oftwominds-Charles Hugh Smith: 2025

Wednesday, January 29, 2025

The AI Fad Just Burned to the Waterline

Sometimes wide moats and billions of dollars to blow lead not to glory but to hubris, which beckons Nemesis.

While everyone was busy reassuring themselves the stock market was still A-OK, the driver of the market--the AI fad--just burned to the waterline. Yes, the current euphoric expectations for AI are a fad, the latest in the endless stream of "gotta have" status signifiers and cultural frenzies.

The core dynamic in all fads is Human Wetware 1.0. Though we glorify our individuality--The primacy of the Individual is the key characteristic of Modernity--we remain a herd animal, alert to every twitch in the herd's emotional state and anxious to join the herd when it starts running, lest we're left behind or lose status.

CEOs are just as prone to fads as the rest of us, and this is how the AI fad gathered momentum. A decade ago the warm-and-fuzzy tech fad that enamored every corporate HQ was fuzzy logic, one of the long line of precursors to the current AI mania. So labels touting "fuzzy logic" were slapped on rice cookers as everyone scrambled to cash in on the latest tech fad.

And so now every package of Kroika Cookies is emblazoned with "powered by AI!" Indeed. The leaders of the herd are especially keen to study every shift in the zeitgeist and the pecking order, as the greatest sin for CEOs is to be revealed as incompetent / clueless by missing the latest boat in corporate fads.

Here is one example of the catastrophic consequences not of missing the boat but of blindly climbing on board. On a flight to Shanghai in May 2000, shortly after the NASDAQ dot-com bubble had peaked, my seatmate was a senior engineer working for a Silicon Valley semiconductor equipment maker. Over the course of the long flight, he recounted the domino-like chain of disastrous results of the CEO jumping on the "gotta offshore production" fad that was sweeping through Corporate America.

The net result of moving production to Southeast Asia and China was 1) the wholesale theft of intellectual property (IP) and 2) the collapse of quality, requiring technicians to be flown in to fix all the quality problems.

But to not move production overseas would have been perceived as "missing the boat," so everyone rushed to join the thundering herd, whether it made any sense or not.

The second dynamic in play now is this: monopolies don't care about efficiency or quality, as the user / consumer has no real alternative. The tech world is brimming with stories of corporate wealth being squandered on teams developing efficiencies that are shelved upon completion. The more money gushing into the corporate coffers, the less interest there is in efficiencies.

Keeping the Good Ship Status Quo on course is good enough--until the Status Quo burns to the waterline. Then the scramble is to cover the disastrous mis-allocation of corporate capital and identify the next fad to join.

The third dynamic is: this isn't about one company. It's about a toolbox that's already infected the entire tech world. It doesn't matter if DeepSeek disappears tomorrow: the toolbox of software structures they've released has already entered the bloodstream of global tech and has already transformed the DNA. There's no going back to brute-force processing as any sort of competitive advantage. Rather, it's a cost anchor that will drag any denialist laggards to the bottom.

The fourth dynamic is: there's nothing investable in this disruption because everyone can now develop the same open-source tools and approaches. there is no monopolistic moat to guarantee profits, and no revenue stream to milk. Rather, like deploying billions of dollars on data farms to improve search, there is no revenue at all. Nobody's paying a single dollar for AI enhanced search.

As I've noted before, when the tools and techniques are freely available to all, there's no scarcity value to any of it. And with no scarcity value--no value proposition so mighty that people will pay a premium for it--then profits are thin to zero.

The "smart money" has noted the AI fad has burned to the waterline, and has been frantically assuring "dumb money" that the stock market bubble is still intact and poised to bubble higher, so there's no reason to sell, and every reason to "buy the dip" so the "smart money" can sell, sell, sell near the top and let the "dumb money" absorb the coming 80% decline as a fad that was poorly conceived from the start has burned to the waterline, and the tiniest wave will send it to the bottom.

The "safe bet" was on heavily moated tech behemoths dumping billions of dollars into the "competitive advantage" of energy-ravenous processing power. That "safe bet" is now in Davy Jones' Locker. The reality that "AI has no revenues and no profits" is lingering above the burned-out hulk as a haze of doubt and confusion.

What's the next fad? Stay tuned. It might just be a retro revival of the time-tested fad for cost-cutting and "return to basics," starting with mass layoffs and slashing capex budgets.

Sometimes wide moats and billions of dollars to blow lead not to glory but to hubris, which beckons Nemesis.

New podcasts:

This is a wide-ranging discussion of DeepSeek with Adam Taggart of Thoughtful Money: SPECIAL REPORT: Did China's DeepSeek Just Pop The AI Stock Bubble? (56 minutes)

CHS on Geopolitics and Empire: Anti-Progress, Resource Constraints, & Digital Neofeudalism (1:29 hrs)

KunstlerCast417: Charles Hugh Smith, Progress and Anti-Progress (1 hour)

Charles Hugh Smith on the Extremes in the U.S. Economy and Markets. (26 min)

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When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF)

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Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
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Tuesday, January 28, 2025

Welcome to the DeepSeek Disruption (DSD)

In summary: bloated headcounts, no new sources of revenue from AI, and limitless content with no scarcity value. Welcome to the DSD: DeepSeek Disruption.

