2002 piece by its total failure to mention private equity or hedge funds. Both were still fairly modest in size and at a nadir then; private equity had invested in innumerable dopey dot-coms, all of which had failed, while hedge funds were still rightly tarnished by the failure of the non-genius Long-Term Capital Management only four years before. In another piece, I had been critical of that operation. In this one, I criticized the quality of big bank managements that had bought investment banking operations at the top of the 1999-2000 bull market and watched their value melt into nothingness. As I remarked to young Ms. Worthington: “Nobody wants to work for idiots” – a problem perpetually present in financial services, where greed and aggression are thought an adequate substitute for intelligence.

My second experiment in career advice was largely correct. Written in 2005, it told Mrs. Worthington to avoid putting her daughter in engineering school, because manufacturing and many IT jobs were being rapidly outsourced. With the feeble governments of 2005-24, that prediction was largely justified, as more and more U.S. manufacturing disappeared offshore. Only recently, with the advent of AI and protectionism, has manufacturing begun to move back within the United States. One mistake the column made, however, through relying on a McKinsey Global Institute study (yes, I was young and gullible in those days) was to forecast that sectors such as insurance would be invulnerable to outsourcing because of regulation. As we have discovered from all the Indian call centers, those sectors can be outsourced just as well as anything else, and AI claims processing is an additional threat to the remaining U.S. jobs done by humans.

Turning to today’s job market, there are some clear pointers for young Ms. Worthington to follow. First, she should avoid at all costs heading for one of the behemoth consultancy firms. Even 20 years ago, their judgements were suspect, and their strategy of using low-level consultants to generate massive billable hours of grunt work to justify their partner-salesmen’s salaries is in the process of disappearing. AI will be able to do the grunt 200-page report full of charts and drivel without the use of junior consultants at all. This will empower smaller, more nimble consultants who can use AI to replace the grunts, but it will hollow out the biggest “Russian Army” consultants in a very few years.

The opposite is true in software creation. AI will be able to create routine software fast and cheaply, but by reducing the cost of software this will massively increase the range of applications where it can be used. With the cost of creating software reduced to a tenth of its previous level or less, the ability to use AI to create software to solve problems or manage machinery has already become more valuable – the market for good programmers, which had been weak in the previous couple of years, partly because of the infinite supply of H1B drones from the Indian subcontinent, has now turned around, and programmers who truly know what they are doing and can manage AI to help them do it are in huge demand. Young Ms. Worthington would do very well to acquire this set of skills, if she is capable of it.

As for banking, it must inevitably suffer a lengthy period of recession and job losses, probably more severe than in 2007-09, because asset prices have once again run far ahead of reality, and banks and other credit and investment institutions have poured capital into the fantasy. The current market assumption is that financial markets will be bailed out by yet more money-printing and subsidies, but the new Fed chairman Kevin Warsh is not Ben Bernanke; indeed during his term as Fed Governor in 2006-11, he was the most prominent opponent of Bernanke’s shenanigans.

With inflation having resurged, and likely to continue doing so as long as the idiotic “Iran War” remains unsettled, there is no chance of interest rate reductions; indeed it is likely that rates will be forced to rise to get a handle on the inflation surge. Further, if Warsh follows through on his promise to reduce the Fed balance sheet, as he should, the gigantic subsidized banking system deposits with the Fed that have distorted financial markets for nearly two decades will be forced to shrink. Indeed, Warsh has already suggested that a sharp reduction in the interest rate paid by the Fed on those deposits would be thoroughly beneficial. With the banks, grossly over-regulated since the 2010 Dodd-Frank Act, being forced to lend to small business, as they should, the private credit system will be deprived of its funding, and the inevitable collapse of its poorly thought-out lending will be swift and destructive.

All over the global economy, there are assets whose values will collapse in the necessary period of tight money that Warsh is likely to institute. Private equity has suffered low returns for over a decade, and no amount of “pass the parcel” flipping the investments from one fund to another will solve the problem. Indeed, the “fast buck” approach of most private equity managers will almost certainly have left their investee companies as hollow shells, with their capability wrecked by destructive maintenance-deferring and research-ignoring management.

Private debt is likely to be in an even worse condition; the decades of “funny money” since 2008 have caused far too much investment to be allocated to these sectors. University endowments have also been abominably managed, with the “Yale model” forcing them into funds that dissipate the endowment in grotesque fees, while “woke” decisions such as Harvard’s “divestment” from fossil fuels in 2021, at the bottom of the market, have devastated their long term returns, which have been far below a simple investment in the S&P 500 Index. Finally, derivatives businesses have done well because investors like to speculate, but a period of tighter money should cure this irrational urge.

If the next decade is likely to resemble the 1930s, then young Ms. Worthington should steer clear of financial services – Merrill Lynch, the largest brokerage house, made a loss over that decade and was only kept alive by Charles Merrill’s mother’s trust fund. But contrary to legend, the 1930s even in the United States were overall an economically successful decade, with high productivity growth – unemployment only remained high because of incompetent government policy. The Hollywood film industry did famously well, so young Ms. Worthington, if she has the talent, should perhaps consider some version of the screen, or even the stage – with AI ubiquitous, audiences will want more humanity in their entertainment. Other successful industries in the 1930s were oil and chemicals, electrical machinery, and distribution/retailing, so updating that list to today’s technology gives her a wide range of options to consider.

