“We are witnessing the mother of all bubbles”

Part I of II – Interview with Fernando del Pino Calvo-Sotelo

As 2021 draws to an end, it is a good time for us all to pause for a moment, look back and take stock of the year that is almost behind us. It is especially interesting to recall what our expectations were at the start of the year and see how they measure up to what actually transpired. 

It might seem like it was eons ago, but it was actually only last January when politicians in most advanced economies were still celebrating vaccines as the answer to all our problems. They would put the pandemic firmly behind us in just a few months, no more restrictions would ever be needed again and lockdowns would be a thing of the past. Around the same time, taxpayers, business owners, investors and ordinary savers were also told to expect a great economic recovery that was just around the corner. What we all got instead was a fresh round of total lockdowns in many parts of Europe, new restrictions all over the world, “health passes” and a daily reality that doesn’t look like anything remotely resembling “normal”. And as for that economic prosperity that was promised, we instead got skyrocketing prices, an energy crisis and an unprecedented, globally crippling supply chain meltdown.     

To discuss this gap between what was promised and what was delivered, as well as what we might expect in the coming months and years, economically, socially and politically, I once again turned to Fernando del Pino. I’ve long found his insights to be reliably discerning and his analyses consistently astute, something that was clearly demonstrated in our last interview this past summer, that proved to be remarkably prescient.

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Fernando del Pino Calvo-Sotelo is a private investor and former board member of Ferrovial, which was founded by his father, Rafael del Pino y Moreno, in 1952. Apart from his extensive experience in the private sector and his insights as a successful investor, Fernando also has a deep understanding of economic and monetary history. He had long been a staunch defender of individual liberty, self-responsibility and independent and rational thinking, and his writings on this present crisis, as well as on other issues, clearly reflect this.

Claudio Grass (CG): We’re quickly approaching the two-year anniversary of the famous “two weeks to flatten the curve” promise by political leaders and the start of the covid crisis. Looking back at everything that has happened since then and how the world and our lives changed, do you think there is any realistic way we’re ever going back to the way things were before?

Fernando del Pino (FdP): It is always interesting to remind people of politicians’ broken promises, so I am glad that you bring up the all-but-forgotten “two weeks to flatten the curve”. Obviously, politicians’ promises are not exactly what I would consider “AAA” grade. When I pondered your question, a couple of examples came to my mind: Nixon ordering Secretary Connally to “temporarily” suspend the convertibility of the dollar into gold 51 years ago, or the “temporary” Spanish Wealth Tax, still in place in most of Spain 44 years later. It is essential that future citizens learn since school that governments do three things: lie, cheat and steal. However, in most countries, children are raised with the idea of philanthropic governments and blind faith in public officials, with the well-known results. 

It still puzzles me that adult, smart people do not view everything the power junkies say and do with a healthy dose of skepticism. After nearly two years of deception, irrational thinking, unscientific policies, corrupt institutions and dictatorial abuse, it is difficult not to suspect that they never wanted to achieve herd immunity but the herd itself, and to a large extent they have succeeded. The principle of blind obedience to authority has been successfully tested. 

The good news is that, yes, I think we will go back to normal, because you cannot fool all the people all of the time and people cannot bear such an emotional stress forever, although this successful global totalitarian experiment should be understood for what it really is: a worrying precedent. The government-media-pharma gang are still coming to grips with reality and finding a way out of this huge deception scheme. It is obviously difficult to admit to the public that vaccines haven’t worked as promised, both in terms of effectiveness and safety, neither have lockdowns, and that all the sacrifices they were forced to make have been mostly fruitless, a gratuitous act of power. They need a scapegoat, while they ruminate how to find a way out. New “Terminator” variants such as “Omicron” (as predicted, we are running out of Greek letters) and the unvaccinated have been chosen as perfect scapegoats for the time being. However, the stubborn truth will eventually and inevitably prevail.

CG: Another one of the promises we heard repeatedly was that of an imminent, roaring” economic recovery. Politicians and central bankers often point to the stock market and to corporate earnings to convince the public that this promise was kept. Do you believe these metrics to be an accurate representation of the state of the economy? 

FdP: Paris-based investor André Kostolany, of Hungarian origin, used to compare the relationship between the stock market and the economy to a dog set loose and its owner having a walk around the block. In the end, both will end in the same place, but the dog will have covered much more distance, running in front of the owner in order to sniff something, coming back, then staying behind to flirt with the neighbor’s female Labrador and then catching up again… The stock market is like the dog, moving randomly and furiously in the short term and more sensibly in the longer term. However, the longer term can take very long indeed! 

Currently, we are witnessing the mother of all bubbles – or maybe the aunt, or the grandma, because we have had so many bubbles since the Central Banks decided to mess around with the economy that it is difficult to rank them. However, one thing is certain: unless “this time is different” (and it never is) financial pain lies ahead. No, the stock market mania does not reflect a “roaring” economy. My view is that Western economies have been languishing for decades in a sort of off-the-radar fashion, kept artificially alive with increasing doses of medication. 

The fundamentals have been weakened. First, productivity is not a given and its increases come in leaps, not linearly, and great increases in productivity have been scant. Secondly, the fuel of economic growth is freedom and the rule of law, and both have been slowly taken away from us, little by little, in parallel to the metastatic growth of Leviathan States in Europe (and to a lesser extent in the US as well) and the creation of perverse incentive systems.

CG: Inflation was also a risk that was consistently and vehemently dismissed over the last year by policy makers, who argued that it is transitory” and that everything was under control. And yet, even by the official metrics, these assurances appear to be increasingly unconvincing. What is your outlook and do you expect to see prices climb even higher in the future?

