Connect the f***ing dots
The Echoing Economics: Markets, Morals, and More
This story was published July 19, 2023
I have actively followed doomers and doomsday prophecies since 2011, specifically those predicting how the “everything bubble” will burst. But being a doomer doesn’t pay off; I still stay in the market and maintain my somewhat unconventional plan. Staying a doomer consistently does not yield benefits in the markets or life.
“ We are worried today over economics; we always will be and always have been as long as we worship economics.” — Manly P. Hall.
An unprecedented bullish trend has largely defined the global economic landscape for the past four decades. The bull market, stretching from the 1980s through the early 2000s, marked a notable period of growth. So, no worries — it seems the S&P 500 will keep on its upward trajectory indefinitely.
It’s misguided to simply observe the S&P 500’s performance and equate it to the health of the “system.” How’s the average consumer faring right now? Not great, it seems. Everyone’s trying to escape the system, indicating its inherent flaws. Yet, we willingly participate in this grand charade, arguably the largest casino.
At our core, we’re addicts, craving both exhilaration and pain. This insatiable urge to escape-what’s driving it? When do we decide we have enough? A million isn’t sufficient anymore. So, what about 10 million? 100 million? A billion? It’s an unending cycle of wanting more. The system’s design parallels an EA SPORTS game, brilliantly scripted to trigger dopamine rushes and torment. The brightest minds are ensnared in this chase for wealth and material accomplishments. Yet, beneath it all, our collective sentiment resonates with a foreboding sense of doom. There’s an undeniable yearning for cataclysmic events, and an impatience for them to unfold swiftly.
Meta stock’s 150% year-to-date surge begs the question: Why? Was there a groundbreaking strategic move? A pruning of unviable ventures? Or is it just another episode of AI-driven mania? We’re well-versed in how these manias culminate, but we’re ensnared in the game nonetheless.
→ After global financial crisis 2008
Following the resolution of the financial crisis in March 2009, we witnessed what’s often referred to as the “Longest Bull Market.” This bullish trend persisted until February 2020, when the onslaught of the COVID-19 pandemic triggered a rapid and intense market downturn.
Massive fiscal and monetary stimulus measures spurred recovery from April 2020.
Let’s journey further back in time and begin connecting the dots.
Why did this period earn the title of “The Great Bull Market”?
While there were a few hiccups, like the Black Monday crash of 1987 and the Dot-Com bubble burst around 2000, the predominant trend over these decades was undeniably upward.
→ 1987 Black Monday: Flood the banking system with liquidity to save the financial system.
→ Dot-Com crash: Aggressively cutting interest rates from 6.5% in 2000 to 1.75% by the end of 2001 and to 1.00% by 2003. A big contributor to what happened in 2008.
1983: Debt: $1.4 trillion GDP: $3.9 trillion 1993: Debt: $4.4 trillion GDP: $6.7 trillion 2003: Debt: $6.8 trillion GDP: $11.5 trillion
The combination of easy access to cheap money and unchecked financial products precipitated one of our most significant economic downturns since the Great Depression of 1929. The term “Moral Hazard” became a household phrase. And the response? Instead of rectifying the root causes, the financial world doubled down on the very measures that had been employed following the Black Monday crash of 1987 and the Dot-com bubble of 2000:
→ Inject liquidity
→ Infinite quantitative easing
→ Drop interest rates to almost zero
Key macroeconomic events:
- Europe PIIGS — European debt crisis.
- Currency wars discussion started to brew.
- The first downgrade of U.S debt, big fight over the debt ceiling in 2011.
- Emerging Markets Slowdown : Countries like China attempted to shift their economies from export-driven to consumption-focused models. (One might question: how successful has this been?)
- Tensions over trade start…
- Bitcoin was born
GDP growth is anemic, and we have zombie nations in the making; look at Finland after 2008. Many other countries, too, have not reached growth levels of “pre-crisis.”
The stage was set for the “everything bubble.” The moral hazard became more pervasive across societies, abetted by easy access to ultra-low interest rate funds and escalating debt burdens across the board — from governments and corporations to individual consumers.
Erosion of everything peaked in 2020 in the form of pandemic craziness. I don’t think it was some big conspiracy theory. It just showed how stupid our policymakers and leaders are. The financial markets became everyone’s favorite playground.
