EC The Difference Between Good Economics And Bad

The Difference Between Good Economics and Bad

“Real protection means teaching children to manage risks on their own, not shielding them from every hazard.” ― Wendy Mogel, The Blessing of a Skinned Knee

In the five weeks from February 19 to March 26, 2020, the S&P 500 fell 33.9%. Because of all the bizarre things we have seen since then, that seems like such a long time ago. Despite serious questions about how quickly the economy will ultimately rebound from the global shutdown, investors are pricing the stock and bond markets for perfection. Many individual stocks sit at new all-time highs, and credit spreads are tighter today than before the COVID-19 outbreak.

Meanwhile, Treasury yields have fallen to levels well below those seen before the pandemic. Mortgage rates for a 30-year term are below 3.00%. Eerily, equity volatility remains quite elevated suggestive of investor anxiety and illiquidity.

As investors, we tend to draw conclusions based on market behavior. When Treasury yields fall, for example, it is not unreasonable to think it portends undetected economic weakness. If credit spreads tighten, it is plausible to believe that the cause is strengthening corporate revenue and earnings.

What if, however, signals are misleading as described above? What if the market’s traffic lights are green and red at the same time? Dare we ask, what happens when good economics become bad.

The Visible Hand

Beginning in February, the Federal Reserve (Fed) initiated several policy programs resulting in massive surge of their balance sheet. In just 13 weeks, the Fed provided over $3 trillion of liquidity to financial markets. The Fed’s efforts in 2008 pale in comparison.

(Click on image to enlarge)

Good bad economics, The Difference Between Good Economics And Bad

While such a policy did not forestall a recession, the objective is clearly to mitigate damage in risky asset markets. Actions of this sort are becoming increasingly routine for frightened policymakers. In the name of expedience, they aim to “rescue” financial markets.

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Edward Simon 1 month ago Member's comment

Lately, there has been an increase in chatter on the net about returning to value investing, or at least that "value" stocks are currently presenting themselves as good investing opportunities because of their relatively low prices. Do you think this is a trend that will gain traction?

Bruce Wilds 1 month ago Contributor's comment

It is only massive and unsustainable deficit spending that continues driving our economy forward. The bottom-line is that we are in the midst of a "false economy" and it is only by the grace of this huge deficit spending that we are not languishing at the bottom of a deep economic pit.

Today late cycle indicators are on the rise, moderating growth, tightening credit, declining earnings, the peak of consumer confidence, rising inflation and more. Deficit spending is not a silver bullet without consequences and with each step forward we get closer to the end of the road.

This is why investors would be wise not to accept America's recent GDP as verification the economy is hitting on all cylinders. The article below argues government spending is a poor substitute for the free market in allocating capital to where it is most effective and it is not economic growth but simply a method of borrowing from the future.

Beating Buffett 1 month ago Member's comment


Moon Kil Woong 1 month ago Contributor's comment

However, I am fiscally conservative. The US messed up pumping the economy for all the years it was expanding. For that, there is no excuse and is the definition of poor planning and economically destitute behavior. We need to learn or put more constraints on central bank actions when we aren't in crisis or in an economic downturn.

Republicans and Democrats are to blame and Congress should take back their power from the central bank, the Presidency, and manage the fiscal aspect of their Constitutional duty better. Simply put, the fault and error of the Treasury has been committed years ago and is the opposite of anything resembling fiscal constraint or good economics. You don't stimulate and carry low interests rates in an expanding economy. Revoke their degrees and make them attend basic economics courses again please.