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As we navigate the currents of today’s financial markets, we’re witnessing a striking contrast between the resilience of equities and the cautious stance of the bond market. Equity markets, it seems, are choosing to overlook looming challenges, clinging to a narrative of a ‘soft landing’ for the economy. On the other side, bond markets are reading between the lines of recent data, seeing it as a signal of the Federal Reserve’s potential pause in tightening, a scenario that could bode well for bond investors, but not a good omen for the economy.However, my own analysis leads me down a different path. I’m increasingly convinced that we’re headed towards a ‘hard landing’, a scenario that will unfold gradually but with significant long-term implications for the U.S. economy. The extended time lags we’re observing, longer than those in previous recessions, suggest that market participants might be overly optimistic about the likelihood of a soft landing.A key indicator for me is the negative growth in M2. This unusual trend could signal a much steeper economic downturn than what is currently priced into the markets.(Click on image to enlarge)
When we talk about monetary policy and interest rates, the narrative becomes even more intricate. Traditional wisdom suggests that a slowdown in monetary expansion leads to lower interest rates. But in our current context, this relationship is not so straightforward. The real issue goes beyond the cost of money. It’s about how money is moving and being used in the economy. Given this, the Federal Reserve’s traditional tools might not be as effective in the coming years.The U.S. fiscal situation only adds to the complexity. With negative national savings, the government is essentially absorbing all private and foreign savings, a trend that’s likely to worsen in a recessionary environment. This could limit growth in the capital stock and add to disinflationary pressures.In the bond market, traditional investors are looking for opportunities, especially in the longer end of the yield curve, anticipating a return to a more normal yield curve. However, I view this with a degree of caution. While normalization of the yield curve makes sense, the current scenario suggests that bondholders might end up paying the price for these imbalances through significant monetization.A critical factor to watch, and potential catalyst, is the large amount of debt issued at low rates during 2020 and 2021, coming due in 2024. This is likely to redirect a significant portion of income towards interest payments, further constraining economic activity. We’re already seeing signs of this in the difficulties emerging in bond auctions.The response to the pandemic – linking monetary expansion with fiscal stimulus – was a misstep in my view. It created a situation where the usual levers of economic control might not yield the expected results.In this landscape, my conviction in Bitcoin grows stronger. It stands out as an asset where the risk-reward balance is heavily skewed towards the upside, particularly when considering factors like the potential impact of an ETF and the upcoming halving event.More By This Author:
Loose Thoughts In A Time Of Uncertainty
