July 9, 2021
There has been nothing written here for some time. During that time there has been a lot of action in markets, but not much is new. The world is still not making much sense from a fundamental perspective but that will go largely unnoticed by most readers.
Economists however are taking note. Today’s inspiration for writing is directly due to an article published on Bloomberg yesterday which reviews new papers calling deficit spending a Ponzi scheme. This has been a theme of mine for a couple of decades and I would have thought that the public would come to terms with this a long time ago, alas, that hasn’t been the case.
The number and distribution of errors in the pricing of markets is growing in leaps in bounds. The celebration of those dislocations is part of the worry and the outcome is very uncertain.
Markets, such as real estate [see story here], equities [see story here] and many consumer goods, [see Canada’s data here] are so vastly out of sync with reality, that people believe that they make sense. This is very necessary to start the path to inflation (making rising prices seem normal) and implies that governments of the world may be able to make inflation stick this time.
There is not much more to say here. Rational behaviour is not evident now, and perhaps will be hard to discuss for some time, but the math that leads to the current, irrational, behaviour is only possible with excessive money supply. Money supply has grown by $1.1 trillion since the first week of July 2020, and has grown by $4.1 trillion since January 2020. That’s a lot of dollars in circulation.
Meanwhile, during one of the most difficult times in modern history, the main measure of financial markets, the S&P 500 is up about 1000 points, or 33% since January 2020.
When this all stops making sense, the downside will likely be difficult and everyone will head for the exits simultaneously, so avoid the crush and be cautious. The big question is when will that happen? It is difficult to say, but undoubtedly it will happen when no one is willing to buy the debts that are fueling the run up. The signs of ever narrower participation in bond markets are increasing. More on that another time.