"I hope all is well with you and thanks again for your constant and consistent interpretation and insights. Re "Boom" and "Panic" (Price and Bennett) I have to say that views of the world gloomily based on references to debt mountains, Ponzi schemes, no growth, furious deleveraging, turning Japanese, binging on easy credit, Great Depression II, financial repression, policy rape, disorderly currency collapse, "beggar thy neighbour" currency manipulation, inevitable inflation shock etc etc....strike me as "it's different this time" thinking, albeit of the pessimistic rather than optimistic variety.
"Such a gloomy bias is behaviourally understandable in the aftermath of a massive recession and near collapse of the financial system. But let's not stay overly obsessed with the horror of what we know has already happened and been priced in markets. Is this way of seeing the world not possibly indicative that we are still climbing a particularly high "wall of worry" with perversely positive implications for the possible remaining duration in the ongoing global economic expansion and global cyclical bull market in equities? Who is to say that there must be low or no growth in a world with considerable spare capacity, growing labour supply, fast progressing technology/ productivity and a boom in unconventional oil and gas supply? Who is to say that interest rates are in fact artificially repressed and that the appropriate and natural market clearing level for real interest rates is not unusually low for both structural and cyclical reasons? In a world that appears to be well clear of any inflationary threshold who is to say that a determined Fed will not succeed in its objective to deliver above trend non-inflationary growth as it leads a global monetary stimulus. As ever, it's dangerous to be overly confident of any view whether optimistic or pessimistic, but "different this time" ideas about fighting the Fed seem as inappropriate as ever. The attached strategy note might be of interest.
David Fuller's view Many thanks for a robust and well-argued email which will be of considerable interest to the Collective. I think you will already know that I agree with much of what you say about the stock market, not least your penultimate sentence above. And since I have long regarded monetary policy as a crucial fundamental factor for stock markets, I am a career-long 'Don't fight the Fed' advocate.
Historically, we know that it takes approximately 5 to 7 years for an economy to recover from credit and insolvency crises. However, we also know that when investing in equities we are not buying the economies about which so many people are understandably concerned. Many companies are doing extremely well. Also, slow GDP growth and accommodative monetary policies ('Don't fight…') remain generally favourable for well-managed companies. In markets, it is tightening monetary policy that I really fear, and need to hedge against by shorting.
This cycle's economic problems have been compounded by dangerous, even ruinous debt excesses and property bubbles. However, while there may be a purity and ultimately healthy cleansing process to Austrian School solutions, few things can be more traumatic for so many people than living through 'creative destruction' similar to an economic collapse of 1930s' proportions. That has never been the only and inevitable outcome, in my opinion.
The QE route back to prosperity may take longer and is not without considerable moral hazards, distortions and longer-term inflationary problems, as so often discussed on this site. However, I am in little doubt that it is more benign than the extreme poverty and desperation that my parents and so many others of their generation experienced in the 1930s.
If we could turn back time and restart the world in the 1950s, I would prefer Austrian School economic policies. Since that is not going to happen we have to live in the world that mankind has created. And I agree with you that not only is it not all bad, there are plenty more developments to be optimistic about, not least an accelerating rate of technological innovation, globalisation and the increased number of market economies, all of which are lifting billions of people out of poverty and into the middle class on a worldwide basis. Their numbers are far greater than the unfortunate people who are slipping back into poverty in the debt-ridden west.
Meanwhile, I will continue to read and listen to what our diverse economic schools have to say, not least those of the Austrian persuasion, particularly if they are also subscribers because I know they are Renaissance men interested in many things, including Fullermoney's behavioural approach to market analysis. I can say the same for the author of this email who has kindly provided us with his latest and very interesting report, which is posted in the Subscriber's Area.