There Ain’t No Such Thing as a Free Lunch – Part 3
In previous articles, I examined the negative externalities of post-Keynesian measures like unlimited monetary easing. First, I explained that such policies were inflating asset prices, squeezing working and middle classes, and thus leading to a core deflationary impact on the rest of the economy (see There Ain’t No Such Thing as a Free Lunch – Part 1). Then, I wrote that too many bailouts might lead to moral hazard and zombie companies, undermining future economic growth (see There Ain’t No Such Thing as a Free Lunch – Part 2).
If such policies tend to weaken the economy, then why assets like stocks, bonds, and real estate keep on rising?
Greed is Good
As already mentioned, bonds and equity markets have been more and more driven by the “Fed put” narrative (see The Fed Put Narrative Era). Besides, households might see the drop of interest rates as a screaming buy signal in the residential real estate space. People have been taught that any correction should be regarded as a huge investment opportunity, so everyone is willing to join the party.
Fear of missing out is a powerful catalyst, especially when wages inflation is so low that all you can do is hope for significant returns on investment markets. If the Fed has our back and if Nancy Pelosi is right about “the stock market floor”, then why not taking risks?
Narratives and Fantasy
Even if people love to state that “the market is not the economy”, assets like, stocks, bonds, and property, are supposed to reflect economic values somehow. And the bad news is that GDP growth has been decreasing for decades in Western economies (see chart below).
Once again, it is important to realize that markets are intersubjective frameworks and that they are driven by narratives. As long as people believe that the dominant narrative is true, extreme valuations may remain a reality. But if doubts arise, then the whole house of cards is likely to collapse, especially as economic fundamentals do not support current levels.
The New Gold Rush
More interestingly, it seems that the market has just reached the “buy everything” moment, with speculative behavior spreading to gold, euro, and even bitcoin.
I have been bullish on gold since 2014, as I have always thought that money printing would reduce the purchasing power of money, pushing precious metals prices higher. However, I think that we should not confuse FOMO with fundamental catalysts, and I am skeptical about any asset going parabolic, including gold and silver.
In my opinion, people believe that anything, from stocks to metals, can make them rich. But in economics, there is no free lunch. In other words, without economic growth, there might be no wealth creation on the long run.
One could argue that gold price is reflecting a sudden drop of confidence in US dollar. But I tend to disagree with that, as it is not consistent with T-bonds trading at historically low yields.
Moreover, if people were losing confidence in the dollar, then why would they see the euro as a safe haven? It would not make any sense, as the Eurozone appears as a more and more fragile entity.
I agree with the idea that post-Keynesian policies will have a deep and durable impact on the dollar. And I do believe that China will soon unveil a monetary framework that could challenge US dollar monopoly. However, I do not think that current speculation on gold has anything to do with the end of the dollar.
It is all about greed and TINA. Nothing new here, and we already know how it will end. But we must admit that asset markets have turned into the most astounding circus the world has ever seen.
However, every fantasy has a price.