Noel Coward’s advice to Mrs. Worthington was based on her daughter’s unsuitability for a theatrical career. My advice herein is rather different; young Ms. Worthington may be a walking Black-Scholes Equation with the sales ability of Phineas T. Barnum; nevertheless, the path to success in finance today is a stony and unprofitable one, and she should avoid it.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: Don’t put your daughter into finance, Mrs. Worthington! appeared first on True Blue Will Never Stain.

There is no question that women as a whole are investing a lot of their energy in the university system. Overall, according to Education Department statistics, the Class of 2026 at colleges skews 61.3% female. The greatest skew is at the Associate’s and Master’s levels, where 64.6% and 63.4% respectively of the Class are female. This suggests that women are especially vulnerable to the social pressure of college, with a high percentage of marginal students going to college for an Associate’s degree rather than taking vocational training and a high percentage of women with Bachelor’s degrees incurring massively more student debt, probably at a level they will never be able to repay, to obtain a Master’s degree that may well be economically worthless. The degrees with the greatest value in the real world, Bachelor’s for basic college skills or Doctorates for academia and the highest scientific posts, skew much less heavily female.

Alex Karp, founder and CEO of Palantir Technologies, has made the same point (well, I can’t be startlingly original every time!) In a recent interview with CNBC, he said AI would lessen the power of

“highly educated, often female voters, who vote mostly Democrat. This technology disrupts humanities trained – largely Democratic – voters and makes their economic power less. And increases the power of vocationally trained, working class, often male voters.”

In another interview with the podcast TBPN, he elaborated:

“There are basically two ways to know you have a future. One, you have some vocational training. Or two, you’re neurodivergent.”

Well first, this column has always been neuro-divergent; that was the inspiration for its inception in 2000 when everything one read was bullish on the hopelessly over-inflated dot-com stock market. Neuro-divergence has been its guiding star over the 25 years plus since then. So, it is very good that the column will have an economic future in the brave new world of AI, despite it being written in a bizarre kind of humanities-major English rather than in mathematical formulae (most weeks!) The column’s neuro-divergence is also very fortunate, as on Karp’s alternative qualification, being utterly ham-fisted I could never make it as a plumber or electrician!

But Karp’s view appears to be a common-sense assessment of where AI will lead, by one who as founder of Palantir has presumably thought about that question longer and more deeply than almost anyone else. Certainly, it is not wishful thinking – Karp is a major mainstream Democrat donor and appears to have voted against President Trump in each of the last three Presidential elections, so presumably regrets that new technology is hurting his political side’s prospects. So, Karp’s wisdom leads one to speculate: why are so many women of this generation immersing themselves in abominable amounts of student debt to get an education at a fancy college in liberal arts that is of almost no monetary value, and will make them almost unemployable in the new AI world?

One can understand previous generations; they were left-leaning (as women have been since the middle 1980s), socialized further left by their schools and believed deeply in careers for women. Therefore, they attempted to get the “best” possible college qualifications in the largest possible quantity for their chosen career despite the appalling financial cost of that choice. But believing in 1996, before the Internet started to hollow out journalism, that a liberal arts degree would provide comfortable employment for the rest of one’s career was rational; believing the same in 2026 is not.

That uncomfortable fact may explain much of the political opposition to data centers, especially in suburban areas where expensively educated arts-major women proliferate. Loudoun County is the quintessential example of such an area, home not to the younger graduates, but to those who have established a successful career in government or more lucratively one of the lobbyist or non-profit groups that infest Washington. Twenty years ago it was solidly Republican, now it is equally solidly Democrat. Since it was the closest area to Washington where there was still spare land and its local government appeared to be friendly, it became home to almost 50 million square feet of data centers, which now pay nearly half Loudoun County’s taxes.

I can reliably forecast that trouble is coming to Loudoun County’s data center paradise. The state government is no longer headed by the reliably corporatist Glenn Youngkin, but by the leftist wolf in centrist sheep’s clothing Abigail Spanberger, and the state Assembly and Senate both have Democrat majorities. Thus, Loudoun County’s ladies, facing extinction of their comfortable liberal-arts-major existence, have the chance to wreak political havoc against the evil powers of AI, that threatens their cozy existence and bids fair to replace them with male plumbers, people they only deal with when they absolutely have to and whose bills always appear to them exorbitant.

