In a note out late last week, JPMorgan’s Nikolaos Panigirtzoglou suggested that the market’s obsession with fiscal stimulus notwithstanding, it’s still all about central bank liquidity provision.
“The upside for equities over the medium to longer term depends more on debt and liquidity creation and thus central bank QE than on fiscal stimulus,” he wrote.
To be sure, Panigirtzoglou didn’t say the fiscal impulse doesn’t matter. It’s just that, in his view, it matters more for the extent to which it will help determine whether the “equity bull market would encompass value and traditional cyclical sectors or continue to be more narrowly focused on high quality and growth oriented stocks.” In other words, it matters more for the character of the assumed rally than it does for the direction of equities as an asset class.
Read more: Equity Bull Market Set To Resume. Central Banks Matter More Than Fiscal Stimulus
For those of you inclined to take a similar view, it’s worth noting that Jefferies’ David Zervos also flags Fed policy as perhaps the key determinant in the near-term irrespective of the election outcome.
Zervos cites “a dovish Fed backstop under any election scenario,” noting that “while there is plenty of potential for rotation within spoos, for the aggregate levels of risk asset and IG credit markets, a highly dovish Fed backstop will be the driver no matter who takes the helm of the White House or control of the Senate.”
Again, it’s the “aggregate levels” bit that’s important. While there’s obviously quite a bit of dispersion under the proverbial hood (both in equities and credit), the 30,000-foot view is a kind of “like it never happened” situation.
That’s in no small part attributable to the Fed’s explicit backstop for corporate credit and, of course, the implicit backstop for equities.
But Zervos doesn’t think every conceivable election outcome will be a total non-event — or at least not looking out over the next year or more. “There is more risk in the longer term from a ‘blue wave,’ due to the potential for increased debt-financed stimulus and the concentration of power,” he said.
As ever, I have to restrain myself from delving into semantics — US Treasurys are not really “debt.” And you don’t have to be an MMT advocate to understand that. It’s more of a philosophical thing. You cannot properly be said to “owe” a sum that is denominated in a currency that you issue. We can all argue about the long-term inflation repercussions (indeed, we can all argue about any number of points when it comes to viewing the world through an MMT lens) but it makes no more sense to say the US “owes” anyone dollars than it does to say that you “owe” debt denominated in your own saliva. Your saliva may not be worth anything, but assuming you owed it to someone and you didn’t suffer from chronic dry mouth, your ability to pay could not be called into question.
Anyway, pulling quickly away from that tangent, note that in the week through October 27, specs ramped up bullish S&P bets to the highest in years.
I’m everywhere and always cautious about overinterpreting positioning data, and you should be too. I present that chart as is. Stocks obviously tumbled on Wednesday and Friday following the period covered by the latest data. US equities have fallen for two consecutive months.
“Some strategists argue the S&P 500 can make a run higher from next year, helped by post-election progress on government aid to combat the pandemic’s economic fallout, as well as the introduction of treatments and vaccines,” Bloomberg wrote Monday, in some boilerplate copy accompanying their own presentation of the same chart.
When it comes to the post-election trade, Jefferies’ Zervos said that “if risk markets want to ramp up sharply on a blue wave, I would fade it, and if risk markets want to freak out on a contested election or divided outcome, I would buy a decent-sized dip.”
“I would” guarantee you that markets will, in fact, “freak out” in a sufficiently adversarial contested outcome. You can make your own call on whether any such “freak out” would be an opportunity. As noted here on Sunday, if things were to go awry in earnest (where that means there’s widespread social unrest and/or volatility surges on expectations for some kind of “science fiction” scenario at 1600 Penn.), the Fed would likely need to flood the market with liquidity. So, your “backstop” would be there, assuming you believe that’s enough to pacify traders and investors in an adverse election situation.
Ultimately, Zervos muses that “the market may not move very much and this election could be the financial markets’ non-event of the century.”
Fingers crossed. Seriously: Fingers crossed.