I've been fruitfully engaged in a lively dialog with readers on my Substack regarding my post yesterday Is DeepSeek a Sputnik Moment? (titled Is (Chinese) Software Suddenly Eating The World? on Zero Hedge) and my conversation with Adam Taggart on his Thoughtful Money channel: SPECIAL REPORT: Did China's DeepSeek Just Pop The AI Stock Bubble? (56 minutes).

I can't summarize all the topics discussed on the thread, but these two comments and my responses illustrate the tremendous range of dynamics now in play in the DSD: DeepSeek Disruption. (One favor to ask: since a bunch of folks borrowed my "Sputnik Moment" phrase without crediting me yesterday, if you use DSD - DeepSeek Disruption, please credit me. Thank you.)

Although the reader comments are only visible to paid subscribers, I post my own comments as Notes on Substack, which are visible to everyone.

Comment posted by Brad M.:
"I've always had a hunch that there are simpler methods to achieve high performing artificial intelligence. Of course, we should note that the chips China did this on are vastly superior than anything prior to the year 2000 lets say. And China does have decades of manufacturing experience and a literal army worth of engineers to throw at the problem. So we shouldn't say that what China did was easy. It was just easier than throwing a mountain of money at the problem. You can't fake scarcity that easily and the Mag 7 as you call them will continue to struggle while the smaller teams given freedom to try anything with their limited resources will continue to find success.

Or that mountain of money might end up working. Who knows for sure until it happens?"

My response:

Brad, those are very interesting points for exploration.

I'm reminded of various stories in TechLand about small teams developing the breakthroughs while thousands of employees in the corporation generated little value beyond maintaining the status quo. So each Big Tech has (for example) 175K employees, all smart, all dedicated, but a much smaller team blew the 175K teams of the Mag 7 away. Steve Jobs famously kept the Macintosh team isolated from Corporate Apple and exerted obsessive control over the development team. He knew better than to let Corporate do the Corporate Thing to the team.

Since finance and tech dominate the economy now, the big question is: how do I make a killing by investing in DeepSeek? This is a koan because there is no "owner" of the software techniques DeepSeek has shared with the world.

To Brad's question, so what do the tech monopolies / behemoths do with their 175K "teams" now? For sure they can try to replicate DeepSeek, but does that require 175K employees? And since everyone else has access to the same concepts, techniques and approaches, then where is the scarcity value that generates revenues? There is none.

This all leads to a sobering conclusion: there is little justification for these huge headcounts going forward.

Comment posted by Simple John:
"I'd appreciate correction if I'm wrong. I believe I've read that the DeepSeek models are strongest on math and physics. In fact, aren't LLM and image generating AI playing in a universe that is immensely less specific than math and physics and thus really just playing with words and images without any real insights?"

My response:

This is very insightful, as the examples of DeepSeek (or competing tools) solving math problems are "problems" where the "correct answer" can be determined. The "answer" to the "question" *write an essay on Charles Darwin for my class assignment" has no equivalent "correct answer." The AI Bot can hallucinate a response that might pass muster if the hallucination is not too wild.

I've played around with Big Tech free AI tools for generating podcasts, essay summaries, etc., and have watched developments in the video-creation space. These are examples of brute-force processing working with templates assembled from "machine learning," i.e. sampling human-generated videos, stories, essays, etc. As John noted, this kind of extrapolation of existing content is a different kind of "answer" to a different kind of "problem."

So there are video-generation tools where you enter text instructions such as "a young man is walking through a 4th of July party holding a beer," and the program generates a video clip of this scene based on its vast database of 4th of July clips, people holding a beer, etc. This is fascinating and fun, because there is no "correct answer."

But what's the value proposition here when everyone (or anyone with a keen interest) can access the same tools and generate limitless AI content? Who's going to watch all this in an Attention Economy that's already saturated with content?

Based on my limited understanding of the many software techniques DeepSeek employs, it seems likely that these structures may well be superior ways to solve "problems" that have testable "correct" answers.

Without going too deeply into specifics, a key concept in high-end machine learning (Google's DeepMind, etc.) is estimating the accuracy of the answer, i.e. the probabilities of various potential solutions being correct. The "wait a minute, maybe this isn't the best path, let's start over" function of DeepSeek is based on the same idea, which is extremely valuable when the "correctness" of the answer actually matters.

In summary: bloated headcounts, no new sources of revenue from AI, and limitless content with no scarcity value. Welcome to the DSD: DeepSeek Disruption.

