22 JUN 2021

Markets/Macro: It May Pay to Be Open-Minded


This article is from the weekly markets/macro comment by Tony Pasquariello, Global Head of Hedge Fund Coverage, Global Markets Division, published on June 7, 2021. The full note and Tony’s weekly analysis are available on Marquee’s Global Markets Insights

By Tony Pasquariello

Imagine if you had been stuck on a desert island for the past couple of years. When back at your control center, you ring up GS for a quick check-down on what you missed while lost at sea. Towards the end of the narrative—which details the greatest economic collapse since the Depression, followed by the fastest economic recovery in American history—your GS contact highlights a few present-day realities:

Tony Pasquariello

i. Over the past 16 months, the Fed’s balance sheet has essentially doubled, having grown from $4.2tr to $8.0tr.

ii. Over the same time frame, US fiscal spending has totaled $9.1tr (including $5tr of COVID relief), creating a Federal budget deficit equivalent to nearly 15% of GDP (for both FY’20 and ’21). 

iii. The US equity market has surged to all-time highs, resulting in a market cap equivalent to a full 276% of US GDP, also a record high.

Given that backdrop, perhaps you wouldn’t be totally surprised by some other eye-popping factoids:

i. Led by a pack of retail traders, a basket of widely held equity shorts would be up 46% YTD—or, more poignantly, +323% off the lows of March ’20.

ii. The stock market would feature record high levels of new issue—be it through IPOs, secondaries, convertibles or an acronym you hadn’t heard much about before you set sail.

iii. The US housing market would find itself in a state of record high prices and record low inventory.

Now, given all of that, you rightly ask: so when did that quantitative easing bonanza end and where are we in the hiking cycle? 

After a long pause, your GS contact politely tells you that QE is still very much going on—to the tune of $120bn bonds per month, including, $40bn of mortgages—and, that the brightest economic minds in the Firm don’t expect the first rate hike until 2024. At that point, you’re probably wishing you had access to financial news over the past few years, and are probably glad that one of the books you had to read on your desert island was Morgan Housel’s The Psychology of Money:

“We think about and are taught about money in ways that are too much like physics (with rules and laws) and not enough like psychology (with emotions and nuance). Physics isn’t controversial. It’s guided by laws. Finance is different. It’s guided by people’s behaviors.”

What’s my point here? I think there’s a lot of wisdom in that quote. Given the enormity of the forces that have characterized the past 16 months, who really knows where this all ends up. At the very least, it may pay to be open-minded on the terminal outcome. Broadly, we may be back into a growth environment that’s very reminiscent of the post-GFC secular stagnation era.