It is yet unclear how this story ends for the markets and the world, but it takes no prophet to see that the system in which we grew up and took for granted is changing before our eyes. Everything we thought was immutable is in flux, and the rate of change keeps accelerating. We are watching a great realignment happen in real time.
BY SIMON MIKHAILOVICH FOR THINGS THAT MAKE YOU GO HMMM AND GRANT WILLIAMS / SUBSCRIBE TO GRANT WILLIAMS
EDITED BY THE INTERNATIONAL CHRONICLES
“When the facts change, I change my mind. What do you do, sir?”
—Attributed to John Maynard Keynes
Normally, one doesn’t expect to find wisdom in a James Bond caper, but, in the words of The Grateful Dead, “once in a while you get shown the light in the strangest of places if you look at it right.” Consider this passage from Ian Fleming’s book (not movie), From Russia with Love, in which an older and wiser MI6 colleague warns Bond against betting everything on an outcome that only appears to be a sure thing. Predictably, the 007 throws caution to the wind and, also predictably, it all goes very, very wrong.
“This is a billiard table. An easy, flat, green billiard table. And you have hit your white ball, and it is travelling easily and quietly towards the red. The pocket is alongside. Fatally, inevitably, you are going to hit the red, and the red is going into that pocket. It is the law of the billiard table, the law of the billiard room. But, outside the orbit of these things, a jet pilot has fainted and his plane is diving straight at that billiard room, or a gas main is about to explode, or lightning is about to strike. And the building collapses on top of you and on top of the billiard table. Then what has happened to that white ball that could not miss the red ball, and to that red ball that could not miss the pocket? The white ball could not miss according to the laws of the billiard table. But the laws of the billiard table are not the only laws (…) in this particular game.”
Indeed, over the past several decades, Western investors and politicians have been operating inside a ‘billiard room’—a climate-controlled safe space that had its own rules and was well-insulated from the vagaries of free markets and outside interference. Whenever the gamblers (aka investors) have overreached, politicians would up the credit lines and tilt the tables so that the gambling ‘whales’ could recoup losses and keep the games going. Once failure became ‘not an option,’ ‘whatever it takes’ was adopted as the sole guiding principle, and the debt pileup became irrelevant. Such were the wages of financialization—once the system came to rely on the perpetual ‘wealth effect’ rather than real wealth, free markets with their propensity for “creative destruction” became simply
unaffordable.
This reality-free gambling parlor was never sustainable but kept on operating until the outside world intervened. Once a real ‘gas main’ (NordStream II) exploded and peer-level adversaries unleashed kinetic war in Europe and the Middle East, offshoring of our industrial might came back to haunt us—one look at the WWII vessel production numbers tells the tale.
That was then. But now, according to Boris Pistorius, the German Minister of Defence, Russian military industry is outproducing the entire Western alliance 4:1. This, despite Russian GDP being reported at only 10% of that of the US. The assumption that overwhelming GDP superiority automatically conferred overwhelming military superiority was incorrect. Suddenly, outcomes that were considered impossible became not just possible but probable. It is yet unclear how this story ends for the markets and the world but it takes no prophet to see that the system in which we grew up and took for granted is changing before our eyes. Everything we thought was immutable is in flux, and the rate of change keeps accelerating.
Just in the past few weeks, the new US president has announced a ‘strong wish’ to ‘buy’ Greenland from Denmark (NATO ally), repossess the Panama Canal from Panama (US ally), convert Canada (NATO ally) into the 51st US state, and take over the Gaza Strip. Not to mention tariffs on friends and foes, and a torrent of other 180-degree policy turns that show no sign of slowing. No one would have thought any of these developments were even remotely possible as recently as last Fall, but now they are suddenly all too real. Such radical pivots are nothing new and have happened many times throughout history, although not in the West during our lifetimes.
We need not go far for examples—during WWII (1939-1945), only three (US, UK, Canada) of the 32 NATO member countries resolutely fought Nazi Germany and her Axis allies. The rest (except Iceland) were either formally allied with the Axis or collaborated with the Nazis. And during the Cold War (1945-1991), some of today’s NATO members switched allegiance from the Nazis to the Soviets and then ultimately to the West. These countries did not keep switching sides out of conviction but because the facts kept changing, and they had to adapt. This was how Lord Palmerston, the British Prime Minister during the height of the British Empire, described the fluid nature of geopolitical friendships and rivalries: “We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual…”. In other words, we have our own agenda, and when the facts change, we change allegiances.
This may sound unprincipled, but such is the reality not just in geopolitics but also in politics, economics, finance, and monetary affairs. We are watching yet another great realignment happen in real time.
How do we “navigate by the stars under cloudy skies,” as Jay Powell described the challenge facing the Fed in August of 2023, during such an unpredictable period? Powell’s latest answer, in December of 2024, was this: “When the path is uncertain, you go a little bit slower. It’s not unlike driving on a foggy night or walking into a dark room full of furniture. You just slow down.” Sounds like reasonable advice, except that no one is listening or slowing down. Markets trade at or near record highs, meme stocks and crypto tokens are bid sky high, and speculation remains rampant across the board. Clearly, the moment of clarity when conventional wisdom accepts that the “laws of the billiard table” are not the only relevant laws remains ahead.
In the meantime, not everyone has been oblivious, especially outside the collective West, and so it is unsurprising that gold would suddenly re-enter the financial discourse. Non-Western physical gold demand has been setting records, as has the gold price. The idea of the US re-mobilizing its gold reserves would normally be dismissed as a gold bug’s pipe dream, but is suddenly being seriously entertained in the Financial Times. Well, when the facts change, what else is there to do but to consider other options?
That gold would make a comeback after decades of epic profligacy was never in doubt to anyone familiar with the history of finance—we have a millennia-worth of precedents to go by and all of them have ended the same way—by going back to gold. This is not by accident—bull markets in gold always coincide with bear markets in trust. Gold is the only financial asset that is not a promise; whenever trust in promises wavers, demand for a promise-free safe haven soars. Because of its physicality and unique properties, gold is to finance what the North Star is to navigation. Both act as implicitly trusted stationary beacons of first and last resort—uniquely immutable, free of complexity, and independent from anyone or anything. Always there, showing the way to those adrift—no instruments, calculations or special knowledge required.
As Jim Grant of Grant’s Interest Rate Observer recently wrote: “gold is money at first sight.”
Given that the vast majority of Western investors do not yet own gold or even recognize its [great] value in times of extreme uncertainty, the next gold rush has only just begun. Again. Truly, there is nothing new under the sun.
Understanding the rules of the game one is playing is fundamental to participation and while the rules of our particular game have changed constantly over the last four decades, those changes have been both smooth and one-directional—a loosening of monetary conditions, more leeway given to policymakers, more protections afforded investors designed to avert market drawdowns and the creation of an environment that first encouraged the accumulation of debt and then, through necessity, became geared towards preventing the inevitable day of reckoning when the debt load became too large for the system to bear—all tailwinds for investors which have lessened the need to understand our new paradigm fully.
But, whether we have chosen to understand this paradigm shift or not, the foundations beneath us have become much weaker as the danger posed by the end of the debt super cycle begins to rise and bubble to the surface.
The game has changed, the billiard table is no longer the environment in which we are operating, and that makes it incumbent upon us to change how we play the game.
