Very interesting and a useful challenge to my thinking. The problem I have is that valuations on most metrics are somewhere between very high and impossible to sustain, GDP growth is low, Gvt debt is high. So buying equities feels like a trade that is contradicted by the long term fundamentals. Still, I suspect that, at least for now, the argument he makes for equities grinding higher might prove sound. I just can't bring myself to buy. Perhaps that thinking by others is why they will grind higher.
I second that. Earnings growth expectations and equity risk premiums are quite stretched, feels like an (AI as an excuse-)bubble to me. And if equities keep grinding higher, leaving fundamentals behind... this can't be sustained forever, right?
The thing is that this argument has existed for every bull market since the GFC. These factors may prove correct, but this has to be weighed against the flow that arises purely from nominal GDP expanding, and the flow of foreign capital through the US' large current account deficit.
The market will swell (in volume and price) to accommodate these macro factors. They all rely on their continuation to keep the wheel spinning. If they stop, then both of you will be correct.
I'm not a believer in velocity as an independent variable. To me it's an error term that sits between GDP and whatever measurement you use for money supply (which is generally M2 but this isn't always the best indicator either).
I've seen Bob's argument, and I think that's the step past debt growth which I think is more relevant. The debt growth enables income growth because it promotes persistent excess demand which drives activity (profits, employment, wages, the whole lot).
Thanks, Peter. Very interesting commentary as always. I had two quick questions:
1. Would you be willing to share how exactly you construct the nGDP stability measure?
2. Debt-fueled growth seems to be an underlying theme throughout this analysis; however, one interesting development is the continued deleveraging of the private sector throughout this expansion. E.g., Non-financial private debt to GDP has been steadily falling since its pandemic spike and now sits at the lowest level since Q1 2003. Of course, public debt growth is a different story, and total debt to GDP (non-fin private + public) remains well above pre-pandemic levels and is growing again. How do you think about the growth impulse (or asset price impact) of public vs. private debt? Do you view those as two different things, or do you just view debt as debt, irrespective of who is borrowing?
Coming back to this great post and your liquidity indicator, as you updated it today: Do you think including some form of velocity of money spending could improve the market-signal of the indicator? Bob Elliot makes the point that for the last year or so, economy is income-driven now, instead of debt-driven. I think as we are now in this inflation regime, (accumulated) savings get spend more than in the last decade, driving velocity and so GDP, earnings up - and maybe also the velocity of the stockmarket-investing itself?
So all markets prices have been persistently and significantly amplified and distorted in one direction by official decree, weights and measures marked to marker, displacing markets normal price setting. Critical State indeed.
“The extreme relationship between price action and liquidity means the event itself is truly random. Only the smallest perturbation is required to cause an explosion because of the inherent unstable nature of short-vol positioning.”
Very interesting and a useful challenge to my thinking. The problem I have is that valuations on most metrics are somewhere between very high and impossible to sustain, GDP growth is low, Gvt debt is high. So buying equities feels like a trade that is contradicted by the long term fundamentals. Still, I suspect that, at least for now, the argument he makes for equities grinding higher might prove sound. I just can't bring myself to buy. Perhaps that thinking by others is why they will grind higher.
I second that. Earnings growth expectations and equity risk premiums are quite stretched, feels like an (AI as an excuse-)bubble to me. And if equities keep grinding higher, leaving fundamentals behind... this can't be sustained forever, right?
The thing is that this argument has existed for every bull market since the GFC. These factors may prove correct, but this has to be weighed against the flow that arises purely from nominal GDP expanding, and the flow of foreign capital through the US' large current account deficit.
The market will swell (in volume and price) to accommodate these macro factors. They all rely on their continuation to keep the wheel spinning. If they stop, then both of you will be correct.
See reply to the post that replied to yours!
I'm not a believer in velocity as an independent variable. To me it's an error term that sits between GDP and whatever measurement you use for money supply (which is generally M2 but this isn't always the best indicator either).
I've seen Bob's argument, and I think that's the step past debt growth which I think is more relevant. The debt growth enables income growth because it promotes persistent excess demand which drives activity (profits, employment, wages, the whole lot).
Thanks, Peter. Very interesting commentary as always. I had two quick questions:
1. Would you be willing to share how exactly you construct the nGDP stability measure?
2. Debt-fueled growth seems to be an underlying theme throughout this analysis; however, one interesting development is the continued deleveraging of the private sector throughout this expansion. E.g., Non-financial private debt to GDP has been steadily falling since its pandemic spike and now sits at the lowest level since Q1 2003. Of course, public debt growth is a different story, and total debt to GDP (non-fin private + public) remains well above pre-pandemic levels and is growing again. How do you think about the growth impulse (or asset price impact) of public vs. private debt? Do you view those as two different things, or do you just view debt as debt, irrespective of who is borrowing?
1. Purely the difference between max/min of nGDP over a 1 year window, divided by the average nGDP over that period. Easy.
2. I've got another piece on this question https://www.macroisdead.com/p/spiralling-government-debt-isnt-a?r=cpq3u
Coming back to this great post and your liquidity indicator, as you updated it today: Do you think including some form of velocity of money spending could improve the market-signal of the indicator? Bob Elliot makes the point that for the last year or so, economy is income-driven now, instead of debt-driven. I think as we are now in this inflation regime, (accumulated) savings get spend more than in the last decade, driving velocity and so GDP, earnings up - and maybe also the velocity of the stockmarket-investing itself?
So all markets prices have been persistently and significantly amplified and distorted in one direction by official decree, weights and measures marked to marker, displacing markets normal price setting. Critical State indeed.
“The extreme relationship between price action and liquidity means the event itself is truly random. Only the smallest perturbation is required to cause an explosion because of the inherent unstable nature of short-vol positioning.”
https://arxiv.org/pdf/2407.10284
SOC https://open.substack.com/pub/bouchaud/p/the-self-organized-criticality-paradigm?r=1z5qli&utm_medium=ios