There is much more to explore in the DSD, which I'll lay out tomorrow. In the meantime, let's check in on HAL 9000's conclusions:

New podcasts:

I just recorded a wide-ranging discussion of DeepSeek with Adam Taggart of Thoughtful Money: SPECIAL REPORT: Did China's DeepSeek Just Pop The AI Stock Bubble? (56 minutes)

CHS on Geopolitics and Empire: Anti-Progress, Resource Constraints, & Digital Neofeudalism (1:29 hrs)

KunstlerCast417: Charles Hugh Smith, Progress and Anti-Progress (1 hour)

Charles Hugh Smith on the Extremes in the U.S. Economy and Markets. (26 min)

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Sunday, January 26, 2025

Is DeepSeek a Sputnik Moment?

I'm not sure that "software will eat the world," but it could consume the stock market bubble in a single gulp.

Is DeepSeek a Sputnik Moment? Let's break it down. The Soviet Union's October 1957 launch of the world's first artificial satellite, Sputnik 1, stunned the U.S., which reckoned it had a commanding lead in "the Space Race." (It turns out the U.S. had the capability of launching a satellite before Sputnik, but held off for various reasons.)

That a geopolitical rival had reverse-engineered advances and leapfrogged the U.S. shocked America into a multi-decade response that culminated, at least in the public perception, in America winning "the race to the Moon" by landing the first humans on the Moon in July, 1969 in the Apollo 11 mission.

The shockwaves generated by a Chinese company's release of a suite of AI tools called DeepSeek last week may well rival the Sputnik shock, as the DeepSeek AI tools appear to meet the same benchmarks as AI tools such as those issued by OpenAI and other companies, but requiring far less computing resources.

DeepSeek achieves its capabilities not from expensive hardware (processors) but from advances in software that can be used on smartphones. The software innovations embedded in DeepSeek have profound financial implications for the companies that manufacture the costly processors needed by conventional AI data centers--Nvidia is the dominant chipmaker in this market--and the Big Tech companies spending billions of dollars (called capex in the financial realm, short for capital expenditures) to create AI tools that they can eventually sell via the subscription model.

DeepSeek software evaporates 1) the need for super-energy-hungry, super-expensive processors, 2) vast quantities of electricity and 3) the market for paid subscription AI tools, as DeepSeek's software runs on standard processors and it's been released as open-source software which can be downloaded and run offline on local resources such as PCs or smartphones.

In effect, the AI hardware monopoly and quasi-monopoly of AI software has been broken, and like Humpty-Dumpty, it can never be put back together again. I was skeptical of DeepSeek, but correspondent Cheryl A. sent me this article, which changed my mind. The author is careful to delineate his chops in the fields of AI and investing, and to dismiss this as uninformed is very likely a mistake.

The Short Case for Nvidia Stock

I read the "Theoretical Risks" section carefully and concluded that what the DeepSeek developers did was take the loss of precision performed at the end of conventional AI via compression and move it into the learning / reward process, where it did the work with less precision but with 45X less CPU/memory/cost.

Necessity is the mother of invention: unable to get NVDA chips in big numbers, the Chinese programmers were forced to innovate in software much like programmers on deep-space missions like Voyager 1, which carried extremely limited CPU and memory onboard. DeepSeek's developers made clever use of software to avoid needing super-duper processing power.

Voyager 1, launched in 1977 with three tiny computers packing a mighty 69 kilobits of memory (one low-resolution JPEG photo) in total and 8k per second processing power, is still functioning 47 years later, as programmers worked around a component failure with clever software.

Some of the clever software techniques used by DeepSeek reminded me of the workarounds deployed by the Voyager team last year when the spacecraft stopped responding. It's worth reading this brief account of their workaround:

NASA's Voyager 1 Resumes Sending Engineering Updates to Earth:

The team discovered that a single chip responsible for storing a portion of the FDS memory -- including some of the FDS computer's software code -- isn't working. The loss of that code rendered the science and engineering data unusable. Unable to repair the chip, the team decided to place the affected code elsewhere in the FDS memory. But no single location is large enough to hold the section of code in its entirety.

So they devised a plan to divide the affected code into sections and store those sections in different places in the FDS. To make this plan work, they also needed to adjust those code sections to ensure, for example, that they all still function as a whole. Any references to the location of that code in other parts of the FDS memory needed to be updated as well.

The team started by singling out the code responsible for packaging the spacecraft's engineering data. They sent it to its new location in the FDS memory on April 18. A radio signal takes about 22 1/2 hours to reach Voyager 1, which is over 15 billion miles (24 billion kilometers) from Earth, and another 22 1/2 hours for a signal to come back to Earth. When the mission flight team heard back from the spacecraft on April 20, they saw that the modification worked: For the first time in five months, they have been able to check the health and status of the spacecraft.

I was also skeptical of the possibility--suggested to me by Adam Taggart, host of Thoughtful Money--that DeepSeek could conceivably prove to be the Black Swan that pops the AI bubble. This now strikes me as less of a possibility and more of an inevitability. There is simply no longer enough advantage generated by super-energy-consuming, costly chips in terms of generating a product that is worth paying for when equivalent tools are already available for free that can run offline on free-standing devices--which means there can't be any back-door stealthy "calling home" by the software.

