Hey Bear, an extremely balanced approach as always.
Something that is hard to prove or quantify in any way is whether the Fed has a third mandate, that of using its incredible ability to exert substantial influence over the global economy and use the USD as a means of applying pressure on other countries to align on its geopolitical goals.
During a period of liquidity withdrawal, with lots of EM in a tough spot I can imagine that swap lines can be a powerful negotiating argument.
I think the U.S. clearly uses the power of USD and to advance geopolitical advances. This is how sanctions work, and they can be crippling (North Korea, Iran, Venezuela etc). While the mechanism is the USD, it is the legislature and executive branch that yield this power.
The Fed's monetary policy also has enormous impacts to the rest of the world as well. To the extent the Fed is hiking, others must follow suit or watch their currency's depreciate, which can be crippling if they rely on imports of food, energy etc. The Fed is also pretty blunt about the fact that it makes its policy for the benefit of the US economy not the rest of the world. But I'm not sure that swap lines have been offered "conditionally" based on geopolitical goals - at least not publicly.
At the end of the day though, the economic power provides influence, and its probably hard to draw lines on where "the market" ends and "politics" begin.
I love that you can keep main text as streamlined as possible and then expound on details, supporting info, and asides below. Then it's up to the reader if they want a 1300 word article or an 1800 word article - it's like a director's cut of a movie. Trust me they aren't going anywhere!
I'm meandering here, but am concerned. I tend to refer back to Richardo's Principles of Political Economy and Taxation (1817) when I need some clarity. We have three factors of production (distribution) capital, labor and, in his day, land, in ours resources. Adding capital changes the relationship between capital and labor, and capital and resources, but doesn't necessarily create more production (distribution). It clearly creates a disequilibrium whose consequences increase demand due to sudden appearance of 'free money' which effectively parasites off of prior value created in the economy. The value of the stock of capital is decreased due to value-less capital being created out of thin air. I worry about the erosion of belief in capital as a store of value, not to the degree of Weimar or Zimbabwe but the same underlying process. Will productive assets and productive labor move out of the capital economy to shield value, reducing liquidity? How long before the disequilibrium finds a new equilibrium, and how will that new equilibrium be different, perhaps support a different economy? I also wonder and perhaps worry that some of the numbers are being fudged with references to the changes 'after the fact' in employment numbers for, if I remember correctly, at least two quarters. Transactional economies operate on belief and faith in fairness and redress as much as on the conversion of value in hard assets into exchangeable capital assets. In the short run, it appears to have worked without the hard work of balanced fiscal management of government. Will this incent the Treasury and the Fed to overplay its hand? Government cannot lower the marginal rate for labor to withdraw from production, increase deficits and debt, increase taxes and expect a functioning economy. The greatest salve for political polarization is growth and prosperity. The policies I see being emplaced seem diametrically opposed.
I've been following you on Twitter for quite a while and just saw your substack! I just read your article from Feb 10 and have a comment on the microstructure of BTC and ETH. Per on chain sleuths, bitcoin's current surge is fueled by BUSD getting cashed out--eg exit pump and not necessarily true speculative demand
Glad you found the substack - here is where I publish most of my thoughts these days.
I do think that instability with BUSD (or any major stablecoin) can result in a temporary spike in BTC or ETH - so certainly could have been factor. But I don't think the correlation between crypto and the rebound in other tech or retail favorite stocks is a total coincidence either.
Do you believe that the feds decision making is purely economy based? As much as i want to agree with all those who are criticising the Fed for their actions, i am curious what other influences there are from governments and other powerful figures to leverage the economy in their favor.
Ultimately i believe the powers of the fed had been used to prevent a depression, but high rate of inflation is the nightmare that is being faced. The ensuing currency wars with rate hikes is like a wildfire that is going to clear out the weak shrubs with a lot of excess dept. As a world reserve, I am not so worried about the American dollar, but as a Canadian, i fear for whats coming to our bloated economy. Canadian GDP tops with the real estate and is complemented with having one of, if not, the biggest bubble in the world for this non-productive asset. As Americas hat, Canadian policy must follow, and i am both excited and scared for the future.
