I meant to publish this entry before I went on holiday, but time got the better of me. My initial impression of markets and the economy as I get back in the saddle is that I haven’t missed much. As such, after hitting F5 an awful lot of times to pull my spreadsheets into the present, I am left thinking about the same themes that I have since Covid-19 ripped up the script. Actually, I am pondering the same themes that I was mulling before the virus too. Economists and analysts are running out of ways to describe the current regime, but in a nutshell, the state of play is as follows. The virus was the straw that broke the camel’s back, prompting policymakers to double-down on the fascinating experiment they have been flirting with, in some form or the other, since the onset of the great financial crisis. How much fiat currency can be created before it either destroys capital markets via inflation, or perhaps more likely, sows political disaccord, if not outright kinetic conflict? I am neatly leaving out the prospect of policy actually getting it right, which is to say; the idea that a new equilibrium is obtained which allows monetary and fiscal policy to seamlessly leave the stage. After all, why would policymakers give up the power that they’re currently being offered by economic events? Luckily the answer to the first part of this question seems to be a very long time, and quite possibly well within the investment horizon for many investors. As a result, investors are being invited to pick up dimes in front of the proverbial steamroller, at gunpoint for added effect. History suggests that they will do just that, until something breaks.
Read MoreThe Narrative™ is treading water at the moment, consistent with price action. The direction still looks decent for the bulls, but it’s getting a bit choppier, which is not a huge surprise. The global equity index is up by 35% since the lows three months ago, but the next three months won’t be as spectacular. This is not a huge insight, leaving the main question of whether equities edge higher, even at a slower pace. The simple stock-to-bond model discussed last week suggests that they will, by 5-to-6% over the next three months to be exact, but it’s probably best not to not hold me on that prediction. Meanwhile, investors and analysts continue to have the same tedious debate about the likelihood of a "V-shaped" recovery, and whether markets will sell off if we don’t get one. This conversation on occasion takes place at an extremely low level of sophistication, so just to make it clear. A V-shaped rebound in growth indicators and surveys, the latter which are often normalised around a trend of ‘zero' growth, is not the same as a full recovery in the level of output. Yet, the idea that markets will sell off if a V-shape in the economic fails to materialise is still presented with alarming regularity. I am not sure how it ever got to this. A full recovery of output always takes a long time after a recession, but markets don't wait around. After the financial crisis, for instance, real GDP in the US didn't fully recover until in the first half of 2011, at which point the MSCI World has already rallied by a cool 92% of its lows. In other words, markets trade on the margin of the data, and that margin is currently well-oiled by policy.
Read MoreI have belatedly revived my Youtube Channel, with two videos. The first elaborates on the points I made in my recent post about the state of the world—and my dissatisfaction of it—and the second updates my view on markets in line with points I made here, with a shout out to two other podcasts that I think you should check out; the BIP show and Odd Lots. I will try to do a video once a week, and I will think about uploading the MP3 files for people who prefer to listen, without watching. The point is that it’s impossible to start with an audio file and upgrade to a video, but the other way around is relatively easy. I am not willing to revive my Soundcloud account, though, but I think Squarespace supports an Apple podcast channel. Stay tuned. In any case, you head over to my Youtube channel and subscribe if you’re just interested in that type of content. Alternatively, I’ll post everything on the main blog.
Read MoreAs my previous post can attest, my mind has been focused elsewhere in recent weeks—and I am also preparing a my next long-form essay to boot—but I thought that I’d have a peak at markets all the same. The Fed’s (non)decision on yield curve control came and went without any significant shift. The FOMC has now locked down the funds rate until the end of 2022, at least, more or less in line with what markets were already expecting anyway. That said, the shift to “time-contingent” forward guidance—over 30 months no less—is a significant step. It caps a remarkable transition from a Fed on auto-pilot in late 2018—with the 2-year yield aiming for 3%—to one now “not even thinking about thinking about raising rates.” A lot of water has gone under the bridge since then, but it’s difficult to escape the conclusion that the shift in U.S. and global monetary policy over the past 24 months is fundamental. The idea of a central bank put was born a long time ago, but it’s difficult to imagine a version stronger than its current form. Quite simply, policymakers wonʼt tolerate, and canʼt afford, tightening financial conditions, of any kind, and over any time horizon, however short and temporary. I have spent considerable ink on these pages arguing that this makes the rebound in equities, in the face of a crashing economy, more-or-less reasonable. In fact, it’s normal for equities to exhibit their strongest return-profiles early in the rebound, as a positive function of sharply rising excess liquidity as policy shifts, but also simply thanks to a low base. After all, it has to pay for those with the guts to buy at the lows.
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