Jesse Livermore (@Jesse_Livermore) is one of the stars of the financial twitter universe who writes anonymously and goes by a pseudonym.
He is also a research partner at O’Shaughnessy Asset Management, check out his latest article Upside Down Markets
Upside down markets
Normally, an organically strong economy correlates with a strong stock market. In an upside-down market, this relationship is inverted.
For instance, bad news is suddenly interpreted as positive information because it may cause the Fed to lower interest rates and make equities more attractive.
An economy that needs fiscal stimulus can end up with a stronger stock market than an economy that doesn’t need fiscal stimulus.
The impact of stimulus on public companies’ fundamentals
- One person’s spending is another person’s income.
- Lack of spending suckers income out of the system; fiscal policy undoes that effect by delivering income to the private sector.
- Fiscal policy lets the government reduce its net worth to inject income into the private sector.
- The government could also tax corporations to fund spending, or corporations could decrease wages to increase profitability.
- In both cases, the result is that customers will have less income to spend.
Will the pendulum swing back to labor and higher wages?
The bull run in asset prices has favored asset and capital owners and corporation profit margins, at the expense of labor and wages.
This income diversion between labor and capital is not about fiscal or monetary policy. It is about market forces such as technology and globalization.
- Technology has reduced the value of labor skills, and more training is now required to provide value to the economy.
- Concentration in industries means less competition for hiring employees.
- Globalization is pushing wages down.
Historically, the highest profit margins have correlated with tight labor markets (e.g., before the crises of 1948 and 2008).
It’s almost like you get the same growth either way, whether you are organically strong or whether you are organically weak. The difference is just whether you get the added benefit of stimulus to get you there.
Potential risks
- Risks don’t get destroyed, they just get shifted around
- Political risk depending on how government composition looks in the coming years
- There is a lag between action and effect: is the money going to the right places and is it enough or too much?
- Targeting risks, just because you are targeting revenue or growth or employment, doesn’t mean the fiscal action that follows will necessarily hit profits, which could still go down
Impact of fiscal policy on the economy
- Handouts provide unencumbered spending power.
- If delivered to the right places, it can drive a greater spending response.
- Obstacles arise when wealth needs to be injected into places people view as unworthy (e.g., bailing out banks and homeowners).
- Post-2008 warnings about hyperinflation and default risks didn’t materialize, and similar warnings now fall on deaf ears.
- Inflation is still low despite near-zero interest rates. This demonstrates the empirical disconnect between the warnings and the actual outcomes.
