1 minute to macro clarity

6th Sep '20 by mojomogoz

4 comments 638 reads

Rinse repeat until you get the right answer...

We have two paths ahead of us:

1) debt deflation depression

2) something else

We will choose 2 though clearly we don’t really know what it is. So far no country has been brave enough to articulate a truly durable alt strategy that negates 1. So it feels like data and proof point relentlessly to 1 and a lot of macro savants and big money people have asserted that based on ‘the irrefutable data’.

However, 1 cannot and will not be permitted. 2 may throw some shakes into the markets at points and some of you sages may profit from that…but know for your own safety you are playing the little waves not the tsunami.

This is all you need to know. Treat my inshite (as Sean Connery would say) as a macro colouring book. Keep inside my lines and the macro mother Gaia will praise you. If you wish to provide your own colouring in of the macro pieces them please feel free to do so in the comments.

Here’s my kick off suggestion:-

We’re in a world of enormous fiscal demands on governments. This will be met by a messy mix of traditional and MMT-ish approaches. Q: How do governments create the max multiplicative impact from their fiscal giving? A: They partially underwrite commercial lending by banks to small businesses (we’ve seen that during Covid crisis). It would also help a great deal to reduce the risk weighting of pools of small business loans to less than inert (but loved) asset backed lending. ‘Free market’ US and UK are in a good place to do this.

There are large swathes of labour in near all western economies that is under-deployed and many places bereft of adequate ‘first world’ activity and infrastructure. We can find the need and the capital to deploy into these areas. Its an issue of will and recognition.

Growth is mainly a mundane quantity and not an innovative one. Why do we insist on suppressing the mundane part? Let the banks boom and stoke the inflation engines!

WARNING: Most of you will not accept the profundity and vision of my two step loop. Its very intellectually unwholesome and unsatisfying for analytical market people so you will make up intellectualisations for why it can’t be. Wrong! Clearly no debt…

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Quest

6th Sep '20

I will vote for 2 something else! Governments will push for growth maybe leading to higher inflation.

Macro

There are some of nations with low public debt (all in their own currency) and who have had a 'good' pandemic. They have good public finances and have no intention of losing their financial discipline. These countries have no need to inflate (devalue their currency) to ease debt repayments. Think Germany.

Then there are some nations with higher public debt (all in their own currency) and who have had a 'bad' pandemic. They had poor public finances which seem destined to get more precarious. Think Spain, Italy, UK? Two of these countries are in the Eurozone and their currency devaluation is not entirely their own decision. The other has .... 'taken back control'.

Then there are the countries with high public debt (in hard currency) and who have had a bad pandemic. They have poor public finances which seem destined to get much worse. For these poor unfortunates devaling their currency makes their repayments worse - but that is what may happen nevertheless.

Then there are the countries which are 'special' - those that are fortunate to have the global reserve currency or who have the ability to control their economy centrally. Think USA, or China?

So, I don't see it as a choice between '1' and '2'. More a point of inflection where the weak get weaker and the strong get stonger?

As you can imagine I am at a loss to why Sterling is as high as it currently is. What the British have always done is let their currency devalue slowly and then not have the discipline to improve worker productivity through education, skills and capital investment. .... Rinse and repeat.

mojomogoz

7th Sep '20

I'd put it to you that Germany is as much of a basket case as anyone else in Europe and the shock of one day realising that will be monumental. Its got acute problems -1) more production than demand, 2) weakening of its export markets (particularly the near EZ market), 3) a trenchant withdrawing US that will not play nicely regardless of wether Trump or Biden, 4) idiotic energy policy (geography and climate make it poor for wind and solar...UK unusually suited to wind) that leaves it beholden to Russia and 5) terrible demographic trends (bulge in 50-65 yo and deficit of 0-20) with a poor record of integrating immigrants too to compensate.

IMO too little domestic demand is a bigger problem than too much and makes Germany much more beholden to global events. When people laud Germany they miss that much of its post integration production strength has resulted from labour reforms (Hartz reforms) in early noughties. Hartz impoverished significant proportions of the german labour force, particularly relative to their productivity. This cut the legs away from domestic consumption. In some ways Germany has a sort of subsidised and indentured (significant state subsidies to support living standards) labour market. Its not very healthy

The above is not a Rule Britannia triumphalist bombast...we've got plenty problems....however, I strongly believe we are in a more durable position than Germany for all our mistakes.

The independence of the BoE and its ability to partake in unholy debt monetisation will be a great strength relative to ECB/Germany. It may be the nudge needed for EU to truly federalise (true fiscal sharing) or it might be the bullet to the head. If the former then I'd want a vote to rejoin. If the latter I'll be delighted to be on the clear outside of it. All Brexit heat and stramash aside I believe that the UK distancing itself from mainland Europe is a good strategic move (whether by design or accident) as I do not think the Europeans will federalise absent a lot of extra pain. Germany did blink during pits of covid...but the politics of that nation are such that once the immediate heat is off Merkel does not have support to "give away" more to the wasteful Europeans (ironic as the Europeans give so much to Germany that has made it strong....a story of national narrative and prejudice sitting in the way of reality)

15th Oct '20

I see we are going to do a bit of market rinse repeat as outlined in original post. I don't know how deep the short term negative gets but my initial banalysis above still holds tight.

Two paths for this current wobble:

A) US politicians see sense and stimulate again (as they will repeatedly for at least the next 5 years) -> this is the fast return to normal service with just a market blip choice

B) Or they squabble and don't stimulate and US treasury market throws a March 2020 style wobble (where there was a buyers strike on all but on the run securities) and Fed march in again with bazookas stabilising the Franken-market -> this is the feel the pain choice and will see rapid downs (absent big vaccine news or rapid turn down in US infection rates)

I'm not telling you its all okay... its not...we're going through the looking glass socioeconomically at this moment. This decade is not going to run politically, financially, policy, economically like the preceding two. Stick to my two step boogie and you will be okay-ish in a strategic sense (still plenty of scope to stress on stock picks of course). The simple macro rinse repeat is your starting point for macro thought. Ultimately, massive sustained fiscal response through monetary financing (and leverage of bank balance sheets if cunning and wishing to avoid too much socialism) in all western countries with monetary sovereignty is the course. Plan accordingly

Don't believe (A) above? Check this out:

US Federal Budget Trends, 2016-2022, using 2020 actuals ($B)
"Total" = Entitlements + Defence + Interest Expense

If you think its only covid caused think again...covid is merely an accelerant.

1 minute to macro clarity

Rinse repeat until you get the right answer...

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Mojomogoz

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