And given that the Mag 7 stocks, most of which are heavily invested in AI, are almost 40% of the total market capitalization of the U.S. stock market, and the global concentration of equity wealth in the U.S. market, then the AI bubble popping will pop the entire global stock market bubble--and with that reduced to rubble, the entire global Everything Bubble in risk-on assets.

The potent phrase software is eating the world may manifest in ways AI investors did not reckon possible when they projected billions of dollars in high-margin profits from AI chips and tools. Whatever we think of DeepSeek's approach, others will quickly reach onto its open-source toolbox and develop their own innovations based on its core structures.

We can be sure that the smart money has already overheard the discussion between Dave and HAL 9000 about the need for power-hungry chips and stiff monthly fees for AI tools:

I'm not sure that software will eat the world, but it could consume the stock market bubble in a single gulp.

New podcasts:

KunstlerCast417: Charles Hugh Smith, Progress and Anti-Progress (1 hour)

Charles Hugh Smith on the Extremes in the U.S. Economy and Markets. (26 min)

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

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Thank you, William T. ($70), for your superbly generous subscription to this site -- I am greatly honored by your support and readership.

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Thursday, January 23, 2025

The Power of Our Behavior

Why is any reduction in consumption posed in terms of unbearable sacrifice, when no sacrifices are necessary to consequentially reduce consumption?

When we think of the word power, we associate it with external forces: energy, technology, the government, etc. But our own choices of behavior are a great power that's all ours. Collectively, our choices of behavior set the direction of our culture, economy, society and political order.

I have a simple standard for the value of information / knowledge: is it actionable? Meaning, does this content give me anything that I can apply to my own life in the real world by modifying my behavior?

This is of course why we turn to YouTube University: we need to fix / repair something, and we seek actionable instructions on how to proceed as effectively as possible.

Some readers accuse me of living in an alternative universe, and they're correct. I am skeptical of all received wisdom, be it conventional or alternative, and I prefer to test things in the real world myself via experimentation and data collection--what's known as the scientific method--and to think things through myself rather than accept someone else's account or explanation.

We all know diet and fitness are both behavior-based. We choose to eat certain things and avoid other things, and we either have a fitness routine or we don't. We also know that diet and fitness are minefields of inter-connected influences, cultural, experiential and psychological, and so our conscious decisions about our behavior are often over-ridden or undermined by other dynamics.

Nonetheless, we still have the power to choose behaviors, and we can test the effectiveness of various modifications in our behavior.

For example, I've been running a decade-long experiment on the effect of my weight and general fitness on the metrics of blood pressure and cholesterol, both of which are prone to being elevated in my case. I've found from observation and data that getting lean (less weight, less fat, more muscle) has dramatically positive effects on my blood pressure and cholesterol, as well as on the critical ratio of triglycerides divided by HDL, so-called "good cholesterol," a ratio which is a measure of general metabolic health. Ideally, the triglycerides / HDL ratio is under 2.0. Mine is 1.3.

The goal here is obvious: to maintain general good health because that makes life more enjoyable. If we define general good health as not needing any medications to maintain our health, then the goal is to not need any medications--and since my metrics are all in the acceptable range, I don't need any medications.

These effects are testable. Since there is no one metric that tells us everything we need to know about our health--I consider agility and endurance, harder to measure than standard metrics, as important as any conventional test result--we can track a variety of data against modifications of our behaviors.

Consider water consumption, an easily measured metric. Water is cheap in the U.S., and so few people think much about their use of water, or how their behavior influences their consumption. Since we lived on catchment--the water supply depends on rainfall, which varies--we're trained to avoid wasting water. (I also lived for months in a micro-house without electricity or water, and we hauled all the water we used in 5-gallon buckets from an agricultural ditch. That will quickly make you value water in a new way.)

Our two-person household uses 1,500 gallons a month, of which 20% to 30% is for watering our vegetable gardens. So our household use is about 1,200 gallons a month, or 20 gallons per person per day (40 X 30 days = 1,200).

The average water consumption for households in Hawaii is around 6,000 gallons per month, which translates to roughly 144 gallons per person per day.

So we're using 25% of the average household, which includes many single-person households, and about 15% of the average daily use per person. Yet we sacrifice no conveniences or comforts. We have a washing machine, we take daily showers, we prepare three meals a day at home and wash a lot of dishes, and so on.

The difference isn't generated by sacrifices, it's generated by simple behaviors. We simply avoid wasting water.

Now consider electrical consumption. This varies by region, of course, and whether the stove/oven, heating system and water heater are fueled by gas/oil or by electricity. In our case, our stove is gas and our water heater is electric.

The average electricity consumption for households in Hawaii is around 515 kWh per month, lower than mainland states due to the lower needs for heating and cooling.

