A client intimated in a recent meeting that, based on our assessment of probabilities for each of our current core positions going forward, we’re not as bearish on stocks as my general vibe (here on the blog) might otherwise suggest.

I acknowledged that, indeed, at least with regard to our core positions, we’re not as bearish on equities overall as we were in late-2019, but I stressed that, nevertheless, not only do virtually all of the same risks remain, when it comes to the underlying debt and equity valuation setups, and so on, they’ve been exacerbated.

So why are we, on balance, a bit more sanguine today than we were ~18 months ago?

In essence, and in a nutshell, valuations, system-wide debt, interest rates (“from” [as opposed to “at”] these levels) and geopolitics are clearly stacked against the stock market. Ironically, on the other hand, in today’s market-centric, unrepentant-money-printing world, one can virtually declare that the worse the setup the less likely the crash. I.e., the worse the setup, the more the top-down desperation to keep financial bubbles afloat.

I.e., in the words of economists C. Reinhardt and K. Rogoff in their seminal book This Time is Different: 

“Bubbles are far more dangerous when they are fueled by debt”

“…amid what may be a period of relatively low velocity of money, heavy debt burdens, and, we presume, further technological advancement — I see increasing odds that we’re at long last on the cusp of something meaningful (but not 1970s meaningful, mind you) with regard to structural inflation risk:

• Increasing populism (a serious headwind for global trade — in both goods and in labor) fueled by growing wealth inequality*.
• A continual stimulating of the economy via fiscal policy (facilitated by easy monetary policy) — demanded by a politically-powerful populist movement.
• China maturing into a service-oriented, consumer-driven economy (moving away from providing cheap labor and goods to the outside world, and, thus, no longer needing to actively devalue the yuan [in many respects the opposite]).
• The Fed’s fear of bursting present asset and debt bubbles were it to implement traditional inflation-fighting measures — thus willing to fall notably behind the inflation curve well into the foreseeable future. In fact, I personally place better than 50/50 odds that if indeed a long-term trend of rising inflation emerges, that the Fed will revert to yield curve control (buying up the price (down the yield) of longer-term treasuries) to control lending rates that, were they allowed to rise, would themselves produce a headwind to rising inflation.
• The trillions of dollar-denominated debt sitting on foreign corporate balance sheets inspiring an active campaign by the Fed to keep the dollar at bay, in an effort to avert what could otherwise turn into a very messy global currency crisis.
• The reticence on the part of producers in the metals space to aggressively expand capacity despite rising prices: Speaks to the devastation they experienced post the ‘08 to ‘11 China building boom.
• The political/environmental headwinds for fossil fuel producers to expand capacity.