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Fiscal Policy
Fiscal Policy
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Weston NakamuraVisionary
Real Vision Exchange Manager, Programming and Community Engagement

WEF Global Risks 2021

WEF: The Global Risks Report 2021, 16th Edition (link)

Just a reminder, COVID had spread worldwide & was well known during Davos WEF last year, with the entire institutional finance community there, and was completely brushed off as barely an afterthought. So ONCE again, COVID has NEVER impacted the markets at the index level. Ever. Not to the end of Feb-March downside crash obviously, since the aforementioned was in Jan, and not to the upside rally, also obviously, since markets recovered by summer and COVID never stopped to this day.  So- why would COVID figured suddenly have an index impact now? 
 

 

Weston NakamuraVisionary
Real Vision Exchange Manager, Programming and Community Engagement

Let's (not) go back to the pre-COVID economy

As per @Jeremiah S post with very telling charts on Corp insiders selling (link here), i did a whole analysis & presentation on this at end of 2019 going into 2020 on what "big business"' really thinks of the so called "booming economy" standing at the end of the longest expansion on record. spoiler alert - while corporates were buying it (literally via record buybacks), executives themselves weren't buying it (also literally), they were very much selling it.

2018-19 saw a surge in CEO turnover to record high executives stepping down. over that same period, corps held record buybacks. See this key chart below from data i compiled (obviously not updated for the past 1+ year).

Whats going on above? CEOs, who have been receiving ever growing % of their personal compensation in stock options and thus incentivized to pump up their share prices, realize that an end of cycle slowdown is at the doorstep and the "E" in P/E ratio is no longer going to contribute to their personal net worth growing - but since when do earnings fundamentals have anything to do with stock prices. So CEOs authorize massive buybacks using FCF and/or debt, pump up their personal net worth, and step down en masse, selling their stock options as they do. Yes, on one hand, they tell shareholders that the best use of their cash is to buy back shares, and even if shares are at all time highs, are apparently still enough of a... (More)

My first thought was that's absurd; they're terrified of raising rates at +126% Debt-to-GDP as it is in the United States at present, which would prioritize a higher rate of interest over the principle payment. (That's a big chunk of change!)

My second thought was that's one of the only things fiscal policy probably can do now with the bias of avoiding a broad, economic, deflationary spiral, which they're also terrified of...

My third thought was this kind of situation is virtually inevitable in terms of how debt cycles work in a world run by central authorities like the Federal Reserve.

Manipulating interest rates and money supply leads to economic booms/busts a la "the debt cycle," which typically come in greater frequency and amplitude over time the more it's done. And once you start, it's hard, if not impossible to stop . . . like a self-fulfilling prophecy due to the algorithmic nature of it.

Taxation and spending are the strongarms of fiscal policy (US Treasury). Interest rates and money supply are the strongarms of monetary policy (Federal Reserve). Obviously they co-exist in the global monetary system, but once a country's Debt-to-GDP crosses over 80% or so, central authorities almost "have to" keep spending in order to avoid deflation. So they work in concert to achieve that end.

That being said, I like Howard Mark's rhetorical reply to the idea of taxing unrealized capital gains: "Would you then give us a refund if we took losses [for no cap gains]... (More)