The Coming Storms

A Butterfly Has Flapped Its Wings

Peter Tchir of Academy Securities

Chaos Theory is often associated with a quotation, something along the lines of “a butterfly flapping its wings in Tokyo leads to a storm in Manhattan”. I’ve always taken that to mean that if we had sophisticated enough models and data collection, we could determine that a butterfly flapping its wings in Tokyo would cause a storm in Manhattan. That despite this seeming like an unlikely correlation that no one could foresee, there is actually a cause and effect. We just don’t have the data or the models  (currently) to link that butterfly to the storm in New York.

I think this is relevant today as I “sense” (for lack of a better word) that one or more butterflies have flapped their wings and the impending storms are on their way. Yes, maybe it is a cop-out that I will be a bit vague, but I can’t help thinking that important things have occurred and in the coming days and weeks we will see their effects:

• Afghanistan. From the moment this occurred, not only were the president’s approval ratings affected, but the media coverage of this administration shifted. This is playing out in real time as both parties (and the factions within each party) try to cobble together infrastructure deals. Expect disappointment.

• Energy Problems in Europe and China. Many would argue that Europe has been “way ahead” of the U.S. in terms of shifting their energy reliance from fossil fuels to other sources. Many have argued, or at least I have, that while sustainability is an admirable goal and one that we must push for, we must ensure that it is done in a way that is both achievable and doesn’t severely hamper our ability to compete globally. China’s energy problems are different, yet highlight the risks to the global economy when the largest manufacturer has issues beyond the already problematic supply chains. I’m not sure what will happen from this sudden focus on energy, but I suspect it will change the narrative in many ways, which will create opportunities and problems.

• Jobs. Complete confusion about the number of unfilled jobs. This is incredibly puzzling and as we move into October, the explanations that many used (including myself) to explain the issue, seem to not be doing a good job of explaining the dynamics. I’m at a loss for a good explanation, but I’m increasingly concerned that the jobs wanted will disappear before they get filled, leaving us in a precarious position. I hope I’m wrong, but...

• Transitory Inflation. Even some central banks are trying to redefine transitory as not having a specific timeframe. With the energy problem and job market issues described above, it is more difficult to see inflation as transitory. Also, since it has been at least six months of “transitory this and transitory that” where some inflation spikes up whenever another area calms down, this makes it hard to say this is transitory.

• Central Banks. While it is difficult to say that the Fed isn’t accommodative, they are poised to be less accommodative than they were. That is happening across the globe.

• China Real Estate. I think Evergrande may be the Mothra that flapped its wings.

In Chaos Theory, patterns only emerge over time and only once those patterns emerge can we see them for what they were. I think we have had several critical events and “moments” that will play out in the coming weeks and most seem bad (except that they do reinforce my longer-term view that we will develop a domestic manufacturing base in the coming years).