When faced with a downturn, did we introspect and seek lasting solutions? Hardly. Instead, central banks and governments across the globe reached into their standard playbook, rolling out sweeping fiscal and monetary measures:
- Plunging interest rates even closer to zero
- Undertaking unimaginably extensive quantitative easing
- Dispatching stimulus checks
- Launching stimulus packages, from PPP loans to various bailouts — whether in the US or Finland. Alarmingly, often the least deserving seemed to benefit the most, attracting opportunists and fraudsters.
→ Moral Hazard is everywhere. Only a few care about anything now.
Shut down economies, pump in “free money”, and then scratch our heads at the inflation spike? The math isn’t hard to understand.
++ The tail-end of 2022 witnessed a severe dip in purchasing power, particularly in Europe, exacerbated by soaring energy costs. The relief from rising energy costs led to an uptick in consumption, notably in the services sector, which rebounded robustly.
++ Central bankers are geniuses, and they tamed the inflation.
Inflation is decreasing rapidly from Jun 2022: 9.1% to Jun 2023: 3.0%.
- Signs of a slowing economy
- Impact on borrowing costs, debt servicing, and asset prices?
- Profits will come down
- Deflation risk?
Hike up interest rates aggressively and hope that nothing will ever break again.
Despite these red flags, the economy’s resilience is noteworthy. Perhaps, it might have fared even better had we let the people, rather than just policymakers, steer it. The interest rates are higher than ever in over two decades.
Party always ends up in a hangover, and so will this. We have too much debt everywhere. It is normal to have cycles, and we still have too much shit floating around. I don’t know where the rates will go next year. Nobody knows. We would be all billionaires if we knew.
There’s public uproar when the price of a meatball meal at my local café inches up by 50 cents. Yet, those same voices go mute when banks slap an extra €1,000 in interest costs. “I am an honest, hard-working citizen, and I love banks.” Banks are raking it in. The permanence of net interest income prints is guaranteed to remain unchanged forever. Let that sink in for a second.
Trying to guess what’s next, we must consider the challenges and potential stumbling blocks ahead.
Was the end of 2022 the bottom, or are we in for more pain?
The reverberations post-2008 to 2012 are felt louder than ever, and this list can be inexhaustible:
→ More currency wars
→ More moral hazard (PPP loans, covid subsidies etc)
→ China slowdown
→ Tension everywhere (Russia vs Ukraine). Will it escalate more? Huge stimulus from US and Europe to support.
Does it even matter? Debt is just growing-more debt = more gains. The swift $1 trillion surge post the lifting of the debt ceiling in June 2023 is a testament to this.
- 1983: S&P 500 ~164. Debt: $1.4 trillion, GDP: $3.9 trillion
- 1993: S&P 500 ~450. Debt: $4.4 trillion, GDP: $6.7 trillion
- 2003: S&P 500 ~990. Debt: $6.8 trillion, GDP: $11.5 trillion
- 2013: S&P 500 ~1,631. Debt: $16.8 trillion, GDP: $16.9 trillion
- 2023: S&P 500 ~4,522. Debt: $32.6 trillion, GDP: $26.5 trillion
Correlation Does Not Imply Causation
2033: S&P 500: ~$9,800
2043: S&P 500: ~$21,200
2053: S&P 500: ~$46,000 (Debt-to-GDP ratio: ~232%. Who cares Japan is doing just fine.)
The million-dollar question remains: Will there be a shift toward prioritizing tangible productivity over financial market gymnastics? Our track record isn’t promising. We’ve historically been trapped in this cycle of amassing debt and then scrambling to salvage our financial systems when crisis looms.
We find ourselves captivated by the theatrics of the market, a mirror reflecting our deeper societal discontent. We secretly want it, and we will get it. Will we fix anything? No. We will continue to do the same. We are trapped in an endless loop. Connect the dots.
Maybe it’s time to introspect on our definitions of success, progress, and purpose. Does it merely revolve around numerical values on an index?
Boundless Possibilities Ahead: Our greatest strength: human innovation. With groundbreaking advancements in AI, Bitcoin, and other technologies, we stand on the precipice of a new era that promises unprecedented growth and the potential to address our most pressing challenges.
The biggest enemy is control. With rising debt, we unknowingly cede more control to governments, entrusting them with the significant task of picking winners and losers. We are losing our economic freedom, ability to create new, try new things, and also fail from time to time. We need bubbles to pop, and we need a wake-up call.
The relentless debt cycle cannot continue forever, or can it? That is the real dystopia. How sustainable is it for the world?
Do we continue pursuing material gains?
Pause, reflect, and prioritize what truly matters.
Sources & Good reads:
Originally published at https://kiiski.substack.com.
