Stimulus isn't a Long Term Strategy: More like a Bet with a British Bookie

By: Uri Estrin - October 14, 2020 09:28am EST
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What’s interesting is that long term investors have a single strategy – stimulus.
What’s interesting is that long term investors have a single strategy – stimulus.

Washington is fairly dysfunctional at the best of times, and with the current truculent political climate, it seems to be at an impasse, especially with regards to on again/ off again stimulus. To me it's surprising that a deal wasn’t done much sooner.

The markets (and everyone else) loves stimulus – money for nothing – on the never-never scheme. Trump and the Republicans should have grabbed it sooner, so as to be in the pockets of the voters before the election, boosting the markets and economy to provide an illusion of all round prosperity. The Democrats believe fundamentally in benefits – so it should be an easy deal at the right number. But that ship has sailed and while common sentiment is that Pelosi is holding the cards, stalling on a deal until after the election should the Dems win, they may find themselves with an uncooperative, obstreperous and even obstructive negotiating partner fearing nothing more to lose.

There’s an old adage: Markets hate uncertainty. But it seems that the current stimulus uncertainty isn’t phasing the markets, as negative information is taken in it’s stride and the markets keep going up – whatever the news.

The Fed too recently weighed in telling Congress to push for more stimulus. There is enormous pressure from all sides. Interestingly though how the markets are in such desperate need of stimulus – implying that the economy is so weak and fragile – yet all of them (gold, equities, bonds) are representing a rosy, healthy, robust picture.

I suppose the markets have priced in what they feel is a foregone conclusion. Stimulus is only a matter of time. The effects of the last round are showing visible signs of cracking. The employment numbers are no where near robust, seemingly hitting a plateau. The roaring inflation that was suppose to cause rampant stagflation is yet to appear, and a bond market which is suppose to collapse, had a small unwinding, Stocks of course are up – apparently MacroTOMI are the only ones who haven’t figured out its a guaranteed one way bet.

What’s interesting is that long term investors have a single strategy – stimulus. The markets are so overconfident and convinced that stimulus must come at any cost that they are betting wildly and unconditionally on it. It’s hardly a great long term investment strategy, it’s more like a bet with a British Bookie, yet relying on hypothetical odds.

What if the Democrats win the presidency and keep the house but not turn the Senate? What if the Republics block any and all attempts at stimulus, preferring a scorched earth policy? What if the political climate sours on huge deficit spending and the appetite moves away from bigger and bigger fiscal deficits? What if there is contagion (read our article: The Black Swan that Breaks the Camel’s Back) and it paralyzes markets into fiscal discipline? There are so many reasons to be cautious of such a singularly risky bet. Read our other article on stimulus and how to position: The (almost) $10 Trillion Question ?

Right now the markets are acting like a spoiled rich kid with daddy’s credit card. Spending with no limit and no regard. But what happens sometimes with rich daddies? They get fed up and decide to teach their kids a lesson. We all know, in the end, there’s no such thing as a free lunch.

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