the current market

The past two years or so have been a time of hyper-activity in the stock market. This situation is highly unusual, in my experience, but it’s something we’ve gradually become accustomed to. So the current market lull, a time when all the economic variables that will affect prices in the near future are already in plain sight, but are slow-moving enough that there’s no real consensus about how events will play out, strikes us as odd–maybe even eerie. Despite this feeling, having stocks “taking a rest,” as several of my long-ago Asian brokers used to say, is very normal.

The huge benefit of a time like this is that we have ample room to imagine how the future will play out (including what we’ll look for to test the correctness of our conclusions, and the strategy we’ll derive from them) and arrange our portfolios accordingly. This kind of “dreaming” is the best use of our financial time right now, I think.

At the most basic level, I think the dominant business cycle issue is the interplay between the desire to reduce, as fast as possible, the extraordinary government monetary and fiscal stimulus being used to counter covid vs. the desire to maintain enough stimulus to support a real rate of economic growth in the 2% – 3% annual range.

Put another way, this is the tension between wanting to raise interest rates to choke off possible inflation vs. wanting to keep them low to foster growth.

It’s already clear that the first step toward stimulus shrinkage will be taken within a few weeks. The real question is how fast/the effect on economic activity.

Taking a longer-term view, a recent academic paper points to another “cosmic” issue.

My interpretation of it: as people get older and wealthier, they become more risk-averse. They spend less; they save more; they take fewer risks. Younger people and the less affluent, in contrast, spend a larger proportion of their income and are less risk-averse. Therefore, if a country wants to maximize GDP growth, its best strategy is to raise taxes on the wealthy and lower them for the less affluent. The US strategy of the past 40 years, epitomized by the “trickle down” theory, has been to do the opposite, which is the worst thing for everyone. What I find interesting is that the analysis takes an economic commonplace and turns it into a critique of Republican tax policy.

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