As an experiment, I set up 400-watt solar panels (about 1/20th the average rooftop system) and ran our electronics off the battery/solar panels for a month. The battery is 1500 watts, roughly 10% of a Tesla Powerwall battery (13.5 kwh). By electronics I mean the modem/router, multiple laptop computers, printer, etc. The goal was to see how little electricity we needed to run all the comforts and conveniences of a middle-class household.

We also turned off our water heater after our evening showers. This takes less than a minute. We sacrificed nothing, as the water stays hot enough for all purposes all day.

We consumed 2.4 kwh per person or 4.8 kwh per day, 145 kwh per month, down from our previous usage per month of 180 kwh. While we already avoided wasting electricity, we have all the electricity-powered conveniences of middle-class life and use them in the usual ways.

We used 28% of the average household in our region. We sacrificed nothing, and generated at most 10% of our own electricity with the modest PV panels. Before the experiment, we used about 35% of the average household consumption. We lowered our usage by nearly 20% with modest behavioral changes and a PV array 1/20th the size of the average rooftop array.

This raises significant questions about our economy, our runaway costs of living and our lifestyles. Healthcare consumes almost 20% of our nation's enormous GDP. How much could we reduce the burdens of cost and ill-health with very basic, nothing-fancy modifications of our behaviors? How much could we reduce our consumption of water and energy with very basic, nothing-fancy modifications of our behaviors?

This raises another question: why is any reduction in consumption posed in terms of unbearable sacrifice, when no sacrifices are necessary to consequentially reduce consumption? Behavioral modifications of the sort described above exact very little from us. Many require very little time and extra effort, and those that do demand time and effort--a daily walk and eating only real food prepared at home--have outsized positive effects that would be considered miraculous were they contained in a pill.

Is squandering resources and health considered some sort of birthright, such that reducing waste and conserving what's valuable sparks our indignation? I confess to seeing little value in indignation at the possibility that squandering valuable resources needlessly (including our own health) might some day exact a price we find excessive.

We want technology or the government to assure our lifestyle can continue unhindered, but what about the immense power of our own choices of behavior? Do they play no role at all?

In the current zeitgeist, I guess these questions place me squarely in an alternative universe. One reader said this made him sad. I'm not sure who should be sad for whom. If I can live in middle-class splendor using a fraction of the resources others consume, I don't discern any source of pity in my alternative universe.

Here's a snapshot of our daily electrical consumption, courtesy of our utility.

New podcasts:

KunstlerCast417: Charles Hugh Smith, Progress and Anti-Progress (1 hour)

Charles Hugh Smith on the Extremes in the U.S. Economy and Markets. (26 min)

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

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Wednesday, January 22, 2025

The Do-It-Yourself Decade

A great many people laud traditional values and lifestyles, but they leave out the hard part: it take a heck of a lot of work, effort and sacrifice.

I'm calling the next ten years The Do-It-Yourself Decade, as whatever we want to happen will increasingly be up to us to do for ourselves. After decades of fostering passive consumption--let someone else make or do the stuff we want / need--we're entering an era that will no longer be optimized for passive consumption, it will be optimized for active participation and production.

That this will be jarring reflects just how dependent we've become on long global supply chains, corporations and the state for the essentials of life, which include not just stuff but a system of values, contexts and incentives that go with the stuff.

For obvious reasons, many people think we've changed captains before the Titanic has been mortally wounded by the collision with the iceberg. This is a comforting thought, because it's based on the idea that those at the top of the Power Pyramid will save us without us having to get our hands dirty.

Alas, we're changing captains after the Titanic has already struck the iceberg and its sinking is already fated. As I outlined in a previous post, Extremes Become More Extreme, and then the system's inherent fragilities and vulnerabilities play out, much to everyone's surprise. Things no longer work as expected, stuff is no longer available as expected, and stuff doesn't get fixed as expected.

This is what happens to systems that have been hollowed out and duct-taped with play-acting "solutions," in which play-acting a solution is delusionally presumed to actually fix what's broken when the whole point of the play-acting is to mask the depth of the actual problems and paper it all over with a narrative, as if the problem was one of perception rather than one of the real world.

In the decade ahead, if we want solutions / fixes /changes, we're going to have to make them happen in our own lives. We can start with the full range of meaning in the phrase get lean: replace the fat of wasted time, "entertainment," "news," consumerist indulgences and relying on the government and corporations to take care of us with the often difficult and tedious work of becoming less dependent on institutions and companies to secure what we value.

If we want a secure supply of food, grow some of our own. If we want to be healthy, then get healthy on our own. If we want a career, then hammer one out ourselves by owning our skills and taking responsibility for getting full value for them. If we want an education, then get it ourselves, not by borrowing a fortune but by figuring out how to learn what we want to learn on our own, at the lowest possible cost in time and money.

