In Greek philosophy everything that is beautiful is by this very fact also good. Likewise everything that is good is also beautiful. All that is good and beautiful is also right and vice versa. All that is good, beautiful and right is also true and vice versa. All that is beautiful, good, just and true participates in the divine and is therefore eternal. The tail end of a bull market is the beatific vision of a perfect balance between growth and inflation. This balance can vary from cycle to cycle. Two decades ago it could have been 3 for inflation and 4 for growth, today it is just under 2 for inflation and close to 3 for growth.
In any case, in every cycle there is an alignment that appears optimal not only for the numbers involved, but also and above all because these numbers suddenly appear sustainable for the entire foreseeable horizon. When the good and the beautiful are discovered not as the fleeting alignment of an eclipse but as new fixed stars emanating eternal light, the mind is struck and reborn into new life. Quotations that until yesterday seemed expensive and unsustainable suddenly appear natural. Buying at a double or triple price compared to what we refused to pay some time before becomes easy and no longer requires particular reflections.
The fact that we do not see the picturesque manifestations of enthusiasm of past cycles should not mislead us. We no longer buy junk bonds ourselves, but the hundred-year bond issues of doubtful debtors are absorbed without problems by the pension funds and insurance companies to which we entrust our future. We no longer buy leveraged like in past cycles, but buy leveraged ETFs that do the same thing for us. We pay for cars to buy without thinking or getting excited and they buy because they see other cars buying. Low volatility makes the upside boring but makes it appear invulnerable. And on the other hand, the small daily share rise is still greater than the annual yield of a bond and therefore we remain invested.
Everything is orderly, aseptic, slow and composed. And inertial. And everything is based on central banks that operate on autopilot, economies that are growing well in all corners of the world and inflation that is so well-mannered that one would even like it to be a little livelier. Thankfully, there are problems and we see them all, but they don't manifest themselves in a loud way. Debt increases every day (especially the Chinese one), but as long as rates remain low and as long as central banks support it, we can not pay too much attention.
Puerto Rico fails? And who ever thought that a debtor who always sold all the paper he wanted, up to the limits of the ridiculous, simply because he was tax exempt, would not go bankrupt? Is this the second sign, after Detroit, of the rottenness rampant in a large part of American local debt? it's okay, as long as one bubo a year bursts we can absorb it without problems. Kim? Raises defense-related stocks. Catalonia? It keeps the euro down and therefore drives up the stock market. Is the populist Babis about to take power in Prague and ally with Budapest and Warsaw against Berlin, Paris and Brussels? Local problem.
Is Franco-German Europe starting to resemble that Austro-Hungarian empire in which everyone said they loved each other only to discover in the end that everyone hated each other? It's okay, as long as there's money in the way and leaving the euro makes everyone poor, they'll stay together. Be careful, though. The current balance is perfect and could even be lasting, on paper, were it not for the fact that these alignments, especially the one between growth and inflation, have historically been difficult to maintain for long. Let's think about the Fed. Trump has three options. Leave it as it is today, confirming Yellen. Make it more aggressive, choosing Warsh or Taylor.
Make it softer, naming Powell or even, as Gundlach says, the ultra dove Kashkari. A more aggressive Fed would raise rates to the point of inevitably causing, if not a recession, then a slowdown in growth. A softer Fed would let inflation rise to the point of embarrassing the long end of the curve and stock market multiples. A confirmed Fed would try to balance, but would find itself dealing with an equity bubble and its inevitable bursting.
When something is (or appears) perfect, sooner or later someone always comes along to make it even more perfect. In the sixties everything seemed perfect. There was growth, much more than today, and full employment. It occurred to someone that, with a little more government spending, there would be even more growth. Instead, there was more inflation. Today Trump bites the brakes. He wants more growth and more jobs. He will almost certainly have an expansive tax reform in the end, but it cannot be ruled out that he will want to leave an even stronger mark on history with an even more expansive Fed.
If this is the case, the other central banks will also have to adapt, on pain of excessive revaluation of their currencies. 2018 will then be a turbo year but also a year in which we will really see if inflation is dead, as they say today, or if, by dint of teasing it, it is ready to come back among us. Tests of this type may end well, but they still give moments of volatility and fear. Let's enjoy the present (always in moderation, as Epicurus would have said) and remain invested as long as the tax reform is a hope to dream about and not a reality that will still have its limits and will not open the gates of paradise for us. Let's get ready to lighten up because the world next year, even in the best-case scenario, will be more unstable.
As for the long term, ignoremus et ignorabimus. How much inflation will there be in 2100, when our centennial bonds still have 17 years left to live? There will be little because technology will have deployed all of its deflationary impact in the meantime or there will be more because (as a recent analysis by the Monetary Fund says) the aging of the population, after two or three decades of disinflation, is starting to cause inflation ? When China has 2100 million fewer people in its workforce in 400, it will have to pay higher salaries or will the robots take care of everything?
In short, let's try to reflect on the fact that at the end of the light, however dazzling it may be, there is always a tunnel into which one must slip. Whether it is as comfortable as the new Gotthard Basistunnel or as narrow and winding as the one built by our great-grandparents, we will see in his time. In two three weeks, the time that Trump has set aside to decide on the new Fedwe will know more.
