Decoder Model Portfolio Update: Return of the Iron Dice
In this week's model portfolio update:
In the early 1990s, in a period of heightened optimism following the fall of the Berlin Wall, a political scientist named Francis Fukuyama put forth a thesis dubbed "the end of history" — the notion that the violent history of human civilization, in the form of wars and value clashes and borders redrawn by conflicts, would cease because democracy and capitalism had won, making strife and conflict — and thus "history" itself — a thing of the past.
"The end of history" remained a viable hope for about a decade — until the terrorist attacks of 9/11, at which point history switched back on again. One could further argue that somewhere between 2001 and 2022, the world saw the end of "Pax Americana" — an American Peace comparable to the Pax Romana of the Roman Empire, in which the United States acted as security guarantor to its allies for the sake of enabling the rise of democracies and the free flow of global trade.
Wherever one places the end point, Pax Americana is definitively over too, which means "the end of the end of history" is upon us. A new age of war has begun, and if anything is known about war in the broad sense, it is that wars are expensive to finance and thus tend to be inflationary.
There are a whole host of reasons why America's cost of security will go way up moving forward — like the need to shore up an ability to fight in two wars at once, or even three, not to mention the need to arm allies with ammunition and weaponry. At the same time, the rest of the world, and Europe and Japan in particular, will have to think much harder about providing their own security as the United States withdraws from its expensive and increasingly ineffective "policeman to the world" role.
Meanwhile war is present in Europe (via Russia-Ukraine) and the wolf is at the door in the Middle East, where hard questions abound with no easy answers (and in some cases no answers at all). Questions like whether Iran will attain nuclear weapons, whether Israel or the United States will allow Iran to attain nuclear weapons, and what happens if they do lead to an explosive range of concerns — as does Israel's non-winnable war in Gaza and the question of what the boxed-in Netanyahu government (whose interests could sharply diverge from Israel's best interests as a country) will choose to do next.
As of now we are looking at all this (a new age of war) and wartime deficits too, with World War II levels of debt-and-deficit spending baked into the cake before the real fireworks (or the next recession) have even begun; it is hard to see how this ends in anything other than breakout levels of inflation and forced debt monetization, with the realities of the exploding debt-and-deficits situation potentially hitting home in 2024.
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