Mike Wilson said Tuesday that corporate America’s haves and have-nots divide is getting worse. He said some other things too, although I’m not entirely sure what.

The notion that the corporate ranks are experiencing the same acute stratification as society in general isn’t new. It’s a mainstay of post-pandemic strategy pieces and indeed, the narrative was prevalent long before “Wuhan” was a household name in the West. Wilson himself wrote about it a few years back in a noted called “The Other 1 Percenters.” He cited that piece on Tuesday.

I’d be remiss not to note that Wilson’s latest is long on gently accusatory language vis-à-vis fiscal policy and a bit short on macroeconomic data to back up the implicit allegations. I say that not as a criticism necessarily, or at least not to criticize Wilson, but rather to emphasize that a defining feature of many “crowding out” macro-policy narratives is a dearth of evidence. “Crowding out” is a notoriously under-defined catch-all employed by small government types to criticize policy platforms deemed insufficiently laissez-faire. It’s not so much that there isn’t evidence to support the existence of a “crowding out effect” as much as it is that proponents don’t seem to know where to find it outside of an introductory economics textbook.

Wilson thinks it can be observed indirectly in the ever-growing divide between corporate haves and have-nots. “[Four years ago], the average company was experiencing earnings headwinds even though the economy was doing well, small-caps and the average stock were underperforming the S&P 500 materially in both earnings and price terms, and the top 5 companies were dominating the market indices. Sound familiar?” he wondered, rhetorically.

“The earnings headwinds are just as strong [today] despite higher nominal GDP, as many companies find it harder to pass along higher costs without damaging volumes,” Wilson said, editorializing around the 2019/2023 comparison shown above.

There’s no doubt that ours is a narrow market. That’s readily observable on any number of metrics and as Wilson noted, it’s evidenced “across indices and sectors.” But he didn’t do the best job of explaining how, exactly, all of the above fits together into a coherent story, let alone an investment thesis.

“The equity market understands this economy is not that great for the average company or consumer,” he said, adding that,

In our view, the [current market] narrowness is partly due to a very unusual mix of loose fiscal and tight monetary policy with accommodative liquidity. Since the pandemic, the fiscal support for the economy has run very hot. Despite the fact we are operating in a very tight labor market, significant fiscal spending has continued. Since 2020, the budget deficit has averaged 9.4% of GDP. Last year, the deficit increased to 6.5% from 5.4% in 2022. While this is well below the levels reached in 2020 (15.2%) and 2021 (10.5%), it’s high considering the Federal Reserve is trying to get inflation down. In many ways, hefty government spending may be working against the Fed and could explain why the economy has been slow to respond to generationally aggressive interest rate hikes. In short, this spending appears to be crowding out the private economy and making it difficult for many companies and individuals.

Maybe. Probably. Definitely, even. But what are those “many ways”? What’s the mechanism through which the deficit (the current deficit) is “crowding out” the private economy? Is this just loanable funds theory? If so, who buys that? Not anyone serious. That’s just another hopelessly stylized graph you have to memorize for Econ 101. Where, precisely, is this observable other than various ratios of the Russell 2000 versus the S&P 500?

Wilson tries to get there through the RRP-T-bill-QT nexus. He cited “massive liquidity being provided by the reverse repo to pay for deficits.” RRP balances, Wilson noted, have dwindled by more than $2 trillion. He characterized RRP as a “funding mechanism” that’s now “part of the policy mix” and “may be making it challenging for the Fed’s rate hikes to do their intended work on the labor market and inflation.”

To the extent record money market fund AUM can be described as a legacy of pandemic largesse (excess savings on the retail side and swollen corporate cash piles from record profits on the corporate side), that largesse is now being recycled into T-bills via RRP transformation, thereby funding the deficit and facilitating a painless QT.

It’s not clear how that’s consistent with Wilson’s “in short” conclusion that the government’s red ink is “making it difficult for many companies and individuals.” And, again, that contention seems to rely on freshman Econ. I can’t imagine that anyone who works at a bank accepts loanable funds theory. Or who knows, maybe they do on the research side.

Wilson seemed to suggest that by serving as a palliative for the overall economy, loose fiscal policy might be prolonging the pain for sectors which are impacted by tight monetary policy, thereby contributing to market narrowness.

“Higher rates are having a dampening effect on interest rate-sensitive businesses and lower/middle income consumers… exacerbating the S&P 500’s 1 percenter phenomenon and help[ing] to explain why the market’s performance remains so stratified,” he wrote. “For many businesses and consumers, rates remain too high [but] this past week’s hot CPI and PPI reports may raise the question of whether the Fed can deliver the necessary rate cuts for the markets to broaden out until the government curtails its deficits and stops crowding out the private economy.”

Folks, I’m sorry. I have to stop there. It’s just too convoluted. Or if that’s not quite the right adjective, let’s call it circuitous. I’m not sure what the story is with Wilson’s last several notes (or if there even is a story) but I have to say, they come across as indecisive attempts to justify a preference for high quality growth stocks, which is to say a preference for the stocks everyone’s “supposed” to be bullish on.

If that’s even a semblance of accurate (and it may not be), I don’t know if we should interpret it as an unspoken mea culpa, indicative of a “shoulder tap” or whether Mike, like everybody else in the world, just isn’t sure what’s going to happen next and in light of that feels more comfortable erring on the side of high quality growth. Whatever the case, I don’t think it makes sense to cover these notes anymore. They’re frustratingly discursive.