Good Tuesday AM,

More selling across the board. Bonds, stocks, bitcoin, all seeing red today. The silver lining though is that for us, with bonds and mortgage rates, the selling seems to be slowing (I do not think the same is going to be true for other asset classes). Fed Chairman Powell is in front of the Senate Committee today reminding everyone of the Fed’s commitment to keep inflating the country. That means bond purchases and no rate hikes for the foreseeable future. In listening to the testimony, I am encouraged to hear Mr. Powell say that it will take all metrics to improve before the Fed would remove accommodation. The unemployment rate has to drop, but also the percentage of workers in the workforce and for inflation to run north of 2.5% for a considerable amount of time. Not one of those metrics, let alone all three, are likely to occur in 2021 (and all three would be hard pressed to happen before end of 2022). So with that, I believe we are nearing the bottom of the channel. The selling will stop and buyers will re-inflate (at least to some degree) mortgage bonds. If you held on, and did not lock, there may be a light at the end of the tunnel. The last week it’s been the light of an oncoming train to run us over but hopefully not the case now. No promises though… choo, choo.

I have to admit that the resolve/trajectory of the equity markets over the last year has been challenging to understand (at lease for me). Bloomberg shared an interesting perspective that I thought I would include.

Anyway, the point is not that the “reopening trade” is red-hot these days (though it is). But that if you go back to about 11 months ago, there was all this talk about how bailouts and Fed credit backstops were going to prop up “zombie companies” and that it was some mortal sin against capitalism to circumvent the process of creative destruction. Well it turned out that there was nothing broken about these business models. They weren’t zombies sucking up potentially productive capital, depriving land and labor from companies that needed it. They were just massively disrupted by a once-in-a-century pandemic.

To sound savvy, people like to repeat the line “capitalism without failure is like religion without sin” and there’s some truth to that in theory. Suppose that for the last 10 years, the Fed had been providing cheap credit to Blockbuster, allowing thousands of video stores to stay afloat, even in the presence of streaming.  And suppose there was a lot of demand for that real estate and those retail workers that Blockbuster was hoarding with its cheap money and unproductive assets. Then you could say that it was acting drag on the economy (perhaps). But that’s obviously an alternate reality that’s got no resemblance to our own.

Contrary to that, it appears there’s going to be huge demand for the enterprises that were crushed during the pandemic, especially once everyone is ready to go outside. And if the economy had been left to spiral downward last March, without grants and credit, we wouldn’t have them here now to satisfy that demand. Ironically, if Congress and the Fed hadn’t sprung into action so fast, inflation today would likely be worse, because we’d already be running into the limits of our (diminished) productive capacity.

There’s nothing about these companies that resemble the Blockbuster scenario above. No zombies sucking up scarce capital. Perhaps the thing that comes the closest might be the dozens or hundreds of VC or SPAC-backed startups in areas like electric vehicles that may be depriving productive incumbents of talent and technology. But nobody’s supposed to call that a problem. That’s just the innovation economy at work.

Please remain safe and healthy, make today great!