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Just How Transitory is Inflation?

Just How Transitory Is Inflation? Would you buy a five year CD paying 5%?

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Just How Transitory Is Inflation? Would you buy a five year CD paying 5%? We would be shocked if anyone answers “no.” On a relative basis, versus other fixed-income options, a 5% FDIC guaranteed CD is a no-brainer. However, to properly evaluate the CD or any investment, we need to factor in inflation expectations. If inflation for the next five years is 10%, the no-brainer CD will be a bust. The pandemic is easing, and the winds of recovery are roaring at the economy’s back. Pent-up demand and the remnants of stimulus are driving robust economic growth. At the same time, the ability to produce and deliver goods remains greatly hampered. The result is inflation, the likes of which have not been seen in over a decade. Making inflation forecasting even harder is considering how past and future monetary and fiscal stimulus might affect prices. Assumptions based on prior periods may prove right but may also be a recipe to lose 5% on a 5% CD. Given such a unique environment, we must be suspicious of confident media and Wall Street inflation narratives. This is a time where we must think for ourselves. To help you, we break down the 336 components and subcomponents of CPI to better appreciate what is driving the current inflation rate. In turn, this will prove helpful in thinking about future inflation rates.

CPI Summary

On July 13, 2021, the BLS released the June CPI report. The following table shows the headline results for the report. June’s prices climbed well above May’s levels, as well as almost all economists’ expectations. The monthly CPI change of +0.9 equates to an approximate 11% annualized rate. For those old enough to remember, the report brought back nightmares from the 1970s. Since 1990, there are only three other months in which the monthly rate rose by 0.9% or more. The 5.4% year-over-year rate of inflation is the largest in over a decade.

Digging Into Cupcake and Biscuit Prices

The information below is from the most granular details within the CPI Index.  For example, the Food category comprises 13.9% of CPI. Over half of it is Food at Home. One component of Food at Home is Cereals. Within Cereals are flour, breakfast cereal, rice/pasta/cornmeal, bread, biscuits/rolls/muffins, cakes/cupcakes/cookies, and a catch-all other category. The following analysis dives into cupcakes, biscuits, and the other 153 products and product groupings compromising CPI. The distribution graph below shows the 153 products sorted by their respective year-over-year change in 2% increments. As shown, over 75% of the constituents are below the +5.4% year-over-year change in CPI (red line).  28% of the year-over-year changes were negative. On a monthly basis, not shown, 69% are below the monthly CPI change (+0.9%). The right-most column shows four subcomponents whose prices have risen by at least 20% in the last year. They are as follows:
  • Used Cars 45.2%
  • Gasoline +45.1%
  • Fuel Oil +44.5%
  • Other Motor Fuels +32.1%
The left-most column shows two subcomponents whose prices have fallen by 10% or more. They are as follows:
  • Food at employee sites and schools (cafeteria food) -29.9%
  • Telephone hardware, calculators, and other information items -17.8%
The following bar chart breaks down the last three monthly data points and most recent year-over-year data to show how the CPI index stacks up against the average and median of the underlying data. Price increases for most subcomponents are not overly concerning. The median inflation rate based on 153 goods is +3.6% annualized or 1.8% less than the CPI Index.

Contribution Analysis

While the data above helps us appreciate inflation, at least not yet, is not a widespread problem, it does not account for how we spend money. The BLS assigns a weighting for each good when calculating CPI. The table below shows the categories accounting for more than 2% of the CPI Index. While only constituting about 5% of the number of categories, these ten components account for over 50% of the CPI Index and almost 90% of June’s increase in CPI.   Gasoline and used cars alone are responsible for half of the year-over-year change in CPI. Transportation services, such as auto insurance, vehicle maintenance, and airline fares rose over 10%. While smaller price increases than gasoline and used cars, transportation has nearly twice the two products’ weighting. Shelter constitutes about a third of CPI. Shelter is comprised of owners’ equivalent rent (OER), which attempts to value housing and rental prices. Both measures were tame at 2.3% and 1.9%, respectively.

