The 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.
Read MoreI have been warming up to this post for a few weeks, even if what’s being said mostly isn’t me saying it. As I have argued on previous occasions, it has become customary to claim that the world is going to hell in a hurry, and that the only solution to this problem is to tear civilisation down, and start anew. I am on record for rejecting both these hypotheses, though for the sake of argument, let’s say that I concede the former. Let’s say that I accept the premise that the way we’re doing things—capitalism, globalisation etc—is in need of fundamental re-design. What would be the most important prerequisite for such a project to succeed?
I’d argue that at whatever level of society such an endeavour is made, it can only prevail if everyone shares an objective method for sorting fact from fiction, truth from false, and sense from nonsense. Without such tools, any such project, at any degree of ambition, would fail. Luckily, humanity has powerful tools at its disposal for such inquiries in the form of science, technology and epistemology. Coupled with good faith, tolerance, compassion and mutual respect, I think that we could achieve just about anything that we set out to achieve. So, what are our chances? Based on the recent evidence, I’d say; slim to none.
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