They don’t know any such people socially. A recent study by Verdant Laboratories of the political affiliations of the most Democrat and most Republican occupations found that arts administrators, English professors, film editors, History professors, psychotherapists, psychoanalysts and museum curators, the sort of people the Loudoun ladies would be happy to have as neighbors, all skewed more than 95% Democrat. Conversely, roofers, mechanical contractors, car salesmen, and home builders, the most Republican groups, and the sort of people they would rarely meet socially, were no more than 80% Republican, thus a much more diverse and tolerant group. Incidentally, if the ladies of Loudoun had the sense to live in a neighborhood with lots of plumbers, like Poughkeepsie, they would find their plumbing bills much more reasonable. Supply and demand, lady, a concept you didn’t come across in your Sociology class!

The Dominion/NextEra merger will provide opportunities for lots of people the Loudoun ladies don’t know socially, whose work is remarkably valuable. The 30,000 employees of Dominion/NextEra combined, the great majority of which will fall into one or other of Karp’s favored groups, appear to be producing $420 billion in value, judging by the merger size. Unlike many tech mergers, this valuation is not unduly inflated by anticipation of the future; the component parts of Dominion and NextEra have been around for a century or more. Yet their value is an amazing $14 million per employee, far more than your average sociology PhD is worth! While I am generally against mergers, this one seems to have the unquestionable advantage of reducing the ability of the Loudoun ladies to mess up the business, either by prohibiting the construction of more data centers or by forcing the companies concerned to install expensive and ineffective windmills.

As for the data centers, they can be installed in deeply rural parts of North Carolina, the parts where FEMA under the Biden administration did not bother answering phone calls. Asheville, NC would I am sure be happy to have some data centers that reliably paid large amounts of local taxes. And yes, it’s further from Washington, so much so that Loudoun ladies probably couldn’t find it on a map. But does it really matter that Federal bureaucrats must wait 0.00252 seconds for their data to travel the 469 miles from Asheville rather than 0.00017 seconds to cover the 32 miles to Leesburg? (Yes, I could have put that in scientific notation 1.7 E-04, but I wanted the Loudoun ladies to understand the point!)

In the unpleasant world in which we live, political games get played in much of the country; for example New York State, a vast area with huge AI potential, has a proposed three-year moratorium on data center construction because of dozy opposition to them by Governor Kathy Hochul and the New York State legislature. While I oppose mergers in general, that between Dominion and NextEra allows providers of data centers in the southeastern United States, the region served by those companies, to choose between several states and regions, few of which will be as expensive and hostile as the ladies of Loudoun. This neuro-divergent column thus welcomes it!

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: Have women misread the job market? appeared first on True Blue Will Never Stain.

The archetypal analysis of big-company life was William H. Whyte’s “The Organization Man” published in 1956, originally for “Fortune” magazine, corporatist but not in those days a notably anti-capitalist outlet. Whyte’s Organization Man, denizen of the vast bureaucracies of the 1950s, that at least in their size were novel after their post-war growth, was extremely risk-averse. He believed that providing he “kept his nose clean” within his company’s vast bureaucracy he would receive regular pay rises, an occasional promotion (which would be unlikely to lead him close to running the company) and a secure job until the age of 65, with a solid final-salary pension attached.

For certain personality types, this was not an unattractive dream. For one thing, it came with a stay-at-home wife attached, equally embarked on a “job for life” provided the husband was not grossly unfaithful or cruel, and generally with a substantial family and a gigantic tail-finned station wagon to drive them around in their new suburb. For a generation brought up in the Depression and who had been through the often very unpleasant experiences of World War II, the tradeoffs involved generally precluded any thoughts of entrepreneurship, which would involve the risk of penury if it did not work out.

Naturally, the Organization Man favored collectivist strategies for the large corporation for which he worked, encouraging cartelizing between large producers in existing U.S. industries, as well as unionization, high assembly-line wages and fringe benefits, all of which would come back to bite their instigators when the cold winds of global competition returned around 1980. The major difference with today’s Millennial socialist apparatchik, who is often alas without the trad-wife, is that the Organization Man normally voted Republican, as did his wife – it was expected of them at their country club.

The unionization, high assembly line wages, final-salary pensions and fringe benefits have mostly gone from those U.S. corporations which have survived the blast of international competition and periodic U.S. downturns. However, the Organization Man ethos has persisted even in their top management, albeit now combined with an unholy greed-filled tendency towards unjust self-enrichment at the expense of shareholders, customers and the U.S. government.

Stock options are a direct drain on shareholder wealth and have been prioritized by corporate top management since very foolish 1993 legislation capping (without indexing the cap) the tax-deductibility of top management salaries. Stock buybacks again reward options-laden management; more important, they reduce the long-term viability of the company, forcing it into an emergency recapitalization at a very low share price or bankruptcy in the next downturn (the Boeing example over the last decade reflects this well). In the Trump administration, tariffs and government subsidies can be gained for any corporation in a politically attractive business, or that meets the President’s favor.

For another example of anti-entrepreneurial management, consider the attempts of management in resource industries such as oil, copper and often gold to hedge their earnings through gambling in the derivatives market, which they almost always get hopelessly wrong. For example, when the Iran War began in early March I invested modestly in Cheniere Energy (NYSE:LNG) on the grounds that as the largest U.S. exporter of LNG, which had indeed pioneered that market a decade ago, it would be bound to benefit by higher volumes and possibly higher prices as shortages of Middle East oil and gas proliferated.

