​If you are a central banker who wants to influence how investors process current and future monetary policy into risk-taking decisions, you embrace communications policy as your primary policy tool.
 
If you are a CEO who wants to train investors to value your stock on a multiple of a number you periodically pull out of your ass, you go on CNBC to tell the story every time you announce earnings.
 
If you are a journalist who wants to make sure that readers come away from an article with the Correct Interpretation, you look for ways to present your opinions as facts.

​But even as monetary policy is on course to switch from stimulus to restraint, governments have moved in the opposite direction. During 2020 and 2021 they spent 10% of gdp supporting their economies and provided another 6%-worth of loans. Whereas after the global financial crisis of 2007-09 many quickly turned to trying to balance budgets in the belief that their debts risked becoming unsustainable, today they are continuing to borrow and spend, on everything from tax cuts to subsidising energy bills.

​This [change toward inflation] is structural in nature, not cyclical. We are experiencing a fundamental shift in the inner workings of most Western economies. In the past four decades, we have become used to the idea that our economies are guided by free markets. But we are in the process of moving to a system where a large part of the allocation of resources is not left to markets anymore. Mind you, I’m not talking about a command economy or about Marxism, but about an economy where the government plays a significant role in the allocation of capital. 

​My structural argument is that the power to control the creation of money has moved from central banks to governments. By issuing state guarantees on bank credit during the Covid crisis, governments have effectively taken over the levers to control the creation of money.

I enjoy intellectual activity and game-playing for their own sake. In such an exercise, self-limitation, playing with rules, seeing how far a limited model will go, are all part of the point. But that activity should be pursued with a sense of modesty of purpose and a clear acknowledgement of the limits of the exercise one is engaged in.
 
What this year’s economics “Nobel” prize does is the opposite. It has the effrontery actually to celebrate one of the weakest dimensions of modern macroeconomic thinking - its extraordinarily limited ability to grasp the macrofinancial instability of modern capitalism. 

​People are screaming for energy relief, they want defence from Putin, they want to do something against climate change. People want that, and elected governments claim to follow the will of the people. No central banker will oppose that. After all, many of the things that are associated with financial repression will be quite popular.

​And so, when you look at market prices today, what do you see? It's much more like what you're seeing is what the market thinks the policymakers will do to achieve the outcomes that they want rather than reflecting what economic conditions it will be.
 
That's why, why is it that the bond yield is where it is [about 1.3% at the end of July 2021]? Well, people think that's where the Fed wants it, and that the Fed can get what they want. And so that's the thing. Now, I think, even on that basis, the markets are going to prove to be wrong because I think the Fed is going to be forced to change their policy, and they're going to allow a higher bond yield because they'll be overwhelmed by the evidence.

​As long as investor psychology is not risk-averse (which we gauge using market internals), investors view zero-interest cash as an “inferior” asset rather than a desirable one. They seek riskier alternatives in the hope of avoiding “zero,” and seem to pay no attention to the valuation of these alternatives. This maddening psychological discomfort with “zero” is how the Fed has created what we view as the broadest and most extreme speculative financial bubble in history.

​Increase the quantity of zero-interest hot potatoes as a share of GDP, and investors respond by chasing yield in other securities. Treasury bills are the closest substitutes, so their yields are affected most reliably. Once base money hit the unprecedented level of 16% of GDP back in 2011, not a dollar more was actually needed in order to hold short-term interest rates at zero.

​When you hear analysts gushing that the “forward P/E ratio” of the S&P 500 has declined to presumably attractive levels, keep in mind that the current forward P/E reflects the highest earnings estimates and profit margins in the history of the U.S. equity market. Even ignoring every prior market cycle, current profit margins are 30-40% above the median observed during the bull market since 2009. 

There are three principal phases of a bear market: the first represents the abandonment of the hopes upon which stocks were purchased at inflated prices; the second reflects selling due to decreased business and earnings, and the third is caused by distress selling of sound securities, regardless of their value, by those who must find a cash market for at least a portion of their assets.

​Aside from ignoring valuations and market internals, one of the behaviors that will get you eaten in a bear market is placing too much confidence in any single "capitulation." Speculative episodes typically unwind in waves. The steeper the starting valuations, the more waves one typically observes.

​If we assume that a decline of over -20% is a bear market, and an advance of over +20% is a bull market, it is shocking how [sic] to realize how confusing that period must have been for investors. The decline from the 1929 top to the 1932 bottom was a secular bear market, but also within that period there were six cyclical bear markets and five cyclical bull markets. Eleven reversals in 32 months!

​Bull markets train investors to think in terms of single, V-shaped selloffs followed by advances to fresh highs. In bear markets, it’s best to quickly abandon that thinking, preferably until market internals improve.

​By watching the financial bears, we can observe the point at which a number of potential factors come together to signal the market can only get better. Those factors include low valuations, improved earnings, improving liquidity, falling bond yields, and changes in how the market is perceived by those who play it.

​Inflation is scalding, and the Fed is vigilant. We are flirting with an inverted yield curve. And yet markets, judging by the Fed funds futures curve, stock prices, and other indicators, are saying we will glide through the next few years without the US central bank needing to raise rates to even 3 per cent, and without falling into recession.

