By Ben Bernanke and Janet Yellen

on July 17, 2020

In many respects this recession is unique. Most recessions result from developments inside the economy, but an external shock—the public health crisis—caused this one. To avoid getting sick, people have curtailed working, shopping, and attending school. Whatever the cause, the coronavirus recession, like all recessions, is imposing heavy costs. Many workers have lost jobs and income, and many business owners’ financial survival is at risk. The economy’s extraordinarily rapid decline earlier this year—as well as the sharp but incomplete rebound following the first steps toward reopening—reflect this recession’s unusual source. In addition, the sectors suffering most differ from past recessions. The heaviest blows have fallen on service industries that involve close personal contact (including retail trade, leisure and hospitality, and transportation) rather than, as is more typical, on the housing, capital investment, and durable goods sectors. Lower-paid workers, as well as women and minorities, are over-represented in the most-affected sectors, and thus have borne a disproportionate share of the job and income losses. And, the virus has affected almost every country, with potentially devastating consequences for trade and international investment.

Because this recession is unprecedented in so many ways, forecasting the recovery is difficult. The course of the pandemic itself is by far the most important factor. As long as people fear catching a potentially deadly illness from other people, they will be cautious about resuming normal activities, even after state and local governments lift lockdowns. Thus, controlling the spread of the virus must be the first priority for restoring more-normal levels of economic activity—but, more importantly, for saving possibly tens of thousands of lives. Members of Congress, local leaders, and other policymakers need to do all they can to support testing and contact tracing, medical research, and sufficient hospital capacity, and they must work to ensure that businesses, schools, and public transportation have what they need to operate safely. Both authors of this testimony are serving on state re-opening commissions, which has provided us insight into the substantial challenges to safe re-opening.

If the pandemic comes under better control, economic recovery should follow. However, the pace of the recovery could be slow and uneven, for several reasons. First, in the face of ongoing uncertainty, households and businesses may remain cautious for a time. They may increase saving and reduce spending, hiring, and capital investment. The longer the recession lasts, the greater the damage it will inflict on household and business balance sheets and the longer it will take to repair the damage. Second, the depth of the recession may leave scars—business closures and the deterioration of unemployed workers’ skills—that will affect growth for several years. Third, depending on the course of the virus, some restructuring of the economy may be needed. For example, people and resources will need to be redeployed out of the sectors most damaged by the pandemic, and business operations will need to be reorganized to protect workers and customers. All of that will take time and money. Fiscal and monetary policies must aim to speed the recovery and minimize the recession’s lasting effects.

ACTIONS BY THE FEDERAL RESERVE

The Federal Reserve has moved swiftly and forcefully in this crisis. It eased monetary policy in March by lowering the federal funds rate, the overnight interest rate on loans between banks, nearly to zero and indicating that it plans to keep rates low for several years. Low interest rates probably had limited economic benefits in the spring. Lockdowns prevented people from spending or working more. However, we expect low rates will spur spending in sectors like housing as the economy reopens. And the Fed may well do more in coming months as re-opening proceeds and as the outlook for inflation, jobs, and growth becomes somewhat clearer. In particular, to maintain downward pressure on longer-term interest rates, the Federal Open Market Committee (FOMC) likely will provide forward guidance about the economic conditions it would need to see before it considers raising its overnight target rate.  And it likely will clarify its plans for further securities purchases (quantitative easing). It is possible, though not certain, that the FOMC will also implement yield-curve control by targeting medium-term interest rates. It could, for example, target two-year rates by announcing its willingness to buy two-year Treasury notes at a fixed yield. The completion of the Fed’s internal review of its tools and framework in coming months will help guide these decisions.

The Fed also has been active beyond monetary policy.

First, the Fed has served as market maker of last resort by acting to stabilize critical financial markets when capital or other regulatory constraints have interfered with normal market-making or arbitrage. The Fed has served this role for repurchase agreements (repos) since September, when intermittent liquidity shortages led to spikes in repo rates. Banks did not provide liquidity to offset these spikes, as they normally would, citing balance sheet limits and other constraints. Because repo markets are critical to the functioning of broader financial and credit markets, as well as for the transmission of monetary policy, the Fed has restored more-normal function in repo markets by conducting large-scale repo operations and by steadily increasing the quantity of reserves in the banking system.

An even larger shock occurred in March, when uncertainty about the pandemic led hedge funds and others to scramble to raise cash by selling longer-term securities. The upsurge in the supply of longer-term securities, including Treasuries, was more than dealers and other market-makers could handle. Key financial markets, including for Treasury securities, experienced substantial volatility. To stabilize these markets, which like the repo market play a critical role in our financial system, the Fed purchased large quantities of Treasuries and mortgage-backed securities, again serving as market maker of last resort. It also set up a new repo facility to allow foreign official institutions to borrow dollars, using their Treasury reserves as collateral, thus avoiding the need to sell those Treasuries. Although risk and liquidity premiums in these key markets have returned closer to normal, at some point the Fed and the Treasury will need to review why the market-making facilities in place before the pandemic hit did not work more efficiently.

Second, the Fed has served as lender of last resort to the financial system, a classic function of central banks. Banks and other financial intermediaries typically borrow short and lend long—that is, they rely heavily on short-term funding to finance long-term loans and investments. If they lose their short-term funding—because their funders lose confidence or for other reasons—they can be forced to sell their assets in fire sales, restrict credit to customers, and, in extreme cases, become insolvent. Central banks can short-circuit that dangerous dynamic by lending to financial institutions against good collateral, replacing the lost liquidity. In the 2007-2009 crisis, which centered on the financial system and included a global financial panic, the Fed as lender of last resort took many actions to provide liquidity to financial institutions, with the goal of stabilizing the system and preserving the flow of credit to the economy.

Fortunately, the financial system is in much better shape today than in was during the financial crisis. Banks in particular are strong, with much higher levels of capital and liquidity. The Fed nevertheless has once again taken steps to ensure that the financial system has sufficient liquidity. Largely replicating our playbook from the crisis era, the Fed has eased terms on the discount window (which provides short-term loans to banks); re-established the Primary Dealer Credit Facility (which lends to broker-dealers); and established a facility that lends indirectly to money market mutual funds, ensuring that the funds can meet depositor withdrawals. In a novel step, the Fed also created a facility that lends to banks, without recourse, against Payroll Protection Program loans, ensuring that banks have sufficient funds to make those loans.

