The Time of Two Popes Has Ended - Or Why I think that Next Year Will (Finally) Be a Normal Year

I'm suddenly far more optimistic about the new year now that we're back down to just one pope.

Benedict was the first pope to retire in 6 centuries when he resigned about a decade ago. His death marks the end of this anomalous disruption of traditions, the end of the time of two popes.

I fully expect the rate of weirdness to drop off now, the West no longer off-kilter. If I'm right about how this works, next year will be just a normal year, which will be a big relief.

Photo from NY Times.

2022 in Review - Setback for Autocracies, a Reversal of Negative Real Interest Rates (and stock market gains), and Technological Advances

2022 was a year of huge stories. Huge.

In technical advances, MRNA therapy got its first positive results with a cancer vaccine, we sustained nuclear fusion for one-billionth of a second, and the Webb telescope looked back in time 13 billion years. (It is not just the future that is bright. With the Webb telescope, so is the past.) And normal people are using AI as a catalyst for creativity. 2022 could become a marker for a new era.

In finance, interest rates have gone positive again. Put simply, money is no longer free. I see this as a setback. You experienced it as the worst year for your portfolio since 2008.

In 2008, the economy destroyed 3.5 million jobs. It is little wonder that the NASDAQ fell by 40% that year. By contrast, this year the economy created 4.5 million jobs. So why did the NASDAQ fall 33% this year? The simple answer is that real interest rates rose 2% during 2022, from a NEGATIVE one-third to a positive one and two-thirds percent. Negative rates make the future incredibly valuable; rather than discount future earnings, negative interest rates actually boost them. What does that mean? Startups, companies with high-risk, high-return products who are trying to create new markets see their valuations surge. But once those rates rise from negative to positive, the value of those speculative earnings plummets.
Prior to 2022, Fed Chair Powell had continued to stimulate the economy with low interest rates even when the unemployment rate was hitting historically low rates. Twice the unemployment rate has hit 3.5% in these 2020s, its lowest rate in about half a century. And rather than raise rates, Powell kept them low, continuing to buy securities as well (what you've heard referenced as QE). Why continue to stimulate the economy with unemployment rates so low? The economy continued to create jobs without inflation.

Last year, inflation hit. Hard. It peaked at 8.1%. Powell began raising rates and all those speculative stocks and exciting unicorns saw their values plummet as interest rates rose into positive territory.

The biggest question for me is simply this: will the extended period of negative real interest rates turn out to be an anomaly or will this period of positive real rates turn out to be (as I suspect it to be) a slight setback towards a new world of negative real interest rates? If it is the first and positive real rates are the new normal, you’re not getting a snap back in your portfolio. It will languish. If it is the latter, and real rates begin dropping again next year, your portfolio will start rising again, perhaps even dramatically.

The third big story is the struggle between autocracies and democracies. It was not a good year for autocracies. Xi pursued absurd COVID policies, dramatically shutting down the country in pursuit of 0-COVID. Putin pursued absurd military policies, invading Ukraine. Both leaders demonstrated one of the biggest flaws with autocracies: the ability to pursue stupid and dangerous policies without dissent. And both leaders created inflation that hurt developed nations. Russian oil prices spiked with the Ukrainian invasion, triggering broader inflation. China’s shutdown was a big part of why supply chains were snarled, another catalyst for price hikes. Dramatically illustrated by Trump’s love for Kim Jong-un and Putin and desire to abandon NATO, autocracies had gained in recent years, leading to a democratic recession. Biden’s election and the events of the last couple of years in Russia and China have seemed to stall the advance of autocracies. This has yet to resolve and could be even messier before it does. Still, this is good news because it suggests that the advance of autocracies has stalled, if not reversed.

Science advances that read like science fiction and a setback for the advance of autocracies is great news. However, a reversal of a bold financial experiment in negative real interest rates seems to me a setback in the transition into an economy that puts more value on the world a generation from now more than it does the world of today. All of these mark 2022 as a year of dramatic change that could ripple into the next generation.

Abortion, Beliefs and Freedom of Religion

"Virginia State Delegate Marie March (R) has pre-filed House Bill 1395, a law that would define life as beginning at fertilization."

Abortion seems like such a contentious issue but I only disagree with three groups of people regarding this topic. I suspect that you share my disagreement with two of these groups, perhaps all three.

1. People who think that egg or sperm - because they are alive and because they are human - are the same as human life. That's just silly. Trillions of eggs and sperms perish every day and no one cares. Sperm and egg are the garbage of life.

2. People who think that newborns aren't yet human and don't deserve to be treated as such. A newborn is human life and the fact that they can't go to the kitchen to make a sandwich and feed themselves is no excuse for treating them as anything less than precious.

3. People who think that they know the instant when the garbage of life becomes precious life, who will dictate to you when you feel like you can treat this as a pregnancy that you may not want to continue versus when you want to treat this as a little person who you will do all you can to bring into this world and nurture.

At the core of freedom of religion is this really important idea: no matter whether you are so convinced of your belief that you literally think people who don't embrace it will spend eternity in torment, you still need to respect their beliefs as being just as real and important to them as your belief is to you.

Freedom of religion rests on respect for opinions that you find ludicrous because you want the same respect paid to your personal beliefs (that some other people will certainly find ludicrous). The reason why religious fundamentalists tend to be the ones protesting the right to abortion is because they are the people least able to acknowledge that very real and very vivid beliefs that they hold might actually be wrong. Freedom of religion requires a certain humility even from true believers, whether they are atheist or Muslim, Catholics or Scientologists. "Knowing" the instant the garbage of life becomes the treasure of life, when egg and sperm are equivalent to a baby, and "knowing" that everyone else is wrong about that instant shows a lack of humility that is wildly inconsistent with a community that practices freedom of religion, a respect for differences in opinion even about really important issues like when life begins (do you believe it begins at conception? three months after conception? 6 months?) or when life ends (at death? when the last person who knew us dies or has forgotten us? never?).

The beauty of the modern world is that we've learned to respect personal beliefs without believing that everyone else must hold our own beliefs. The group I disagree with most? The group who believe that their beliefs are the only beliefs that should be legal. It's a very medieval concept and has no place in a country that was a marvelous invention of Enlightenment philosophers in part invented to grant freedom of religion and thought.