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What If It All Comes Apart?
Considering markets as we've come to know them over the past decade (or three) were built on a set of assumptions which no longer hold, asset prices have held up remarkably well in 2022.
That might seem like an odd thing to say. After all, the S&P came into the back half of the year on track for its worst real returns on record, investment grade credit is down an unthinkable 17%, currencies are a mess and a GDP-weighted index of global government bonds is currently on pace for the worst yea
I think that it is a great and freeing exercise to entertain all possibilities as to whether rate hikes by the Fed can actually contain an inflation, which is strongly driven by supply side factors. Certainly made me think. But one mustn’t be seduced by its out of the box appeal to jump to the conclusion that Zoltan Poszar has stumbled onto the truth, just yet. The proof is still to become a real pudding.
US demand for goods jumped over 20% in the fall of 2021 over 2019 (2020 was anomalous) as America, scared to death by death due to the pandemic, went on an epic revenge consumption explosion – ‘I consume therefore I still am!’. Not only did Americans have a deep need to buy and live their best lives now!, but they also had an immense cash hoard with which to actually do it, for various reasons.
No supply line, no factory, no work force, even when they are working at their best, which they obviously weren’t, can possibly handle that kind of demand shock. And this once in a lifetime snafu and the accompanying inflation was well underway, before war super sized it in February.
So until I see that massive consumption of goods come down to around 2019 levels and inflation still manages to remain highly elevated, I will assume that the Fed throwing the baby out with the punch bowl to STOP DEMAND NOW will do its dreary magic and bring inflation down considerably.
In the US, we are fortunate to be able to largely (although not entirely) rely on capitalism to solve many of the problems that our economy is experiencing.
Lack of labor can be solved with automation and spending money on lobbying for more effective immigration. Younger generations will be much more accepting of thoughtful immigration.
Energy problems will get solved over time. Bill Gates, among others, are already working on SMR’s. Nuclear is expensive- but public/private partnerships can handle the cost and then be able to export energy to the rest of the world. There are also multiple promising companies that are working on improving battery storage without creating a disproportionate dependency on rare earth elements that the US is unwilling to mine.
Companies will backtrack on putting all manufacturing in the “China basket” in order to minimize the potential catastrophic risk that China nationalizes their operations, as Russia did. Apple has already started shifting manufacturing from China to India.
Workers will eventually be spending more time in the office. Microsoft just published a survey completed with 20,000 employees in 11 countries. 87% of employees stated they were as effective working from home as they were when they worked in the office. 80% of managers disagreed. This will rescue commercial office real estate and many small businesses.
When everything gets put back together- I am betting it functions even better than before.
The stock market broke below 30,000 today, on its way to Filene’s basement (that’s a Boston thing). It occurred to me that so little of the reaction of the markets today reflects what is real, expected to be real, not certain, etc., that any semblance of market efficiency, price discovery, or anything else that is rational is a complete myth. Even the machines seem to not quite know the rules and individuals are bereft. The market is a maelstrom to stay away from, although I did do some bond buying today. I found a brand new mink coat laying on good old Filene’s basement floor and I couldn’t resist. Anyway in case no one noticed, it seems everything has already come apart.
I wonder if our friends in the private equity side will finally be forced to lower their valuation marks. I hear they left most prices steady in their June reports to clients.
“ Currently, inflation realities mean everyone is compelled to move in the same direction anyway, but even if you wanted to, you couldn’t march to your own drum” – you couldn’t’ … unless you are Turkey, in which case – whatever – why not 🙂
There’s only one big boss from the Bosphorus.