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  • Writer's picturecrhyldahl



We have written extensively over the past several weeks regarding the seemingly decoupling of economic reality and the state of the capital markets. Instead of reinforcing that argument with the endless and obvious fundamental reasons for concern we decided to take a different approach and try to answer the following question. Under what scenario can current valuations be justified? There are always research reports that are more cheerleading than substantive. These reports are painful to read because they arrive at the same bullish conclusion no matter what the facts. The bottom line of all these bullish arguments is very simply monetary profligacy. They lack any empirical, conceptual, or theoretical evidence and emphatically cheer equities as long as the Fed continues inserting themselves into the markets. But what else has to happen to sustain valuations and reach justifiable equilibrium? That’s the narrative we try to tell here. Please mind the sarcasm throughout.


The most obvious assumption being made by our cheerleaders is that a vaccine will be available to the masses later this year. The vaccine will eliminate the spread of Covid-19. Furthermore, all health issues associated with Covid-19 will be immediately eradicated. The vaccine will eliminate the virus completely. This explains why current spikes in outbreaks are being completely ignored (to the dismay of our media who seem to be rooting for the virus by keeping daily scores). Nothing left. It will be gone. The backlog of untreated health problems will also simply disappear. Apparently, it will also erase our memories of it as well and our society will binarily return to full employment, spending, and prosperity. This dynamic will take place and all small businesses, like ours, will return to our 2019 revenue levels. Restaurants, service-oriented business, and entertainment venues will be at full capacity again and consumers will just return to business as usual. In fact, to justify current market dynamics they will have to return to a higher level of consumerism than before the pandemic. It’s going to be awesome!


Small and medium size businesses that were forced to shut down completely and those that currently are operating at a fraction of capacity will binarily return to full capacity. Our society, having been brainwashed to forget the pandemic completely, will immediately return to levels of employment higher than before. Employers will hire at higher wages to induce former employees off their juiced-up unemployment benefits and they will all come swarming back to work. The incurred debt through the PPP and EID loan programs (CARES Act) will be completely forgiven by the government so businesses are in a better fiscal state then they were prior. Tens of millions of people will instantaneously return to work at higher wages and we will all get promotions. This will entice even more people to participate in the workforce and thus the magical virtuous employment cycle will end in even a better place than before. Again, it’s going to be awesome!

Societal Behavior

Apparently, no human being will be impacted by the recent experiences of lockdowns, media death counts and infection numbers, social distancing, masks, and now even social unrest. We will return to our narcissistic ways with no changes to our behavior whatsoever. We’d argue that they assume we will return to an accelerated spending cycle in order to make up for lost time. Consumers will be programmed to live life for the now. Borrow, borrow, spend, spend. Consume like there is no tomorrow. After all, if a second wave comes and no vaccine exists who cares about debt? Our future may never come. Orwellian like brainwashing will be universal. It’s going to be awesome!

Monetary Policy

Any hiccup along the way will be quickly remedied by monetary policy. Any valuation dynamic that poses even the slightest possibility of fundamental realities will be swiftly wiped away with a liquidity insertion. The size of the liquidity insertions matters not. If market participants react properly to the insertion its size means nothing. What’s a few trillion dollars anyway? Chump change when you can simply create some more. This has been the most powerful, and most likely, force behind the markets for the past decade. The Pavlovian psychology behind these markets has been nothing short of extraordinary and is the root cause of the BTFD mentality. Again, it’s going to be awesome.

Fiscal Policy

Another exogenous force that the markets are assuming to continue is fiscal insanity like the CARES Act. In addition to the aforementioned debt forgiveness it is clearly assumed that another massive fiscal stimulus is going to take place. Only its size may be debated. Certainly, a continuation of free money is in order. Inflation? Doesn’t exist according to these folks. Like monetary policy, what’s a few trillion more dollars to our debt load? Afterall, the empirical findings behind Rogoff and Reinhart’s conclusions mean nothing to the Keynesian’s now in charge. The fiscal policy can’t include more perverse unemployment incentives as that would counteract our employment scenario so giving money away should do nicely. Moreover, the Trump administration has completely lost any credibility regarding fiscal discipline and with the election around the corner will certainly be complicit in accepting anything that comes out of Congress. Simply buy the votes. The debt and deficit are a problem for someone else down the road. Not our problem. Carpe Diem, baby! It’s going to be awesome!

What could possibly go wrong?

According to our cheerleaders, nothing. They are proud members of what we call the Markovian Club. History, facts, empirical evidence, theory, and conceptual underpinnings mean nothing. It is purely about the now. Today is all that matters. Our policy makers have been members for a very long time. Membership requires proof that you act and behave in a manner where the path taken to every point in time is purely random. Each member must show that they ardently follow the principle that where we came from and where we are going is nothing but chance. It seems that large swaths of the United States are climbing over one another to join. Tearing down historical monuments regardless of their significance is all the vogue to gain admission into the club. It’s going to be awesome!

God Bless America!

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