I do agree that the US's economic influence is the favored tool for geopolitical influence these days. Sanctions are far more common today than the military intervention.
I also agree that the Fed's policy has enormous consequences for the rest of the world, even as the Fed bluntly states that they are acting based on the best course for the US economy. Case in point is the real estate bubble in many countries outside the US (for our part, 2008 really did reset the housing market downwards, housing valuations are far less extreme, and mortgages are fixed-rate).
I understand your concern as a Canadian - I was in Vancouver and was absolutely floored by the recently selling prices of seemingly generic homes in the suburbs we stayed (I live in Manhattan, so my sticker-shock is notable). Canada is not alone in this regard, and to the extent that rates do not fall back to zero, this is going to be a huge problem - especially in countries where variable-rates are prevalent.
I'm at that stage of still forgetting that I'm subscribed and being pleasantly surprised on Friday morn to find a new essay.
I very much appreciate the calm tone backed with confident familiarity with the topics.
As a layman, I mostly react to what is right before my eyes. Though your point that outcomes/evaluations are still in flux is unassailable, what I see is concerning:
1) Dozens, hundreds, thousands of small businesses in my locale are gone. Others, esp restaurants, are still in big trouble due to rising costs of good, rising mandated wages, with customers who are more careful in their spending. My eyes tell me that small business has taken a huge hit, while Amazon has largely replaced them with its army of trucks everywhere.
Is this expected because Amazon is so much more efficient? Or did Amazon use their power during the shutdowns to grow explosively while Mom and Pop were forcibly closed? Will things swing back or is this a permanent new reality?
2) Building, quite a lot of new tall buildings everywhere. A couple of friends report the same in their states. I'm seeing many, many huge projects. So many new apartments, so much new office space. With the difficulty we see for employers to get butts back in chairs ... who will use the vast new amount of space being created? Where is the money coming from?
3) Not a new trend but dipping into the news will often provide more examples of gov't policies driving the economy while markets are interfered with. Will we someday reach equilibrium or are we destined to reach a centrally planned economy?
Thanks again for your careful and thoughtful insights.
Thank Jim, glad you have enjoyed reading it, and can appreciate a more balanced and moderate perspective.
Taking your points in turn:
1) Absolutely the biggest loser were small service businesses like restaurants and who don't have the same access to capital, or ability to withstand losses. Though some stimulus was directed towards small businesses (PPP), it was not particularly well targeted, and did not necessarily make up for lost revenue. The result was that many went out of business in 2020/21 (as the stock market raged to new heights). This sucks - there's no way around it.
One silver lining is that there actually has been a surge in new business formations during the pandemic as well. Originally I was skeptical that these new businesses were all legit, but I do think that people found themselves with enough "seed capital" (i.e. cash) to start something businesses and the disruption of the years also led people to rethink their profession, follow passions etc.
Big companies in general (i.e. Amazon, McDonalds etc) were all big winners, though I do think there has been a slight shift back towards small business (many of which are bars/restaurants) as consumption moves back into services.
2. Well on the residential side, multi-family construction starts reached the highest level going back to the 1980s during the pandemic, so you certainly aren't imagining it. On commercial real estate, I certainly wouldn't want to have office space under construction today that was underwritten based on pre-pandemic prices. There is a lag for CRE since leases are much longer, but certainly most dense urban office zones will see price meaningful declines.
3. I think the reality (whether we like it or not) is that the trend has moved towards more government involvement than less. 120 years ago there was no Federal Reserve, 100 years ago there was no social security, or modern securities regulation etc. More recently, the trend of monetary policy is for the central bank and government to have ever more direct influence on markets as they seek further control.