Under the heading of lender of last resort to the financial system, establishing currency swap lines with fourteen foreign central banks was one of the most important actions the Fed took in the 2007-2009 crisis. The Fed has revived this program. Currency swap lines allow foreign central banks (who assume all the credit risk) to lend dollars to banks in their jurisdictions. The broad availability of dollar liquidity is essential because most global banks do substantial borrowing and lending in dollars, including lending within the United States. The swap lines sustain the flow of dollar credit and reduce volatility in dollar-based markets, to the benefit of the U.S. economy.

Third, the Federal Reserve, with the support of the Congress and the Treasury, has also served during the current crisis as a lender of last resort to the non-financial sector, backstopping key credit markets facing the prospect of severe disruption from the pandemic. To take on this role, the Fed invoked its emergency lending powers under Section 13(3) of the Federal Reserve Act. Since those powers require that the Fed’s lending be well secured, it has had to rely on funds appropriated by the Congress and allocated by the Treasury to cover possible losses. Using these authorities, the Fed revived financial crisis-era facilities to stabilize commercial paper and asset-backed securities markets. Going beyond the financial crisis playbook, the Fed has also added new facilities to lend to corporations and state and local governments and to buy outstanding corporate bonds.

These programs have not extended much credit, so far, but that does not mean they have not succeeded. By establishing the programs, the Fed gave private investors the confidence to re-engage by reassuring them that the government would not allow these critical markets to become dysfunctional. Indeed, the corporate and municipal bond markets largely stabilized after the announcements, before any loans were made. Of course, if these markets seize up again, the Fed’s programs can extend credit.

The Fed also established the Main Street Lending Program to lend (through banks) to medium-sized companies. It is too soon, however, to judge its performance. This program is very different from anything the Fed has attempted before and poses difficult technical challenges. Although the Fed took many public comments while setting up the program, and made substantial changes, questions remain about how many banks and borrowers will participate. The Fed and Treasury may have to further ease terms for borrowers and increase incentives for banks for this program to have the desired effect. Or, the Fed and Treasury could add a new facility, along the lines of funding-for-lending programs run by the Bank of England and the European Central Bank, that simply subsidize banks for making additional loans to qualifying borrowers (for example, businesses below a certain size). That approach leaves the underwriting decision completely with the banks, while the size of the subsidy can be adjusted as needed to achieve the desired level of lending.

Finally, the Fed has also taken actions as a bank regulator—for example, encouraging banks to work with borrowers hobbled by the pandemic. It decided recently, based on stress test results, to bar stock buybacks by banks and to limit—but not eliminate—their dividends.  Based on our experience in the global financial crisis, we think the Fed may find it needs to go further. Although banks are currently strong, it is possible the pandemic will so damage the economy that credit losses mount rapidly. For a successful recovery, the banking system must remain strong and able to lend.

Is there more the Fed could do? As we noted, the Fed likely will provide more clarity about its monetary policy plans, and it may need to adjust the terms or borrower eligibility requirements of its various lending facilities. Broadly speaking, though, the Fed’s response has been forceful, forward-looking, and comprehensive. But, as Chair Powell often notes, the Fed’s authorities allow it to lend, not spend. Some households and firms will need subsidies or grants, rather than loans, and spending is, of course, the province of the Congress.

WHAT FISCAL POLICY MIGHT DO

The fiscal response to the pandemic has thus far been quite effective. Enhanced unemployment insurance and the Paycheck Protection Program have helped unemployed workers and their families, together with many businesses, survive the spring shutdowns. The fiscal support for the Fed’s lending programs likely will help preserve credit availability, possibly with only a portion of the allocated funds being spent.

However, some programs authorized by the Congress are ending, and new actions are necessary. Our recommendations for further fiscal action are:

First, Congress should develop a comprehensive plan to support medical research; increase testing, contact tracing and hospital capacity; make available critical supplies; and support state and local efforts to safely open businesses, schools, and public transportation.

Nothing is more important for restoring economic growth than improving public health. Investments in this area are likely to pay off many times over.

Second, with unemployment still very high, enhanced unemployment insurance should be extended, and complementary programs like food stamps should be adequately funded. Unemployment insurance could be restructured to deal with the incentive problems that some have noted, for example, by capping total payments at a fixed percentage of regular income. Rather than making a one-time appropriation, the Congress should create an automatic stabilizer by tying supplementary unemployment insurance and other support programs to the national unemployment rate or state unemployment rates. Under this approach, supplementary support will flow if conditions worsen, without further congressional action, and will automatically decline as conditions improve. This approach would provide people with aid when they most need it and would also help stabilize the economy as a whole by supporting income and stimulating spending automatically when the unemployment rate is high.

Third, Congress should provide substantial support to state and local governments. These governments are on the front line in providing critical services, including first responders, public health, education, and public transportation. State and local governments have been leading the way in designing a safe re-opening of the economy. The enormous loss of revenue from the recession, together with the new responsibilities imposed by the pandemic, has put state and local budgets deeply in the red. With limited capacity to run deficits, these governments will have to lay off workers and limit essential services unless they get federal help. As we learned after the financial crisis, fiscal contraction at the state and local level slows the national economy and offsets the benefits of federal action. To allow state and local governments to continue to provide essential services, and to avoid the recessionary effects of major state and local spending cuts, federal support should be substantial and without overly restrictive conditions on the aid.

Following our advice would further increase the already record-level federal budget deficit. With interest rates extremely low and likely to remain so for some time, we do not believe that concerns about the deficit and debt should prevent the Congress from responding robustly to this emergency. It remains important to use national resources wisely, with well-designed and effective programs. And, at some point, we will have to think through how to ensure the long-run sustainability of federal finances. The top priorities now, however, should be protecting our citizens from the pandemic and pursuing a strong and equitable economic recovery.

My view

Everything written above in essay will lead to lower dollar and higher inflation along with higher asset prices of securities which will benefit from this strong cocktail of Monetary and fiscal policy with added support from capping of bond yields. US is following the path of post world war II when they capped the bond yields and nominally defaulted on their bond obligations. This way they were also able to reduce their debt burden

Posted by beyondoverton in Asset Allocation, Debt, Equity, FX, Monetary Policy

Fed is now probably considering which is worse: a UST flash crash or a risky asset flash crash. Or both if they play their hand wrong.

Looking at the dynamics of the changes in the weekly Fed balance sheet, latest one released last night, a few things spring up which are concerning.