The saliva explanation of MMT is unique and very effective in aiding understanding
I thought so. haha. It’s got something for everybody. If you like looking at the world through an MMT lens, it speaks to the inherent veracity of MMT as a framework for understanding things. If you don’t like an MMT lens, you can say saliva is worthless.
But, obviously, my point is to emphasize that the debate around viewing the world through an MMT lens is about what happens once we all understand that the lens is itself basically a “truth” lens, so to speak. That is: MMT is fact, at least for most currency-issuing, advanced economies. It’s just a description of *how it works.” There’s no debating it, really.
The debate comes when we ask: “Ok, so we’re all going to accept that reality is just reality in the US, the UK, Australia, Canada, New Zealand, etc., Now what are we going to do with this knowledge and how are we going to wield it safely?”
The way to wield it safely is currently being executed. Deny reality. If politicians/the general public were ever to wake up it would be a one way ticket.
Politicians can’t be trusted to curb spending in the (mmt is common knowledge and acted upon) eventuality that inflation becomes a problem. Their votes are for sale to the public (if we’re lucky) and to special interests. Establishing an “independent fed” is testament to that historic sentiment.
The saliva MMT analogy makes this post an instant classic.
That the banks continue to play politics on the eve of the election by siding with the irrational means likely the election will be a non-event for rationality taking root in the USA.
MMT is an interesting theory. Right now it probably does have validity for the US since the world uses US $ as a reserve asset. Is that really true of Great Britain right now- not sure. Japan- probably. Euro/Bunds ok maybe even though technically Germany no longer has its own central bank- it has a lot of sway in the ECB. The rest not so much… I would compare it to the theory of the liquidity trap. Is it everywhere and all the time a consideration-no. Does it have validity in a recession/depression with rates near zero and declining velocity of money- YES. Like MMT, sometimes it works but other but others it does not.
Of course it’s true of Britain. If somebody bombs London tomorrow, the UK might “borrow” to “fund” the war effort, but that’s not really where the pounds are coming from. Do you think the UK would literally wait until the bonds are sold to start building more planes and weapons? Or say “Well, I guess we can’t retaliate until everyone pays their taxes.” Of course not. The British government is the source of pounds. Where else do pounds come from if not from the British government? They’d just create the pounds out of thin air and pay military contractors to build what they need irrespective of expectations for bond demand or tax payments. I had a lengthy comment posted here, but I’ve shortened it up, as I don’t see much utility in going back over this for the umpteenth time on a post that’s not really related to MMT. It’s true of all currency-issuing, advanced economies with a high degree of monetary sovereignty and it’s true not because it’s a “good” or “the best” theory, it’s true because it’s true. It’s tautological. MMT is, in many respects, a truism. It’s nearly as true for CAD, AUD, etc. as it is for USD, GBP, and JPY.
I think my understanding is pretty good. In fact in my circle of market friends I have advocated the US do this for quite some time- pre pandemic. And for now Britain can do this. But between Brexit and lockdown their credit is becoming impaired. An impaired credit will have market access curtailed once it gets really going. But at a certain point, issuing more currency starts to have negative effects and the trade offs start to bite- otherwise Argentina, Turkey, Zimbabwe etc. would have no problem- right? Cost- benefit start to kick in and MMT no longer is an abiding fact. That is what I meant by not sure.
Their credit is not impaired. I don’t care what any ratings agency says. This is so maddening. Britain doesn’t need “market access.” Why do they need market access? This is one (of several) points you’re missing. They don’t have to borrow. And no, this is not (at all) comparable to Turkey or Argentina or any other EM. EMs often end up saddled with foreign currency debt (i.e., debt denominated in currencies issued by DMs, most obviously USDs). That’s one pressure point, as it makes them beholden to US monetary policy and extremely vulnerable to currency fluctuations. That isn’t the case for Britain. It’s not applicable. It’s apples to oranges. The connection you’re trying to make when you mention Argentina and Turkey isn’t just fallacious, is a total non sequitur. That’s the last thing I’m going to say for this particular thread.
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