Imagine my joy this week when Cheniere reported its first quarter results, to discover that even though its revenues were up about 8%, and its EBITDA was up 25%, the company reported a loss of $3.5 billion for the quarter, because of $4.6 billion in losses on derivatives contracts, presumably mostly betting against the price of natural gas. Needless to say, I have sold my shares. If I wanted management to play games in derivatives markets, I would invest in a company like Jane Street that does so professionally and knows what it’s doing. In my own portfolio, I like to know what positions and risks I am taking and will hedge them as I see fit, without allowing my share values to be subjected to sudden lurches of ineptitude (other than my own).

Part of the problem is structural. Corporate managements in ordinary “C” corporations (“Inc.”) are controlled by Boards of Directors, who theoretically represent the shareholders but in practice in public companies are mostly concerned to stay out of legal trouble and draw their fees without excessive angst. There are no entrepreneurial incentives on a Board of Directors; they generally have only minimal numbers of shares in the company, and any awards of restricted stock or options from the company will be designed to minimize rather than maximize their temptation to take risks – good governance requires that any “incentive” effects are modest and that boxes get ticked.

However, beginning in Wyoming in 1977, private companies have had the option of forming a limited liability company (LLC) which eliminates the Board of Directors but retains the advantage of limited liability. Currently, income in such companies is taxed on a “pass-through” basis to shareholders, rather than a separate corporate income tax being payable. Effectively, shareholders are treated as if they received 100% of earnings as dividends, which can of course be a disadvantage.

Such a structure preserves the entrepreneurial incentives of management, without a Board of Directors to dampen them. There is no reason in principle other than current regulations why this structure should not be useable even when a company is publicly listed, since having limited liability, there is no likelihood of shareholders being asked to pay back any losses. Currently, entrepreneurs who start new companies generally do so through an LLC structure, because of its simplicity and the greatly improved alignment of the company’s success with their rewards.

There is a contrary tendency among the venture capital community, who like to impose on investee companies a Board of Directors structure through “Subchapter C” incorporation. This enables them to remove the company founder if they get tired of him, through their control of the Board. However, that ability is economically thoroughly pernicious; such venture capitalists are not themselves entrepreneurs, but merely a combination of bankers and personnel managers who have figured out a way to charge fees and percentage rewards based on the growth of tech and other companies. As for the unlucky entrepreneurs in such companies, they are forced to tick boxes and play office politics with their investors’ representatives rather than seeking the entrepreneurial breakthroughs that make the world rich. With such investors, the company which the entrepreneur created has become an Organization before its time.

Whereas in the 1970s and 1980s venture capitalists added value as well as capital through their networks of business connections and provided a truly superior return to their shareholders, in recent decades far too much money has flowed into this sector, which has come to provide mediocre returns and often depends on adding unnecessary and dangerous leverage to its investee companies through “leveraged recapitalizations.” Like share repurchases, most of these leveraged recapitalizations are damaging and dangerous to the underlying businesses concerned, subtract value from the economy as a whole and benefit only those greedy private equity fund rent-seekers who undertake them.

Capitalism cannot flourish without capital; it also cannot flourish without entrepreneurs. Of course, if investors such as today’s Millennial box-checkers with their 401(k)s, wish to have the dubious protection of a Board of Directors, they can continue investing only in Incs. Allowing such timid and misguided souls to invest in private equity, on the other hand, is asking for rip-offs; having no connections and limited money and understanding, they will be last in every queue, getting the worst deals and the worst positions in deals.

However, allowing LLCs to offer shares publicly, thus removing the dead hand of Boards of Directors, is just one reform we can make (through SEC regulation or legislation, whichever is needed) to allow the world’s wealth to be controlled mostly by capitalists and like-minded investors. As a capitalist investor, I will gladly pay tax on all my investee company’s earnings; it is worth it to have management working properly and capitalistically in my interests (and NOT playing games with derivatives!)

Make the necessary legislative and regulatory changes! Our economic future depends on it.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: True Capitalism is not Corporatist appeared first on True Blue Will Never Stain.

I was awakened to the potential philosophical benefits of space colonization by President Trump’s welcoming speech to King Charles III last week, where he remarked:

“Here on a wild and untamed continent, they set loose the ancient English love of liberty and the Great Britain’s distinctive sense of glory, destiny and pride.”

The (mostly English, but many Dutch and other Europeans) colonists who set sail for North America were trying to build a society different from those they had left behind. Religiously, most of them did not wish to submit to the control of the Church of England (though their alternative, at least in Boston, was far more authoritarian).

Politically, as evidenced by the 1619 creation of the Virginia House of Burgesses, they sought a system different from the absolute monarchies that still dominated Europe, at least before 1642. Their voyage across the stormy Atlantic was undertaken, not for the joys of digging an unforgiving uncultivated soil and fighting off marauding Native Americans, but to give themselves a new life free from the political constraints and norms of their home countries.

