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Update: We have published the The Wages of Debt - February 2019!

The Wages of Debt

“The market system of determining financial relations and valuing assets gives signals that lead to the development of relations conducive to instability and to the realization of instability. Periods of stability (or of tranquility) of a modern capitalist economy are transitory.”

-Hyman Minsky

I thought the S&P 500 would have to drop below 2300 before the Fed would change course’, but apparently I gave the Fed too much credit. On January 4th, Fed Chairman Powell backed off the hawkish stance he took at his December 19th press conference and said the central bank would be “patient” before further tightening monetary policy. He also added that the Fed would alter the pace of reducing its balance sheet rather than keeping the program on “autopilot.” The market interpreted these comments to mean that the Fed would soon end the tightening it began in December 2015. In truth, we don’t know what the Fed will do, but the signals sent by Mr. Powell were suspiciously consistent with the approach taken by his predecessors to run to the markets’ rescue every time they throw a tantrum.

And Mr. Powell was not alone. His colleagues in Europe and Japan whispered similar sweet nothing’s in the ears of their markets while China actively eased in January to deal with economic weakness in their regions. The sad reality is that a global economy choking on debt has little tolerance for higher rates. The sadder reality is that central banks can only delay the pain; they cannot eliminate it. While we should never be surprised when central banks behave this way (after all, printing money in one form or the other is what central banks do), their behavior will only exacerbate the epic post-crisis debt explosion that threatens the global economy. Any short-term market relief only delays – and therefore magnifies – the painful adjustments that will ultimately have to be made to deal with this debt.

These moves rather than any meaningful improvement in the economic outlook were the primary reason stocks rallied throughout the month of January. In fact, as discussed below, the economic outlook didn’t improve at all. Investors should use the January rally to lighten risk exposures and position their portfolios for the world as it exists, not as they would like it to be. And the world that exists has far too much debt that can never be repaid and political and business leaders who refuse to take the necessary measures to deal with it. But we cannot merely blame our leaders. The people who elect them are also responsible for failing to hold them accountable. While everyone was celebrating strong GDP growth of
$1.3 trillion in fiscal 2019, America’s debt also grew by $1.3 trillion. Ignorance may feel like bliss, but more bliss like that is going to sting....

 
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Investment Outlook - December 2018

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