I've recently posted about the rise in global & national debt and the increasing dissonance between markets and the economy. This post is about inflation and the long-term economic effects of 2020.
We're currently operating on $6 trillion of stimulus. The Trump administration approved the first 4 trillion dollars, and Biden's administration added another $1.9 trillion. Around $3.5 trillion of that went to purchasing government securities. Meanwhile, the U.S. Treasury also printed another $2B in dollars (more than they produce in a normal year).
Here is an infographic showing the programs enacted to counteract the pandemic's economic impact.
via PGPF (3/15/21)
These strategies make credit easier to get by growing the money supply and lowering interest rates with banks having more reserves. Without these and the Fed's other emergency measures, the economy likely would have crashed ... but was it a "fix" ... or did it just delay the inevitable?
In the short term, the stimuli did a pretty good job of creating liquidity, preventing a substantial market crash, and increasing faith in the system.
Markets became more erratic and harder to predict. And other ripples are starting to show in the economy.
Inflation: Temporary?
It's not hard to tell that prices have risen recently. But, while consumer prices have risen 2%, on average, investors continue to invest in treasuries and push the price of 10-year yields down to where they were in February of last year. That seems to imply that despite inflation and stimulus, investors still have faith in the Fed.
The hope would then be that the inflation is transitory and not a long-term effect of the stimulus.
via Wall Street Journal
It's possible that this inflation is the result of a post-Covid demand surge (and not the beginning of a larger trend). You can also assume that the surge in prices of airfares, hotels, and sports games will drop once they become "normal" again. And, even if they don't, if wages don't rise with that new demand, it's easy to picture demand returning to normal.
The last time the Fed created money on a similar scale (the Great Recession), high long-term inflation didn't materialize, so it might not happen again.
Conclusion
I think it's unlikely that we see another 1970s style surge – and I think it's equally unlikely we see major deflation. With that said, I still don't think we've seen the end of the effects of the pandemic and the pandemic stimulus either.
One of the practical results of the Fed's bond purchases is that it creates money to finance the gigantic debt run up by Congress. With the national debt at almost $25 Trillion, it gets harder to pick a measuring rod of financial health that isn't woefully inefficient. The idea of "sound money" or a sustainable fiscal path seems increasingly questionable. But, if you believe in Modern Monetary Theory and in the United States' amazing ability to borrow, it's possible that there truly is no worry. Japan is a potential example of that - with a debt-to-GDP ratio of double the U.S.
So, even if inflation continues, it's hard to judge how bad a sign it is.
Whether or not there's a crash tomorrow (or 7 years from now), at some point, we know there will be a "correction."
Predicting the future is hard!
Curious to hear what you think.
An Insider's Look at Markets
Just because we perceive something, doesn't mean it's true.
Ten people can witness an accident, and all perceive different things.
Often, our eyes see, and our ears hear, just what we expect them to see or hear.
And with news, rumors, and urban myths, it is important to remember that just because many people say something – it doesn't mean it's true either.
Confirmation bias is dangerous whether we are looking for a reason to do something or not do something. Likewise, confirmation bias is dangerous whether you are looking to buy or sell.
The truth is that humans can make things up ... but we also can notice things and infer meanings that aren't there. Sometimes we also assume cause when coincidence is more likely.
I suppose there was an evolutionary benefit to our ancestors who were able to infer danger before it ate them. Nowadays, it's probably better if we temper those instincts a little.
Why Do We See Patterns In Random Data?
The human mind is especially good at finding patterns in data.
Often, I believe that I can see a pattern in random data. OK, I understand that I don't really see patterns in random data; but to me, it seems like there are patterns in the random data.
This happens because we don't look at data neutrally. That means when the human eye scans a chart, not all data points get equal weight. Instead, we tend to focus on outstanding cases, and we tend to form our opinions on the basis of these special cases.
In other words, it is human nature to pick up the stunning successes (or failures) of the method and to overlook the more common performances. It's one of the reasons that I moved from marking up charts myself, to using computers, to leveraging a team of data scientists and advanced A.I.
Human fear, greed, and discretionary mistakes make it hard for humans to understand or predict markets.
Understanding Markets
In reality, there is no such thing as a "Market" ... It is really just a collection of separate traders - and only some are human.
One of the reasons that markets experience great volatility is that different groups buy or sell for different reasons at different times.
Consequently, even if one group trades using a consistent set of rules, a strategy that effectively combats it only works until that group stops trading those rules.
And though there are "patterns" in trading, they're essentially random to you or me. Because they can happen in different time frames, or scales, or orders.
I shot a video that goes into more detail.
Conclusion
In trading, predicting markets is much different than using math and statistics to measure the performance of a technique (or a library of techniques). If markets are random, why waste even a minute trying to predict random. Instead, figure out something valuable that you can predict or know.
While I often believe I see patterns in markets, I know better than to make trading decisions off of those perceptions.
The amount of traders is growing, the diversity of traders is growing, and the speed at which trades are made is growing. As a result, there's more confusion, more volatility, and more noise.
It's all about finding the signal from the noise, and making finer distinctions - because if you don't know what your edge is, you don't have one.
Hope that helps.
Posted at 11:15 AM in Business, Current Affairs, Ideas, Market Commentary, Science, Trading, Trading Tools | Permalink | Comments (0)
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