1.The rise in repos for a second week in a row – a very similar development to the March rise in repos (when UST10yr flashed crashed). The Fed’s buying of Treasuries is not enough to cope with the supply hitting the market, which means the private sector needs to pitch in more and more in the buying of USTs (which leads to repos up).

This also ties up with the extraordinarily rise in TGA (US Treasury stock-piling cash). But the build-up there to $1.4Tn is massive: US Treasury has almost double the cash it had planned to have as end of June! Bottom line is that the Fed/UST are ‘worried’ about the proper functioning of the UST market. Next week’s FOMC meeting is super important to gauge Fed’s sensitivity to this development

2.Net-net liquidity has been drained out of the system in the last two weeks despite the massive rise in the Fed balance sheet (because of the bigger rise in TGA). It is strange the Fed did not add to the CP facility this week and bought only $1Bn of corporate bonds ($33Bn the week before, the bulk of the purchases) – why?

Fed’s balance sheet has gone up by $3tn since the beginning of the Covid crisis, but only about half of that has gone in the banking system to improve liquidity. The other half has gone straight to the US Treasury, in its TGA account. That 50% liquidity drain was very similar throughout the Fed’s liquidity injection between Sept’19-Dec’19. And it was very much unlike QE 1,2,3, in which almost 90% of Fed liquidity went into the banking system. See here.  Very different dynamics.

Bottom line is that the market is ‘mis-pricing’ equity risk, just like it did at the end of 2019, because it assumes the Fed is creating more liquidity than in practice, and in fact, financial conditions may already be tightening.  This is independent of developments affecting equities on the back of the Covid crisis. But on top of that, the market is also mis-pricing UST risk because the internals of the UST market are deteriorating. This is on the back of all the supply hitting the market as a result of the Treasury programs for Covid assistance.

The US private sector is too busy buying risky assets at the expense of UST. Fed might think about addressing that ‘imbalance’ unless it wants to see another flash crash in UST. So, are we facing a flash crash in either risky assets or UST?

Ironically, but logically, the precariousness of the UST market should have a higher weight in the decision-making progress of the Fed/US Treasury than risky markets, especially as the latter are trading at ATH. The Fed can ‘afford’ a stumble/tumble in risky assets just to get through the supply in UST that is about to hit the market and before the US elections to please the Treasury. Simple game theory suggest they should actually ‘encourage’ an equity market correction, here and now. Perhaps that is why they did not buy any CP/credit this week?

The Fed is on a treadmill and the speed button has been ratcheted higher and higher, so the Fed cannot keep up. It’s a dilemma (UST supply vs risky assets) which they cannot easily resolve because now they are buying both. They could YCC but then they are risking the USD if foreigners decide to bail out of US assets. So, it becomes a trilemma. But that is another story.

The Fed needs to make a decision soon.

Fed is facing a dilemma…actually a trilemma

• Shape of the economic recovery: Why “Letter Shapes” like V, W, L, and U are insufficient to describe what will occur
• How financial markets will react to multiple recovery scenarios in the real economy
• U.S.-China relations in the post-COVID19 world
• State of the art in industrial drone technology

https://www.podbean.com/ew/pb-b3uei-ddc8bd

by Nick Maggiulli

The UFOs were supposed to arrive around 4PM on December 17, 1954.  At least that’s what the Seekers, a Chicago-based cult group, were told by their leader through a decoded message.  The core belief of the Seekers was that the end of the world was near and that “spacemen” were coming to rescue them from this impending doom.    

But, as 4PM came and went, the spacemen never arrived. 

“What went wrong?” some of the members asked themselves.  The group was forced to rationalize the no-show. 

Initially, some members of the group suggested that their saviors from space never arrived because a few non-committed members were at the event.  This theory was not accepted by the group, so they kept discussing.

Finally, one of the group leaders declared that this had been a “practice run” to test their skills.  It was all a drill, and they all had passed magnificently.  This explanation was wholeheartedly embraced by all but one member of the group.  

However, over the course of the next week, three more rapture predictions were followed by three more failures and three more equally impressive rationalizations.

One such prediction never materialized because it was “another drill.”  Another failed because, as the leadership determined, the group’s deep dedication actually prevented the apocalypse from happening altogether.  This ingenious excuse changed the Seekers from failed prophets to the saviors of humanity in one fell swoop.  

And with each failed prediction, most of the group members stay committed with some of them even increasing the conviction of their beliefs.  Here is how one member explained their commitment to the group in When Prophecy Fails:

I’ve had to go a long way.  I’ve given up just about everything.  I’ve cut every tie.  I’ve burned every bridge.  I’ve turned my back on the world.  I can’t afford to doubt.  I have to believe.

The most amazing part of this story is that out of the 11 members of the Seekers, only two left the group following the string of incorrect predictions.  As the authors of When Prophecy Fails note:

It is reasonable to believe that dissonances created by unequivocal disconfirmations cannot be appreciably reduced unless one is in the constant presence of supporting members who can provide for one another the kind of social reality that will make the rationalization of disconfirmation acceptable.  

In other words, if you have a social support system, any such conflicting beliefs can be overcome with rationalizations.  This is evidenced by the fact that the two members who left the Seekers were the ones most isolated from the group.  

This brings me to my main point. 

It’s been a week since the long-awaited Bitcoin halving, and it appears that the massive price increase that was supposed to occur, never materialized.  Everyone who claimed that, “the Bitcoin halving isn’t priced in,” and that a drop in supply would lead to a big increase in price was clearly in the wrong.

However, I know that this unfortunate fact won’t matter to the diehard HODLers of Bitcoin anyway.  After all, it didn’t matter when these BTC price predictions failed to come to fruition:

And won’t matter when future ones fail either. 

It’s like this Jurassic Park meme on repeat:

In all seriousness, I used to think that making a prediction that turned out embarrassingly wrong was bad for your image, but I’ve slowly begun to realize that most people, especially devout followers, don’t really care. 

Why?  Because it is so easy to rationalize the failed predictions after the fact without causing any long-term reputational damage.  

For example, do you think that fans of Elon Musk cared when he got this COVID-19 prediction so gloriously wrong?

Nope.   

How do I know?  Because look at the level of engagement on this tweet response illustrating Elon’s massive error:

5 Retweets.  156 likes.     

In Elon’s world that basically rounds to zero.  The tweet might as well not exist.

And when I’ve Tweeted similarly snarky replies towards individuals with equally wrong predictions, do you think this caused a mass exodus among their followers?  Not a chance.  

