Asset protection
The investment community is divided down the middle into a deflation camp and an inflation camp. From a high level, both parties agree on much of the same issues, such as the negative consequences of overusing debt capital to sustain economic growth. The two parties, deflation and inflation, don’t even necessarily disagree on the ultimate end game. The next several years, however, are still up for debate.
A very similar phenomenon is unfolding in nearly all developed economies. An overuse of debt capital for unproductive projects and initiatives has rendered all major economies impotent in terms of the ability to generate real economic growth without borrowing something in the range of $5 of debt for $1 of growth. Clearly unsustainable.
Our focus will be mostly on the US economy in this note, although a similar process and potential outcomes are available to most developed nations.
To summarize briefly, the US economy came into the COVID crisis with public and private debt to GDP near 370%. The ratio was near 260% if we exclude the foreign and financial sectors. In order to ease the pain of the COVID crisis, as an economy, we borrowed an extreme amount of money to keep failing businesses and households afloat. These actions, while necessary, pushed nonfinancial debt to GDP above 270% and well beyond all critical thresholds studied and deemed to cause negative impacts on the economy…CLICK for complete article
Back on August 18, a little-followed quant at JPMorgan, Peng Cheng, came out with what may have been the most prophetic (and timely) market analysis in recent months, when he – unlike his “strategist” peers at major banks were trivially hiking their S&P year-end price target to keep in lockstep with the market – urged clients to take cover as he voiced concern about the near-term future of technology stocks, thanks to a combination of factors from a worsening market concentration and factor crowding, to the potential for improving Presidential polls for President Trump, rising rates (a 20 bps increase in the month of August) and increasing US-China tensions.
“With the long-end of the curve already threatening a confluence of threshold signals for yields to break higher, continued price weakness has the potential to trigger another flow of momentum based selling pressure,” Cheng wrote on the last Friday of August, adding that “Rising rate risk and factor crowding, the potential for improving presidential polls for President Trump, and increasing U.S.-China tensions provide reasons for investors to consider hedging near-to-intermediate term risk.”
He was dead on, because what followed just a few days later – in no small part as dealers tried to savage SoftBank’s gamma exposure (which had been mostly closed by then) – was the fastest 10% correction in the Nasdaq from an all time high in history.
So with the burst of selling behind us, and some speculating that the rally will now continues, what does Cheng think will happen next? CLICK for complete article
These are genuinely fascinating times to be an investor. Markets seem to be going through a generational phase shift, and not necessarily for the best. I see a culture that is leading itself away from prosperity and towards the abyss, and I’m helpless to stop it. My emotions run the gamut watching events unfold, oscillating between indifference and unbridled rage. I can end up in a dark place. “Just burn it all down!” I think at times. It turns out that I’m not alone, though frankly, I wish I were. While my nihilistic outbursts seem justified, they’re just as harmful as the culture I’m repudiating.
In my last article, I postulated how the ideology of postmodernism permeates financial markets. I see it manifesting as heavy-handed regulations, endless interventions, and a neurotic obsession with markets’ continual rise. Here, I will comment on the reaction to this, which I see as nihilism. To be sure, I believe postmodernism’s influence on markets is negative, so I’m sympathetic to this opposing view. However, the perceived antidote may be just as dangerous as the poison…CLICK for complete article
Yesterday we explained why Bank of America, a contrarian voice among Wall Street banks, believes that hopes for an explicit announcement of Average Inflation Targeting by Jerome Powell in his highly-anticipated speech titled “Monetary Policy Framework Review” which wraps up an examination of inflation which started in early 2019 among both among central bank officials and the public, will be a disappointment.
The first reason that an explicit policy would entail picking a specific time period over which PCE inflation is required to average 2% before beginning a policy normalization (hiking) process. This is a problem, because in simulations conducted by the BofA rates team, it found this could in require the Fed to remain on hold for 42 years!…CLICK for complete article
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