I don’t think anyone can discern where this leads
https://www.sitkapacific.com/recent-letters/Sitka_Pacific_2021_Annual_Letter.pdf
“When the history of this period is written, the past year may be remembered as the moment when market prices began to be influenced more by monetary policy than by underlying economic fundamentals.”
Managed capitalism. A whole new phase of The System. Implication: it’s now essentially impossible to know what to do with investment monies. “Investors the world over have been attempting to assess the implications of receiving almost no return from risk-free assets [bonds]. This past year the 10-Year Treasury yield traded in a range far below any other range in history, including the lowest yields seen during the Great Depression.”
“The reaction to the phase-shift in Treasury yields had a dramatic impact on risk assets [stocks] in the latter half of 2020. Spurred on by the lure of value relative to a sub-1% bond yield, the U.S. equity market rose to the highest valuation in history.”
2020 . . . “spectacular financial-world events” . . .
* the steepest global economic contraction since the 1930s
* a 0.4% yield on the 10-Year Treasury note (historically ranges from 3% to 7%)
* a negative price of oil (and then a surge to $65/barrel)
* a new record low in junk-bond yields
* extreme volatility (early in the year the equity market suffered its fastest decline of 30% on record; that was followed by the most dramatic upturn, so that by the end of the year valuation of the stock-market-as-a-whole was at 180% of GDP, higher than ever before and more than twice the historical average)
* in just three months, between March and June, the Fed expanded its balance sheet as much as it did over six years following the 2008 financial crisis
* this astounding monetary expansion, coupled with the $2.2 trillion pandemic relief bill passed by Congress, resulted in the highest growth rates of broad money supply measures since World War II
“Yet as dramatic as the monetary expansion in the U.S. has been over the past year, it may prove to be just the beginning. Central banks from New Zealand to Sweden joined the Fed by initiating their own quantitative easing programs in 2020, and there is a growing realization that the era of influencing the economy solely with interest-rate adjustments may now have been supplanted by a new era of waxing and waning levels of quantitative easing, coupled with fiscal stimulus. This transformation of monetary policy from growth and inflation management via interest rates to an era of ongoing adjustments to the pace of central bank balance-sheet expansions is an historic threshold to have crossed, and it appears markets have only just begun assessing its long-term implications.”
“Our discussion in this letter will focus on the impact of having crossed the threshold into this new era. Beyond the pandemic, and the noise of the high-frequency economic and market data, this transit may prove to be a truly pivotal event for the markets. For context, we will begin our discussion with a return to the last pivotal time the markets began to detach from the economy [1960s] which confounded value investors then just as much as the markets have in recent years.”
https://www.sitkapacific.com/recent-letters/Sitka_Pacific_2021_Annual_Letter.pdf