Just like the Seekers who remained committed in the midst of conflicting evidence, most people can overcome cognitive dissonance with the right amount of social support.  

You can say the same thing about Bitcoiners, permabulls (like myself), and, dare I say, value investors.  

After all, the prophets of AQR have come down from the mountain top yet again to tell us why now is a fantastic time to invest in value stocks.  This is only 7 months after they nudged us to “sin a little” in value’s direction.  So, does that imply that today I should be sinning a lot?  Should I become the Lucifer of value investing?

Despite my sardonic tone, I am not implying that value investors or Bitcoiners are apart of a cult, only that the same mental processes are at work within these groups as well.  Reducing cognitive dissonance is a hell of a drug.    

This explains why most followers won’t abandon the faith when their leaders get things wrong.  Because failed predictions never really mattered.  Just think of how many famous politicians and business leaders have made terrible predictions, yet are still revered.  

For example, Steve Jobs said that the Segway would be “bigger than the PC”, Steve Ballmer laughed at the unveiling of the iPhone, and Alan Greenspan called for double digit interest rates after 2007.  All of them were dead wrong, but, who cares?

In honor of this recent revelation, here are some predictions I have for the next decade:

• The Dow will reach 60,000 before 2030.
• Interest rates in the U.S. will go negative and will stay low for the foreseeable future.
• Inflation in U.S. dollars will remain low for the foreseeable future.
• Large gatherings (i.e. concerts, cruises, packed bars, etc.) will return even if we don’t find a COVID-19 vaccine.  
• Working remotely will not replace most in-person offices.
• There will be major overhauls in the tax system to reduce wealth inequality.

You may not agree with my predictions, but that’s okay.  Because if I’m wrong, I know you won’t really care, will you?

---

Nobody Cares About Your Failures

Despite my cynicism throughout this post, there is a silver lining in all this.  That silver lining is that people don’t care about your failed predictions because they don’t really care about your failures. 

This really hit home for me after reading a post from fellow blogger Four Pillar Freedom where he discussed what he has learned since he turned 18:

The world isn’t watching you as closely as you think. Take more chances. Your failures will mostly go unnoticed. And those who do notice rarely care.

And it’s so true.  We tend to forget that most people are so worried about their own problems that they don’t have time to think about your own faults.  This is why, earlier this year, I wrote:

When people don’t like your work, the response isn’t negativity, but silence.

But that silence is soon forgotten.  Let me prove it. 

How often do you think about my “less than stellar” blog posts? 

I already know your answer—never!  Because, why would you? 

You will forget one of my mediocre blog posts much more quickly than I ever could.  Well, guess what? 

The same thing is true for any of your failures as well.  They will mostly be forgotten by most people.  But if you are still skeptical, consider what one of the greatest athletes of all time had to say about failure:

I missed more than 9,000 shots in my career.  I’ve lost almost 300 games.  26 times I’ve been trusted to take the game winning shot, and missed.  I’ve failed over and over and over again in my life.  And that is why…I succeed.

-Michael Jordan

 Thank you for reading!

Why Failed Predictions Don’t Matter

I have been reading David’s view for last two years and he predicted 3000 on S&p,10 on crude oil , 1800 on Gold and massive rally in miners in 2018 .He also predicted 0.5% on US 10 year more than a year back.

Below are his latest views

Tom welcomes back experienced investment professional David Hunter of Contrarian Macro Advisors to the show. David shares some of his controversial contrarian views on where the markets are heading. He often receives criticism from investors for his differing views.

David expects a rebound this summer and fall followed by another pull-back in the market. The market should rally for a few more years due to massive money printing by the Fed and central banks.

His long term views hold for vastly higher gold, silver and oil prices as inflation takes hold in a few years. This inflation will result in an eventual global deflationary bust, which will come with the biggest bear market since 1929.

Time Stamp References:
1:10 – Recent events review.
4:15 – Melt-up explanation.
6:20 – Outlook for Markets.
10:30 – Economic Lag Time.
13:50 – Second collapse predictions.
17:00 – Eventual global deflationary bust.
21:30 – What will drive the current recovery.
23:47 – Expectations for the US dollar.
26:30 – Service debts at zero percent interest.
28:15 – Money printing and the Fed.
34:40 – Bullish case for gold, silver, mining stocks.
39:45 – Timeline for his predictions.
44:25 – Bond market thoughts.

Talking Points From This Episode
• He expected a correction but not this extreme.
• Expects a melt-up rebound in stocks and then a pullback.
• This downturn and recession are likely to last 18 months.
• Expecting a manufacturing-driven recovery, not a consumer.
• Global deflationary bust coming by the end of the decade.

David is Chief Macro Strategist with Contrarian Macro Advisors. He is an investment professional with 25 years of investment management experience and 18 years as a sell-side strategist with strong expertise in macroeconomic analysis and portfolio management. His strong macro capabilities, combined with a contrarian philosophy, have allowed him to forecast economic cycles and spot market trends well ahead of the consensus. Intellectually honest, independent thinker comfortable with charting a course apart from the crowd. Accomplished stock picker and value-oriented portfolio manager.

by Daniel McMurtrie via themedium.com

I have been spending a lot of time trying to observe not just what is going on in the world, but also what’s going on in my own head. I’ve realized that I may have a blind spot right now. Most of the people I know in my hometown of Richmond, VA work in the industries which have been hit hardest by the virus — restaurants, bars, hospitality, healthcare. Speaking to people I care about, it has felt like doomsday. I’ve felt unable to be optimistic given their pain and knowing how so many others are dealing with the same or worse. It has felt that things are so bad and the ways in which they could get worse for a very extended period are numerous. But my job is to invest in the stock market, and the stock market appears to many to have completely diverged from the “real economy.”

So… why could that be? What’s the bull case here for stocks? Let’s set aside long term existential concerns for a moment and look at what things could look like to a bull in the next 4–8 months.

The virus and its impacts are increasingly socially normalized and tolerable for Americans after 2 months stuck inside. A re-shutdown appears unlikely unless there is a radical increase in lethality / risk from the virus. If deaths are steady, the cumulative death toll that is socially allowable may be quite high (>500K over 18 months).

Monetary policy has collapsed discount rates globally, with risks more to deflation than inflation. The Fed has made it clear a liquidity crisis will not be allowed.

