Charles Hugh Smith: Why This Recession Is Different

Let’s explore what’s different now compared to recessions of the past 60 years.

1. Deglobalization is inflationary. Offshoring production to low-cost countries imported deflation (product prices remained flat or declined) and boosted corporate profits.

Deglobalization will increase costs and pressure profits.

Just as cleaning up the environmental damage of rampant industrialization imposed costs on the U.S. economy in the 1970s that generated stagflation (inflation and stagnant growth), reshoring essential supply chains will impose costs, pushing prices higher.

Everything costs more in developed economies due to their high wages and social costs (pensions, healthcare, disability, etc.), high taxes, strict environmental standards and extensive regulations.

Consumers will pay more as supply chains are onshored / secured.

2. Energy will cost more. The price of oil and natural gas will fluctuate and could drop significantly as global demand drops, but in the long run the easy-to-access energy has been depleted and all energy will cost more.

Consumers will pay more regardless of where the goods and services come from

3. Capital will no longer have zero cost: interest rates may briefly return to near-zero but over time the cost of credit/borrowing will rise.

The 40+ year cycle of credit has bottomed and is reversing. As global risks rise, capital will demand a return.

Global risks are much higher than generally recognized. Each risk factor doesn’t just add risk arithmetically: 1 + 1 + 1 = 3. Risk rises geometrically as each risk boosts the possibility of runaway feedback.

Climate change, scarcities, geopolitical tensions, capital flows–each reinforces the negative effects of the others. As risk rises, capital demands a higher return.

4. Definancialization will revalue assets. The hyper-financialization that fueled global growth for the past 40 years depended on the cost of credit falling: interest rates fell for 40 years, rewarding borrowers and buyers of bonds, which increased in value with each click down in interest rates.

These trends are reversing. Credit will cost more and every existing bond loses value with every click higher in interest rates / yields.

As profits from globalization dry up and credit costs rise, asset valuations based on cheap credit and rising profits will be repriced lower

Assets that benefit from scarcity, Deglobalization and Definancialization may increase in value.

But there are many other factors that play a part in revaluing assets:

— generational selling as the elderly sell assets to fund their retirement

— global capital flows as money flees insecure Periphery nations for the Core (North America)

— heightened risk will revalue whatever is deemed safe and secure and what’s viewed as risky / speculative

— unprecedented inequality will drive clawbacks, wealth taxes and expropriations of wealth viewed as illegitimate or excessive.

Any one of these factors could upend conventional expectations of what each asset class will do in the future. All four interacting makes it impossible to predict any future valuation with any certainty.

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