Suspend your disbelief and embrace the future of free money
The enthusiasm that currently reigns in the markets borders on euphoria. Retail money is pouring in, and now FOMO is taking over more widely.
You have to decide whether you are inside or outside. We all know the risks associated with the virus and current economic data and it takes a huge leap of faith to pile up here, but betting on humanity has been the best bet in the history of the world.
1) We are in the post-pandemic world
You can consider this in several ways:
- The virus somehow weakens and admissions to hospital / ICU decrease even with high infections
- Only the elderly / sick who get very sick and the few healthy people, but the numbers are low enough to be “acceptable”
- Summer helps cut numbers
Naturally, you have to watch the data while reporting it, but at this point, it will take a big spike to reverse sentiment about the virus.
2) fiscal conservatism is dead
It is basically a generational secular change that is much more important than the virus. The United States could have a $ 8 trillion deficit this year if another stimulus bill passes. At the same time, the Treasury borrows at 0.80% over 10 years.
Deficits no longer matter. Obviously, there is no free lunch, but fiscal conservatism no longer wins elections. So why not another $ 8 trillion deficit next year? What is possible in the economy when public spending is unlimited?
There will be a calculation and it will mean a deterioration of the currency. The S&P 500 crossed 3000 last month on viral optimism but it will one day cross 6000 but not because of economic growth, but because of a deterioration.
I think it will last much longer than almost everyone thinks. I think it will define the decade as huge deficits will become the new standard everywhere.
3) Low rates forever
Central banks have spent the past decade forecasting inflation that never came. They raised rates in anticipation of his arrival or because they wanted a return to “normal”. The failure of policy and forecasts has been a constant source of embarrassment.
Now they return the script and will keep the rates low until inflation actually happens. Once there, they also talk about letting the economy run at full capacity to offset previous deficits.
It’s a revolution in central banking and it means zero rates are there for the foreseeable future.
There are so many low rate ripple effects. Namely, they make the bonds inaccessible to the majority of investors. Savers have no choice but to regroup in stocks and hope for the best. Debt-fueled corporate takeovers will be back in no time.
What is so important about low rates and the budget constraint is that it lasts much longer than the virus, regardless of whether it ends this year, in 2021 or 2022.
The other side
I get it. This is madness. We will have 20% unemployment in tomorrow’s non-farm payroll report and it will still be around 10% at the end of the year. The business is closing at unprecedented rates and never coming back. The virus is not dead and could rage in a second wave. All this is insane. The economy is aging and young people are overwhelmed by student debt.
But the choice you have to make is to believe in the arena or to stay on the sidelines because this party is just beginning. Of course it will stop the tears and there will be ebb and flow, but unless the number of viruses begins to increase, it will not end soon.