A theme permeating Barbara Tuchman’s books is the recurrence of periods when the gap between image and reality becomes excessively wide, and the system fractures.
I think we’re living through one of those periods.
It could just be my mental state after two months of sheltering in place with young kids at home.
But there is a yawning gap between the illusion of prosperity in the (U.S.) stock market, and the scale of economic destruction in the real world.
More than
33 million Americans have filed for unemployment insurance in seven weeks. The International Labor Organization
has warned that the equivalent of
305 million full-time jobs will be lost globally in Q2, consigning more than
1 billion people to poverty.
This is a world-historical calamity.
Global central banks — with the Fed
primus inter pares — have pulled out the stops, flooding markets with trillions of dollars of liquidity.
But
as TayTay admonishes us, “Band-Aids don’t fix bullet holes.”
At a certain point, it doesn’t matter how much credit central banks inject in the system, because the issue is one of cash flow and solvency.
The Fed has foamed the runway for sensible institutions and people of means to calibrate their portfolios for a range of possible futures.
I think the range of futures is
much wider than most people appreciate.
See, it’s not simply the scale of suffering, it’s the distribution of it. It’s not just unemployment, it’s the destruction of small business owners’ life work and savings. Asset price inflation is a poke in the eye with a sharp stick.
Alas, I’m wondering whether the Fed’s actions to support credit markets and ‘flatten the curve’ for asset prices ultimately transfers the risks from capital markets to politics.
And I don’t know if you’ve been paying attention to
the long-running trends in the United States, but the political realm is primed for an explosion.
Trump is an appetizer.
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In last month’s newsletter, I shared
five ideas I’d been pondering during quarantine.
One of them was around the intertwining of corporate and national interests; I asked:
- How will the state use its expanded control over the flow of funds to influence corporate decisions?
- How will corporations use their ties to the state to shape the markets for labor and capital?
Re: #1, I think there is a non-zero probability that the United States tapdances its way into a command credit economy in the next few years. If we enter a debt deflation, then I suspect the Fed will become more activist in shaping the volume and direction that banks steer credit (assuming it doesn’t do so itself) to engineer inflation. What’s the probability? I have no idea.
Re: #2, there is a fairly broad consensus that labor is going to get a fair shake out of this crisis. That companies will pay higher wages to lure people back to work. That companies will be eager to bring back their staffing to pre-Covid levels. That the government will create a better safety net for citizens.
I think that sentiment is utterly delusional.
I think we will see downward pressure on wages, greater appetite for rationalizing headcount,
and little movement on an expanded welfare system.
It’s a bit counterintuitive, but I think the odds are that (large) corporations and the state will shape the markets for labor in ways that will squeeze workers and small business owners until the system breaks.
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Is there a more fitting curtain call for the post-World War II international system than a pandemic that disproportionately kills the Silent and Baby Boom generations?
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Clearly, there is an incredible degree of uncertainty. We could have the S&P at 500 or 5,000.
The list of questions I have about EM grows the longer I think about ‘em.
I have an abiding preference for tilting toward markets and / or verticals where dollars are scarce — but dollars are scarce nearly everywhere!
That said, a few themes I’ve been pondering for the post-Covid world:
- Long-term ownership interests in (family-owned) private businesses — preferably businesses that pay dividends and whose ‘shares’ can be owned for a decade or more;
- Financial inclusion — particularly ‘flow’ businesses (e.g., digital payments) in markets where households aren’t leveraged;
- EM secondaries and distressed / special situations; and,
- Bitcoin as a safe asset? (disclosure: long BTC; see also "King Dollar?")
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Even though I think things in the United States could get bad over the next five years …
… like very, very bad …
… I want to close on a high note.
I am
(still) cautiously optimistic that “younger generations will respond to these challenges with ingenuity, catalyzing a political realignment that will lead to regeneration and prosperity. We just can’t see it yet.”
Peace and health be with you.