Many investors understandably remain focused on the rally in equities, probably with a mix of satisfaction and astonishment. As interesting as the virus-defying rise in equities is, though, the real story this week has been in U.S. rates, Let me explain. It started with analysts suddenly remembering that trying to shield the economy from the Covid-19 induced lockdowns is going to cost money. Markets’ memory was stirred by the U.S. Treasury announcing that it is planning to place $3T worth of debt in Q2 alone, a cool 14% of GDP, and that’s probably just the beginning. The initial response by many analysts was to extrapolate to a depreciation of the dollar. After all, that’s an awful lot of currency that Uncle Sam will need to produce, assuming that is, that the Fed is going to stand up and be counted. As I argued in my day-job, that reaction was surprising to me. After all, it’s not as if European governments won’t have to dig deep either, and it’s not clear to me that the race to throw money at Covid-19 favours a bet against the dollar. In any case, before we get to currencies, the incoming tsunami of U.S. debt issuance is also, obviously, important for fixed income, and in a world of uncertainty, I am happy to report that the movie currently on offer is one that we have seen before.
Read MoreWhat a week, eh? It feels as if my last dispatch at the beginning of the month was written a lifetime ago. The sell-off in equities was already severe by then, and I was in a buy-the-dip mood. My initial intuition proved correct; the rebound happened, as did the new low. My prediction of subsequent choppy sideways movement was brutally refuted, however, sell-off, a surge in volatility and dislocation across multiple markets to an extent not experienced the financial crisis. There are so many things we don’t know, so let’s start with the few things we do. Covid-19 is now morphing into a hit to the real economy not seen since the financial crisis. The virus’ foothold in Europe is strengthening, and country by country are now shutting down their economies in a desperate attempt to avoid the disastrous scenario unfolding in Italy. The U.S. and the U.K. are acting as if they’re somehow immune or different, I fear they aren’t. In any case, it is besides the point. The global economy is now in recession, and the scrambling action by fiscal and monetary policy is really just an attempt to prevent an economic shock turning to a prolonged crunch with a wave of private sector bankruptcies and soaring joblessness.
Read MoreBridgewater Co-CIO Bob Prince was ridiculed earlier this month for his comments in Davos that “we’ve probably seen the end of the boom-bust cycle.” Pundits were quick to draw comparisons to Irving Fisher’s infamous remark on the eve of the 1929 stock market crash that the equity market had attained “a permanently high plateau.” I sympathise with this interpretation of Mr. Prince’s comment. They come on the back of a 21% 12-month rally in the MSCI World, in an environment where trailing earnings have declined, by nearly 5%. In other words, the P/E multiple has gone from around 15 to just over 20 in the space of a year, and this in an environment where global growth has been slowing. To pile on even further, the recent performance of global equities has been ridiculous, with monthly returns over +2% since September. Naturally, the key for any medium-to- long term investor is to make sure to be long during such periods, but I under- stand if Mr. Prince’s declaration has contrarian investors running for exits. I can’t help but feel, however, that the world is upside down. The speed with which Mr. Prince’s comments was shot down seems to invalidate the contrarian position to me. I mean shouldn’t we be worried only if investors and analysts agreed with his comments.
Read MoreThe teaser from this week’s missive is posted below as usual, but I have a few housekeeping notes to start the year. First off, I know that I am doing less market-oriented stuff recently; I apologise. The good news is that I am diverting my energy towards a long-form essay on fiscal policy. It’ll be in the same type of format as my two previous essays on the Life Cycle Theory and the Balance of Payment. In short, I am appalled by the level of debate about economic policy these days, so I am trying to inject some context and colour on the current flurry about fiscal policy, what it is—as in what it really is—how economists think about it, and what it can and can’t do. This potentially covers huge ground, but I reckon that I have managed to distill the story into a coherent argument. It’s 80% done, and I hope it will be worth the wait. I expect to have the first draft done next month, and then it goes to the editor for a ruthless take-down. The final version should be done in March, with a bit of luck.
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