• John Prior

The Debate

One of the features of the internet/social media dominated world is that it gives those with something to say a platform to reach people in a way that did not exist in past crises. It’s not that these views or information didn’t exist in the past but it’s just much easier to find and consume. My personal weapon of choice as a platform of information consumption is Twitter, which provides me with more useful content regarding financial markets that I can possibly consume.

So, what is my Twitter feed telling me today? If I said the overwhelming sentiment is “a tad gloomy” I am sure you get the picture. One thing that is absolutely consensus is that everyone thinks that everyone else thinks there is going to be a V-shaped recovery: an oxymoron if ever there was one. This is the main justification I can see cited as to why equity markets have performed as well as they have. I have always been in the camp that the full information discounted in market prices are a little more than “what everyone knows, everyone knows”. FT Alphaville alluded to this in an article titled “The Zimbabwification of Wall Street” in which they playfully note that maybe the market is discounting something yet unseen, in this case, the future hyperinflationary effects of unbridled money printing. File under “neve a truer word spoken in jest”.

These last couple of weeks have been notable in that we have had many titans of the investment world weighing in on how they see things; they broadly fall into two camps. In the red corner we have the deflationists who think that no amount of government bailouts and money printing can deal with the solvency issues resulting from the pandemic and that equity markets have lost their marbles. They point to collapsing monetary velocity as evidence that money printing has lost its potency. Their number include luminaries such Stan Druckenmiller, Carl Icahn, and David Tepper. Even Warren Buffett sounded as bearish as I have ever heard him at the recent Berkshire Hathaway annual meeting. In the blue corner, we have the inflationists such as Ray Dalio, Paul Tudor Jones and Bill Ackman all of whom are more in the camp that central bank money printing combined with fiscal largesse will allow the world to inflate its way out of its chronic debt problem.

The fact that you have so many investment greats with totally different views is of informational value. No one knows. However, if forced to grab a sponge and join a corner I would be with the blues. That is not to say that I don’t think there are some tough rounds coming up. But ultimately, I do believe central bank trillions overwhelm super-investor billions. As Ben Bernanke said in his famous interview on 60 Minutes in 2009, “To lend to banks, we simply use the computer to mark up the size of the account”. Or as Jerome Powell said last week “We won’t run out of money”. If the missing piece of the jigsaw is converting bank reserves into spending power for main street, that is a much easier thing to do than finding a coronavirus vaccine. To be clear, I don’t believe for a second that this is a path to prosperity, but I do believe it will be the default “least worst” choice and that has implications for both nominal asset prices and real asset values.

I also believe that while we have dealt with several volatility events in modern times such as the financial crisis in 2008 and the current coronavirus pandemic, THE volatility event is still ahead of us. This will occur when there is finally a shift in the deflationary regime (defined by falling rates of price increases rather than falling prices) that has been in place since the early 1980’s, to an inflationary regime, engineered out of necessity. Fire fighting deflation is firmly in the modern central banker’s comfort zone for which they are equipped with a tried and tested toolkit. When the world realises that the only weapon they have to curb rising prices is to literally burn down an hyper-leveraged world with rate rises that it cannot bear, their bluff will be called and the results from their choices will be spectacular to behold. Remember that volatility is a double-edged sword. This may seem a million miles from the situation we face today, but things can change and as investors, the things that we can barely make out on the distant horizon are of more consequence to our journey than what we can see with absolute clarity in our rear view mirror.

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