Three Things I Think I Think – Happy New Year!

Here are some things I think I am thinking about.

1) Happy new year! 2020 – what a strange year. Awful in many ways and weirdly good in others. For asset prices it was a nightmare of a year, turned into a great year:

  • Global Stocks: + 16.3%
  • US Stocks: +18.3%
  • US Bonds: +7.5%
  • 1-3 year T-Notes/Bills: +3%
  • 20+ Year T-Bonds: +18.1%
  • Gold: +24.8%

On a more personal level, this was a year of enormous struggle for many. From the pandemic and its health problems to the constant economic concerns. I won’t help you relive the memories. Instead, let’s focus on the future and try to remember the things that 2020 really highlighted:

  • The importance of health.
  • The importance of loved ones, friends, family, and togetherness.
  • The importance of financial stability.

I’ll try my best to write a little more about each of these topics this year and hopefully help you remember them all along the way.

2) “Stability creates instability”….That old Hyman Minsky quotes is one of the best ever in finance and economics. 2020 was perhaps weirdest because the instability came from out of nowhere. It was a truly exogenous shock to the economy in that it was more like a meteor than a boom/bust cycle. Of course, if you were reading Pragcap this year you understood all of this back in April. And you knew that it wasn’t likely to persist. This wasn’t the next Great Depression because, quite simply, it wasn’t an endogenous shock that was likely to persist.

Boom/bust cycles are unique in that they involve years of excess build-up. People become overly optimistic about tech stock valuations. People become overly optimistic about house prices. Those are busts that develop from a boom. The super interesting thing about 2020 is that it was basically an entire market cycle inside of a larger market cycle. What I mean is that you had a developing boom cycle going on that was interrupted by an exogenous shock which is now taking us back (or above) the previous boom point. So, in a weird way you can argue that the stability that sews the seeds of instability is taking hold again as the economy more or less returns to its 2010-2019 trend….

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