By Paul Lavin on Medium:
2020 getting set to go out with a bang
The US is on the cusp of an economic boom. The Covid crisis is petering out yet policy will remain pedal to the metal with high powered fiscal and economic intervention more potent than the weak-assed monetary fiddling normalised after 2008, regardless of whether Trump or Biden wins. We’ll follow in the UK, and Europe will too but may drag its heals in that unique euro-dysfunction style and flirt with misguided austerity.
2008–2020 has been a sort of bastardised semi-depression in the West. After 2008 we prevented the debt deflation and capital destruction impulse that history foretold must happen through unusual and spectacular monetary policy responses. But we didn’t prevent the pervasive depression-lite economic gloom and lack of belief in a future that afflicted many an ordinary Joe.
The 2020s will be our reawakening after depression. The ‘mundane’ economy rather than the ‘innovation’ economy will boom back after years of semi-depression with the extra duress of the Covid crisis providing a clear end point to our decade plus depression and a platform from which to economically spring.
It has always been a delusion to think that economic power and success can only accumulate to megatech platforms. The innovation economy is wondrous but part of its huge success flows from the depressed state of other areas and the effectiveness of monetary largesse supporting asset prices and speculative behaviour that has favoured financial speculation and megatech.
Amazon is a superb business but is also a super parasite feeding on a decayed corpse, aided by diseased policy and political leadership. However, the majority cannot remain enfeebled in our hypermedia proletarian societies just so as a minority becomes ever stronger. Cake must be shared with all or it will be for none.
Economic renaissance is not necessarily equity index fuel
No doubt extraordinary support measures will be turned down a notch or two. There may be some errors in this winding back of support that cause moments of economic strain but on the whole support will be removed slower than economic ‘normality’ returns. Above all else and at all cost, US policy response (fiscal as well as monetary) will seek to avoid a slide into a deflationary doom loop. Whatever it takes!
Everyone knew already before the bug that the real economy needed to find new oomph. The shutdown just makes it even more glaringly obvious and has liberated a spectacular and powerful new toolset to remedy it. We are through the looking glass and there’s no going back. The real economy is the policy focus. A path back to employment for millions is urgent.
How this plays in equity markets is nuanced. On balance it’s likely to be supportive of specific risk taking but less clear-cut good news for indices dominated by high valuation megatech and listed unicorns in the US. Rotation, chop and general narrative change may push against any meaningful up move for a period.
A renewed bear market phase is possible depending on how supportive policy action segues with an economy and people deciding there is some post Covid normality. Explicit yield curve control may keep the fire lit under equity markets but a cap on long term yields is likely to be somewhere in the 200–300bps area and a rapid reprice into that range would trouble many highflying stocks.
The more speed with which we believe the broad economy can head to normal activity the more likely we see a US bear phase given that their indices are dominated by anti-normality pro-Covid plays. Many non US markets have a much easier path to upside as long as they don’t stamp on the brake with regards to supportive policy (looking at you Europe!). The UK has an open goal to score in as long as policymakers stay away from shades of austerity and just keep pumping.
A phrase from my hometown Aberdeen in North East Scotland captures our Covid moment: “Dinnae fash yersel, ye’ll be deid soon”.
It’s a stoic message conveying that we should get on with things as life is short. Its essential truth is that coping, regardless of the cards we’re dealt, is our only option in life. Aberdonians are often considered dour bleak sorts by outsiders. A gruff exterior often disguises a hardy earthy levity, even optimism. Nevertheless, it’s hard for outsiders to discern the joie de vivre through the barnacled Calvinist exterior.
Faced with uncertainty I don’t view it as an obvious mistake for governments to have acted in an extreme precautionary manner. Although I was against lockdown I could understand why they were pursued as an option, for a limited period, as system insurance to ensure we could cope with an unquantified destructive force. However, our hypermedia patrolled long-lasting puritan’s prison has been insane.
