Some hundred years ago, Russian political economist Nikolay Kondratiev proposed a technological supercycle of 45-60 years, roughly corresponding to a human lifetime. Kondratiev’s core idea is that technology born in the ashes of the prior period drives the growth and investment in the subsequent supercycle. Each “Kondratiev wave” ends with a long “winter” crisis, distinguished by contracting investment and collapsing birthrates. Kondratiev waves are easily observable in modern history. The steam-power wave ended with the depressions of the 1870s, which lasted through the mid-1890s. The electricity wave ended with the depression of the 1930s, which lasted through the 1940s. The semiconductor wave likely ended with the housing bust of the late 2000s. This is winter. To combat the deflation and unemployment of the winter depression, global central banks have unleashed unprecedented credit creation and desperate asset purchases to keep prices rising. The inevitable result has been record-low, even negative interest rates. Risk premia across asset classes have been crushed. Volatility has been pancaked. The low interest rates have clobbered active management and the hedge-fund industry in particular. This is especially true in fixed income, where compressed yields mean you need massive defaults to make money. Some of the best fund managers (who, as a rule, don’t just look to sell-sell-sell and skin their clients) have returned money or completely shut down services for the public. As a result, the industry has downsized and bifurcated. On one hand are the large “passive” funds, which can only survive by strong asset-allocation (esp. macro) research. On the other are boutique firms, which can only survive by offering a unique product. Whales of the investment world such as public pension funds can’t enter those narrows because they would wreck the investment strategy with sheer size. This is the barbell writ large. And everywhere survival … Continue reading Coin Fiends, Tulip Jokers, and How Kondratiev Invented Bitcoin and Extreme Tail Risk