The Battle Over the Balance Sheet
Fading market power, more on the balance sheet, lack of slack, slower but not slow
‘No Monopoly Can Maintain Itself Without Government Support’ Milton Friedman
In Your Facebook
The ongoing debate about whether the ‘20s expansion is still in the early stage, has transitioned to mid-cycle, or whether excessive fiscal and monetary stimulus created a boom/bust condensed process, will be crucial as monetary policy tightening begins in March. The current Fed actual (not intended or expected) policy setting is consistent with early cycle activity with virtually no risk of a short boom/bust outcome. Equity market sector and factor performance, as well as the recent Fed policy normalization related correction, implies we are transitioning to mid-cycle. The Treasury yield curve flattening since the tapering of asset purchases began in November hints at the boom/bust scenario. For our part, given that our focus is on markets rather than the real economy, Federal Reserve policy normalization is the key factor in the transition to mid-cycle. In other words, the timing of the Fed beginning the normalization process plays a large role in the length of the economic cycle, but until that process begins, markets benefit from the twin tailwinds of improving growth and easy monetary policy. Despite the assertion of economists, strategists and policymakers that the pandemic was unprecedented, sector relative performance followed the early cycle playbook without exception. Now that the first monetary policy correction has occurred, investors should begin to focus on secular trends.