Top Reads, Listens & Follows of the week
Hidden Fragility
Takeaways:
Throughout history humans have built increasingly complex and interconnected systems that prioritize efficiency and low prices over durability. These systems get us 86” TVs delivered tomorrow for ~$1k, but they’re inherently fragile.
My two top reads from this week highlight this. Amazingly, as the headline explains, the U.S. military relies on one Louisiana factory. It blew up. This factory creates a combustible black powder for military munitions that has no substitute. Our push for efficiency and cost reduction in the nation’s industrial base resulted in all the black powder being made in this one factory.
For over a decade, this wasn’t an issue. We had adequate munitions stockpiles and the war in Afghanistan was ending. Not anymore. We discounted a future that would never again involve humans shooting each other at close range in muddy Eastern European trenches. There was no way, there are McDonald’s there. But war is human, and the fragile systems we’ve created have been exposed.
For awhile it was just fine to allow most of our PPE to come from China, they’re great at manufacturing, but it was a grave issue during the pandemic. The paper below from the Santa Fe Institute concludes that fragility is endemic and, worse, that the process which creates it, hides it.
So - why does this matter? From an investment standpoint, investors are plagued by recency bias and are pricing that things are returning to ‘normal’, aka the Fed will cut rates and inflation will subside to levels we saw during the 2010s, but a lot of data doesn't support that view.
I’m increasingly convinced that de-globalization will continue and that governments will address the fragilities we’ve observed in the past few years by ‘on-shoring’ or ‘nearshoring’ things of critical importance like energy and microchips. This, combined with efforts to address climate change, will require an enormous amount of infrastructure and commodities. The war in Ukraine seems like it will drag on. These forces will drive inflation above the markets’ expectations over the medium/long term.
Predictions like this are fun to make, but hard to get right. What’s indisputable, though, is that investors benefit from holding assets and strategies in their portfolio that are biased to perform well when inflation exceeds expectations. Assets like gold and commodities, and strategies like trend following, deserve a place in a well rounded portfolio. Neglecting the importance of these assets, or trying to perfectly time their purchase, will make your portfolio more fragile. We know how that turns out.
Reads: If you have trouble accessing some of these reads, try this
The U.S. Military Relies on One Louisiana Factory. It Blew Up. (here)
The Hidden Fragility of Complex Systems (here)
The Grim Life and Brutal Death of a Wagner Recruit (here)
People Don't Change by Jared Dillian (here)
The attention economy by Kyla Scanlon (here)
Buy Your Winter Coat in the Summer – When it’s on Sale! By Lewis Johnson (here)
Listens:
Chicago’s Renegade Sheriff Wants to Fix Law Enforcement (here)
Wes Gray on the Marines, markets, and momentum (here)
Ric Edelman, the relentless optimist, and Josh Brown (here)
Follow, Watch & Other great content:
60 Minutes: Nicholas Cage, the man, the myth.. (here)