2% Is The New 10%
Days like these make it difficult to stick by any disciplined "strategy," no matter how simple you've tried to make things.
The two-day decline for US equities hardly counted as a "rout," but at the lows, it was tempting to add some exposure. That might sound absurd considering valuations. Regular readers may remember the figure (below) from two weekends ago, but I think it's useful, so for those who missed it, I wanted to highlight it again. It speaks for itself. Literally -- just read it.
I have always been of a Bearish nature and always believed that the tides do turn. I think it has become different with the Dam/Dike of Central Banks. It is not that many of us were wrong about our views that were steeped in a mere Century or Two of observation but if the World changes when do you acknowledge such. You ran an article this winter that compared this rally to 1933 and it was sobering. My only thought can be that computerization along with Central Banks have truly changed everything. We avoided what should have been a deflationary depression.
Is that what Austrian purists believe would have been in our best interest as a Nation or for the World?. People are still dying the world over but the supply lines did not freeze as they may have. Market purity could have starved many millions of people. Oh but then markets would be pure, washed clean of all the bad business and the people who work there. Yep and it would cheapen labor. Moral nonsense. Most of the naysayers are looking to keep labor cheap even if in denial of it.
Disparity may have been heightened but the awareness of its cause has been heightened also. Is it different this time? At this moment, absolutely. It has been better than any plausible bad outcome, even if the rich get richer.
This is all a big gamble….always is. Nothing is true, only guesstimates. If the sky falls I am betting that it is soft and lightweight and bounces back where it belongs.
“Yep and it would cheapen labor. Moral nonsense. Most of the naysayers are looking to keep labor cheap even if in denial of it.”
When you hear a GOP lawmaker or candidate proclaim his allegiance to the tenets of the Austrian School, remind him that him that the Austrians also advocate for the free movement of labor across borders. Along with goods.
Let us not forget that many of our central beliefs about the world were born of heresy.
I find myself both surprised and confused at how much I agree with some of the points put forward by the H yet find others where disagreements are irreconcilable.
Ha. What you’re experiencing is the “confusion” associated with reading honest, intelligent and, most importantly, balanced commentary in a world largely devoid of it.
Perhaps you should assess the other sources where you get your information and compare the style and quality to what you find here, then ask yourself this: “Who’s really telling me the truth and who’s feeding me one-sided nonsense all day for clicks?”
(Hint: I’m the guy with the uncompromising commitment to quality and balance. Everyone else falls short.)
The confusion comes from the fact there are some well developed and reasonable ideas as the ones outlined in this article that come in conflict with some of the MMT arguments put forward. The fact that the premise is correct (how public expenditure is financed) does not lead to correct conclusions (ergodicity).
As long as you acknowledge that the premise is correct, you and I don’t really “disagree.” Where I become somewhat exasperated is when people pretend like public expenditures in advanced economies are everywhere and always “pre-funded” from tax money or borrowing. As you seem to be acutely aware, that simply isn’t true. It isn’t a matter of politics or “theory,” it’s just facts. It seems like you fully grasp that, you just don’t like where people go next with the analysis. Which is totally fine. That’s your prerogative. Disagreements based on the same set of acknowledged facts are healthy. Unfortunately, most disagreements (at least in the US these days) are based on one party to the argument not understanding (or accepting) the facts. Maybe things are different abroad. I hope so. 🙂
I totally agree with your assessment.
H’s assessment that is.
I am myself a junior economist at best, but reading this blog off and on for a number of years I have gained some great insights. I still do believe that the Central banks are staving off pain now for more pain later. I think they are accelerating the devaluation of the USD and setting China up to be in a position to use their digital yuan to replace the USD as the sovereign currency globally. Will that happen this year? No. In 10 years? Possibly. But, shrinking rates on top of growing debt that is full of unknown tranches of quality is the housing bubble on a much more broad scale. Zombie corps have become the norm and the stock market has become purely gambling with no fundamental investing knowledge required. Crypto’s have become giant stores of wealth and no one knows if they will even be considered legal in 5 years. Housing prices have been flying off the charts for years and make no sense when compared with real wage growth. Tech corps are making massive profits off of sketchy business practices and have zero accountability with what they do with their user’s data. It’s like we’ve got 4 bubbles inflating simultaneously at once. the dot.com bubble, the housing bubble, a stock market bubble, and the crypto bubble. What happens if they all pop at the same time? 1929.
Re: your comments about China. It is clear from many of H’s recent posts that he believes that government budgets are essentially a useless appendage, at least in the US and other developed nations with central banks issuing currency. If we need something, since we are a sovereign nation who’s central bank and treasury can essentially create whatever money is needed we should just write the check, as it were. I’ve been thinking about that and although the Yuan is not yet a global reserve currency, the Chinese government treats its economy in the same way we do. It effectively buys what it thinks is needed, shuts down the taps when it wishes and directs the country’s resources to fit its priorities. As more and more Yuan are moved into the developing world, China is making friends and supporters in many regions without regard to debt. If the money spends then it will be desired. Regardless of what labels we apply to China, if it walks like a duck and quacks like a duck (a Pekin Duck at that) …. it’s obviously a duck.
“So, what do you do when you see 3% or 4% or 5% shaved off the top of a rally?”
Allocate cash to bonds. I spent the early spring predicting 2% on the 10yr by Memorial Day — which seems increasingly unlikely. Could sell everything in May and go away, but behind his placid exterior Jay Powell seems like a pretty determined guy. So time to try bonds as a hedge against falling equity prices. For a little while, at least.
Confusing, indeed.
We all strive for balance but no one is compelled to agree with everything on these pages. H.. your commentary provides the best guardrails available anywhere that I have ever encountered . We are all the Captain of our own ship but this blog is a navigation chart that I consult for clues to tomorrows Hazards as well as trends above all others . Here I would conjecture we have a strong majority in agreement..
I definitely would not feel as confident as I do regarding making my own investment decisions without the Heisenberg Report. I have sworn off Maria, often throw away an unread WSJ (On my “to do” list to shift to online only deliver) and have committed to reading a lot of non fiction books on subjects of interest.
On the other hand, I read every single post by Prof. H.
What you write is interesting, but the counterpoint is Japan.
Japan had been “all stops” trying to promote growth since the Plaza Accords.
How is that working out?
Where did I say: “This works out 100% of the time for everyone always?”
All-in-all, not so badly in Japan.
On a GDP per capita basis? Pretty well, tbh.
And while people argue/complain about lost decade(s), I would argue that social malaise (assuming there really is a social malaise in Japan vs. journalists looking for confirmation of their narrative) is better than economic depression.
That said, I’m pretty sure Japanese leaders wish their predecessors had done things differently in the late 80s/early 90s…