​"So many of the arguments that take up our time—and especially my time—are little more than flashes of St. Elmo’s fire lighting up the airwaves with little relation to the reality on the ground. This is a good and decent country, and because of its prosperity Americans enjoy the luxury of using opinions like kindergarten toys. We smack each other with Lincoln Logs and shoot pieces of Lego at each other on a daily basis. But when events require us to put away childish things, most do. Because beneath our opinions rest some core commitments that run through the American character like veins of granite. We like freedom. We like fairness. And we actually like peace quite a bit, too. It’s just that when bullies and tyrants threaten any of these things, we get pissed. And we tend to do something about it."

​"Popular trust in virtually every American institution—from businesses and governments to churches and newspapers—keeps falling to new lows. Public debts soar, the middle class shrinks, welfare dependencies deepen, and cultural arguments worsen by the year."

​"[O]ne can’t help but wonder whether we are on the cusp of an economic singularity in which the laws and bedrock beliefs that formed the foundation of international economic order for decades break down. The consequences are similarly unknowable, but we suspect a great reset may indeed be upon us."

​"So all of the fertilizer, all of the oil, all of the natural gas, all of the bauxite, all of the nickel, all of the iron ore all of the copper, all of these things that the Russians used internally within the Soviet empire, they were dumped on international markets and they continued to dump them for 30 years. It’s one of the reasons why inflation has been so tame around the world for so long. We were coasting on the leftovers of the Soviet industrial giant. Well, now we get to do all that in reverse in a year."

​"But you move to this world, where in a sense, the Central Bank is controlling the short rate. They're also in a soft sense with QE controlling the bond yield and in a soft sense, controlling the aggregate corporate spread and mortgage rates. I mean, you went from one level of control to multi layered control of the economy. That's a big difference. And so, when you look at market prices today, what do you see? It's much more like what you're seeing is what the market thinks the policymakers will do to achieve the outcomes that they want rather than reflecting what economic conditions it will be."

​"That's why, why is it that the bond yield is where it is? Well, people think that's where the Fed wants it, and that the Fed can get what they want. And so that's the thing. Now, I think, even on that basis, the markets are going to prove to be wrong because I think the Fed is going to be forced to change their policy, and they're going to allow a higher bond yield because they'll be overwhelmed by the evidence."

​"[I]nflation was a massive surprise but it had no impact on the markets. Didn't impact the bond market. Didn't impact the currency market. Didn't impact the stock market. And I think the reason for that is pretty simple is that the markets fundamentally don't really care about macro. They care about the policy environment. So they care about how perhaps the macro might impact the policies."

​“The logical extreme of this argument is known as the ‘fiscal theory of the price level’, created in the early 1990s (and in the process of being refreshed: John Cochrane of Stanford University has written a 637-page book on the subject). This says that the outstanding stock of government money and debt is a bit like the shares of a company. Its value—ie, how much it can buy—adjusts to reflect future fiscal policy. Should the government be insufficiently committed to running surpluses to repay its debts, the public will be like shareholders expecting a dilution. The result is inflation.”

​"And today, we've moved from, the period from let's say, the 1950s through 2008, and a period of interest rate, what we call MP1 [monetary policy phase 1] into MP2 being quantitative easing, and now this phase that's been accelerated with the pandemic, has been this movement in the monetary, what we call Monetary Policy 3, but it's the merger of fiscal and monetary policy."

“There is no way that we have engaged in the scale of asset purchases in the pandemic where there’s going to be a policy which ultimately is going to be perfect and not cause some sort of interruption to asset prices or something else that would be destabilizing. I think that would be in the realm of practically miraculous.”

​“They are a new generation of investors. 86 million millennials got financialized in the US last year. They hit their prime investing ages of their 30’s.
 
They have debts, no savings, no hope from the grind. They are poor [sic] than any 30 year old in the last 70 years.”

​“What economists call absolute mobility—the probability that a child will grow up to earn more than their parents—has dropped precipitously. In a paper published in 2016, entitled ‘The fading American Dream’, a team of social scientists found that Americans born in the 1940s had a 90% chance of earning more than their parents had earned at the age of 30; for those born in the 1980s, the chance of that had dropped to 50%.”

“The only thing that helps the climate is if demand falls with supply. Demand falls because of policy, and because technology drives the costs of the alternatives down, and capital goes into them. Some will say higher [fossil fuel] prices are what causes higher investment in alternatives. But they are going to cause a backlash against the climate policies that we really need.”
 
“What this [crisis] shows is how difficult, disruptive and messy this transition is going to be. Whoever thought we could replace the lifeblood of the world economy and that would be easy? It’s going to be super volatile.”

​“Having already suffered the fastest drop on record, Chinese junk bond markets - where property developer issuers dominate - were routed once again as fears about fast-spreading contagion in the $5 trillion sector, which drives a sizable chunk of the Chinese economy, continued to savage sentiment.”

​“Some 4.3 million people quit jobs in August — about 2.9 percent of the workforce, according to new data released Tuesday from the Labor Department. Those numbers are up from the previous record, set in April, of about 4 million people quitting, reflecting how the pandemic has continued to jolt workers’ mind-set about their jobs and their lives.”

​“Likewise, the survey evidence on why people dislike inflation reported in Shiller (1997) indicates that a major concern is that their wages won’t keep up with price increases—which certainly doesn’t suggest that they view themselves as having much bargaining power with their existing employer.”