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Three Things I Think I Think – The More Things Change the More They Stay the Same

Here are some things I think I am thinking about:

1) Markets are crazy, part 2,343,325. I like to say that markets don’t really “cycle” like a sine wave. They tend to trend up and to the right with temporary shocks along the way. Whatever causes the shock (up or down) will always be different. But the responses are more or less the same. That is, people get greedy, then they get really greedy, then they get fearful and then they get really fearful. Timing all of this is damn near impossible, but while the causal factors are always “different this time”, the one constant that’s never different this time is human emotion.

We’re obviously living through one of the “really greedy” phases. Case in point, AMC bonds, which have to be one of the charts of the year. These bonds were left for dead just 8 months ago and have roared back to life. What’s amazing about this though is that it’s not really a recovery story. This is more of a meme stock story. That is, Reddit investors have pushed the stock ever higher which allowed the company to raise capital earlier this year. And that capital infusion has allowed AMC to float. I always like to say that investing in secondary markets is akin to betting on horses. Your bets don’t necessarily impact the horses running the race. But here’s a situation where the markets are so crazy that the bettors have actually influenced how fast the horse can run….Amazing times.

2) The Economics of Permanent Stimulus. Matthew Boesler had a very interesting piece in Bloomberg yesterday. The basic gist of the article is that macroeconomics has changed forever in the sense that fiscal policy has now become the dominant response to economic downturns. He asks an interesting question coming out of 2020 – if the government can always replace the lost income from a recession then why wouldn’t the government always do this?

I’ll be honest. This is a question that scares me. Regulars know I am not all that sympathetic to Austrian economics and I generally favor fiscal policy to monetary policy. In fact, I am probably partially to blame for the sea change in thinking since I’ve been such a vocal proponent of using fiscal policy over the last 10 years. But I am still very much a Countercyclical Keynesian as opposed to the new brand of MMT style Procyclical Keynesian that has come to dominate much of the thinking of late.

Maybe I am biased because I spend too much of my time trying to manage financial risk, but this all has a very “free lunch” feel to me. For instance, let’s say the government responds with big fiscal stimulus the next time the economy and markets get a whiff of recession. Well, the markets will roar back to life in anticipation. They’ll become more overvalued than they already were. And one could argue that this stability will breed future instability. And the markets will become more volatile. And when they do the government will respond again with another stimulus. And the markets will roar back to life and then become unstable. Rinse, wash repeat until the stimulus causes enough inflation in the real economy that the markets realize that this is all destabilizing in a real sense. The cure becomes the disease.

You see, this didn’t work with the Fed’s responses. I’ve nuked that narrative a million times in the last 10 years consistently explaining that the Fed doesn’t have the big bazooka. So, the Austrians had it backwards this whole time. They thought the Fed was propping up the markets, but the markets were mostly responding to fundamental changes in the economy. Fiscal policy changes the whole game. The last year proved this definitively. When the Treasury starts printing money then you really do have the effect that the Austrians were always worried about. And in a situation where this becomes permanent and procyclical the Austrians could actually end up being right about how this ends up being counterproductive in the long-run.

Now, here I am sounding like an Austrian Economist….

3) Here Comes the YOLO Summer. Earlier this year I said that this Summer was going to be the “YOLO Economy”. People mostly mocked me saying that the recovery was fake and all that. And they might end up eventually being right. But for now the YOLO Economy is fully here. The Fed’s Q2 GDP Now forecast is a whopping 10.3%. Whooboy. That’s a big one.

Anyhow, enjoy while we got it. That rate of growth is sure to wane. My guess is things won’t be nearly this easy as we move into 2022. And if the boom continues to boom and the greed leads to more greed then we maybe need to start getting worried about the boom causing a bust. See #2. 🙂