With the Dow Jones just a handful of gamma imbalance rips away from 20,000, the CIO of One River Asset Management, Eric Peters, shares some critical perspective on the market's recent euphoric surge, going so far as to brand what is going on as America's "Massive Policy Error", the biggest in the past 50 years.
His thoughs are presented below, framed in his typical "anecdotal" way.
Anecdote
“America’s Massive Policy Error,” said the CIO. “That’s the title of the book someone will write in ten years about what’s happening today.” Never in economic history has a government implemented a fiscal stimulus of this size at full employment.
“The Trump team and economic elites believe that anemic corporate capital expenditure is the root cause of today’s lackluster growth.” It’s not that simple.
If credit to first-time homebuyers hadn’t been cut off post-2008, and state and local governments had spent as generously as they had after every other crisis, this recovery would have been like all others.
“People think that if only we cut taxes, kill Obamacare, and build some bridges, then American CEOs will start spending. That’s nonsense.” Ageing demographics, slowing population growth, and massive economy-wide debts have left CEOs unenthusiastic about expanding productive capacity.
“You make the most money in macro investing when there are policy errors and this will be the biggest one in 50yrs. These guys are going to crash the economy.” But not yet. First the anticipation of higher borrowing and rising growth expectations will widen interest rate differentials. Which will lift the dollar. But unlike recent episodes of dollar strength, this one will be accompanied by higher equities as investors ignore tightening financial conditions because they expect offsetting tax cuts and infrastructure spending.
Emboldened by higher equity prices, bond bears will push yields higher, lifting the dollar further, validating people’s belief in a strong economy in the kind of reflexive loop that Soros described in The Alchemy of Finance - the kind that drives extreme macro trends.
“This will be like the 1985 dollar super-spike. And the Fed will eventually be forced to follow the steepening yield curve, hiking rates aggressively, tightening the debt noose, killing the economy. Then rates will collapse, crushing the dollar.”