Three feedback loops are driving the most dominant factor regime ever. Understanding that doesn't need to make you bearish. But be aware of them to realize when the music stops playing.
And, if I understand your opinion, you think that the US decided to pay more interest to stimulate more domestic investment? Interest paid depends on rates and issuance volume, right? But there could be too much of a good thing? Are they hoping that productivity in the economy rises to replace this source of liquidity, and that increased tax receipts help to fund interest payments on this issuance? This might keep inflation in check in the longer term? But the risks are…? Maybe we don’t see that productivity after all? And so there’s an increasing amount of short tenor issuance needed to monetize the debt? Is this maybe why a Trump-aligned Fed chair was put there? To coordinate with the Treasury and control yield curve if necessary? Sorry for so many (perhaps dumb) questions. I’m trying to understand what the likely tree of outcomes is for investors, because this doesn’t seem sustainable, but there’s so much I don’t understand.
I am not sure there is too much intention here because I doubt that those in power are aware of all these feedback loops. I do believe though that this environment is very convenient for most people involved which is why they keep feeding it. It's clearly a leverage cycle that will eventually pop. Hard to anticipate how. One way I have been thinking about: The higher valuations go, the less shares the passive bid buys. It naturally weakens. For example, if there are $70tn in US market cap and the passive bid is $1tn per year, than the passive bid is 1.4% of total market cap. If market cap rises to $100tn, then the $1tn bid is only 1%. Share prices can't outperform liquidity creation forever. In the long run, the US stock market compounds roughly at the rate of US Dollar denominated debt creation. So the deficit has to go to $3tn, $4tn, $5tn etc at a sufficient pace to keep the bull market going.
And, if I understand your opinion, you think that the US decided to pay more interest to stimulate more domestic investment? Interest paid depends on rates and issuance volume, right? But there could be too much of a good thing? Are they hoping that productivity in the economy rises to replace this source of liquidity, and that increased tax receipts help to fund interest payments on this issuance? This might keep inflation in check in the longer term? But the risks are…? Maybe we don’t see that productivity after all? And so there’s an increasing amount of short tenor issuance needed to monetize the debt? Is this maybe why a Trump-aligned Fed chair was put there? To coordinate with the Treasury and control yield curve if necessary? Sorry for so many (perhaps dumb) questions. I’m trying to understand what the likely tree of outcomes is for investors, because this doesn’t seem sustainable, but there’s so much I don’t understand.
I am not sure there is too much intention here because I doubt that those in power are aware of all these feedback loops. I do believe though that this environment is very convenient for most people involved which is why they keep feeding it. It's clearly a leverage cycle that will eventually pop. Hard to anticipate how. One way I have been thinking about: The higher valuations go, the less shares the passive bid buys. It naturally weakens. For example, if there are $70tn in US market cap and the passive bid is $1tn per year, than the passive bid is 1.4% of total market cap. If market cap rises to $100tn, then the $1tn bid is only 1%. Share prices can't outperform liquidity creation forever. In the long run, the US stock market compounds roughly at the rate of US Dollar denominated debt creation. So the deficit has to go to $3tn, $4tn, $5tn etc at a sufficient pace to keep the bull market going.
Pretty much sums it all up
Good to have everything in one place occasionally. :)
one of the best FAs ever written imo
thanks! also links to each topic for additional detail! :)