I don't think it's so clear how much the Fed helped the recovery, which was mainly due to relaxation of the lockdown restrictions (just as the sharp downturn was because of those restrictions, as you point out). It seems even more clear that the 2021 measures did little other than to fuel inflation--spending had recovered, as your chart shows. The 2020 Fed intervention probably did moderate the severity of the downturn. But it should have been temporary, modeled on the 9/11 example, rather than needlessly prolonged, as with QE 2 and 3.
I think that may be part of it, but there weren't really many true "lockdowns" in the US after initial couples month or so of the pandemic (I was in NYC the entire time). Even if many services were still impacted, a lot of expenditure was replaced by goods. If you were drill in on PCE Durable Goods you could see the distinct spikes that correspond with each round of stimulus. I think its hard to argue that stimulus (in all forms) wasn't an important factor.
Great article. At least for me, the collateral damage is my faith in free markets. The best research or edge in the world doesn't seem to matter anymore and it feels like the best way to generate returns is just to swim in the same direction of the Feds interest rate policy. Bubble stocks with low rates / low inflation & boomer stocks / commodities when high rates / high inflation.
Thanks David. That captures the sentiment of my sentence
"Though it seems that moderate policy would lead to longer-term stability than a fishtailing Fed, wishful thinking doesn’t help explain or analyze the practical consequences of policy today."
One lesson I've learned the hard way is that its better to be pragmatic about the way things work rather than the ways you think things should work. Moral hazard is beneficial for longer than people expect, even if it erodes foundations.
Hey Bear, an extremely balanced approach as always.
Something that is hard to prove or quantify in any way is whether the Fed has a third mandate, that of using its incredible ability to exert substantial influence over the global economy and use the USD as a means of applying pressure on other countries to align on its geopolitical goals.
During a period of liquidity withdrawal, with lots of EM in a tough spot I can imagine that swap lines can be a powerful negotiating argument.
I think the U.S. clearly uses the power of USD and to advance geopolitical advances. This is how sanctions work, and they can be crippling (North Korea, Iran, Venezuela etc). While the mechanism is the USD, it is the legislature and executive branch that yield this power.
The Fed's monetary policy also has enormous impacts to the rest of the world as well. To the extent the Fed is hiking, others must follow suit or watch their currency's depreciate, which can be crippling if they rely on imports of food, energy etc. The Fed is also pretty blunt about the fact that it makes its policy for the benefit of the US economy not the rest of the world. But I'm not sure that swap lines have been offered "conditionally" based on geopolitical goals - at least not publicly.
At the end of the day though, the economic power provides influence, and its probably hard to draw lines on where "the market" ends and "politics" begin.
Thanks for reading!
I hope you get your Central Park penthouse one day. Thanks for another great piece!
On second thought, maybe I'm more of a brownstone guy... but penthouse gets the point across. Thanks for reading Shmuel!
Por qué no los dos? ;)
Be careful what you wish for - I may have to charge for the Substack to pull that off haha
Those 11 points at the end really help in understanding, do keep them. Thanks!
I love that you can keep main text as streamlined as possible and then expound on details, supporting info, and asides below. Then it's up to the reader if they want a 1300 word article or an 1800 word article - it's like a director's cut of a movie. Trust me they aren't going anywhere!