FdP: Yes, we find again that “transitory” word. Politicians never understand that the only thing truly transitory is themselves: they come and go and no one remembers them once out of office. That is the nature of the vanity of the world, which unfortunately most of them forget about. Inflation has fooled many of us for years. I understand that CPI as calculated before (no hedonics, etc.) has been way higher than the current official figures, as Shadow Stats rightly points out. However, the gigantic financial experiment carried on by central banks around the world has not shown up on the CPI figures as extensively as one would have expected. 

Reasons abound, of course, in hindsight. It seems to be a complex issue. One usually overlooked factor is China’s access to the WTO and the seismic outsourcing of manufacturing to that country, an enormous geopolitical power shift with implications that the West will not understand until it’s too late. China has enjoyed high productivity due to its hardworking people, looser regulatory frameworks and much lower salaries. Lower salaries are a “transitory” competitive advantage, though, because their very success sows the seed of their ultimate failure (the country gets richer and its relative salaries grow accordingly). However, China has now developed its own tech skills, so it has seized the opportunity. On the other hand, the huge imbalances created by its central planning – sooner or later destined to failure – and the social distortions and spiritual drought brought about by the always destructive and tyrannical Communist ideology make this country extremely fragile. Also, the accumulation of commercial banks’ reserves after 2008 did not end up in people’s pockets as central bankers expected, and we also had the internet and ecommerce deflationary effect, etc. 

There are also many reasons for the “sudden” inflation bout, again, in hindsight. The fiscal excess of sending checks directly to homes, the equivalent of the panem et circenses policy in the decadence of the Roman Empire or previously in the Ancient Greek democracy, might have been the turning point. The bottlenecks caused by the suicidal lockdowns are yet another reason, though hopefully ephemeral – unless turned into a geopolitical weapon. Anthropogenic climate change nonsense might be the most lasting reason, as fuel fossil exploration and production have been persecuted by the climate change fanatics and producers have not been covering the depletion of their reserves. By the way, in the context, the OPEC has seen an opportunity of seizing a bit more power, like in the good old days. The truth is that wind and solar can never become the base of any electricity generation system because of their intermittency and cost (the Laws of Physics somehow don’t care about political narratives). The electric vehicles myth also defies common sense, but we seem to live in a collective mania, a madness of crowds, fed by a few power junkies and some economic interests, where reason no longer applies, only totalitarian authority from some unelected, distant bureaucrats. 

Regarding the inflation outlook, I learned long ago to be very prudent regarding macroeconomic forecasts. I tend to lean towards the mentality of the Austrian School of Economics in the sense of having a sound framework and a line of logical reasoning rather than engaging in excessively detailed forecasts. Also, unexpected events happen in reaction to reality that shape that very reality in complex political and economic feedback processes which are difficult to identify and weigh. In this sense, I would say that the central banks’ opinion is usually a powerful contrarian indicator, so if they say inflation is transitory, odds are it won’t be. 

The energy crisis seems to be here to stay, if the faith-based “green revolution” offensive continues uncontrolled, only temporarily tempered should a depression come in and soften the demand (maybe another “two weeks to flatten the curve…”). Protectionism is on the rise as politicians suffer the ugly bites of reality and search for a scapegoat. Monetary and fiscal foolishness that teaches that money no longer deserves respect (an infinite supply brings its value close to zero) continues unabated until the system can no longer hold and breaks apart. On the other hand, inflation is the endgame for these monetary excesses. So, in the end, you have a worst-case scenario in which either the currency implodes or you have a depression, but of course apocalyptic scenarios almost never play out. We will come out of this.

CG: Beyond the economic impact, do you also expect the deteriorating living standards to have sociological and political repercussions?    

FdP: In democracies, politicians have the perverse incentive of doing not what is right for the common good in the long term, but what it right for them in terms of securing reelection, meaning they try to make voters happy tomorrow, promoting immediate gratification. To be fair, that’s precisely what the spoiled voter demands from them. So, power holders cannot be called “leaders”, but “followers” of polls and public opinion. Also, no politician is held responsible for anything, so they can ruin their country and still enjoy a comfortable retirement. 

What can you expect under such incentive system? Of course, the deteriorating living standards, hidden under unaudited public figures calculated by the very same people that are to be judged by them (CPI, GDP, etc.), are already having social repercussions. We might soon witness “the Great Frustration”, where the masses start to understand that the promises of Big Government will not be fulfilled, that they are going to live below their parents’ standards, that money doesn’t grow on trees after all and that “progress” is neither linear not a given. These are the consequences of The Five Experiments the West has been carrying on for decades. This would naturally create fear, anger and chaos, and quite predictably, politicians will turn on their deflector shields and point the finger to some well-chosen scapegoat, usually minorities inside the country or foreign countries (“the enemy”). The Jews were the scapegoats of the Weimar Republic’s hyperinflation and the unvaccinated are scapegoats of the covid vaccines’ fiasco. Of course, I do not intend to compare the two except conceptually, but in most cases of revolutionary chaos or serious economic crises, minorities – be it political, ethnic or religious – or foreigners have been blamed and persecuted before everyone came to their senses again. 

We should learn from History – which is nothing more than learning from human nature and the laws of political power – but we don’t. Once you create huge fear and it gets out of control, you have opened Pandora’s Box, which can lead to very dangerous situations. And fear is like fire: very easy to light, extremely difficult to put off. The covid media terror campaign, designed to create universal demand for the covid’s faulty vaccines and gene therapies, has created PTSD on a sizable percentage of the population, and that will require a long time to heal. Fear begets anger, and politicians are experts in redirecting that anger away from themselves.

End of Part 1—————

In the upcoming second part, we shift our attention to the current state of climate politics and their implications for the average citizen, the campaign against free speech and we also discuss basic principles that long-term, responsible investors should keep in mind in these uncertain times. 

Claudio Grass, Hünenberg See, Switzerland

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