Fiscal stimulus has made consumers more than whole, with aggregate consumer purchasing power now UP versus pre COVID. Short term, the market is presuming additional significant fiscal stimulus. If it does not come, the market will try to force it. This is a major risk + downside trigger, but it requires you to presume the Democrats or Ron Paul type Republics will have both the will and the ability to gamble the economy for election plays.

If a combination of Monetary Policy and Fiscal Stimulus can / did fix this crisis practically overnight, equity discount rates will lower / multiples will increase as the probability of systemic failures is lower. Failure is being made impossible so long as a firm does not fail alone. Long term, the market will now know it can force any of these measures and more from the government. This is very bullish equity beta generally. At a high level, the sovereign and the system is so levered that it cannot allow material downside, so they are putting on a martingale betting strategy and assuming all risk on the USD. This could fail at some point, but it’s a much bigger issue than equity prices.

If the consumer is strong and tolerance for virus risk is increasing, the prospects for SMEs re-opening are better than our base case. While it will not be overnight, consistently improving business performance will have a reflexive impacts on increasing business confidence.

Capital markets remain extremely accommodating with debt and equity financing available for nearly everyone who seeks it. Covenants, loan payments, and rents are being adjusted as needed almost universally. Everyone is playing ball.

I think I speak for a lot of people when I say I was blown away by earnings this quarter. The large index weightings are virtually unaffected in ways the market will care about, and most of the companies we cover have reported robust recoveries in weekly data in April. Even existing home sales are sitting over 90% of normal with people not being able to go out and look at houses. Pretty wild to me.

Georgia’s reopening data is really robust, having based and now uniformly moving up in all categories steadily.

Mark Cuban did some surveying on reopening weekend. The data was not very positive, but the signal in this data will be how it changed over time. It should not be surprising that most business operators did not have the risk tolerance to burn cash to be open during the first few days they were allowed to.

Specific individual companies and assets may require a repricing, but there is more than enough liquidity for those assets to not become stranded. Isolated firm failures are not terribly economically relevant if the underlying economic output is not impaired. Candidly, there is an absurd amount of money looking to buy distressed individual situations.

Within the stock market, retail investors are participating in recent upside more than any other investor group. This is bullish for overall business and consumer confidence. While it is true that retail inflow spikes tend to end badly, they also have been historically predictive of extreme bull market runs.

Investors as a whole remain extremely bearish, to the extent that even entertaining a bullish view induces fairly violent responses. But these people are already out of the market. Their views do not impact price unless they are forced to capitulate, in which case they drive the market up.

News flow is consistently incrementally positive and forms a reflexive loop where negative news is looked through and the bears and bearish views become thought of as annoying “boy who cried wolf” claims.

At a high level, all of this feels so, so, so wrong. It feels that it should not be this way. The economy should not be simply a function of immense government money, right? Or has it always been that way and we are bound by the comforts of having invested in the United States? But it is now, and the cognitive dissonance here combined with the immense amount of financial liquidity equates to the perfect setup for a massive bull move / equity bubble until such a time there exists a feedback loop to stop these dynamics.

I’m not yet at a point where I have positioned my book based on the above, but I am thinking about it. My hope is that among the hundreds of people who post nasty things about me after reading this, a few may have some interesting insights.

For now, I think the bear case is dead until either momentum breaks and/or information above changes. The biggest potential catalyst for bears in my mind is congress refusing to do additional fiscal stimulus. Having said all of this, the top is now likely in, as I have become my own contra and in doing so I offer myself to be nailed to the cross as the messiah of the bears.

As Central Bank Balance sheets rise to newer highs, and uncertainty surrounding the extent and time period to which the economy comes back online creating third order effects, we need to understand what comes next.

If we were to consider the proposition that history repeats itself or rhymes in certain ways, a few insights can be garnered.

For instance, we are able to garner that the ability of debt to generate GDP growth seems to be severely diminishing.

If history is a guide, stocks have further to go before they hit bottom. That’s Sokoloff’s view -Then as now, he says, “central bankers were pushing on a string”, trying in vain to whip up a real economic recovery with monetary policy.

“The more debt you add [via monetary and even some fiscal policy], the more unproductive the debt becomes,” says Sokoloff.

This fits in with the view that we are in a defining period of financial history as we were in the 1920’s. As the dollar is inflated away and purchasing power eroded, we will see that because it coincides with flight to safety towards dollar , the effect on dollar will observed with a certain lag.

“When you get debt above 90 per cent [of GDP], you reduce economic growth by one-third. And the velocity of money declines,” says Sokoloff. “So, the productivity in that debt declines too. A dollar of debt used to get you 40 cents of growth. Now, with all this stimulus, it’s about 25 per cent.”

One of the highlights of Sokoloff’s report is the list of timely historical quotes, such as this one from Montagu Norman, governor of the Bank of England between 1920 and 1944, which ran in an issue last year analysing whether the Fed rate cut of 1921 might have fuelled the boom-bust cycle of the Roaring Twenties: “We achieved absolutely nothing . . . nothing that I did, and very little that old Ben [Strong, head of the NY Fed] did, internationally produced any good effect — or indeed any effect at all except that we collected money from a lot of poor devils and gave it over to the four winds.”

As we see MMT rise to the foray where the limit to deficit financing is inflation rather than taxes, funding or any other fixed point. We will see the value of currency being eroded further which bodes positive for gold , as it captures the corresponding loss in purchasing power.

So are we heading for a default by loss of purchasing power of the currency in which it is denominated , Sokoloff concurs. As he states in fact, even with the stimulus, “there will have to be massive debt relief on both principal and interest”. Not that this is anything new; Sokoloff has been making comparisons between a previous debt-forgiving superpower — Rome — and the US for years.

https://www.ft.com/content/b8639ab6-8936-11ea-9dcb-fe6871f4145a

In a CBB from a decade or so ago, I noted that at the commencement of WWII President Roosevelt marshaled an agreement from the major warring parties to avoid the bombing of civilian targets. It was not long, however, before civilians living near military installations were considered unfortunate collateral damage. And so began the incremental abandonment of the principle of safeguarding innocent noncombatants. By the end of the war, there were no limits – nothing too outrageous or deplorable: population centers, viewed strategically as even more valuable than military targets, were under unrelenting brutal bombardment. Hiroshima and Nagasaki suffered nuclear devastation.

“Money printing” and fiscal borrowing/spending viewed as unconscionable prior to 2008 are these days easily justified. The “nuclear option” is readily accepted as a mainstream policy response. A Wall Street economist appearing on Bloomberg even posited the current crisis is worse than World War II.

