Monday Assorted Links
A brilliant piece of writing by Rusty Guinn that examines the absurdity of trying to look at the stock market through a fundamentals lens and makes a case for thinking outside the box, outside the prevailing narratives of the financial press, for thinking critically and creatively about how a post-coronavirus world could look fundamentally different than a pre-coronavirus world.
The people who win this game will be the ones who can smile at the end of universes, gods and worlds and say, “I am Hope.”
That doesn’t mean being bullish.
It means having imagination.
Imagination to see with clear eyes the shocking capacity of uncertainty to embarrass probabilistic frameworks used incorrectly to model it.
Dalio projects out the implications of long-term interest rates going to zero. The fear is that monetary policy loses it's effectiveness, but what are the implications of that reality?
Contrary to popular thinking, the markets will have a bigger effect on the economy than the economy will have on the markets
What he's hinting at here are a set of conditions similar to the Great Financial Crisis of 2008 – that is, a financial system crisis spilling over to the real economy. The 2008 financial crisis was caused by a credit and liquidity crisis that largely originated in the financial system; Dalio is worried about a similar set of effects (different causes) due to a deflationary environment, something we haven't seen in generations in the United States.
On the limits of monetary vs fiscal policy:
In some ways you can think of the Fed’s response as slowing down financial time for certain parts of the financial system: If you own securities and have financial obligations, the Fed is making sure that you can get cash for those securities to meet those obligations. But if you have a job and need to pay rent, and your job has stopped paying you, the Fed will not backstop your liquidity. Again, not its job, but you might reasonably feel aggrieved that the bit of government responsible for backstopping financial-market liquidity is so much better and faster at its job than some of the other bits.
Without a doubt, the news will get worse from here. But it’s ability to shock us will diminish.
I hope he's right.