Sticky versus Flexible Prices

To forecast future inflation, it’s beneficial to understand which prices are sticky and which are flexible. Sticky prices change infrequently. However, when they increase, they tend to stick, so to speak. Examples include education, communication services, and motor vehicle insurance. Flexible prices oscillate over time. Examples include gasoline, fruits and vegetables, and car rentals. The Atlanta Fed distributes a sticky and flexible price index. The index constituents and explanation of each index is found HERE. The graph below charts the Fed’s sticky and flexible price indexes. Not surprisingly, the sticky index is stable, and the flexible index is volatile. Changes in CPI tend to be heavily correlated with the flexible index and not so much with the sticky index. Since 2012 the correlation between the flexible index and CPI is 96%. The sticky index and CPI only have a 30% correlation.  Given the flexible index drives CPI, we look at the four largest contributors to the June surge in CPI. We want to understand if they are flexible or sticky prices and assess their likelihood of reverting to pre-pandemic levels. If prices are unchanged in the future for these goods, the rate of inflation will gravitate toward zero. If they fall in price, they will exert negative pressure on CPI. The following four components, detailed below, account for 76% of the recent increase in CPI. Let’s review whether they are sticky or flexible, as well as expectations for future price changes.

Shelter (OER and rent)

Shelter is by far the most important factor in the CPI Index. OER, accounting for most of shelter prices, are only up 2.3% versus last year. The smaller subcomponent, rent, is up even less at 1.9%. Shelter prices tend to be sticky. Other than the 2008 financial crisis and the Great Depression, the U.S. never really experienced a meaningful decline in national housing values. While the BLS’s OER price measure is tame, house prices are not. The well followed Case-Shiller home price index is up 17% year over year. Rental prices are also picking up. Per Apartment List “So far in 2021, rental prices have grown a staggering 9.2 percent. To put that in context, in previous years growth from January to June is usually just 2 to 3 percent.” Our concern is CPI Shelter Index catches up to reality, providing a significant boost to inflation in the months ahead. Further, given shelter tends to be sticky, a reversal in prices is less likely. All that said, the correlation between the reality of house and rent prices and the CPI shelter levels is weak. The graph below shows little correlation between CPI Shelter prices and the Case-Shiller Index. The CPI index trends from the housing boom of 2000-2007 are not much different than periods before and after. The second graph shows the disconnect between actual rent and the CPI’s calculation of owners’ equivalent rent.

Transportation Services

Transportation services have a 5.27% weighting in CPI but account for about 10% of the recent increase in CPI. Of note in this category is car and truck rental prices rising 87% versus last year. Motor vehicle insurance is up 11.3%, and public transportation, including airfare, is up 17%. Most of the line items in this broad category are flexible. Airfares, accounting for .74% of CPI, are much higher today than last year because air travel was dead last year. The same story holds for auto rentals. Further, due to a lack of supply, auto rental chains sharply increased prices versus those before the pandemic. As the shortage of cars abate, rental prices should follow. Also, pandemic related, many insurance customers received discounts last year since they did not drive as much as usual. Those discounts are expiring, resulting in what amounts to temporary price increases. This sector was heavily affected by the pandemic and unease with travel. As the economy normalizes, we expect most prices in this category to revert to historical norms. This sector will likely provide a deflationary pull on CPI in the future.
 

Used Cars

There is a severe shortage of used cars related to the pandemic. The graph below shows the resulting surge in the Manheim Used Car price index. Once the chip shortage and other problems reducing the production of new cars abate, used cars will become more plentiful. At such time, likely in the next six to nine months, used car prices will plummet. While car prices tend to be sticky, we believe the recent aberration in used car prices will not hold. As we have seen, despite a small contribution, used car prices can have a significant effect. The same math will hold when prices correct as well.

Gasoline

Gasoline and energy, in general, are the wildcard in any inflation forecast. Energy accounts for 7.1% of CPI, and gasoline is over half of that. Gas prices are highly flexible. They typically oscillate with economic growth and oil production. OPEC production is still limited although increasing, and U.S. Shale production remains slow to come back online. At the same time, demand, as measured by the amount of product supplied, fully recovered. If energy prices sustain current levels, the incentive to produce will increase and result in downward price pressures. A natural slowing of economic activity will potentially reduce demand. We think gasoline and oil prices generally are likely to stay near current levels but risk price reductions. As such, the contribution from higher gasoline prices will decline significantly.