Using fear as a policy implementation tool has been a giant mistake. Once fear has been embedded in a society, particularly of an invisible pervasive deadly threat, it cannot be easily unthreaded with an un-fear policy. The longer fear is used the more pervasive its destructive undertow.
Mob wisdom has been coaxed by fear into putting on a pedestal countries that chose ‘extreme coping’ (i.e. not coping!) and denigrating those that sought to cope with rational moderation. New Zealand is an example of the former and Sweden the latter.
Pursue the puritan’s solution of closing near all activity down and the stats related to viral spread will be brilliant. Whereas, a coping strategy is risky and messy with mistakes punished by the bug. Sweden acknowledges it could have done better particularly around the protection of vulnerable elderly groups.
I’m not asserting that Sweden got it all right but I do believe they pursued a fairly rational coping policy that they can extrapolate and extemporise from. How many waves of full shutdown can NZ accept over the coming years before radically changing approach? NZ’s policy provides no platform to build from if the bug is pervasive and persistent. Six months from now there’s a high probability Jacinda Ardern’s is in a very difficult spot and her judgement questioned.
In future we will all be Sweden not NZ, be it for this bug or any future pandemics.
The only thing we have to fear is fear itself
It may be that the only sustainably rational choice for complex interdependent societies is to succumb to a wave of infection before they can get to the other side of the bug. Pragmatic (or disorganised!) nations may look much less unwise six months from now relative to the puritans.
Obviously, a vaccine in the next few months will save blushes and make the radical puritans look good. However, lack of effective safe vaccines could create unimaginable policy hellishness for puritan countries. How do you step out of isolation and back into a world that is robust to the bug knowing you must experience the pain of raised mortality? Or stay sheltered and crater your economy?
Undoubtedly, my view will divide opinion. So, let’s not fight about it, let bygones be bygones, accept error on all sides and look forward. US data is interesting…
Infection rates rose significantly in the US from June onwards yet death rates have not responded in the same way. I don’t want to make a case beyond that. What’s happening is complex and open to argument and interpretation in many ways. However, it is an uncontroversial observation that this pattern is significantly better than expected and important to note that the general wisdom (from scientific advisors on down) was that it would be much worse.
The bug can undoubtedly be deadly but it is not viral armageddon nor systemically overwhelming and the majority of the population is unlikely to experience serious side effects or worse. Obviously, any prolonged death process is going to look very ugly if we focus attention on it. Anyone that has had someone close experience death throes over many days knows this. We have been paralysingly mawkish in our observation of the Covid dying process.
Both US liberals and conservatives found their reasons for flouting Fauci’s advice. Since May the bug has been given plenty of room to do its worse be it lack of social distancing by gun-totting ‘freedom’ nuts, woke protestors or the young partying like they should.
Excess deaths are not good but if this is the result from American carelessness why would much more obedient, mannered and authority obeying Europeans countenance going back into lockdown? We know the costs in multiple dimensions including non-Covid health and wellbeing are too high.
Clearly a fear de-escalation path has opened before us through the USA’s massively incoherent Covid experiment. Not by design, but by glorious accident, the US experiment signals the end game for debilitating Covid fear. We haven’t decided to see this clearly yet despite its obviousness. Opinion sensitive elected governments probably want to hear a message from the electorate that its time to move on rather than risk pushing it too much themselves.
A catalyst is coming to irrevocably move us on past Covid stasis….
Back to school and through the looking glass
Here in the UK under-18s are all back to school by early September. This is the watershed event for society’s attitude to Covid19.
To reverse back into a full defensive huddle as a society once this major step to normality has been taken will be near impossible. Only a truly devastating second wave of infections with significant mortality and morbidity seen in children, and the under-50s who generally care for them, will force us back into full huddle.
Back to school means that coping not fearing is our irrevocable path. Under-50s will be super reluctant to step back once they feel some normality is returning. Heck, some of us may even enjoy the commute to work.