In today’s world, there no longer exists the possibility of finding a new and virgin land which we can colonize according to our own beliefs. The world is full, and we can only choose from the governments available, by and large a pretty sorry lot. For one like myself who values free speech, free markets and property rights, there are really only two alternatives today: Donald Trump’s America and Sanae Takaichi’s Japan (which would not let me in anyway!) There is no longer a European country that is not subject to grotesque over-regulation in the interests of “net zero” or some other chimaera, while free speech in the EU is conspicuous by its absence.

We are not even secure against backsliding in the United States (apart from the dread possibility of a Democrat victory in 2028). The Trump administration is considering whether to institute compulsory government vetting of AI models – as AI becomes more and more central to the economy and society, it is not difficult to see the harm that could be done by such regulation in the wrong hands. Government is the last institution to trust in the regulation of anything important, because it is always in danger of subversion by leftist cranks, against whom ordinary citizens have no practical recourse.

The philosophical need is thus approaching to find a new home that is not subject to the ever-tightening global consensus against freedom and property. In 17th century Europe, even Galileo Galilei would have benefited from a colonizing trip to North America. The same need to escape the deadening miasma of leftist consensus is almost upon us today.

The questions are: how and where? There are two technologies needed for a substantial colonization of other planets to take place: fusion power and advanced genetic engineering.

Fusion power is needed to transport the huge payloads of colonization across interplanetary distances. Conventional rocket engines, such as we have been using since the 1950s, require a vast multiple of their payload in fuel and fuel tanks when undertaking an interplanetary journey. Given that rockets cannot be infinitely scaled up, the payload that such rockets can carry is only sufficient to carry a few colonists on each trip, and the energy costs for those trips are gigantic. In addition, since conventional rockets are limited in their speed, a trip even to Mars requires several months, exposing voyagers to damaging amounts of radiation. Fusion power when available will avoid these limitations, allowing larger groups of colonists to be sent and permitting trips even to the outer planets and their satellites in a reasonable space of time, say a couple of months.

All the planets other than Earth offer pretty hostile environments for human life over the long-term. To some extent, technology can overcome this. The Florida peninsula was considered to be more or less uninhabitable when the U.S. acquired it in 1819; the main interest was in the Panhandle – but air conditioning has allowed luxurious human life to exist even in Miami in August. Thus, while the Moon cannot have an atmosphere retrofitted – its gravity is too low – something may be possible on Mars, and other Solar System bodies, such as Saturn’s moon Titan, may also be inhabitable with geoengineering. Like the means of transport, geoengineering will require nuclear fusion or some equivalent power source, since it will be extremely power-intensive.

However, even with geoengineering and even picking target planets carefully, human beings as currently constituted will have a hard time living there. We are optimized for a dense atmosphere, a quite strong gravity and a fairly narrow range of ambient temperatures. Even a “terraformed” Mars, given currently practical limits, will be much smaller than Earth, have a gravity about 40% of Earth’s and will suffer temperatures far below Earth average simply because of the lesser supply of solar radiation and the thin atmosphere. Human beings will be highly suboptimal for such an environment. While Mother Nature would produce a redesigned human being in a few thousand years of Mars residence, those few thousand years would be thoroughly miserable.

Accordingly, for mass settlement of Mars we must tweak the human genome so that it can survive happily on lower gravity, a thin atmosphere and a cold average temperature. We are quite close to having this capability currently; it should be well within our grasp within a couple of decades, when we have fusion power and other necessities for colonization.

Once we have genetic engineering, there is no need to restrict ourselves to Mars. Other planets will require more severe terraforming and genetic engineering, either because they are too cold, (Titan) too hot (Venus) or have excessive gravity (Jupiter). Jupiter is the most attractive real estate in the Solar System, because it is so big, but to live there we must create a form of humanity that can deal with an ammonia/hydrogen atmosphere, much more powerful gravity and an ability to swim, since there is no solid surface. A tough ask, probably producing a kind of human jellyfish! However, there are several planets with atmospheres dense enough to support some form of life, and a re-engineered humanity and a certain amount of terraforming should multiply our potential habitats.

Beyond the technology of colonization, there is the question of its political and economic structure. Here, we are at a disadvantage to the Jamestown settlers and the Pilgrim Fathers: our communications are too good. Even if we settled on Neptune, or on the partner of Pluto with a newly discovered atmosphere, both audio and video communication will be possible with a signal delay of only about 4 hours. If an authoritarian world government or group of national governments, such as seems very possible to appear, wanted to control its colonial outposts it would be perfectly able to do so logistically, provided the outposts did not declare Independence, at which point a General John Burgoyne would have to be sent out.

That would vitiate the purpose of colonization. If the Pilgrim Fathers had known that through modern communication they could be forced to listen weekly to sermons from Archbishop William Laud, they would never have bothered to leave England. We therefore need to ensure that any colonization is carried out by agreement with some suitably eccentric trillionaire, with no government involved at any stage of the process. With such a sponsorship, a Mars, Titan or Neptune colony would be self-governing from the start, with every colonist subscribing to an Ayn Randized U.S. Constitution “with the errors and ambiguities left out.” (Of course, if hardline Marxists or theocrats wanted to colonize somewhere they would be free to do so – and the best of British luck to them!)

