By Eric Peters, CIO of One River Asset Management
“Hong Kong is filled with frustrated bulls,” barked Biggie Too, chief global strategist for one of Wall Street’s Too-Big-To-Fail affairs. “And New York is full of frustrated bears,” said Biggie, finishing up another world tour. “People don’t understand why the S&P is here. Look beneath the surface and there’s horrible damage. But you have these 10 tech stocks in a different universe,” bellowed Biggie. “We used to mock Beijing and their two economic policy gears; 4th and reverse, boom and bust,” he said. “We’d laugh at China for their state-owned enterprises, but it kind of feels like we’re moving to that here,” said Too. “Google can do as they want, just so long as they make sure we beat China.”
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“We’d be in unchartered territory and the consequences on the US economy could be highly uncertain and adverse,” said Jerome Powell, warning of the risks from a looming government debt default. “No one should assume that the Fed can protect the economy from the potential short and long-term effects of a failure to pay our bills on time,” continued the Chairman. And that’s really saying something. You see, when the person running a $7.8trln central bank balance sheet, acquired through successive rounds of protecting the economy from any and every risk imaginable, says not even he can help, you probably ought to listen.
“Our economy is in free fall due to unsustainable fiscal policies,” wrote a group of 43 GOP senators, including Minority Leader McConnell. So severe is Mitch’s purported economic freefall that the unemployment rate declined to 3.5%, nearly a 54-year low.
“This trajectory must be addressed with fiscal reforms,” added the senators. But as pretty much everyone knows, both parties run colossal deficits when in power, and seek reforms when out. This is why our national debt rises inexorably in good times and then explodes higher in bad times.
No one in Washington seriously opposes this construction because there have been few negative consequences. With deficit spending comes higher economic growth, lower unemployment, and pork.
Naturally, the notion of paying our bills is a fallacy in a system of perpetual deficits. Rather, we roll our old debts as we incur new ones. We pay interest with more debt still. And the only way to restore relative balance between the size of this debt and our economic output, is to grow the latter faster than the former. But as the debt becomes larger, and the interest the government pays on it rises, the process becomes vastly more difficult.
As this happens, governments find new ways to manipulate markets, investors, and the economy to achieve this objective. And that is what we will have to navigate in the decade ahead, as we hunt for opportunities.