Heads I Win, Tails You Lose

“Every 10 year or so, dark cloud will show up in the financial market and it will rain gold”. Ben, you are saying Warren Buffet will Never be able to buy cheap/fairly valued company again until " they" allow it.
Reading your stuff some times send chills down my spine that makes me doubt how real your stuff is, and yet the killer rabbits, stalking horses, never the same gag twice resonate with something in my bones. I instinctively know what kills everybody would NOT be something sharp and noticeable like 2008. It is more likely something dull, hard to feel, and yet it would eat you alive like chronic disease. There is still 25% of me believing "market’ has its own will and gravity and “they” won’t be able to defy it like they won’t be able defy physics. I also know “they” won’t let it go without putting up a flight at threat of extinction level.

“Because emerging markets are going to be crushed before this is over.” Please could you elaborate on this point?

Ben,

As usual , you make thought-provoking, interesting points but to me your view still feels a little like “This time it’s different”.
Now granted I was brought up in the business when commonplace knowledge was “the market is bigger than government”
And I realize post 2008 the gov’t has imposed it’s will on markets, I just don’t think it can continue to do so in the long run.

But perhaps I have a different sense of how long “the long run” is than you.

To play Devil’s Advocate for a moment – in the defense of “They” – what’s so scary about “How I learned to stop worrying and love the S&P”? Active investment managers have to find another line of work; Warren Buffett has to buy the likes of KHC because there are no other cheap/fairly valued large companies. Weighed against millions of Americans depending on “the market” for retirement, to fund college educations, and so on, it seems like a good deal.

“Because the bond market ain’t a political scorecard” – whatever happened to bond vigilantes? Are they extinct or just in hibernation?

So, does this all mean get ready for “that 70’s show”?

The short answer, John, is to point you to an oldie-but-goodie ET note titled “It Was Barzini All Along” (https://www.epsilontheory.com/it-was-barzini-all-along/). The skinny here is that EM as an asset class is not an independent thing, but is just a reflection of DM monetary policy. And as DMs engage in a race to the bottom to devalue their currencies and jointly monetize their debt, that totally wrecks EMs.

The long answer is that I’ll be updating the Barzini note over the next two weeks and republishing the updated thesis!

It is very difficult to predict the path The Great Reset will take.
We can’t know what the political environment will be as technology begins to eat into the employment rate. Will increasing productivity reduce consumer prices or will inflation rise? If it’s the latter, will the Fed react by raising rates and trigger a Volcker-style recession? Will Congress order the Fed to monetize the debt? —John Mauldin

So Trump has let the dogs of debt loose as far as the fiscal deficit goes. The Obama administration had got the yearly fiscal deficit back under control, but that ‘austerity’ has been jettisoned and the U.S. will run a $1 trillion-plus deficit. Call it 4%-5% of GDP. Hey folks, you don’t have to wait on AOC or Bernie…MMT is already here,they are just not admitting it! Neither is Powell, he has no clue.

The direct monetization of debt is how you get inflation. Monetizing naked debt is how inflation happens and that looks like the path ahead now that QT is dead and the deficit is booming.

It will be interesting to watch oil and gold…do you know what the Fed has almost doubled/tripled in purchasing in 2018 and continues at the same rate in 2019…ahhh gold! Look it up, its on there balance sheets. I wander what bitcoin does in that world? Assuming it breaks new records…

A world in recession might not have such a strong appetite for U.S. Treasurys at the current low rates and heaven forfend if that lack of appetite in itself pushed up interest rates. Someone has to buy. Who is going to buy if the world decides it is not as keen as it was on U.S. debt?

Exporting Debt is the single biggest U.S Comparative-Advantage!!! What happens in a low yield world of the global connective-tissue and the historical global pacifier of US Treasuries stops??? I do not know…but no one else does either.

I think Richard Koo is correct in his assessment of a global-balance-sheet recession/problem/depression,what ever is coming?

Very Relevant….inflation-and-debt National Affairs by John H Cochrane

These dynamics essentially add up to a “run” on the dollar — just like a bank run — away from American government debt. Unlike a bank run, however,
it would play out in slow motion. But in the “run from the dollar” scenario, people want to get rid of all forms of government debt, including money. In that situation, there is essentially nothing the Fed can do. When there is too much debt overall, changing its composition doesn’t really matter.

Above all, we need to return to long-term growth. Tax revenue is equal to the tax rate multiplied by income, so there is nothing like more income to raise government revenues. And small changes in growth rates imply dramatic changes in income when they compound over a few decades. Conversely, a consensus that we are entering a lost decade of no or low growth could be the disastrous budget news that pushes us to a crisis.

I hope you’re right.
But I don’t think you are.

At the risk of being a pain in the ass [but I’m really agreeing]…

I’m thankful that the world I live in is not Gaussian, the alternative would be depressingly boring. Gaussian distributions are most commonly encountered in toy models, real phenomena observed over only short time scales, and deliberate misdirection by conscious actors.

The current racket of the central banks can be seen as trying to simulate a very narrow Gaussian’ish process where the SP500 returns X% ± Y% with Y small. And today’s particular racket can be seen as a natural evolution of the CB racket since the early 70’s and the “secular” decline in interest rates during this regime. Every once in a while the CB’s get a little complacent [as in staying too tight for too long], there’s some kind of asset price crash, and rates need to ratchet down in order to maintain the illusion. The illusion that “the US is actually objectively special, it didn’t just get a transient advantage from being the only industrial economy that wasn’t bombed back to the stone age in WWII”, among others.
But here we are with the interest rate trend line not meaningfully different from 0, and things can’t help but get weird. Corporations spend every spare dollar buying back shares and disappearing into themselves, people start to hoard $100’s, etc… Pretty soon it’s cats and dogs living together. There HAS to be a regime change, and MMT-enabled inflation is about as plausible as anything else. With the caveat that extrapolating through discontinuities is a dangerous game.