The Fed’s Folly!
If you watch market reaction to economic news such as Friday’s job report is a good example of a manipulated market; when perceived bad news send risk asset prices higher anticipating the Fed will keep the liquidity gravy train running at full steam longer. But don’t blame the Market; Market is just a reflection of market fundamentals, which are supply & demand of capital and risk. The Market is distorted because the arbiters of monetary policies globally have flooded the market with liquidity thus mispricing risk. The cost of such policies are misconstrued by many market participants because they are the beneficiaries of such manipulations, therefore their perceptions have been blinded by their good fortunes. On the other hand, the majority who see their wages stagnant or declining and their standard of living deteriorating over the decade help to fuel the rise of the demagogues.
Central banks unconventional policies have fueled massive inflation of asset prices and risk taking of the wrong kind…chasing beta & unicorns. These policies have created the greatest dichotomy of the have & have not…not only in people but companies as well. Just look at companies such as Tesla & Uber; they are burning through cash like drunken sailors in a red-light district, but unlike the drunken sailors, they are given carte blanche to spend thanks to the liquidity bubble. They are forging into area such as self-driving cars which will suppress the total demand of vehicles by increasing the utilization rate per vehicle. The problem is traditional companies that compete with those unicorns are adhered to some traditional valuation matrixes; therefore they are forced to find more efficiencies by incorporating more automation, thus more elimination of jobs. There is nothing wrong with efficiencies, but when excessive stimulant forces rapid structural changes mean greater instability to the economy, unfortunately, the arbiters of policies are often too ignorant & too slow to response to changes. As I’ve said many times before, we’ll need massive deflation as we transform from the industrial age to the information age to take care of the huge population of under-utilized workers. Unfortunately, most of the traditional economic assumptions, models & evaluation bench marks such as demographic, inflation, GDP & productivity are misleading & obsolete because of the structural changes, globalization & tax jurisdiction shopping. The United States true GDP & productivity gained are substantially higher if not for tax jurisdiction shifting (the recent news of Apple & EU over tax is the tip of an iceberg of what I’ve been saying for a long time).
There are also accumulations of future productivity gains in the system thanks to massive investments in area such as A.I., robotics & automation, self-driving cars, energy etc. They are hard to measure right now, but once fully deploy, they can unleash massive productivity gains to the system. Another big misconception is the demographic trend; the notion a country GDP growth is tied to the population growth is a concept of the industrial age where the size of the work force determines GDP because labour plays a much bigger part in the manufacturing process. In the Information Age, the size of the work force matters little, but the quality of the labour pool. The quality will have to keep improving and the quantity need will keep diminishing thanks to the advancement in A.I. & automation. Unfortunately, the custodians of the system - including fiscal & monetary policy makers and the leading thought’s leaders are still constrained by antiquated theories & assumptions; unless we unshackled those antiquated guiding forces, we’ll keep marching down the wrong path.
? We must change our perception in deflation vs. inflation; deflation should be view as part of the economic maturation of the developed nations…from Industrial Age to Information Age.
? We must automate global monetary system among major economies; allow money supply to grow at their predetermine rates & eliminate human mismanagement of monetary policies.
? We must allow free market to be the arbiter of capital flow & free ourselves from bureaucratic tinkering; inhibit politicians & central bankers from picking winners & darling industries intentionally or otherwise.
? We must procure an equitable transitional plan to guide us through the transformation from the Industrial Age to the Information Age.