To challenge monetary and fiscal stimulus is almost tantamount to being unAmerican. After all, tens of millions of American citizens are hurting – millions of small businesses near the breaking point. They are deserving of support in these circumstances. Yet I don’t want to lose focus on analyzing and chronicling ongoing catastrophic policy failure. COVID-19 greatly muddies the analytical waters.

Federal Reserve Credit jumped another $146bn last week to $6.598 TN, pushing the eight-week gain to a staggering $2.453 TN. M2 “money supply” rose $365bn, with an eight-week rise of $1.727 TN. Institutional Money Fund Assets (not included in M2) rose another $76bn, boosting the eight-week expansion to $921bn.

The Fed this week expanded its new “main street” lending facility, raising limits to include companies with up to 15,000 employees and $5.0 billion in revenues. Our central bank, as well, broadened terms for its state and local government financing vehicle to include counties as small as 500,000 (down from 2 million) and cities of 250,000 (reduced from 1 million).

From the WSJ (Nick Timiraos and Jon Hilsenrath): “The Federal Reserve is redefining central banking. By lending widely to businesses, states and cities in its effort to insulate the U.S. economy from the coronavirus pandemic, it is breaking century-old taboos about who gets money from the central bank in a crisis, on what terms, and what risks it will take about getting that money back.” The article quoted Chairman Powell: “None of us has the luxury of choosing our challenges; fate and history provide them for us. Our job is to meet the tests we are presented.”

There has traditionally been an unwritten agreement – an understanding borne from historical hardship – that central banks would never resort to flagrant monetary inflation. Risk to “innocent civilians” would be much too great. “Open letters” challenged the Fed’s foray into QE, including one from 2010 signed by a group of leading economists: “We believe the Federal Reserve’s large-scale asset purchase plan (so-called ‘quantitative easing’) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.”

QE was to be a temporary crisis-management tool, employed to respond to the “worst financial crisis since the Great Depression.” The initial Trillion from late-2008 was to be reversed, returning the Fed’s balance sheet back near the pre-crisis $1.0 Trillion level. Somehow, QE was employed in 2019, with stocks at record highs and unemployment at 60-year lows. Last year’s monetary fiasco foreshadowed the 2020 nuclear option – a couple Trillion in a couple months. At this point, it’s gone so far beyond anything thought possible with “helicopter money” or even MMT stimulus. Don’t hold your breath awaiting “open letters” of protest. A Fed balance sheet briskly on its way to $10 TN seems just fine to most.

The Fed cut rates to zero (0-0.25%) in December 2008. The Fed then waited a full seven years for a single little “baby step” 25 bps increase. Nine years from the slashing to zero, rates were still only 1.25% (to 1.5%), before peaking at a paltry 2.25% (to 2.50%) with the Powell Fed’s final 25 bps increase in December 2018. Going into the 2008 crisis at less than $900 billion, the Fed’s balance sheet was still at $3.7 TN as of August 2019 (down from peak $4.5TN).

The Fed’s failure to retreat from aggressive monetary stimulus (aka “removing the punch bowl”) was a critical policy blunder that promoted destructive financial and economic excess. And in an unamusing Groundhogs Day dynamic, we are to believe that the current crisis will be resolved by only more egregious volumes of Fed liquidity and “loose money”. As master of the obvious, I will state categorically: “It’s not going to work.”

A question from Bloomberg’s Steve Matthews during Chairman Powell’s post-meeting press conference: “Do you worry that this recession is going to fall hardest on those workers who’ve struggled and just got job gains in the last year or two, and that it may take years from now before there are opportunities for them again?”

Powell: “…We were in a place, only two months ago, we were well into, beginning the second half of the 11th year is where we were. And every reason to think that it was ongoing. We were hearing from minority, low and moderate income in minority communities that this was the best labor market they’d seen in their lifetime. All the data supported that as well. And it is heartbreaking, frankly, to see that all threatened now. All the more need for our urgent response and, also, that of Congress, which has been urgent and large, and to do what we can to avoid longer run damage to the economy which is what I mentioned earlier. This is an exogenous event that, you know, it happened to us. It wasn’t because there was something wrong with the economy. And I think it is important that we do everything we can to avoid that longer-run damage and try to get back to where we were because I do very much have that concern.”

My comment: I understand the Fed’s attention to “community outreach” and its PR focus on minorities and low-income workers. Yet not even Trillions of lip service will change the reality that the Fed’s securities market policy focus promotes inequality and divisiveness. At its roots, QE is a mechanism of wealth redistribution. Zero rates transfer wealth from savers to borrowers and speculators.

Moreover, there are myriad costs associated with central banks nullifying the business cycle. The toll the unfolding crisis will inflict upon minority and low-income families will be horrendous. Federal Reserve policies of unrelenting monetary stimulus and market intervention ensure an especially problematic downturn. The business cycle is absolutely essential to the functioning of capitalistic systems. Policymaker intolerance for even mild market and economic corrections promotes cumulative excess and distortions that will culminate in extraordinarily deep and painful busts. I viewed chair Yellen’s employment focus as convenient justification and rationalization for delays to the start of policy “normalization.” Boom and bust dynamics do no favors for minorities and the working class. Monetary and financial stability should have been the Fed’s top priority. QE, low rates and market backstops reinforce instability and latent fragility.

The Associated Press’s Chris Rugaber: “You did talk about potential loss of skills over time. So, are you worried about structural changes in job markets that would keep unemployment high and, therefore, potentially beyond the ability of the Fed to do anything about, which was something that was debated, as you know, after the last recession?”

Powell: “So, in terms of the labor market, the risk of damage to people’s skills and their careers and their lives is a function of time to some extent. So, the longer one is unemployed, the harder it gets, I think, and we’ve probably all seen this in our lives, the harder it is to get back into the workforce and get back to where you were, if you ever do get back to where you were. So… longer and deeper downturns have had, have left more of a mark, generally, in that dimension with the labor force. And so, that’s why, as I mentioned, that’s why the urgency in doing what we can to prevent that longer-run damage.”

My comment: Central banks have for way too long encouraged the notion of deflation as the principal risk. I have argued Bubbles were instead the overarching systemic risk. Central bankers (along with Wall Street) have asserted that aggressive monetary stimulus has been necessary to counter deflationary risks. But if Bubbles were indeed the prevailing risk, this added stimulus would undoubtedly promote only greater maladjustment, systemic risk and fragility. After already contributing to inequality and divisiveness, monetary policymaking now places trust in the institution of the Federal Reserve in jeopardy. Flawed doctrine and a string of recurring missteps have ensured the worst of possible outcomes: a deep and prolonged downturn within a backdrop of heightened social and political instability.

