Monthly Market Commentary - December 2020

Markets and Mr. Keynes


I want to start this monthly commentary with an undisputable truth: markets are on fire. 2020 goes on record as a great year for risky investments; 2021 is starting on the same footing. With the Nasdaq 100 up almost 50%, the S&P500 and the Russell 2000 up in the area of 20%, the United States got the lead once again. Global stocks had double digit returns; Japan, China, Honk Kong and EM did very well. Even Europe managed to get even in a final rush. Global government, corporate and high yield bonds all delivered high single digit returns. Gold was up 25% and cryptos skyrocketed. All industrial commodities had excellent results, with the exception of oil (though it strongly recovered in the last couple of months). Foreign currencies outperformed the USD. Markets are hot, not much to add. I cannot hide that, when I phoned my friends to wish them a wonderful 2021 and told them that the year just passed was so great, I felt they were amazed how this could have been possible during a pandemic. You have to excuse them. They are regular people with regular jobs and Covid-19 hit them very hard. They do not understand the details and the intricacies of the free money world we live in; but they aren’t stupid. The simple question they asked was “why this has happened?” I tried to give a synthetic answer. They get the story of the vaccine and the better prospects for this year. They do not handle the concept of trillions very well but get the story of extra-stimulative monetary policies around the world that are now going to be boosted by fiscal looseness at levels last seen during World War II. They should have heard that the whole world is going Keynesian in full swing. The only disturbing thing is that they do not feel they benefit much from these policies. I insisted they should understand that they are the ultimate beneficiaries of the third or the fourth derivative of such maneuvers. My friends keep on being unconvinced, to say the least. It was after one of such calls where I described the high temperature of the markets that one trivial anecdote came to my mind. Everybody knows that the system we use in most of Europe to measure the temperature gets its name from a Swedish scientist of the eighteenth century: Anders Celsius. However, not many know that Celsius had proposed a very different approach to measurement. He took the zero degrees level as the boiling point of water at normal atmospheric pressure and then counted UP as the temperature went down, with water freezing at 100 degrees. Around the same time, other scientists developed similar measurement systems but numbered from 0 to 100; the way we normally do today, i.e. the centigrade scale. In spite of having the opposite idea the system got Celsius’ name ever since. This anecdote made me think what legendary English economist John Maynard Keynes would think of this shift towards never ending stimulative policies. He is the father of the economic stimulus idea after all. I must admit I never read the General Theory. The book is on my library for “retirement reading” in good company (Smith, Schumpeter, Sraffa, Marx…). Like anyone with a degree in economics I studied his ideas in textbooks. I always thought he must have felt betrayed by the work of Hicks that simplified his theory in the mathematical IS-LM framework while Keynes did not use a single formula or graph in his original masterpiece. We know that math brings “rigor” in economics, together with “mortis” though. I also read some books and articles about Keynes life. After a difficult start (he went almost broke twice) he became a successful investor and the Kings College of Cambridge profited immensely from his services. Being one of the smartest persons ever lived, I believe he would have made tons of money in the present environment. Despite this, I am not so sure that he would be so happy that everyone today claims being a true Keynesian when asking for more fiscal stimulus. I doubt that he would approve such low interest rate environment too. At the end of the day, he is the one that theorized the “liquidity trap”. My basic understanding of Keynes’ ideas is that, in a recession, you got to help kickstart an economy to ease people pain by stimulating aggregate demand on a “temporary basis”. In doing so, you should concentrate on the weakest. The focus should be on employment and social distribution of income and opportunities. Now, it is obvious we are living in a situation where government help is needed. I cannot deny that. Keynes ideas fit the bill. However, the ideology western economies are following do not seem really Keynesians to me. We are overdoing it and, at the same time, not really helping the ones in need. We cannot say ours is a socialist system. The only thing policymakers care about is that the public is treated as consumers and does what is supposed to do: consume. Until now, I do not see any redistribution policies in western societies. At the same time, we are not in a capitalistic system because the most important price of all, the cost of capital, is rigged. Therefore, investments and productivity lag while speculation is at an extreme. I coined a new word for the world we live in: wealthalism. We are doing whatever possible to defend and increase existing wealth. In 2016 I wrote a commentary talking about the “1 basis point society”; 4 years later this prediction got real. We will borrow, spend, borrow more, spend more like there is no tomorrow. 99.99 percent of the people do not own or do not have access to the assets that benefit the most from these developments but guess who is supposed to repay all these debts? Ah ah…we financial literate people know the answer but let’s just keep it for ourselves… You know, some people might get very angry, wear an intimidating bison hat and make a mess around.

Peppe Ganci, CFA

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