An uneasy calm has descended on the markets since the end of the first quarter put a stop to the heavy liquidation in bonds and some gained the sense that commodities were perhaps a little overcooked. The rebalancing and retracements those two entailed could yet run further, but we very much doubt that we’ve seen the last of the inflationary wave.
The sell-off in Treasuries is causing a few conniptions and simultaneously provoking a spate of bearish comments. The higher the markets go without some sort of correction or consolidation, the riskier they get, but we don’t think bonds, per se, are yet enough to trigger a reversal
Inflation, Milton Friedman famously said, is a monetary phenomenon. But it is also one given the readiest of outlets through recourse to what we call ‘fiscal’ policy – i.e., by spendthrift governments borrowing money created at their call and forced into the system by means of warfare, welfare, contracting, cronyism, bureaucratic expansion and plain old boondogglery. Arguably, this is where we find ourselves today, in a world where supply is no longer likely to meet demand as abundantly and as effortlessly as has been the case these past twenty years.
We ended the summer by saying that – barring another disastrous, COVID19-inspired, mass governmental embargo on everyday economic activity – the miners, makers, movers, and merchants of the things we need to run our lives when we are not scrolling through Instagram or pretending to pay attention to a yet another pointless Zoom conference would begin to make up ground lost in lockdown to the providers of such diversions. State interference would henceforth take other, more chronic forms of hindrance: tending deliberately to boost demand while making its satisfaction progressively more difficult. So far – broadly speaking – so good.
On the eve of what is shaping up to be a particularly momentous US election, we offer our view of what is at stake – both in the markets and out in the real world, far beyond the flickering screens of the trading room.
If we compare like with like, we find that the semi-mythical ‘equity risk premium’ may not be quite the yardstick it’s made out to be. In fact, the right sort of bonds have proven every bit as rewarding as stock, over the years and it’s cheap to bet they might do so again
OPEN ACCESS FOR A LIMITED TIME ONLY.
It’s not just the leaves that often turn when the year begins, with gathering pace, to slip towards its chilly end. Markets often do, too.
Given this backdrop, the sell-off in the Nasdaq – in the marvelled-at ‘Growth’ stocks, in the FAANGs, and in Tesla – comes at a moment which is particularly intriguing for reasons which go far beyond whatever coup SoftBank may or may not have attempted and whether those irritating Lockdown Livermores have finally gotten their comeuppance.