Podcast Notes 📝: Current macro state of the financial markets
Does our current macro setup resemble that of the crash of 1929, 1940, or 2008?
Does our current macro setup resemble that of the crash of 1929, 1940, or 2008? Bankless did a podcast with Lyn Alden discussing the current macro state of the financial markets. Here's our synopsis of the key ideas discussed:
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Is this the end?
Let's divide it into a couple of different time frames and use RayDalio's long-term debt cycle framework. We can say that it's the end of something big, but of course, the end is a long process and it can be a decade-long process. When we go down to zero interest rates and reach a massive amount of debt in the system, we usually go through some sort of currency devaluation and system change.
So, it's not the end of the world but it's the end of an era! We've been in a decelerating growth environment for more than a year. The fact that this one is so inflationary is making it more severe and it is starting to look like a recession at least by many leading indicators.
Where are we in the arc of the long-term debt cycle?
There's no country large enough to have the only global reserve currency. In the last long-term debt cycle, we did see the transition from the UK having a global reserve currency to the United States. However, we are heading towards a more decentralized type of reserve currency system. It was somewhat accelerated by the events seen in Ukraine and Russia:
Russia starts a war and then the West responds by cutting off their foreign exchange reserves. Suddenly everyone around the world realizes they are holding liabilities of countries they are not necessarily a fan of! The money-like aspects of these reserves are perhaps not as money-like as people thought if they can be censored and confiscated by others.
The US-dominated global order is shifting into a multi-polar world that has multiple centers of power rather than a unipolar world. Thus, the global demand for the Dollar is low among foreign central banks since they are drifting toward a decentralized model.
Which part of the history analogs are we currently in? Are we in the 1940s or 1970s or 2008s or 2020s?
This inflation is similar to the economic environment of the 1940s. We didn't have a lot of bank lending. We didn't have a lot of demographic expansion. In the 1940s there were huge fiscal expenditures to fight the war and rebuild things after the period of stagnation. Inflation in the 1940s was fiscally driven which resulted in a sharp increase in the money supply.
We have a similar scenario for the past 15 years where the 2008 crash resembles the 1929 crash. Throughout the 2010s we had a mild depression, then we had the 2020 pandemic and it is very similar to wartime finance in the 1940s. We printed trillions of dollars and it ends up being inflationary as one would expect. Thus, the 2020s are very similar to the 1940’s market conditions.
How do we get stable?
The FED is going to raise rates until it breaks something. The first mistake they made was responding very late to inflation. The mistake that the FED is making right now is responding super aggressively to inflation. We are already in an "economically decelerating activity" environment & the FED tightening into it is very unusual.
Not only are a lot of inflation variables outside of their control. They can't do anything about the inflation caused by the supply constraints. They can't create new supply, all the FED can do is try to suppress demand and that can lower prices but ironically that comes at the cost of a recession. So, the FED has a limited tool set and just to preserve their legacy they're going to use it until it gets messy enough.
Are there any weak market links that are going to break first due to FED actions?
It's the treasury market or credit markets.
In 2017, we had a strong economic environment b/c of the fiscal stimulus. It was in the form of tax cuts. They were basically putting more money into the economy and we had a rising economic environment. By the time we got into late 2018, they run out of stimulus and we were slowly rolling over in terms of economic activity. And the FED starts to hike rates!
Jerome Powell described it as being on Autopilot. He said that they were going to continue hiking rates and eventually the credit markets broke. The junk bond markets completely froze for six weeks and no one was able to issue debt b/c the yields were messed up.
\Will this Recession turn into a Depression like the decade of the 1930s?
It is possible but it would take a different form. The 1930s was a dis-inflationary decade and we had an oversupply of commodities while having a low economic output. In this decade, we are seeing early signs of an energy crisis and this decade would be more of an inflationary type of Depression (if it happens).
However, the bottlenecks that could make this decade bad are:
Inflation - Partially what's happening with the money system
Shortages - The main problem would be meeting the needs for essential goods
At the end of the day, it's all about whether people can get the energy they need and energy is the master resource that affects everything else. So, the key thing to answer is will we have serious trouble getting the energy we need. And that's also where we can get really bad humanitarian outcomes. Having abundant energy is essential for humans and it is more important than inflation levels.
What will the new normal look like and can you give some actionable advice for people to prepare for the new normal?
We have gone from a unipolar world to a more efficiently interconnected multi-polar world. Going forward into the future with the high amount of debt and the energy crisis, we are going to have a more constrained world. That could take the form of inflation and there would also be other periods where we could have deflation in the economy. A new normal for this decade is going to be the kind of "Cyclical Inflation" where it can go away for periods of time but then it's quick to return once the conditions are right for it.
The practical thing that people can do is to have stockpiles at home and essentially not rely on the idea that everything will be in abundant supply. People should be self-sufficient and be well prepared for periods of disruptions and challenges. People should take a diversified approach to their portfolio and have a number of assets that are important for the next decade. Also, people should cultivate themselves and develop a diverse skill set to make their life resilient to the challenges ahead.
Do you have any advice on mental health?
Exercising and staying in shape is really important for mental health
Implementing a healthy eating habit is also equally important for mental health
Have gratitude for what you have and be as constructive as possible
Develop strong relationships around you - either online or offline
Relationships are crucial especially in this environment where people hate each other so much due to extreme wealth concentration
We also live in a world where information travels super fast
People should not only focus on their reinforced ideas, rather they must seek out information that they disagree with so that they can learn from it
See the full episode here:
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