Future Inflation

We think the current inflationary surge is temporary. When flexible prices, especially some of those mentioned, normalize, inflation is likely to follow suit. This is an uneasy forecast. The following are key factors that can prove us wrong:
  • Shelter, accounting for a third of CPI, starts rising in line with house and rent prices.
  • Wages continue to gain momentum, further increasing demand for goods while the supply and production lines are not fully operational.
  • Round after round of fiscal stimulus continues, further driving demand.
  • An inflationary mindset infiltrates consumer behavior. If people think prices will rise in the future, they are more likely to spend at today’s “cheaper” prices, again driving demand.

Summary

We remind ourselves daily to be humble as we are in unchartered territory. Trying to predict the future in normal times is hard enough. Trying to predict it today with so many unparalleled factors is fraught with risk. All we can do is follow the data, watch for emerging trends, and track consumer behavioral trends closely. While we believe that recent price increases are temporary, we are not wed to that forecast. Importantly, neither are our investment decisions. Review inflation one day at a time and take everyone’s inflation forecast with a grain of salt.

 

The post Just How Transitory is Inflation? appeared first on RIA.

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Are Voters Recoiling Against Disorder?

Are Voters Recoiling Against Disorder?

Authored by Michael Barone via The Epoch Times (emphasis ours),

The headlines coming out of the Super…

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Are Voters Recoiling Against Disorder?

Authored by Michael Barone via The Epoch Times (emphasis ours),

The headlines coming out of the Super Tuesday primaries have got it right. Barring cataclysmic changes, Donald Trump and Joe Biden will be the Republican and Democratic nominees for president in 2024.

(Left) President Joe Biden delivers remarks on canceling student debt at Culver City Julian Dixon Library in Culver City, Calif., on Feb. 21, 2024. (Right) Republican presidential candidate and former U.S. President Donald Trump stands on stage during a campaign event at Big League Dreams Las Vegas in Las Vegas, Nev., on Jan. 27, 2024. (Mario Tama/Getty Images; David Becker/Getty Images)

With Nikki Haley’s withdrawal, there will be no more significantly contested primaries or caucuses—the earliest both parties’ races have been over since something like the current primary-dominated system was put in place in 1972.

The primary results have spotlighted some of both nominees’ weaknesses.

Donald Trump lost high-income, high-educated constituencies, including the entire metro area—aka the Swamp. Many but by no means all Haley votes there were cast by Biden Democrats. Mr. Trump can’t afford to lose too many of the others in target states like Pennsylvania and Michigan.

Majorities and large minorities of voters in overwhelmingly Latino counties in Texas’s Rio Grande Valley and some in Houston voted against Joe Biden, and even more against Senate nominee Rep. Colin Allred (D-Texas).

Returns from Hispanic precincts in New Hampshire and Massachusetts show the same thing. Mr. Biden can’t afford to lose too many Latino votes in target states like Arizona and Georgia.

When Mr. Trump rode down that escalator in 2015, commentators assumed he’d repel Latinos. Instead, Latino voters nationally, and especially the closest eyewitnesses of Biden’s open-border policy, have been trending heavily Republican.

High-income liberal Democrats may sport lawn signs proclaiming, “In this house, we believe ... no human is illegal.” The logical consequence of that belief is an open border. But modest-income folks in border counties know that flows of illegal immigrants result in disorder, disease, and crime.

There is plenty of impatience with increased disorder in election returns below the presidential level. Consider Los Angeles County, America’s largest county, with nearly 10 million people, more people than 40 of the 50 states. It voted 71 percent for Mr. Biden in 2020.

Current returns show county District Attorney George Gascon winning only 21 percent of the vote in the nonpartisan primary. He’ll apparently face Republican Nathan Hochman, a critic of his liberal policies, in November.

Gascon, elected after the May 2020 death of counterfeit-passing suspect George Floyd in Minneapolis, is one of many county prosecutors supported by billionaire George Soros. His policies include not charging juveniles as adults, not seeking higher penalties for gang membership or use of firearms, and bringing fewer misdemeanor cases.

The predictable result has been increased car thefts, burglaries, and personal robberies. Some 120 assistant district attorneys have left the office, and there’s a backlog of 10,000 unprosecuted cases.

More than a dozen other Soros-backed and similarly liberal prosecutors have faced strong opposition or have left office.

St. Louis prosecutor Kim Gardner resigned last May amid lawsuits seeking her removal, Milwaukee’s John Chisholm retired in January, and Baltimore’s Marilyn Mosby was defeated in July 2022 and convicted of perjury in September 2023. Last November, Loudoun County, Virginia, voters (62 percent Biden) ousted liberal Buta Biberaj, who declined to prosecute a transgender student for assault, and in June 2022 voters in San Francisco (85 percent Biden) recalled famed radical Chesa Boudin.

Similarly, this Tuesday, voters in San Francisco passed ballot measures strengthening police powers and requiring treatment of drug-addicted welfare recipients.

In retrospect, it appears the Floyd video, appearing after three months of COVID-19 confinement, sparked a frenzied, even crazed reaction, especially among the highly educated and articulate. One fatal incident was seen as proof that America’s “systemic racism” was worse than ever and that police forces should be defunded and perhaps abolished.

2020 was “the year America went crazy,” I wrote in January 2021, a year in which police funding was actually cut by Democrats in New York, Los Angeles, San Francisco, Seattle, and Denver. A year in which young New York Times (NYT) staffers claimed they were endangered by the publication of Sen. Tom Cotton’s (R-Ark.) opinion article advocating calling in military forces if necessary to stop rioting, as had been done in Detroit in 1967 and Los Angeles in 1992. A craven NYT publisher even fired the editorial page editor for running the article.

Evidence of visible and tangible discontent with increasing violence and its consequences—barren and locked shelves in Manhattan chain drugstores, skyrocketing carjackings in Washington, D.C.—is as unmistakable in polls and election results as it is in daily life in large metropolitan areas. Maybe 2024 will turn out to be the year even liberal America stopped acting crazy.

Chaos and disorder work against incumbents, as they did in 1968 when Democrats saw their party’s popular vote fall from 61 percent to 43 percent.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times or ZeroHedge.

Tyler Durden Sat, 03/09/2024 - 23:20

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Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

The…

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Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

The U.S. Department of Veterans Affairs (VA) reviewed no data when deciding in 2023 to keep its COVID-19 vaccine mandate in place.

Doses of a COVID-19 vaccine in Washington in a file image. (Jacquelyn Martin/Pool/AFP via Getty Images)

VA Secretary Denis McDonough said on May 1, 2023, that the end of many other federal mandates “will not impact current policies at the Department of Veterans Affairs.”

He said the mandate was remaining for VA health care personnel “to ensure the safety of veterans and our colleagues.”

Mr. McDonough did not cite any studies or other data. A VA spokesperson declined to provide any data that was reviewed when deciding not to rescind the mandate. The Epoch Times submitted a Freedom of Information Act for “all documents outlining which data was relied upon when establishing the mandate when deciding to keep the mandate in place.”

The agency searched for such data and did not find any.

The VA does not even attempt to justify its policies with science, because it can’t,” Leslie Manookian, president and founder of the Health Freedom Defense Fund, told The Epoch Times.

“The VA just trusts that the process and cost of challenging its unfounded policies is so onerous, most people are dissuaded from even trying,” she added.

The VA’s mandate remains in place to this day.

The VA’s website claims that vaccines “help protect you from getting severe illness” and “offer good protection against most COVID-19 variants,” pointing in part to observational data from the U.S. Centers for Disease Control and Prevention (CDC) that estimate the vaccines provide poor protection against symptomatic infection and transient shielding against hospitalization.

There have also been increasing concerns among outside scientists about confirmed side effects like heart inflammation—the VA hid a safety signal it detected for the inflammation—and possible side effects such as tinnitus, which shift the benefit-risk calculus.

President Joe Biden imposed a slate of COVID-19 vaccine mandates in 2021. The VA was the first federal agency to implement a mandate.

President Biden rescinded the mandates in May 2023, citing a drop in COVID-19 cases and hospitalizations. His administration maintains the choice to require vaccines was the right one and saved lives.

