Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
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Summary: This morning's opinion piece from Gillian Tett of The Financial Times reminded me of something my friend Mark Voller said during a recent conversation in a macro conference call. When talking about the Japanese banking sector he made the remark that "they have been kept liquid insolvent for decades".
Eureka! My brain said… That’s it! That’s our new world order in a nutshell: The Fed and its merry men can keep endless liquidity flowing, but its efforts are only restoring lost capital from the demand shortfall, not injecting new capital to already zombie companies which have been kept alive by zero-bound and QE policy nonsense since the GFC in 2008 and before that by the worst enemy of markets ever – Mr. Greenspan since 1987.
There are few things I, or the market can predict, but ironically the monetary future is known, as everything Japan has ever done will be repeated by other G-10 banks, in particular the US. The fault line of course comes from Japan system never having been a real market based economy, historically in feudal times, but even in more recent times through keeping competition and foreigners out of the C-suites and through massive cross holdings controlled indirectly at all times by the political powers. In other words: also here welcome to the future.
Through copying Japanese monetary policy and becoming dependent on the flow of new debt we have made the market based economy impotent and in the process risked the real economy as the bigger and more important victim.
Tett’s article also points to the massive disproportional gap between Wall Street and Main Street. It is important to realize that the Fed and US Treasury are now the one and same entity. The Fed is now merely an extension of the Treasury for funding purposes and it’s now conducting policies that at best would be in violation of the spirit of the Federal Reserve Act and at worst a direct overreach of its mandate that was not intended nor ever legislated for.
Lines from article:
The always excellent Gillian Tett remind me how badly we need insightful, critical analysis in this sea of pundits and forecasts. Then you may ask, if you know the future, can you tell us about it ? Of course...
The next policy will be YCC, Yield Curve Control, a program the Bank of Japan introduced in 2016. To be fully transparent and fair, the US used YCC in the 1940s (to control US treasury yields after WWII while lifting price controls and in order to haircut real value of savings in war bonds to pay for the war effort). If you would like to read more, here is brand new paper from Federal Reserve Bank of New York, research department: How the Fed managed the Treasury yield curve in the 1940s.
The global crisis has now fast forwarded the adaptation of this which I formally expect to be introduced as a tool as soon as we have started to reopen the economy. Current Fed governors Richard Clarida and Lael Brainard (who is considered the “proxy” for present Fed policy) have both recommended using YCC in speeches here and here plus the old guard of Yellen and Bernanke is also aboard the YCC train to nowhere.
Like everyone I admit to confusion on what to do here. I liked and understood the binary risk at the lows, which made me long, then came the expected all-in, which then became too much. The Fed/Treasury seem to operate under the illusion that: --“if a little of something is good, then a lot of it is extremely good”. This defies all math and nature rules, which dictates that it’s the marginal change, improvement, price, data that makes the difference not the momentum or the amplitude.
I change views rapidly these days, so use the above as a snapshot, for what it’s worth.
Take care, enjoy and nice weekend,
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