The K-Shaped Disconnected Recovery

Government Stimulus has fuelled markets but failed to impact the real economy

A lot of people seem to have a real problem with the fact that the markets are doing so much better than the broad economy (i.e. markets turned up while economic numbers turned down). This is now being described as a K-Shaped recovery.

We actually think that the K-shape makes perfect sense – the biggest driver of economic activity is usually the change in the rate of change of private credit. But in the last 6 months, that’s been dwarfed by the stimulus that we’ve seen from governments, in terms of the liquidity that they’ve produced. Most of that liquidity has actually gone in to capital markets (according to some estimates, more than 97% of over $3.5 trillion that so far has been dispersed has gone into capital markets or capital markets proxies).

So, it actually makes sense that capital markets are doing well and it also makes sense that the real economy, which has taken the brunt of Covid-19 but had very little support in terms of stimulus, is doing so badly. But does that matter? Well it matters because it means that the real driver of markets has now been entirely government stimulus and markets are completely disconnected from what’s going on in the real world. So, unless somehow the real world catches up, or unless we keep getting more stimulus, then I don’t see how the run that we’ve had in pretty much all asset classes can sustain.

Rising markets aren’t providing business owners with confidence to invest

The three biggest myths in the world are Father Christmas, the Tooth Fairy and Trickle Down Economics. I’m not 100% denying the existence of Father Christmas or The Tooth Fairy but I know that Trickle Down is absolute rubbish. It doesn’t work and it never has worked. What we need is trickle up. If we want to have anything to look forward to in 2021, we really need to see the direct injection of some of this liquidity into the pockets of people who make the biggest impact on the economy – that is the people with the greatest marginal propensity to spend. If you give this liquidity to the neediest people, they’ll literally go out and spend it straight away in the real economy. Those people don’t even own any stocks! What’s happening in the equity markets and capital markets is a completely different planet from what’s happening in the real economy.

Accelerating the final ‘Blow-off’ as a pre-election stimulus readied in time for the US election ‘grid-lock’…..

US policymakers have pumped $3.5-4 trillion Dollars so far. $2.5 trillion of that was in March and April and almost the entire remainder was in June and July, so most had been used up by the time we got to August, when just a couple of hundred billion Dollars of new liquidity was dispersed into the markets. The next stimulus that ‘should’ come along and ‘should’ take the markets higher and we ‘should’ all be buying into, is still gridlocked in the US political system and this has highlighted that fundamentals are so bad that markets wouldn’t be this high without stimulus. If we take the liquidity away, you’d want to avoid the Teslas, and FANGs and really high Beta stocks. If liquidity isn’t there, don’t touch them with a bargepole. The minute that liquidity comes back, buy them [into their final blow off top] because that’s where the liquidity will go.

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