Olaf Stapledon, a writer whom Lewis did not care for because of his atheism, in Last and First Men (1930) created a future history covering 2 billion years in which humanity genetically engineers itself into 18 different species, moving inwards to Venus when the Sun shrinks into dwarf status and outward to Neptune when it goes nova. By this evolution, human civilization reaches heights far above anything imaginable to us First Men. We are now close to the technology to make Stapledon’s dream (hopefully with Lewis’s ethical system) a reality, and in far less than 2 billion years.

A mixture of Lewis’s aethereal eldils and Stapledon’s Fourth Men Great Brains, solving the problems of the universe in their almost immortal concrete bunkers, is probably ideal.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: Out of the Noisy Planet appeared first on True Blue Will Never Stain.

To begin with an asset class not normally thought of as part of the capital market, student loans. Since a disgraceful Obama-era piece of legislation of 2010, these have been issued directly by the government. (This was only the last of a succession of disgraceful pieces of legislation in this area, the worst of which was the Bush-era 2005 Higher Education Act, extending government-guaranteed loans to graduate and professional students, thus raising the amounts of debt incurred per student to infinity with the rise of the perpetual student – a folly extended by the 2007 College Cost Reduction and Access Act, which allowed income-based repayments, thus removing the incentive for borrowers to get a proper job on graduation.) Of the $1.7 trillion of student loans currently outstanding, only 30% are being serviced according to their terms, making them lower quality assets than all but the most grotesque subprime mortgages or automobile loans.

This is not entirely the fault of the students concerned. If you were going to college from 2010 on, it was almost impossible not to incur a student loan—they were pushed hard even to students whose families did not need the money. However, the real reason for the program’s high default rates was the utter dishonesty of the Biden administration, which extended a payments moratorium far beyond the period when it was justified during the COVID epidemic. This payment moratorium caused the accrued interest on student loans to pile up. Biden then dishonestly proposed all kinds of “relief” schemes for student debt, none of which had any chance of being legally authorized by Congress. Such schemes, being subsidies from ordinary people without college to rich kids with useless degrees, were morally utterly repugnant and economically damaging.

In those circumstances, borrowers who suddenly did not have to pay their student debt monthly, naturally found the extra $500 per month (say) would allow them to lease a fancy automobile even though their income was modest and likely to remain so. This was unsound finance of course, but in what educational institution, even business schools which teach the joys of leveraged buyouts, are young Americans now taught the principles of sound finance?

The amount eventually lost in student loan defaults will probably be around $1 trillion of the $1.7 trillion now outstanding, which amount will be added to the Federal debt. That is not staggering, but as Senator Everett M. Dirksen (R.-IL) did not say (because he was dealing with mere billions) “a trillion here, a trillion there, and soon you’re talking real money.” There will also be a painful but necessary reform needed to stop this systemic bleeding in the future; ideally this should involve closing down about three quarters of the nation’s colleges, forcing the rest to cut back their wasteful expenditure sharply, and sending only around 15% of the population rather than the current 60% to suffer the wasteful indoctrinations of college.

Student loans are only one source of future catastrophic debt losses. According to a recent Allysia Finley piece in the Wall Street Journal, the percentage of Federal Housing Administration loans where debt payments to income exceed 43% — generally considered risky – has risen to 64% in 2024 compared with only 36% in 2007, the year the subprime mortgage crash occurred. About 1 in 7 FHA loans originated between 2022 and 2025 defaulted within a year. Under the Biden administration, the taxpayer’s interests as creditor were grossly neglected in every area they could be; the property rights of ordinary taxpayers are always vulnerable under Democrat administrations, but the Biden administration was extreme.

As in 2007, there is thus a glut of government-sponsored bad debt just waiting to land on the economy. In this sector, Wall Street is less involved than in 2007, but there is, in addition, a plethora of subprime automobile loans, of perhaps $400 billion, since lending standards for auto loans were lowered and maturities lengthened after 2009 (many especially toxic auto loans have of course been incurred by those given a payment holiday on their student debt). Since this is largely independent of mainstream Wall Street, you can add it to the 2007-type debt default pile.

Wall Street itself has created far more dodgy assets than in any past bubble – even 2000 and 1929 pale by comparison. It has a mechanism to do so that was absent in 1929 and relatively small in 2000: the private equity fund and its brother the private debt fund. The managers of these organizations are generally paid a fee, typically 2% for private equity, on the assets they collect and may in addition earn a “carried interest” bonus of typically 20% of any profits, which are calculated with assets “marked to market” by “experts” in a way that may bear no relation to their true value. At the very least, this gives them a huge incentive to collect assets from the dozier pension funds and college endowments and a much smaller incentive to manage the assets properly, which requires knowing all the mundane and technical details of their investee company’s operations.