If we want a secure water supply, then we better buy a water tank. If we want reliable electricity, then we better arrange to save up and invest in our own system, however modest. If it charges phones, keeps the Internet connected, powers a few lights, and is sustainable, then that's a lot better than having nothing but a flashlight.

Get lean means getting rid of the garbage weighing us down: the garbage food, the garbage consumption of junk we don't need, the garbage social media and "entertainment," the garbage debt, the junk we don't even use that's in storage, the garbage unpaid shadow work imposed by our corporate masters and government agencies, and the garbage narratives that keep us focused on what the globalists might be doing instead of what we can do for ourselves in the real world.

Roughly 80% of the populace has been packed into mega-cities and urban sprawl. This environment of complete dependence on complex systems operated by the state or corporations is optimized for a mindset of dependence--"somebody do something!"-- and for passive consumption: earn money performing some task in the Machine and then spend it buying stuff and services.

It's a massive change to re-think this dependency and sobering lack of self-reliance, for to remedy those deficiencies may require moving all the big pieces of our lives, more or less all at once. It's daunting.

The Do-It-Yourself Decade means no more spending six hours a day staring at a screen for amusement / distraction, for there's too much real work to do. Here's what your phone's screen time should look like, once the transition from consumption and dependence to production and self-reliance has occurred.

A great many people laud traditional values and lifestyles, but they leave out the hard part: it take a heck of a lot of work, effort and sacrifice. Teaching kids by letting them do real stuff in the real world takes time and effort. Making a meal for an elderly person and getting them to the table takes time and effort, especially when you're already stretched thin. Learning difficult things on our own takes time and effort. All the good things in life demand tremendous sacrifices, and I don't mean things relating to making, spending or saving money. In a society optimized for finance, ease and convenience, these realities don't play to the dominant narratives.

The real world demands far more of us than finance and the online / passive consumption world. Shopping is not a replacement for skill, effort and taking responsibility for things that have been offloaded onto others.

The problem is systems tend to break down in a non-linear fashion, as the decay is not visible. This means predictability is low and things tend to happen all at once. Alternatively, things stop working a bit at a time, and the frogs are slowly boiled before they realize the situation demands some sort of extraordinary action.

These are hard things to consider. They are not comforting in the sense of reassuring us finance, ease and convenience are permanent thanks to technology and AI. But if we consider the meaning of freedom and liberty not as cliches, but as freedom from dependence and freedom of movement, then considering hard things becomes assuring in a much different way.

The band is still playing and the ship feels unsinkable. That's an easy narrative to find comfort in. But is it realistic? Time will tell.

And yes, that's my phone and my Skilsaw.

New podcasts:

KunstlerCast417: Charles Hugh Smith, Progress and Anti-Progress (1 hour)

Charles Hugh Smith on the Extremes in the U.S. Economy and Markets. (26 min)

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Monday, January 20, 2025

Extremes Become More Extreme, Then Revert to the Mean

A fatal bout of runaway instability becomes inevitable when "extraordinary emergency measures" become permanently essential to keep the bubbles from popping.

A funny thing happens as policies intended to fill financial potholes transition from "temporary emergency measures" to "we need to keep doing this to stabilize the status quo": extremes get more extreme as what were once viewed as extraordinary policy measures required to keep the rickety system from collapsing become the "New Normal."

Of course the Federal Reserve continues suppressing interest and mortgage rates even after the financial crisis has passed, because if they stopped, the system would revert to crisis and collapse.

I've assembled a few charts of extremes becoming more extreme as a consequence of "emergency policies" becoming not just normalized but the keystone of the entire economy. What were desperate expediencies at first are now the lifeblood of the economy: withdraw them and the economy collapses in a heap.

I discussed these extremes in a podcast with Richard Bonugli (26 minutes), with the following charts providing context.

What's extraordinary is the systemic nature of the current extremes. New heights of precarity are being reached across the entire spectrum of the economy, not just in stock market bubbles but in the concentration of "wealth" in risk-on speculative assets--the very assets most prone to destabilization and reversion to the mean, the statistical dynamic in which outlier metrics eventually return to their starting point.

The causes of this reversion don't matter; after the fact, pinpointing the cause becomes a popular parlor game, but the reality is systems revert without any specific cause: suppressing instability with extreme policies creates a temporary illusion of stability, but the extreme policies actually increase instability.

Credit-asset bubbles are a manifestation of extremes generating an illusory euphoria of stability while beneath the surface, these extremes are ramping up instability to the point that sudden breakdown / collapse is the only possible outcome.

When the economy becomes dependent on ever more extreme financial trickery to maintain the illusion of stability, a death loop becomes normalized: as instability leaks through the extreme policies, then even more extreme measures are instituted, generally behind the scenes. Obscure methods of expanding liquidity are normalized, bank credit and other mechanisms (repos, etc.) are jacked up, all of which serve the goal of duct-taping the system to appear stable to unknowing eyes.

The problem with this financial fentanyl is that it's impossible to detect the lethality of the dose until it's too late. That's the current situation in American and global markets.