Politico’s Victoria Guida: “…More broadly, you mentioned earlier this year that the federal debt was on an unsustainable path. And I was just wondering, for Republicans that are starting to get worried about how much fiscal spending they’re having to do in this crisis, you know, whether that should be a concern for them?

Powell: “In terms of fiscal concern…, for many years, I’ve been, before the Fed, I have long time been an advocate for the need for the United States to return to a sustainable path from a fiscal perspective at the federal level. We have not been on such a path for some time which just means that the debt is growing faster than the economy. This is not the time to act on those concerns. This is the time to use the great fiscal power of the United States to do what we can to support the economy and try to get through this with as little damage to the longer run productive capacity of the economy as possible. The time will come, again, and reasonably soon, I think, where we can think about a long-term way to get our fiscal house in order. And we absolutely need to do that. But this is not the time to be, in my personal view, this is not the time to let that concern, which is a very serious concern, but to let that get in the way of us winning this battle…”

My comment: We’re in the endgame. There will be no turning back on either massive monetary or fiscal stimulus. Not surprisingly, Congress is already contemplating an additional Trillion dollars of spending. The floodgates have been flung wide-open, and at this point it will prove troublesome to ration stimulus. Meanwhile, deeply maladjusted market and economic structure will dictate unrelenting stimulus measures.

I would add that last year’s reckless Trillion dollar federal deficit was the upshot of years of experimental monetary policy. There was but one mechanism with the power to inhibit Washington profligacy: market discipline (i.e. higher Treasury yields). But market discipline was one of the great sacrifices to the Gods of QE and New Age monetary management. Stating that the Fed has been complicit in Washington running massive deficits (even throughout a market and economic boom period) is not strong enough.

Bloomberg’s Michael McKee: “And I know you said that this isn’t the time to worry about moral hazard, but do you worry, with the size of stimulus that you and the Congress are putting into the economy, there could be financial stability problems if this goes along?”

Powell: “In terms of the markets…, our concern is that they be working. We’re not focused on the level of asset prices in particular, it’s just markets are trying to price in something that is so uncertain as to be unknowable which is the path of this virus globally and its effect on the economy. And that’s very, very hard to do. That’s why you see volatility the way it’s been, market reacting to things with a lot of volatility. But… what we’re trying to assure really, is that the market is working. The market is assessing risks, lenders are lending, borrowers are borrowing, asset prices are moving in response to events. That is really important for everybody, including… the most vulnerable among us because, if markets stop working and credit stops flowing, then you see, that’s when you see… very sharp negative, even more negative economic outcomes. So, I think our measures have supported market function pretty well. We’re going to stay very careful, carefully monitoring that. But I think it’s been good to see markets working again, particularly the flow of credit in the economy has been a positive thing as businesses have been able to build up their liquidity buffers.”

My comment: It is the nature of contemporary Bubble markets that they are only “working” when they’re inflating. We witnessed again in March how quickly selling turns disorderly – how abruptly markets turn illiquid and dislocate. There were, after all, only nine trading sessions between February 19th all-time market highs and the Fed’s March 3rd emergency rate cut.

The Fed has for years nurtured the perception that the Federal Reserve was ready to backstop the markets in the event of incipient instability. The Fed “put” became deeply embedded in the pricing of various asset markets – certainly including stocks, corporate Credit, Treasuries, structured finance and derivatives. But this financial structure turns unsupportable the moment markets begin questioning the capacity of central banks to sustain inflated prices.

We observed the Fed being “trapped” dynamic in action: Market Bubbles had inflated to unparalleled extremes. When collapse began in earnest, unprecedented liquidity injections and interventions were required to reverse the panic. But this liquidity was then available to fuel disorderly markets on the upside, setting the stage for only more instability going forward. Fed officials are surely delighted their measures are proving instrumental in what will be record debt sales (Treasuries and corporates). But do today’s market yields make any sense heading into a major economic downturn with unprecedented debt and deficits? The Fed can claim it doesn’t focus on the level of asset prices, but the reality is the Fed is trapped in policies meant to sustain highly elevated asset markets.

Listening to Bloomberg Television Wednesday ahead of the Fed’s policy statement, I sat in disbelief at what I was hearing: one of our nation’s leading economists speaking utter nonsense. There is a long list of individuals that should have some explaining to do when this all blows up.

Bloomberg’s Tom Keene: “In the field of economics, there are people that are always excellent at mathematics and then there’s the truly excellent. I spoke with Randall Kroszner of Chicago and the Booth School earlier today – he’s one of those people. And another one is Narayana Kocherlakota, of course, the President of the Minneapolis Fed and now at the University of Rochester. He has been extremely aggressive about a Fed that needs a different and better dynamic… You have said that this Fed must be more aggressive. What is the next step for Chairman Powell?”

Kocherlakota: “I think that the Fed should really contemplate going negative with interest rates. I think that would send a powerful message about their willingness to be supportive of their price stability and employment mandates. Obviously, there’s a limited amount of room that you can go negative, because eventually banks and others will substitute into cash. But I think there is some room to go negative – 25, 50 bps below zero – and that makes all your other tools more effective – the forward guidance we’re going to see at some point down the road, asset purchases and yield curve control – all that becomes more effective if you can go further below zero.”

Bloomberg’s Scarlet Fu: “We’ve seen Europe, we’ve seen Japan go further below zero and it really hasn’t done what they wanted. In Japan’s case, the country then moved to yield curve control. We know the Federal Reserve has telegraphed yield curve control as an option, what’s the risk from the Fed just moving to targeting yields now and skipping over going to negative interest rates?”

Kocherlakota: “The risk, Scarlet, is you’re not doing enough. I think the Fed statement is exactly right. The ongoing public health crisis will weigh heavily on economic activity in the near-term – and poses considerable risk to the outlook over the medium-term… You want to throw every tool you got available at that. I’m not saying I’m opposed to yield curve control – I’m absolutely not. But I think going negative with interest rates is going to make that tool even more powerful – more effective than simply rolling it out on its own.”

