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Some say the world will end in fire,
Some say in ice.
From what I’ve tasted of desire
I hold with those who favor fire.
— Robert Frost, Fire and Ice (1920)

I think most of us are like Robert Frost. I know I am. When I think about how bad things might happen, how our world might end, I tend to imagine it in a series of mighty events like market crashes that explode like bombs and result in a blaze of destruction. That’s the romantic in me and Frost, imagining that we perish in fiery excitement.

I suspect, though, that the far more common end is that we die in the bathtub.

Certainly that’s what stagflation is, economic death in the bathtub. Economic death by slow, ignominious ice rather than quick, heroic fire. It’s not a crushing recession where everyone loses their jobs and a great wailing erupts across the land. It’s a long, gray slog where meager real growth feels like death, but you keep up appearances as best you can. Stagflation is a long gray slog where every day you feel more and more stretched … attenuated … because nothing is getting cheaper and every now and then you’ll be hit with a new price or an unexpected bill that literally takes your breath away. You can manage it. For now. But damn. Stagflation is a long gray slog where you read about people in the news making lots of money or riding some big financial win, all smiles, but in your own financial life and the financial lives of everyone you know the smiles are increasingly wan and forced. Everyone you know is bleeding. Not yet bleeding out. But damn.

Sound familiar?

A big part of my job, and probably my favorite part of the job, is that I get to talk with a lot of people about money. Not money in the aggregate or the generic, and not money in the sense of this stock or that stock, but about their real-life money or about other people’s real-life money that they manage or advise. I get to talk with people inside the US and outside the US. I get to talk with people of modest means and with crazy rich people. I get to talk about what they’re doing in the real world and what they’re doing in the market world. Usually there’s a fair amount of difference in what people are doing, even when everyone is nervous about the future. Not today. Not for the past 2 months or so.

Nothing has changed in people’s consumption behaviors. Nothing. Everyone is doing everything that they did before. Maybe a little more nervously and maybe a little more on credit, but no one has changed the way they live their lives. The one exception to this is that non-US people are no longer consuming US travel. They’re still consuming US education for their kids, but they’ve cut back on travel to the US in a really major way.

Everything has changed in people’s risk-taking behaviors. Everything. The non-US people are bringing their money back home, wherever home is. They want to eliminate their risk exposure to the US, period. The US people are doing nothing in a profound way, by which I mean they are of course eliminating their risk-on behaviors like buying a new house or expanding their company or bankrolling nephew Gary’s start-up, but they are also NOT doing the typical risk-off behaviors like selling their stocks and going to cash or slashing the price on that rental house that’s been on the market waaay too long or telling little Johnny or Jenny that $100k for another year of ‘higher education’ at [[checks notes]] the University of Miami is just not in the cards.

I talk with so many people who are frozen in place, for whom ‘risk’ is less and less a meaningful concept. They’re extremely unsure about the future, so they don’t want to risk investing in anything new. But they also don’t trust the traditional safe havens like Treasuries or (for the more monied crowd) the yen, so they don’t want to risk selling anything old. They’re domestic US investors, so a falling dollar doesn’t hurt them like it does a non-US investor with US assets, and there’s only so much gold you can add to your portfolio before you start to look at yourself askance in the mirror. So they do nothing in a profound way. They don’t increase risk but they don’t diminish risk. They’re averse to risk and they’re averse to risk-aversion! It’s a word without much meaning any more, and that’s why I titled this note The Death of Risk.

It’s a very weird place for an economy to find itself, where the entire idea of ‘risk’ gets obliterated because of an intentional erosion in the full faith and credit of the US government, and I think that all of our economic models and projections about what happens next are going to be wrong.

Let me show you just how weird a place we are in, where no one trusts the US government (or to a lesser and related sense the Japanese government) as a safe place to preserve their wealth when the world gets squirrely.

10-Year “Investors are Fleeing to X” Semantic Density (Raw Density)

(Click on image to enlarge)

This is a 10-year chart of the semantic density of investor narratives (what we call semantic signatures) concerning five “safety assets” — gold, money market funds, US Treasuries, the Swiss franc and the Japanese yen — across millions of financial news articles, blogs, research reports and transcripts. Semantic signatures are linguistic markers not for sentiment, topics, or keywords, but of a specific meaning that the author is trying to convey regardless of the specific words chosen to say it. Basically this technology gives us the ability to read everything in the world for meaning and then measure the mathematical density of that meaning-distribution across replicable linguistic structures. Lots of ten-dollar words in that last sentence.

What you’re seeing in this chart is that whenever there’s a market crisis or event that provokes risk-off and safe haven-seeking behavior, financial news media talks a lot about where that money is going. You see a lot of dark blue in that 10-year chart, which is gold, and you see a lot of tan in that chart, which are US Treasuries. Depending on the crisis, you see a fair amount of green, which is the Japanese yen. These are the go-to safety assets over the past ten years, especially gold and US Treasuries. The clear exception to this rule is our current risk-off, safe haven-seeking moment, where gold makes its usual appearance but US Treasuries and the Japanese yen are noticeably diminished from prior and similar risk-off moments.

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