Let's go through a few of the many extremes flashing red warning signs of systemic precarity.

A handful of Big Tech stocks are holding up not just the S&P 500, but the entire global stock market. The Mag 7 (or top 10, it's basically the same) dominate the market capitalization of the entire S&P 500 to a dizzying degree. Everyone knows this extreme is not a sign of ruddy economic health, but they're forced to chase the mega-cap stocks lest they be fired for underperformance: another example of a death-loop feedback.

Stock valuations in relation to GDP have reached new extremes, with stocks being valued at more that 200% of the nation's GDP.

U.S. stocks--concentrated in a mere 7 stocks--are now 67% of the entire global stock market. For context, China's stock market has a 3% share of the global stock market, the American populace is about 4% of the global population, and America's GDP is 26% of the global GDP in nominal terms and around 15% when adjusted for PPP (purchase price parity).

Since ownership of stocks and other financial assets is concentrated in the top 10%, the concentration of "wealth" in stocks has greatly increased wealth inequality. The ownership of stocks is not just concentrated in the top 10%, it's also a core asset of the Boomer generation. According to Jim Bianco of Bianco Research (@biancoresearch on X), "The share of equities held by people who are at or near retirement age (55+) has climbed to about 80%, up from 60% two decades ago, according to an analysis of Federal Reserve data by Rosenberg Research. And Americans 70 and older now have an "astonishing" 30% share."

Other sources indicate that 52% of people aged 60-65 have 70% of their savings in stocks.

Stock ownership across the board has also reached historical extremes.

Given the extreme concentration of stock market gains in a handful of mega-cap tech companies, it's little wonder that the Nasdaq index has reached extremes of valuation compared to the the small-cap Russell 2000 index.

Lest we imagine that the extreme policy distortions that have been normalized to "stabilize the system" only manifest in the stock market, consider the extreme low of housing affordability. Lots of finger-pointing here, but few seem to notice that the Federal Reserve and the quasi-governmental mortgage agencies have effectively socialized the entire U.S. mortgage market. The only analog of such state control might be, well, um, Communist governments.

Here is how reversion to the mean worked in 2000 to 2003: The Nasdaq stock index fell 80% in 2.5 years. I can assure you that very few observers in March 2000 thought such a mean reversion was possible, much less inevitable, and the few Cassandras who warned of this were dismissed as losers who'd missed out on the greatest expansion of "wealth" in history.

Yes, well, "wealth" is also a funny thing, if you measure it solely by bubbles inflated with financial fentanyl: a fatal bout of runaway instability becomes inevitable when "extraordinary emergency measures" become permanently essential to keep the bubbles from popping.

New podcast:
Charles Hugh Smith on the Extremes in the U.S. Economy and Markets. (26 min)

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Thursday, January 16, 2025

Is Placing a Wager in a Casino an "Investment"?

Producing quality goods that aren't addictive or obsoleted in a few years--there's no money in that, fool. Get real. You want to get rich, "invest" in a bet in the casino.

Is placing a bet in a casino an "investment"? Absolutely! An "investment" is now defined as a wager, often leveraged, at a gaming table in the casino. Anything that offers a gain is an "investment."

This is of course at odds with the classic understanding of "investing in new productive assets" that is core to classical capitalism in which the open market for goods, services, labor, risk and capital allocates capital to the highest and best use, i.e. the most profitable use, via the maximization of self-interest by all participants.

Once upon a time, increasing productivity was the most profitable deployment of capital. Now financial trickery in the casino is the source of outlandishly large gains. For example, buying back shares of the corporation's outstanding stock, reducing the number of shares "sharing" the company's earnings, cash flow and valuation.

So management creates a million new shares as compensation to managers and employees, and then uses surplus capital to buy back two million shares, jacking up the value of the newly created shares that are now mostly in the hands of senior management. $10 million for you, $100 million for me: easy-peasy.

What risk-laden investment in higher productivity could possibly match the gains generated by this low-risk financial mechanism? There is none, hence the rise of stock buybacks as a core use of surplus capital and borrowing power, for it's even smarter to borrow vast sums to fund buybacks and then service this debt with earnings, as borrowing vast sums to fund huge buybacks boosts shares prices far more than a trickle of net earnings.

What makes sense is offloading the risks and low profit margins of production to overseas companies and using the gains from this transfer of risk to fund more stock buybacks and other financial tricks in the casino.

In the happy story, the money investors buy shares with is invested in new equipment that boosts productivity. But this describes a tiny sliver of the financial realm: yes, a new start-up company will issue shares to raise capital to fund its expansion. But this is approximately 0.1% of the transactions in the casino, which is all about trading existing shares--and financialized derivatives of those shares--of companies.

None of the money being wagered in the casino goes to the corporation that issued the shares--none. So what are "investors" "investing" in? Wagers on whether shares will rise or decline in value, based not on increasing productivity but on the skillful deployment of financial tricks, planned obsolescence and addiction.

