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Right, everyone HATES the feeling of being wrong.
Which is pretty ironic when you think about it because the best way to be right... is to be wrong.
OK Grandma, let me explain...
Risk being wrong to better understand the world around you
Hopefully that's better?
Even if it's not, let's go for a real-time experiment.
It all started here... 👇
We established early in the conversation that the stock market and the economy are not the same thing, but what about the economic cycle?
According to the BofA survey, the majority of investors think the economy is mid-or late cycle. 👇
I disagree (this is the part where I risk being very wrong)
See, I think modern economic cycles are driven by credit more than any other factor.
And central banks have created a staggering $9 trillion (so far) since the start of the pandemic.
Unprecedented monetary and fiscal support ensured that the recession was short, and avoided many of the worst outcomes.
The huge wave of bankruptcies has not materialised, while yield-hungry investors have snapped up corporate debt on even the junkiest of junk companies, being paid a relative pittance for their troubles.
So, generally speaking, larger companies have improved their balance sheets, re-financed at record low interest rates and reduced their debt-servicing cost.
Consumers and small businesses don't have the same access to credit markets, but the banks are playing their part by easing lending standards 👇👇👇
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For those currently employed, many are more creditworthy than ever before, especially in the U.S. where many consumers have actually been able to pay down debt during the pandemic.
In many cases incomes have increased and collateral has been revalued higher.
And if you've got kids, those child tax payments will start hitting your account any day 👇👇👇
It's been noticed by the big dog...
And credit card spending is recovering...
Now, let's look at a typical credit cycle 👇👇👇
And compare that to a business cycle... 👇👇👇
The blue dot shows where 73% of investors think the global economy sits 👆
And the blue box is where I think the global economy sits 👇
✅ Activity rebounding
✅ Credit beginning to grow
✅ Profits growing rapidly
✅ Policy still stimulative (both fiscal and monetary)
✅ Inventories low & sales improving
Employment is still way below pre-pandemic levels (suggesting activity is nowhere near peaking) and policy is still stimulative...
The current growth concerns centre around two main factors.
- The potential for the Federal Reserve to tighten policy 'early'
- China's negative credit impulse
Whilst a QE taper is nailed on in my view, I'm not so sure about the rapid rate hikes to follow.
Much depends on the inflation data next year.
Inflation is the real fly in the ointment. If it doesn't settle down, the Fed could find themselves having to reluctantly hike rates before the recovery is complete.
There is only so long that base effects and bottlenecks will be accepted as an explanation...
The new FAIT framework gives them flexibility, but current inflation levels will require a response if they continue.
If they can ride out the storm, I think they will keep rates low for as long as they can to pursue their full employment target.
Whilst in China, it would be no surprise to see that credit impulse return next year 👇👇👇
Those calls will get louder if China's Q2 GDP data disappoints tomorrow.
Summing up, the economic recovery is advancing well but not yet complete.
Credit growth is set to drive the economy from early to mid-cycle in coming quarters.
Relatively high debt levels will likely ensure that the roaring 20s narrative is never fulfilled, but there is still room for more growth in this new economic cycle.
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