The Boeckh Investment Letter - Government Policy and the Markets: Prepare For Some Big Changes

When markets don’t perform the way politicians want, you can count on them to bypass, manipulate or manage these markets. All too frequently these attempts are motivated by short-term political needs where appearances take priority over substance. Currently market distortions in housing, credit and the financial system are huge and dangerously unstable. We are now beginning to pay the price. There is a critical shortage of political will to tackle the underlying problems and band-aid solutions will likely keep us lurching from one crisis to the next over the coming years.

As we discussed in The Great Reflation the steady increase in credit during the debt supercycle hid a multitude of sins. Distortions in both the domestic and global economy grew virtually unchecked behind a veil of prosperity. Such a facade was supported by the expansion of private debt relative to income or GDP–choose your yardstick. The distinction between wealth and credit became clear in the aftermath of the financial crisis. Peering behind the veil reveals an ugly, distorted picture: unsupportable private debt levels, spiraling public sector debt, massive trade imbalances with the accumulation of reserve assets of a few countries, and a flawed international monetary system. All of these issues imply economic stagnation and high structural unemployment in the U.S. and other developed countries.