I'm meandering here, but am concerned. I tend to refer back to Richardo's Principles of Political Economy and Taxation (1817) when I need some clarity. We have three factors of production (distribution) capital, labor and, in his day, land, in ours resources. Adding capital changes the relationship between capital and labor, and capital and resources, but doesn't necessarily create more production (distribution). It clearly creates a disequilibrium whose consequences increase demand due to sudden appearance of 'free money' which effectively parasites off of prior value created in the economy. The value of the stock of capital is decreased due to value-less capital being created out of thin air. I worry about the erosion of belief in capital as a store of value, not to the degree of Weimar or Zimbabwe but the same underlying process. Will productive assets and productive labor move out of the capital economy to shield value, reducing liquidity? How long before the disequilibrium finds a new equilibrium, and how will that new equilibrium be different, perhaps support a different economy? I also wonder and perhaps worry that some of the numbers are being fudged with references to the changes 'after the fact' in employment numbers for, if I remember correctly, at least two quarters. Transactional economies operate on belief and faith in fairness and redress as much as on the conversion of value in hard assets into exchangeable capital assets. In the short run, it appears to have worked without the hard work of balanced fiscal management of government. Will this incent the Treasury and the Fed to overplay its hand? Government cannot lower the marginal rate for labor to withdraw from production, increase deficits and debt, increase taxes and expect a functioning economy. The greatest salve for political polarization is growth and prosperity. The policies I see being emplaced seem diametrically opposed.
I've been following you on Twitter for quite a while and just saw your substack! I just read your article from Feb 10 and have a comment on the microstructure of BTC and ETH. Per on chain sleuths, bitcoin's current surge is fueled by BUSD getting cashed out--eg exit pump and not necessarily true speculative demand
Glad you found the substack - here is where I publish most of my thoughts these days.
I do think that instability with BUSD (or any major stablecoin) can result in a temporary spike in BTC or ETH - so certainly could have been factor. But I don't think the correlation between crypto and the rebound in other tech or retail favorite stocks is a total coincidence either.
Great writing and explanation on why the stimulus money has longer term effects. Nice work Bear!
Thanks and glad you appreciate it! There is more every Friday at 8am EST :)
Do you believe that the feds decision making is purely economy based? As much as i want to agree with all those who are criticising the Fed for their actions, i am curious what other influences there are from governments and other powerful figures to leverage the economy in their favor.
Ultimately i believe the powers of the fed had been used to prevent a depression, but high rate of inflation is the nightmare that is being faced. The ensuing currency wars with rate hikes is like a wildfire that is going to clear out the weak shrubs with a lot of excess dept. As a world reserve, I am not so worried about the American dollar, but as a Canadian, i fear for whats coming to our bloated economy. Canadian GDP tops with the real estate and is complemented with having one of, if not, the biggest bubble in the world for this non-productive asset. As Americas hat, Canadian policy must follow, and i am both excited and scared for the future.
I do agree that the US's economic influence is the favored tool for geopolitical influence these days. Sanctions are far more common today than the military intervention.
I also agree that the Fed's policy has enormous consequences for the rest of the world, even as the Fed bluntly states that they are acting based on the best course for the US economy. Case in point is the real estate bubble in many countries outside the US (for our part, 2008 really did reset the housing market downwards, housing valuations are far less extreme, and mortgages are fixed-rate).
I understand your concern as a Canadian - I was in Vancouver and was absolutely floored by the recently selling prices of seemingly generic homes in the suburbs we stayed (I live in Manhattan, so my sticker-shock is notable). Canada is not alone in this regard, and to the extent that rates do not fall back to zero, this is going to be a huge problem - especially in countries where variable-rates are prevalent.
I'm at that stage of still forgetting that I'm subscribed and being pleasantly surprised on Friday morn to find a new essay.
I very much appreciate the calm tone backed with confident familiarity with the topics.
As a layman, I mostly react to what is right before my eyes. Though your point that outcomes/evaluations are still in flux is unassailable, what I see is concerning:
1) Dozens, hundreds, thousands of small businesses in my locale are gone. Others, esp restaurants, are still in big trouble due to rising costs of good, rising mandated wages, with customers who are more careful in their spending. My eyes tell me that small business has taken a huge hit, while Amazon has largely replaced them with its army of trucks everywhere.
Is this expected because Amazon is so much more efficient? Or did Amazon use their power during the shutdowns to grow explosively while Mom and Pop were forcibly closed? Will things swing back or is this a permanent new reality?
2) Building, quite a lot of new tall buildings everywhere. A couple of friends report the same in their states. I'm seeing many, many huge projects. So many new apartments, so much new office space. With the difficulty we see for employers to get butts back in chairs ... who will use the vast new amount of space being created? Where is the money coming from?
