Who Picks Up the Tab for the Free Lunch?

The exponential growth of the global COVID-19 pandemic steamrolled the path for a new era of unprecedented state intervention in the world’s economies and its financial markets. From its bird’s-eye perspective, the International Monetary Fund recently predicted that rich countries will borrow 17% of their combined GDP to fund a total of $4.2 trillion in spending and tax cuts, designed to keep the world’s economies afloat. The IMF, however, is woefully behind the frenetically changing news-cycle curve.

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Beware the Ebb Tide

With equity markets soaring, both investors and speculators must be expecting a V-shaped recovery, a resumption of earnings growth, and commensurate ongoing appreciation in stock prices. The path of least resistance is upward as the demand from speculating surfers is exceeding the supply from investors who, in the midst of perplexing mixed signals, are standing flat-footed on the shore as the wave of liquidity whipped up by the Fed obscures the ebbing of the economic tide.

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Down the Rabbit Hole

As I wrote to you on October 19, 2017, Edward Chancellor and I met soon after I read his prescient and literarily superb book, Devil Take the Hindmost: A History of Financial Speculation (2000). We have stayed in regular touch, including attending a Berkshire Hathaway annual meeting together. This is his fifth appearance as guest writer. Just yesterday he sent me the following fable from Breakingviews which, with his permission, I am posting as it captures the zeitgeist of the times like few others are able to do.

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Financial Stability at Risk: Déjà Vu 2007

History may not repeat itself, but some of its lessons are inescapable. One is that in the world of high and confident finance little is ever really new. The controlling fact is not the tendency to brilliant invention; the controlling fact is the shortness of the public memory, especially when it contends with a euphoric desire to forget. The rule is that financial operations do not lend themselves to innovation. What is currently so described and celebrated is, without exception, a small variation on an established design, one that owes its distinctive character to the aforementioned brevity of the financial memory. The world of finance hails the invention of the wheel over and over again, often a slightly more unstable version. All financial innovation involves, in one form or another, the creation of debt secured in greater or lesser adequacy by real assets.  

–John Kenneth Galbraith, 1993

All eyes are focused on the markets, which take the temperature of collective investor sentiment every second and, in a more obtuse sense, of the economy, where news—GDP, consumer income and consumption, investment spending, net exports and the like—drips over the course of a month or months like water out of a leaky faucet.

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Tracking the 90% Economy

The U.S. is reopening for business. Headline employment numbers on Friday, June 5 showed that 2.5 million jobs were created in May. Unemployment dropped to 13.3% in May from 14.7% in April. There was a misclassification error that could result in an adjustment 3 points higher for the most recent reading, but even that number would be significantly lower than economists’ expectations of nearly 20%.

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Could the Pandemic of 2020 Redefine “Enough”?

During the financial panic of the 2009 recession, Jack Bogle, founder of Vanguard Group and prolific author, dashed off a pithy book titled, Enough. For all the fiery zeal so characteristic of Bogle’s style, this reflectively soul-searching book subtly and obliquely confronted the intransigent problem of wealth disparity in the United States, an increasingly visible scourge that was last this acute in our nation as the roaring 1920s drew to an ignominious close.

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To Hedge or Not to Hedge

Over the course of several short months, a novel coronavirus exploded onto the global scene as the COVID-19 pandemic. Long-volatility and put-option strategies have garnered significant attention in the wake of the 2020 Q1 selloff as managers with exposure to market downside protection reported truly remarkable returns. This has reignited debate over the utility of hedging strategies.

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