Boosting the fund’s net asset value by hugely leveraged “recapitalizations” of investee companies is a much easier way to declare returns, requires no understanding of the underlying businesses, and allows your auditor to sign off on profits, of which you receive 20%. Establishing a “private debt” fund to buy the debt created by such recapitalizations is another nice way to keep it all in house. If the company stubbornly refuses to increase in value, you can always sell it at an inflated price to a “continuation vehicle” new fund you have set up.

As you will have spotted, very little of all this requires the private equity investor to add value. The only problem with it is that, based on the law of supply and demand, which works as well in investing as in everything else, the gigantic flood of new money into this sector has depressed the returns to private equity investors well below those on the Standard & Poor’s 500 stock index, so private equity managers are being paid “2 and 20” to underperform a simple index fund.

Some investors have noticed this; the idiotic “Yale Model” of investment by which college endowments put all their assets into private equity, private debt and timberland, has now been thoroughly exploded by the grossly inferior returns achieved by the largest college endowments in recent years. You would think, with all that intelligence available, the Ivy League colleges could themselves invest better than Wall Street, but apparently not.

At some point, even the high pressure sales techniques of private equity managers will fail to attract new money into this sector, which needs a large flow of new money each year to maintain values. That is why, in the deregulatory Trump administration, ordinary retail investors have now been allowed into private equity — you can bet this would not have happened if the returns were still tolerable. You should avoid these investments like the plague; not only will they on average produce inferior returns, but as a supposedly “unsophisticated” retail investor with no important “contacts” you will be offered only the worst and most overpriced deals. As for private debt funds, they should be avoided even more firmly; they do not have even the theoretical upside potential of private equity investments. In the words of the famous question to J.P. Morgan, NONE of the customers-investors in private debt funds have yachts!

The public stock market is also overvalued, partly because of the appalling fashion for stock repurchases, which are simply a scam rewarding management with stock options at the expense of ordinary investors. However, the fashions for Artificial Intelligence and its associated “data centers” have created an additional bubble of their own, very similar to the “fiber-optic cable” overcapacity of 2000.

Not only are data centers fashionable, but the “Big Beautiful Bill” of last July allowed big companies to write off 100% of their capital investment in them. Since corporate behemoths are not allowed to pay negative tax, there has been a vigorous market in selling data center tax benefits to companies that still have tax capacity. That is why U.S. corporate tax receipts fell by 27% in the 6 months to March 2026 – with state and local tax incentives as well, a grotesque glut of data centers is being created. In theory excess data centers will come in useful in the long run, just as did fiber optic capacity, in huge glut in 2001 causing several bankruptcies, but filling up its capacity by 2010. However, there is one difference: ten-year old fiber optic capacity is almost as valuable as brand-new capacity, so a glut can be worked off over time. Conversely, ten-year old data centers are at least a couple of “Moore’s Law” generations out of date, so about as useful as a ten-year old laptop. Thus, the data center glut will have much less long-term value than did the 2000 fiber optic glut.

Ludwig von Mises explained in the 1920s what must happen when there is a glut of investment: it must be liquidated, sold for a tiny fraction of its cost or bulldozed, and huge amounts of money, both debt and equity, must be written off. That will almost certainly bring us a “triple-whammy” version of the 1930s. One can only hope that the global political reaction to the slump this time around will be less disastrous than that of the 1930s, which brought FDR but also Hitler. Even in the best case however Elon Musk can have little hope of being treated better than his 1920s/30s equivalent Andrew Mellon, who was hounded into his 1937 grave by the IRS.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: The Asset Price Distortion Bubble appeared first on True Blue Will Never Stain.

Warsh’s desire to cut the Fed down to size is wholly admirable. Total staffing at the 12 regional banks is a staggering 24,000, with 3,000 at the Board of Governors in Washington DC. This is far more than is required to implement and design monetary policy, although to be fair the overstaffing goes back a long way – total staffing of the System peaked at around 30,000 in the early 1970s – presumably there were football-pitch-sized rooms full of “comptometer girls” solving the complex monetary equations dictated by Keynesian theorists.

Nevertheless, the grotesque $3 billion cost of what is supposed to be a mere “renovation” of the Fed’s main building indicates that bureaucratic bloat has got entirely out of hand. The Fed is supposed to be “self-financing” but the $200 billion accumulated deficit resulting from the Fed’s oversized balance sheet and its inept management of monetary policy suggests that these Pharaonic additional burdens should not be imposed on long-suffering U.S. taxpayers.

There is a more important structural problem. When the Federal Reserve was created in 1913, its Board of Governors was placed in Washington, as part of the Woodrow Wilsonian Progressive urge to enlarge the Federal government and bring all possible activities under its wing. Initially, this structure proved thoroughly artificial; the power through the 1920s rested with the head of the New York Fed (Benjamin Strong until his death in 1928) who took responsibility for dealing with the money markets, then as now domiciled in New York. Only after the New Deal did Fed power truly become centered in Washington, initially subordinated to the Treasury, but from 1951 a fully independent agency.

This presents an immense cultural problem. Washington DC votes overwhelmingly Democrat, by 90.3% in the Harris/Trump contest of 2024, and the inner suburbs of Montgomery and Arlington Counties are little better. (Fairfax County, Virginia was marginally Republican when I moved there in 2000, but it soon swung overwhelmingly Democrat, to the great detriment of my son’s secondary education, as the Federal bureaucracy and its lobbying and NGO nexus expanded under the leftist Presidencies of George W. Bush and Barack Obama.) As a result, the cultural and social miasma forcing even top-level Fed officials to the Left is overwhelming, and difficult for them to resist, especially under a feeble Chairman like Powell.

The 0.50% interest rate cut in September 2024 was a grave example of this. The markets did not expect any more than a 0.25% cut, if that, as inflation was still well above the Fed’s absurd 2% target. There was thus neither economic justification nor market demand for the larger cut, which can only have been made to goose the markets and provide a better economic environment for the November election of President Biden’s successor Kamala Harris.

A stronger Fed Chairman like Warsh might be able to resist such pressures, but with 3,000 staff the blizzard of leftist muttering and media leaks around the building if he did so would make life very difficult (and the other Fed Governors would not necessarily be so strong-minded). The solution is to move the Fed Board of Governors to one of the outlying Federal Reserve Banks whose politics are not perverted by location in a big-city ghetto. Kansas City, host of the Jackson Hole annual gathering and home until recently of the admirable President Esther George, would seem ideal, but there are also arguments for St. Louis, home of the best Fed collection of economic statistics.

In such a location, there would be no pressure on local staff to adhere to the Left, so Fed monetary policy decisions would be taken with political impartiality, as they should be. Staffing would not be a problem; those wishing to make a career with the Fed would find Kansas City restaurants and amenities perfectly adequate and real estate costs and commuting times much lower than in Washington – their children’s education would also be much improved. The separation of the Fed Board from the political nexus would further its independence from bullying by the President or Congress, while it would be little more remote from the money markets of New York than it is currently; in any case air travel and modern telecommunications have shrunk intra-U.S. distances and journey times to a trivial level.

Turning to monetary policy, Warsh has already expressed his wish to cut down the size of the Fed’s balance sheet. There is no advantage whatever in the Fed’s recently renewed program of quantitative easing; it monetizes the Federal budget deficit by laundering it into risk-free deposits with the Fed by the big banks. It also makes it far too easy for the slobs in Congress to carry on spending. The interest-bearing dross on the big banks’ balance sheets is easy risk-free money, therefore a direct subsidy to doing no corporate lending, which vitiates the banks’ purpose for existence.

At the very least, Warsh should resume the program of quantitative tightening that was abandoned last December, selling $40-50 billion of bonds per month into the market to reduce the Fed’s balance sheet from its current $6.9 trillion. To reduce further the drag from the Fed’s past QE, he should also reduce the interest paid on bank deposits with the Fed to no more than 2%, even while he keeps the official Federal Funds rate at its current level. That will please Trump’s desire for lower interest rates, while ensuring that the rate lowering does nothing to feed inflation but merely reduces an unnecessary subsidy to big banks.

Even more important than reducing the Fed’s balance sheet, however, is changing its inflation target to zero. As this column has frequently reiterated, the current 2% inflation target doubles prices every 35 years and prevents ordinary savers from planning their long-term futures. This is especially the case if, as at present, the Fed frequently misses its target on the upside and then makes no attempt to recapture the excess inflation it has created. Even President Trump’s eccentric objective of lower nominal interest rates would be assisted by the Fed having an inflation target of zero, since nominal rates would decline over a year or two to the current level of long-term real rates in the TIPS market, i.e. 2.6%-2.7% compared to the current 10-year Treasury yield of about 4.3%. The 2% inflation target resulted from Fed Chairman Ben Bernanke’s absurd phobia of deflation, which rested on ignoring the healthily deflating U.S. economy of the 1880s, which saw sharply rising living standards and excellent economic growth. The irrational and damaging manias of past Fed Chairmen must be swept into the trash where they belong.

There are other Warsh reforms that make sense. He wants to eliminate the published “dot-plot” forecast of short-term interest rates made by FOMC members. This is a sensible reform, because the dot-plot shows FOMC members to be absolutely lousy interest rate forecasters, which you would expect but monetary magic requires should not be advertised.

Outside monetary policy, Warsh is absolutely correct that the Fed should have no role in regulating “climate change” or in managing the Consumer Financial Protection Bureau, currently under its responsibility. It is also not very good at banking regulation, which can be left to the Office of the Comptroller of the Currency and the FDIC – having three separate agencies regulating banks is asking for trouble, and removing duplication will also reduce costs.

As for the newly refurbished Fed building, it can be sold for condominium development, turned into convenient downtown luxury residences for Washington’s army of lobbyists – preferably overpriced, to reduce unearned lobbyist wealth.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: An Agenda for Kevin Warsh appeared first on True Blue Will Never Stain.