re: Discussion of Fed Liquidity’s Impact on Equity Markets

That McKinsey study is really good and discusses this topic. Here’s a relevant bit:

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While we cannot say for certain that deleveraging will occur today, we do know empirically that deleveraging has followed nearly every major financial crisis in the past half-century. We find 45 episodes of deleveraging since the Great Depression in which the ratio of total debt relative to GDP declined, and 32 of them followed a financial crisis. These include some instances in which deleveraging occurred only in the public sector; others in which the private sector deleveraged; and some in which both the public and private sectors deleveraged simultaneously.

The historic episodes of deleveraging fit into one of four archetypes: 1) austerity (or “belt-tightening”), in which credit growth lags behind GDP growth for many years; 2) massive defaults; 3) high inflation; or 4) growing out of debt through very rapid real GDP growth caused by a war effort, a “peace dividend” following war, or an oil boom.

The “belt-tightening” archetype was by far the most common of the four, accounting for roughly half of the deleveraging episodes. If today’s economies were to follow this path, they would experience six to seven years of deleveraging, in which the debt-to-GDP ratio declines by around 25 percent. Deleveraging would begin two years after the start of the crisis, and GDP would contract for the first two to three years of deleveraging, and then start growing again.

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Recall the study was from 2010 and that, instead of deleveraging like the authors concluded would ultimately be required, we doubled down with even more debt. We are paying the price for that now with well below trend Real GDP Growth expectations, a large output gap and monetary policy that is no longer effective.

Absent an unprecedented level of government intervention, I think market forces alone will force us into belt-tightening mode and that this will occur despite continued efforts by fiscal and monetary authorities to find more room in the belt.

Chris Cole Endgame

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Chris Cole Endgame

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Reading this in advance of listening:

The Allegory of the Hawk and Serpent: How to Grow and Protect Wealth for 100 Years

As well as this companion piece:

The Dragon Portfolio: How to Preserve and Grow Your Wealth for the Next Century

We're going into a phase of lockdowns

That'll do wonders for their inflation targetting. I would imagine that consumption in general for the holidays goes way down. Less travel, dining out and gift shopping. 2021 is going to be shaky for the labor market.

What's funny is that you know those programs wouldn't expire if Trump was re-elected.

What's not funny is that you now have the blueprint to federally backed loans from the Treasury issued through the banking system. Just like I've been saying - the banks are now government utilities. Next up are the financial institions that will be mandated to purchase Treasuries when yields can no longer be controlled by a narrative and QE.

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What's funny is that you know those programs wouldn't expire if Trump was re-elected.

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Haha, no shite. Biden is going to be left holding the bag.

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Next up are the financial institions that will be mandated to purchase Treasuries when yields can no longer be controlled by a narrative and QE.

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You can almost smell the desperation at this point. I wish the bond market would say to hell with it and jack rates up.

Check these graphs out. Stock buyback charts: Yardeni Research

I'm trying to find research on debt financed stock buybacks by S&P sector.

Oh and we should welcome back Janet Yellen to the team

I forgot to tell you. I heard a really good point about the "sideline cash" we pointed out in Q2 with the money market inflows. Don't be tricked by it. When corporations drew their revolvers that cash goes into money market mutual funds.

The inflation rates by month compared to prior year are pretty eye opening. Not sure if that's the norm. 2021 is going to be a ride. Stimulus will help fill gaps but there has to be major white collar layoffs and unless there's some extended moratorium on rent/mortgage payments the consumption rates will drop dramatically.

Mikey has a new series on Real Vision. Looks like it’s focused on China:

LINK

What are y’all’s investment positions going to be when the fruits of deflation bear out over 2021.