Opposite George

“In Hinduism, Shiva is a deity who represents transformation. Through destruction and restoration, Shiva reminds us that endings are beginnings, and that our world is constantly undergoing a cycle of birth, death and rebirth.” – Karen Salmansohn

In properly functioning markets, prices move based on order flow within reasonable ranges, the last price being the foundational anchor for the next. Market makers stand between buyers and sellers, smoothing out price and ensuring decent execution in exchange for a small spread. Like all metastable systems, markets sometimes break, with massive order imbalances leading to previously unthinkable prices. Such black swan events happen with a decent enough regularity that we’ve become accustomed to assuming means will be regressed to and life will go on as normal.

Sure, a few hedge funds might go out of business, a banker or two might lose their bonus – but by and large, isolated examples of broken markets are just another temporary curiosity to observe from a comfortable distance. Nobody likes hedge funds managers or bankers all that much anyway. Did the great Volkswagen stock squeeze of 2008 change the car market much? Did the recent GameStop squeeze inspire a revitalization of dying retailers? Of course not.

But not all markets are created equal.

The market for energy in Europe broke this week, and this has profound and dangerous consequences that many have been warning about for months. Energy lies at the very center of our incredibly interconnected and highly sensitive supply chains. It would be easy enough to write about how exploding natural gas prices in Europe have led to substantial intervention by the Chinese in all manner of important markets. Or how China has curtailed silicon production as part of a sweeping response to its own energy crisis, which almost assuredly will cause a cascading series of calamities down the value chain in the coming weeks, impacting everything from the production of solar panels, the construction of housing, and the assembly of new automobiles.

It would also be easy to write a piece pointing out how predictable this all was to anybody paying attention. After all, we wrote about what would likely happen – in one form or another – here, here, here, here, here, here, here, and here.

Instead of doing either of those things, we spent yesterday at The Chicken Coop™ brainstorming around what we think is really going on here and doing our best to model the opportunities that will follow this inevitable period of rolling crises. Even Doomberg must think about spring, no matter how cold the upcoming winter will be.

We started with what we got wrong with Covid. While we managed to get ahead of the imminent collapse in markets and positioned ourselves and certain key clients accordingly, we totally underestimated the speed and depth of the fiscal and monetary response and were blindsided by the boom in housing that materialized off the bottom.

In hindsight, it is obvious. The lockdowns forced people to spend more time at home. The Fed and Congress quickly injected enough real money into the economy to offset the deflationary air pocket that the lockdowns created. That money had to go somewhere, so it went into improving the home, either through fixing the current one or upgrading to a newer, less taxing dwelling (New York’s loss was Florida’s gain).

We aren’t in the hindsight business at Doomberg, but rather the foresight business. So, here’s our best guess at what is going to transpire after the coming dark storm clouds finish drenching us with their rain of doom:

• The breaking of the European energy markets is just a symptom of a greater disease. It reflects the demise of the just-in-time logistics philosophy at the heart of modern capitalism.

• Companies can no longer delegate their survival to the tight performance of their supplier base in the name of efficiency. This works until it dramatically and disasterously doesn’t.

• There will be a massive build out of raw material and work-in-progress inventory, which will likely further exacerbate ongoing inflationary pressures in the near term.

• There will be a staggering wave of onshoring. Businesses simply can’t rely on unreliable ports, a shortage of longshoremen and truck drivers, or a backup in rail car availability. So, they won’t.

If we’re right, the scale of the upcoming wave of onshoring will likely surpass the flight from the cities we observed after Covid, at least as measured by economic impact. America is going to learn to build stuff again. It is going to understand that robustness matters at least as much as short-term efficiency. That ensuring your suppliers can also earn their cost of capital is a good thing. That co-creating value and sharing it with partners is shrewd, not gullible. Companies will do these things because they must.

If Covid taught us anything, it is that entrepreneurs and small business owners are resilient. That the human endeavor has a forward arrow. That governments will finance the initial safety net needed to deaden the impacts of any new crises and will keep conditions loose as much as needed (or more). The upcoming Balkanization of our energy markets is a Covid-scale emergency, and we at Doomberg are developing a game plan that anticipates what must happen, not what we fear might happen.

In our view, pendulums swing, night turns to day, and Costanza gets the girl.

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