Maybe some of you found my “you’ll be dead soon” heading distasteful? My intent is to convey my belief that our tolerance for a circumscribed existence is attenuating, not dismiss Covid fatalities. I don’t believe the majority of us will accept a great deal of restrictions upon us for years to come even without a vaccine.
I have always been at the sceptical end of my friends with regard to how severe the bug is and how much we should change our lives to cope with it. Those that were more in agreement with strict controls on personal activity seem to be tiring of it. They are much more of a mindset to get on with the future. Of course, with some anxieties but that is hardly a surprise when fear has been used as a policy tool in many ways.
When will The Donald light the touch-paper dangling in front of him?
The above chart is the government’s piggy-bank at the Fed — the US Treasury General Account (TGA). The Donald is sitting on 8% of US GDP in ready cash. This is not Fed funny money (aka QE) that can only go into Wall St as asset stimulus but real world readies that can be spent on Main St.
That this money is sitting there at this time is a remarkable thing. I’m not expert in the machinations of government in the US but typically Congress would need to liberate this spending. However, there’s often an executive or emergency workaround in the US. It seems sensible to assume The Donald has a plan to put this money to work in a forceful way.
Why wait so long with just weeks to go before election day?
Pump and Dump leads to Trump?
The infection chart above showed the US is going through a marked wave of infections. Deaths never rose in sync with the infections as a lot of (pseudo) experts and full-time media Mawks predicted (like Hawks except mawkishly fear mongering rather than warmongering). The doom just didn’t monger in the way they warned.
No one was sure of this two months ago. No one can be sure that the worst has passed now either or that the recent pattern of infection and death is predictive of what will come later this year and into 2021. However, Trump has an election to try and win and he’s got to make his move to do it. The recent decline in infection and death rates allows him to choose his direction of attack unhindered.
Trump’s play is going to be to go hard on economic recovery and normality. If death rates kept rising he would have needed to focus on radical policies to fight the bug and a much less Trump boosting focus on healthcare issues.
If Trump can find a way to deploy 8% of GDP into the economy in the short term its dynamite. Particularly if it coincides with people feeling some optimism and less fear regarding their ability to cope with the bug, alongside a powerful sense that the government has their back.
Against a good opponent Trump would be a dead man walking regardless of whatever short term policy magic he could muster. Biden isn’t a good opponent and gives Trump more than a fighting chance. Simply, he seems too enfeebled with age to be a good president. For many Americans voting for Biden will be an unenthusiastic choice driven by a desire to vote against Trump.
This gives Trump a real window to snatch power again. Remember that before Covid19 struck many in the US felt like things were going well, even booming, and Trump, despite his evident awfulness and divisiveness, was viewed as very hard to beat. Two bad choices for president and apolitical sorts might just choose the devil they know (but keep quiet about it to friends and pollsters).
Trump’s got 10 weeks and 8% of GDP to work with. He’s been oddly quiet and passive in recent weeks. It’s probable he’s waiting to strike. Trump’s style is to be big, brash and aggressive. He’s going to do that on steroids for 10 weeks. And it’s quite possible that Biden appears insipid and infirm by comparison (he’s got an elderly man’s enfeebled intonation when he speaks!). The race for the White House is going to get very hot and my money is on The Donald winning again…8% of GDP!
The end of the 2008–2020 depression
Logical extrapolation is the enemy of insight today. This time really is different in that there is not a past pattern or circumstance that can be used as a fulsome explanatory template for where we are today and where we are going.
Cross section data samples of our current reality lend themselves to many interpretations…choose your bias and fill your analytical boots. During peak Covid19 panic most market and economic shaman could see mainly dark times ahead. Shades of a new Great Depression.
The end is nigh analytical vibe has ameliorated somewhat since but the bias is still very much that the future is very troubled. The recovery from March lows caught out most market savants and as they didn’t recognise 2008–20 was already a depression they are going to continue to lag and be surprised by reality.