3) Not a new trend but dipping into the news will often provide more examples of gov't policies driving the economy while markets are interfered with. Will we someday reach equilibrium or are we destined to reach a centrally planned economy?
Thanks again for your careful and thoughtful insights.
Thank Jim, glad you have enjoyed reading it, and can appreciate a more balanced and moderate perspective.
Taking your points in turn:
1) Absolutely the biggest loser were small service businesses like restaurants and who don't have the same access to capital, or ability to withstand losses. Though some stimulus was directed towards small businesses (PPP), it was not particularly well targeted, and did not necessarily make up for lost revenue. The result was that many went out of business in 2020/21 (as the stock market raged to new heights). This sucks - there's no way around it.
One silver lining is that there actually has been a surge in new business formations during the pandemic as well. Originally I was skeptical that these new businesses were all legit, but I do think that people found themselves with enough "seed capital" (i.e. cash) to start something businesses and the disruption of the years also led people to rethink their profession, follow passions etc.
Big companies in general (i.e. Amazon, McDonalds etc) were all big winners, though I do think there has been a slight shift back towards small business (many of which are bars/restaurants) as consumption moves back into services.
2. Well on the residential side, multi-family construction starts reached the highest level going back to the 1980s during the pandemic, so you certainly aren't imagining it. On commercial real estate, I certainly wouldn't want to have office space under construction today that was underwritten based on pre-pandemic prices. There is a lag for CRE since leases are much longer, but certainly most dense urban office zones will see price meaningful declines.
3. I think the reality (whether we like it or not) is that the trend has moved towards more government involvement than less. 120 years ago there was no Federal Reserve, 100 years ago there was no social security, or modern securities regulation etc. More recently, the trend of monetary policy is for the central bank and government to have ever more direct influence on markets as they seek further control.
Thanks again for reading!
I don't think it's so clear how much the Fed helped the recovery, which was mainly due to relaxation of the lockdown restrictions (just as the sharp downturn was because of those restrictions, as you point out). It seems even more clear that the 2021 measures did little other than to fuel inflation--spending had recovered, as your chart shows. The 2020 Fed intervention probably did moderate the severity of the downturn. But it should have been temporary, modeled on the 9/11 example, rather than needlessly prolonged, as with QE 2 and 3.
I think that may be part of it, but there weren't really many true "lockdowns" in the US after initial couples month or so of the pandemic (I was in NYC the entire time). Even if many services were still impacted, a lot of expenditure was replaced by goods. If you were drill in on PCE Durable Goods you could see the distinct spikes that correspond with each round of stimulus. I think its hard to argue that stimulus (in all forms) wasn't an important factor.
20 degrees outside, taking a sunbath at the balcony with an article of TLBS… life’s good! Oh…and a coffe!!
Enjoy! Hope that's in Celsius not Fahrenheit (sorry we are still hanging onto our outdated systems of measure over here)
Oh true! I never understood it hahaha
Great read! My takeaway line
Once inflation began to show up in the data in early 2021, it was outright ignored.
Thanks Greg. No matter what ends up happening going forward, this will be regarded as a costly mistake.
Great article. At least for me, the collateral damage is my faith in free markets. The best research or edge in the world doesn't seem to matter anymore and it feels like the best way to generate returns is just to swim in the same direction of the Feds interest rate policy. Bubble stocks with low rates / low inflation & boomer stocks / commodities when high rates / high inflation.
Thanks David. That captures the sentiment of my sentence
"Though it seems that moderate policy would lead to longer-term stability than a fishtailing Fed, wishful thinking doesn’t help explain or analyze the practical consequences of policy today."
One lesson I've learned the hard way is that its better to be pragmatic about the way things work rather than the ways you think things should work. Moral hazard is beneficial for longer than people expect, even if it erodes foundations.