The gains reaped in the casino are now the measure of the economy as a whole, and the primary source of "wealth." Producing quality goods that aren't addictive or obsoleted in a few years--there's no money in that, fool. Get real. You want to get rich, "invest" in a bet in the casino.

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Wednesday, January 15, 2025

Catch-20: The 20 Dynamics That Will Shape the Next Decade

From low-Earth orbit, we see only the mighty sprawl of immense power. The internal gearing driving contradictory dynamics is buried beneath the grandeur and the euphoria.

The consensus holds that things are looking up as the mighty forces of technology, political change and the market are all in confluence, reinforcing each other in a New Roaring 20s that will remake America and the world for the better.

The potential is certainly present, and so the question boils down to: is the system that's in place able to accomplish all these transformative changes--including transforming itself along the way? For this is the catch in euphoric expectations--let's call it Catch-20, in a nod to Joseph Heller's Catch-22, in which the request to be relieved of duty due to insanity is proof of sanity.

Catch-20 is the system has to first transform itself as the means to accomplish all the wonderful things, but it's incapable of transforming itself due to the vested interests who will move heaven and earth to keep it locked in its current configuration. The euphoric expectations are based on the belief that the system as it is today is perfectly capable of transforming the economy, society and daily life.

But if we examine the system as a system, stripped of ideology and other belief structures, we find a system of contradictory dynamics that are largely impervious to political change, technology or the market. In other words, the forces that are aligned to transform life have little purchase on the system dynamics that are operating beneath the surface euphoria.

I've presented this list of the dynamics that will shape the next decade to subscribers, with the goal being to elucidate each dynamic in depth as the year unfolds.

In my analysis, these are the engrenages, the gearing that is irreversible due to the design and mechanics of the system. This gearing can be understood as a metaphor for addiction: the system is addicted to its own continuity, yet it's blind to the destructive consequences of this gearing.

Each of these points can be understood as one of the gearings in the machine, a machine as complex as the Antikythera mechanism. Together, these 20 gearings make up Catch-20: the system is incapable of transforming itself, which is the essential first step in transforming the world.

1. The system is optimized for infinite growth / expansion. If expansion falters, the system crashes.

2. The system is optimized for infinite substitution of whatever becomes scarce as the means to continue expanding. Each substitution is inferior / not equivalent to the original resource.

3. These optimizations only function in a narrow envelope. Should the system stray outside this envelope, it crashes.

4. The fundamental principle of the system is "no limits": there are no limits on human ingenuity, and so there are no limits on technology and growth.

5. There are intrinsically contradictory dynamics in the system.

6. Scale and asymmetry are the core contradictory dynamics.

7. The system's optimizations mis-diagnose problems, so it selects "solutions" that accelerate its own dysfunction.

8. The system lacks the means--the values, feedback and institutional structures--to adapt to changing conditions. The solutions offered are based on misdiagnoses of the actual problems, so the problems only become more intractable.

9. As a result, the preferred "solutions" are all forms of play-acting, i.e. the notion that controlling the narrative / framing the "problem" as solvable with existing policies is actually solving the problem.

10. The system's core mythology is Technological Progress is unlimited and unstoppable and so it will solve all problems by its very nature. We can remain comfortably seated and watch as Technology solves whatever problems arise.

11. This belief blinds us to the fact that technology also generates Anti-Progress. Since accepting Anti-Progress undermines our core faith in Technological Progress, we deny the existence of Anti-Progress, just as we deny being addicted. This denial renders us incapable of correctly diagnosing problems and choosing actual solutions rather than play-acting "solutions."

12. Due to these conditions, the system is involuted: no matter what option we choose, nothing changes systemically. Real change is only possible at the micro-level of our own lives, by creating our own adaptable "life-system."

13. Over-Optimization renders the system fragile and vulnerable to breakdown. In our hubris, we believe we control all variables.

14. Cycles of War and Debt Renunciation are aligned and mutually reinforcing.

15. The Logic of Planned Obsolescence and Addiction: these are the drivers of new sales / profits.

16. Jevon's Paradox: new sources of energy are consumed rather than substituted for existing sources.

17. Tacit loyalties / "tribes" that no longer align with traditional political / ideological boundaries are emerging; these are as yet "unbranded" and unrecognized: akin to objects invisible to our eyes because they're radiating infrared energy.

18. Under-competence: we have just enough knowledge / experience to keep the machine running but not enough to rebuild it or adapt it.

19. The critical keystones in the system are not visible until they crumble, bringing down what was presumed to be rock-solid and permanent.

20. The relentless increase in the cost of essentials fuels a decline in the quality of goods and services, to the point that we have lost any sense of quality.

It's not popular to view the system from a great distance. From low-Earth orbit, we see only the mighty sprawl of immense power. The internal gearing driving contradictory dynamics is buried beneath the grandeur and the euphoria.

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