“Our administration’s vaccination requirements helped ensure the safety of workers in critical workforces including those in the healthcare and education sectors, protecting themselves and the populations they serve, and strengthening their ability to provide services without disruptions to operations,” the White House said.

Some experts said requiring vaccination meant many younger people were forced to get a vaccine despite the risks potentially outweighing the benefits, leaving fewer doses for older adults.

By mandating the vaccines to younger people and those with natural immunity from having had COVID, older people in the U.S. and other countries did not have access to them, and many people might have died because of that,” Martin Kulldorff, a professor of medicine on leave from Harvard Medical School, told The Epoch Times previously.

The VA was one of just a handful of agencies to keep its mandate in place following the removal of many federal mandates.

“At this time, the vaccine requirement will remain in effect for VA health care personnel, including VA psychologists, pharmacists, social workers, nursing assistants, physical therapists, respiratory therapists, peer specialists, medical support assistants, engineers, housekeepers, and other clinical, administrative, and infrastructure support employees,” Mr. McDonough wrote to VA employees at the time.

This also includes VA volunteers and contractors. Effectively, this means that any Veterans Health Administration (VHA) employee, volunteer, or contractor who works in VHA facilities, visits VHA facilities, or provides direct care to those we serve will still be subject to the vaccine requirement at this time,” he said. “We continue to monitor and discuss this requirement, and we will provide more information about the vaccination requirements for VA health care employees soon. As always, we will process requests for vaccination exceptions in accordance with applicable laws, regulations, and policies.”

The version of the shots cleared in the fall of 2022, and available through the fall of 2023, did not have any clinical trial data supporting them.

A new version was approved in the fall of 2023 because there were indications that the shots not only offered temporary protection but also that the level of protection was lower than what was observed during earlier stages of the pandemic.

Ms. Manookian, whose group has challenged several of the federal mandates, said that the mandate “illustrates the dangers of the administrative state and how these federal agencies have become a law unto themselves.”

Tyler Durden Sat, 03/09/2024 - 22:10

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The Coming Of The Police State In America

The Coming Of The Police State In America

Authored by Jeffrey Tucker via The Epoch Times,

The National Guard and the State Police are now…

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The Coming Of The Police State In America

Authored by Jeffrey Tucker via The Epoch Times,

The National Guard and the State Police are now patrolling the New York City subway system in an attempt to do something about the explosion of crime. As part of this, there are bag checks and new surveillance of all passengers. No legislation, no debate, just an edict from the mayor.

Many citizens who rely on this system for transportation might welcome this. It’s a city of strict gun control, and no one knows for sure if they have the right to defend themselves. Merchants have been harassed and even arrested for trying to stop looting and pillaging in their own shops.

The message has been sent: Only the police can do this job. Whether they do it or not is another matter.

Things on the subway system have gotten crazy. If you know it well, you can manage to travel safely, but visitors to the city who take the wrong train at the wrong time are taking grave risks.

In actual fact, it’s guaranteed that this will only end in confiscating knives and other things that people carry in order to protect themselves while leaving the actual criminals even more free to prey on citizens.

The law-abiding will suffer and the criminals will grow more numerous. It will not end well.

When you step back from the details, what we have is the dawning of a genuine police state in the United States. It only starts in New York City. Where is the Guard going to be deployed next? Anywhere is possible.

If the crime is bad enough, citizens will welcome it. It must have been this way in most times and places that when the police state arrives, the people cheer.

We will all have our own stories of how this came to be. Some might begin with the passage of the Patriot Act and the establishment of the Department of Homeland Security in 2001. Some will focus on gun control and the taking away of citizens’ rights to defend themselves.

My own version of events is closer in time. It began four years ago this month with lockdowns. That’s what shattered the capacity of civil society to function in the United States. Everything that has happened since follows like one domino tumbling after another.

It goes like this:

1) lockdown,

2) loss of moral compass and spreading of loneliness and nihilism,

3) rioting resulting from citizen frustration, 4) police absent because of ideological hectoring,

5) a rise in uncontrolled immigration/refugees,

6) an epidemic of ill health from substance abuse and otherwise,

7) businesses flee the city

8) cities fall into decay, and that results in

9) more surveillance and police state.

