Stock markets will ascend higher

Abraham George Market Musings

During the GFC 2008, Hank Paulson was the Treasury Secretary in the US under the George W. Bush presidency. Before joining the government, Paulson was the CEO of Goldman Sachs. During the crisis, Paulson introduced a program called TARP (Troubled Asset Relief Program) to stabilize the markets. The authorized amount was USD 700 bio. The money that was used was only USD 426 bio and actually the government got back around USD 440 bio. While the money was used mainly to support major banks and auto companies, it is estimated that through the process the government saved more than a million jobs. So, TARP overall was a great success.

Even during the 2020 pandemic crisis the government responded with an unimaginably bold response of USD 3 trio emergency stimulus that manufactured the fastest recovery last year from the deepest recession in modern history. Ever since, we have never been short of announcements of additional stimulus. There is another USD 5.5 trio of government spending that will very likely be dropped onto an already hot economy. So where is this all leading to? We really don’t have much idea. But some very experienced, very successful common sense money managers have been very critical of the Fed and the government.

I have already mentioned about Paul Tudor Jones, Stan Druckenmiller and Ray Dalio in my previous writings. In fact, the great macro trader Druckenmiller has made most of his money following the government policies. He is worth about USD 6 bio and has compounded at the rate of 30 pct approximately for 30 years. Druckenmiller has been meeting with many senators to warn them against the current policies.

Druckenmiller is highlighting that with the passage of these two spending bills, that almost two thirds of the money will ultimately be spent in the name of ‘crisis’ will have come after the economy already recovered.

His point is that the present policies will destroy the US economy. Aggressively spend into an already hot economy. Give more drugs to a drug addict. This is a recipe for bubbles and hot inflation. Both can lead to large economic declines. You will not only create future crisis, but you will have no ammunition to fight another crisis.

With a Fed who has openly committed to supporting the equity markets at any weakness, I think one should not fight it. If common sense tells you that this has gone too far, stay out of it but please don’t try to short it!

Eventually the damage will come and it have been triggered by the Fed. There will be four stages to this process. First the Fed will have to acknowledge the hot inflation. Still everything is ‘transitory’. Secondly they will stop fueling it. Thirdly they will start chasing it and finally they will kill it with higher interest rates.

I think we are still at stage one. As the famous economist John Keynes said “markets can be more irrational than you can be solvent”. So folks, enjoy the ride as long as you can clearly see cracks in any policy change from the government. For the moment, the Fed has your back covered.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.