I take a different view. The past is a trap. We will not tolerate a debt deflation cycle and there is absolutely no reason under our fiat system that it is inevitable. Those that see it that way are victims of historicism. Calling the future from here takes a bit of a freeform jazz vibe rather than the full data driven Dalio.
There is much in our Western economies to reflate and invest in. There is great scope for a cycle of activity and growth. Afterall, most growth is fairly ordinary and mundane with a few elements of innovation around the edges. It is only during our semi-depression 2008–20 that we became deluded into thinking that only innovation drives growth. Madness!
Modern Monetary Theory, banks and inflation to the rescue
But aren’t we all tapped out for cash and indebted up to the eyeballs? No doubt corporations and governments in the US and Europe have increased debt loads to very high levels. Backwards looking intellectualism tends to see pain and retrenchment as the societal coping mechanism. Of course, it misses the wood for the trees.
It’s clear that debt monetisation is now part of the policy toolset and unlikely to be put back in the toolbox anytime soon. Whether its full MMT or backdoor MMT (like the Fed and Treasury dance earlier this year that has left The Donald with 8% of GDP to play with) governments can find extra to spend. Markets will have a long tolerance for MMT-ish things if used for perceived productive investments.
Banks (particularly in the US and UK) are relatively pristine pools of capital to play in, with the ability to continually replenish if they find love and an up cycle. They have been the locus of the 2008–20 semi-depression and have felt its full chastening chill to the detriment of the proletariat (including little business) at large who are dependent on banks rather than Fed-fed capital markets for support.
In the depth of the Covid panic governments leaned on banks for help. They asked them to lend to businesses and incentivised it by providing collateral backing from government balance sheets (magical things that they are). The brilliant Russell Napier goes into detail here and here on the implications. Do you think that governments will lose sight of the idea that a contingent promise and poke from them can have such a large impact on the activity of banks with such significant real economy knock on ramifications? There is so much more that can be done with this new ‘policy tool’!
What if a portfolio of small business loans had a lower risk weighting than traditional asset backed lending? Afterall, assets only have value when supported by a productive economy. No doubt there will be bad loans and nasty down cycles, but better to bail out productive assets than inert ones. Formalise some form of first loss tranche taken by government and undoubtedly we’d have an economic boom for regular people. We need to get beyond the 2008 societal insanity that banks are evil and lending booms are all bad. They are essential to progress.
With MMT(ish) policy and bank lending backed by government collateral inflation is an inevitability. There is so much to do in our societies that will be productive from green investment and infrastructure renewal through to re-shoring essential productive functions. This is an economic game that ordinary Joes can take part in particularly with a lending hand from their newly keen and friendly bank.
Inflation from rapidly rising activity and investment will help those more encumbered balance sheets to struggle through their hangovers, particularly as policy makers will do what they can to repress interest rates and yields (like they did after World War 2).
This is our path and it’s a boom not a depression. Depression and gloom was so 2010s. The worries of the 2020s will come in a different somewhat back to the future inflationary flavour.
Interesting stuff. We have discussed this pivot point when societies cross-over from fear to accepting the virus as the new normal. I don’t think that we’re there yet but even semi-viable vaccines could well be the tipping point.
On the convergence of “puritan” and “pragmatic” state responses to the virus, I think that they will converge at the vaccine rollout, which will be troubled, so both can claim victory.
The thesis raises some interesting questions:
- a fiscally irresponsible Trump is better for everybody than responsible, taxing Democrats;
- commodities and gold remain a strong bid in this new world order;
- asset prices too, though Australian will be severely hampered by looking backwards to responsible now irresponsible policy and the scorching from the resulting AUD rocket, and
- finally, if the essence of MMT is irresponsible (it need not be but probably will be in the hands of pollies) is it now irrational to be rational about financial market price discovery?