The 10th stage is the sacking of liberty and civilization itself.

It doesn’t fall out this way at every point in history, but this seems like a solid outline of what happened in this case. Four years is a very short period of time to see all of this unfold. But it is a fact that New York City was more-or-less civilized only four years ago. No one could have predicted that it would come to this so quickly.

But once the lockdowns happened, all bets were off. Here we had a policy that most directly trampled on all freedoms that we had taken for granted. Schools, businesses, and churches were slammed shut, with various levels of enforcement. The entire workforce was divided between essential and nonessential, and there was widespread confusion about who precisely was in charge of designating and enforcing this.

It felt like martial law at the time, as if all normal civilian law had been displaced by something else. That something had to do with public health, but there was clearly more going on, because suddenly our social media posts were censored and we were being asked to do things that made no sense, such as mask up for a virus that evaded mask protection and walk in only one direction in grocery aisles.

Vast amounts of the white-collar workforce stayed home—and their kids, too—until it became too much to bear. The city became a ghost town. Most U.S. cities were the same.

As the months of disaster rolled on, the captives were let out of their houses for the summer in order to protest racism but no other reason. As a way of excusing this, the same public health authorities said that racism was a virus as bad as COVID-19, so therefore it was permitted.

The protests had turned to riots in many cities, and the police were being defunded and discouraged to do anything about the problem. Citizens watched in horror as downtowns burned and drug-crazed freaks took over whole sections of cities. It was like every standard of decency had been zapped out of an entire swath of the population.

Meanwhile, large checks were arriving in people’s bank accounts, defying every normal economic expectation. How could people not be working and get their bank accounts more flush with cash than ever? There was a new law that didn’t even require that people pay rent. How weird was that? Even student loans didn’t need to be paid.

By the fall, recess from lockdown was over and everyone was told to go home again. But this time they had a job to do: They were supposed to vote. Not at the polling places, because going there would only spread germs, or so the media said. When the voting results finally came in, it was the absentee ballots that swung the election in favor of the opposition party that actually wanted more lockdowns and eventually pushed vaccine mandates on the whole population.

The new party in control took note of the large population movements out of cities and states that they controlled. This would have a large effect on voting patterns in the future. But they had a plan. They would open the borders to millions of people in the guise of caring for refugees. These new warm bodies would become voters in time and certainly count on the census when it came time to reapportion political power.

Meanwhile, the native population had begun to swim in ill health from substance abuse, widespread depression, and demoralization, plus vaccine injury. This increased dependency on the very institutions that had caused the problem in the first place: the medical/scientific establishment.

The rise of crime drove the small businesses out of the city. They had barely survived the lockdowns, but they certainly could not survive the crime epidemic. This undermined the tax base of the city and allowed the criminals to take further control.

The same cities became sanctuaries for the waves of migrants sacking the country, and partisan mayors actually used tax dollars to house these invaders in high-end hotels in the name of having compassion for the stranger. Citizens were pushed out to make way for rampaging migrant hordes, as incredible as this seems.

But with that, of course, crime rose ever further, inciting citizen anger and providing a pretext to bring in the police state in the form of the National Guard, now tasked with cracking down on crime in the transportation system.

What’s the next step? It’s probably already here: mass surveillance and censorship, plus ever-expanding police power. This will be accompanied by further population movements, as those with the means to do so flee the city and even the country and leave it for everyone else to suffer.

As I tell the story, all of this seems inevitable. It is not. It could have been stopped at any point. A wise and prudent political leadership could have admitted the error from the beginning and called on the country to rediscover freedom, decency, and the difference between right and wrong. But ego and pride stopped that from happening, and we are left with the consequences.

The government grows ever bigger and civil society ever less capable of managing itself in large urban centers. Disaster is unfolding in real time, mitigated only by a rising stock market and a financial system that has yet to fall apart completely.

Are we at the middle stages of total collapse, or at the point where the population and people in leadership positions wise up and decide to put an end to the downward slide? It’s hard to know. But this much we do know: There is a growing pocket of resistance out there that is fed up and refuses to sit by and watch this great country be sacked and taken over by everything it was set up to prevent.

Tyler Durden Sat, 03/09/2024 - 16:20

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