Keene: “One of the great themes here… and this goes to the late Marvin Goodfriend of Carnegie Mellon, is the amount of negative interest rates. Ken Rogoff at Harvard also addressed it in his glorious book, ‘The Curse of Cash’. OK, so we tweak it a quarter point, a little bit here, a little bit here. Really, do we need to experiment with a boldness that forces the banking system into new actions?”

Kocherlakota: “One of the roles of economists like myself that are in academia, you mentioned Ken and Marvin who lead the way on this, is to really try to push us into a much better place. I really believe that fifty years from now people are going to look back – economists are going to look back – as the existence of cash much like we look back at the gold standard. We look back at the gold standard as a period which really hamstrung monetary policy and created huge amounts of unemployment as a result during the Great Depression. People are going to look back at the existence of cash and the zero lower bound – the inability to go much below zero with interest rates – in the same way, hamstringing the ability of central banks to provide sufficient support to the economy – and thereby creating excessive unemployment and robbing people of their jobs.”

Fu: “…You were out front in suggesting that the Federal Reserve cut interest rates before they actually did between meetings, I just wonder with this idea of negative interest rates are you in communication with anyone on the FOMC? Is there any slice of the members of the FOMC open to the idea of negative interest rates in any meaningful proportion?”

Kocherlakota: “I’m certainly not in communication with the FOMC, except hopefully they’re watching right now. What I learned during my time as a policymaker is that – I was a hawk for a while and then I became a dove. But I could never be dovish enough. There’s always this force within you as an economist that’s pushing you toward being a hawk – to be concerned about inflation or concerns about putting too much accommodation out there – too much monetary policy out there. What I learned at my time at the Fed was never to be concerned about that. So right now, I think the Fed is concerned about going negative. They feel that somehow that’s going to cause risk to the banking system or somehow be too much in terms of monetary policy. My own view is, and I hope I’m wrong on this, but I think they’ll learn as we have a slow recovery from where we are that they’ll have to do more. I think negative will come up… Down the road I think it will come up because I think they’ll need it.”

“The Fed must be more aggressive”? You gotta be kidding. And why such an ardent proponent of negative rates when there is little if any evidence from Europe or Japan that they are constructive? The “existence of cash” and the “zero lower bound” are the problems – similar to the gold standard? All nonsense. Our nation desperately needs some talented young, independent-minded economists to take the initiative to reform our deeply flawed economic doctrine. This week’s CBB was too heavy on quotes and light on analysis. But there was just a lot that needed to be documented.

http://creditbubblebulletin.blogspot.com/

Posted April 28, 2020 by Ben Carlson

The peak of the stock market before the 1987 Black Monday crash came in August even though the pummeling itself didn’t occur until October.

When the S&P 500 peaked that August the 10 year treasury yielded 8.8%. By the time October rolled around the benchmark U.S. government bond was yielding 10.2%.

Can you imagine earning more than 10% on a “riskless” government bond today?!

Prior to falling more than 36% from 1968-1970, the 10 year yielded close to 6%.

Before the S&P 500 was cut in half in 1973-1974, government debt yielded 6.5%.

In the nasty recession that began in 1980, which saw the S&P 500 fall close to 30% by 1982, you could have gotten nearly 13% for simply buying a 10 year treasury bond.

Stocks fell roughly 20% in 1990. Heading into that bear market bonds paid almost 9%.

Bond investors could have lent to the government at more than 6% when the dot-com bubble blew up in early-2000.

Even before the Great Financial Crisis in October 2007, high-quality bonds were fetching almost 5%.

When the stock market peaked in late-February earlier this year the 10-year was paying less than 1.6%.

U.S. stocks have never gone into a crash with lower rates than we had this year. And, as with most bear markets, the flight to safety has pushed those yields even lower (currently less than 0.7%).

To get a better sense of the difference between market crashes over the past 50+ years and the current iteration, here’s a comparison of the rates at prior peaks along with the annual income being paid out on a $100,000 investment for 10-year treasuries:

I’m stating the obvious here but maybe people are overcomplicating things when it comes to looking for reasons the market has been so resilient during this crisis. What if interest rates are the Occam’s razor here?

I’ve looked at all of the other reasons the stock market has held up better than expected during a massive economic contraction:

These factors are likely all playing a role but the fact that bond yields are so low may be the simplest of all explanations as to why the stock market hasn’t fallen further.¹

All of the world’s investable assets have to go somewhere. Every portfolio in the world is made up of some combination of stocks, bonds, cash and other assets.

Investors can always go to cash and the numbers show there was a record surge in money market inflows last month. But think about all of the money invested by pensions, endowments, foundations, sovereign wealth funds, family offices, highly paid corporate executives and wealthy individuals. Do you think all of those investors are going to sell their risk assets to move into government bonds or cash that’s yielding nothing?

Just look at the paltry income provided by 10 year treasuries on $1 million now versus the starting point of every decade since 1960 and where we stand today:

In the past, you could legitimately move to the beach and live off the interest of default-free government bonds.

I don’t know too many people who can live on 65 basis points of income a year.

There are many reasons interest rates are so low right now other than the flight to quality. Demographics, the Fed, low inflation, a huge number of retiring baby boomers, negative rates in other countries, lower economic growth from a maturing economy and a host of other issues help explain why rates have been falling for 4 decades and are fast approaching 0% (or lower).

Does this mean stocks can’t or won’t go lower?

Of course not. The market fell nearly 35% in the blink of an eye at the outset of this crisis. I’m not suggesting low interest rates can prop up the stock market forever or completely abolish volatility.

In fact, just the opposite. I think interest rates on the floor will invite even more volatility into the fray, both to the upside and the downside. We could see many more booms and busts because of the interest rate environment, they just might be smaller in magnitude than they were in the past.

Low rates will also likely lead to a market that doesn’t always make sense.

Valuations aren’t always going to make sense in this environment.

The stock market’s ups and downs aren’t always going to make sense in this environment.

Investor actions aren’t always going to make sense in this environment.

Risk appetites aren’t always going to be aligned with portfolio allocations in this environment.

The fact that investors no longer have a safe haven where they can earn decent rates of interest will have many unintended consequences.

I’m not the first person to discuss a possible TINA (there is no alternative) marketplace. But I think people underestimate how a dearth of yield in high-quality bonds has changed the incentives and risk equation for numerous investors.

We have never seen interest rates this low. Don’t be surprised if this leads to more surprising outcomes because investors have never navigated markets like this before.

https://awealthofcommonsense.com/2020/04/occams-razor-on-interest-rates-and-the-stock-market/