Thursday, May 2, 2024

Looking At Financial "One-Offs" Driving The Economy

Biden recently signed a massive aid package to give Ukraine and Israel a boatload of money. Much of this will be in the form of weapons made here in America. In short, this will be another way of delaying a recession while weakening the American economy over the long run. Indicators of where the economy is going are all over the place. I still contend that building real wealth is rooted in saving and building real things that have utility value rather than bridges to nowhere. 

Those of us accused of promoting doom porn and claiming history indicates markets revert to the norm have been wrong for a long time. In our defense, distortions in the markets can go on for a long time. Still, if history is any guide this time will not be different. Simply put, trees do not grow to the sky and at some point, the numbers do not work. Not all things move in a linear fashion or extend along a straight or nearly straight line, they can go parabolic, or collapse before our eyes. 

Lately, many people have forgotten the lesson the economy tried to teach us in 2008. Massive intervention halted that collapse, but this is not about the Fed, it is about the economy. Looking back through history, many of the things that have impacted the economy are now viewed as "one-offs" or in some ways a one-time event with a huge impact. This is one reason many comparisons between what is and what was have now been rendered obsolete. Still, certain laws of economics should and do, over the long term remain intact. 

Don't forget, that much of the financial machine runs on autopilot and not on a day-to-day basis. This means markets become complacent and tend to assume a trend will continue. After a decision is made as to how money will be invested over the next year or two investors have a way of turning their attention elsewhere. This is a key reason so much money is passively invested and discounts the long-term ramifications of reality

Also, important is the velocity of money. This is the speed at which money moves through the economy. It is important to remember a very small percentage of rich households at the top hold much of the money cast out into the world. This is often parked in investments and does not get "spent." This might explain why the speed at which money moves through the economy has been slowing. Meanwhile, no moss grows on the money poor people get into their hands. 

Liquidity and leverage also play a large role in economic growth. Leverage is often tied to loose and easy money policies. While people seem obsessed with small changes in interest rates, a far greater concern is liquidity. Without liquidity, markets can not function and true price discovery does not take place. There is a yin and yang aspect to the economy that short term can be forgotten putting investors at great risk. This centers around the opposite but interconnected self-perpetuating cycle that results from bad policies. 

To get a handle on where the economy is headed investors are generally forced to turn towards the news and the most recent data. Sadly, incompetent bureaucrats, people with agendas, and governments have a way of skewing data. Financial strength is different from the illusion of growth often touted in the GDP that results from a slew of methods to boost consumption. Below are examples of a few things  investors fail to see as the "one-offs" they are.

One of the most underrated drawbacks in our world full of people is that with a large population also come large problems. People have to be fed and taken care of. Cycles of population growth may generate ever more opportunities and new demand, but this is only part of a much larger economic equation. It can lead to quality not quantity being greatly underappreciated. Capital flows and factors such as brain drain due to taxation and legal protection are a big deal.

The goal of all investors should be to look out long term and not to lose a lot of capital until we get there. Capital preservation is job one while at the same time positioning ourselves to benefit during the final inning of an unending game. Considering the number of people that have made a fortune and then lost it, good luck with that.


(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)



1 comment:

  1. Doom porners will have their day. By hiding true inflation numbers, US admin pretends USD treasuries produces a real return (higher than inflation). This is not the case, and is unlikely to be anytime over the next 10 years. Foreigners are reducing USD treasuries, slack taken up by Fed monetisation. BRICS are running scared of weaponisation of Russia's USD investments. Central banks are buying gold. This time, liquidity will not solve a debt and value issue like it did in 2008. This time, the sucker is likely going down: