Markets and the Economy: Back to Surreality

The economy is witnessing an unholy trinity of false ideas, weakened institutions, and malign interests converging to stymie its long-term health and resilience.

By Chris Recker  ▪  January 06, 2021
Featured Image

Surreal (adjective) fantastic and incongruous


Rationality seems to have exited the building. The economy is witnessing an unholy trinity of false ideas, weakened institutions, and malign interests converging to stymie its long-term health and resilience.

Interventions for the Street not the Economy

The U.S. federal government has passed trillions in stimulus to stave off a collapse in consumption, but there have been effectively no plans for long term investment or structural reform to drive growth.  

Central banks are mindlessly printing money and inflating asset prices to never-before-seen heights that will no doubt increase the wealth gap and have negative implications for investors, pensions, retirees, and taxpayers.  

We calculate that the ~53% year-over-year increase in U.S. M1 base money is an extreme event -- 8 standard deviations from the mean. The classic definition of inflation is an expansion of money and credit.

Even with reports of effective therapeutics and imminent approval/deployment of vaccines, a purported positive market catalyst, the big three central banks expanded their assets by nearly $500 billion in November alone. Since Q3 2019, the Fed, European Central Bank (ECB), and Bank of Japan (BOJ) have collectively grown assets by $8 trillion, or an unheard of +56% increase in just over one year.

An Economy on the Ropes

Labor markets are in shambles as lockdowns disproportionately affect small businesses, which constitute over 40% of GDP and nearly 50% of employment.    

As the trade deficit widens and the U.S. trudges through an economic recession, legislation results in sending a large portion of federal stimulus to other countries. Remarkably China is a key recipient,  despite the recent investigation from Nick Paton Walsh at CNN alleging a cover-up by the Communist Party of China (CCP) during the early stages of the outbreak that advanced the global spread. 

China is unwilling to open its domestic markets, refuses to abide by international rules, and has close to a $400 billion surplus with the U.S. Repatriating that production would seem an easy policy remedy to buttress unprecedented amounts of unemployed Americans, not to mention the positive social dynamics gained from healthy communities.

And the result of an irrational response to this man-made crisis is a continually weak economy. 

Leading indicators and bond markets signal that growth in the near and intermediate terms will not be as strong as Wall Street is forecasting.

Broad indicators show a decelerating recovery. Consumption, nearly 70% of GDP, wallows near depths comparable to the 2008 Global Financial Crisis.  

A new round of government checks will offer support to this number, though this flow provides very little help for the long term. Current conditions certainly are not helping fertility or family formation rates, another key ingredient to structural economic growth. Neither is the lack of policy being directed to investment of infrastructure or supply chain re-shoring.

Fed Picks Winners Who Should Be Losers

When we turn to asset markets, incredulity sets in as high yield bonds are at their lowest nominal rates ever. Incongruously, S&P Global Market Intelligence reports that U.S. corporate bankruptcies are set to hit a 10-year high. Normally, the bond market demands higher rates to compensate for higher default risk.

Bloomberg  reports that 200 of the 3000 largest publicly traded companies are “zombies” that cannot seemingly payoff their debts. But thanks to Federal Reserve programs they can access capital markets, harming the companies, competitors, and the entire economy. Combined, these zombies have nearly $2 trillion in obligations

These numbers barely reflect the commercial real estate issues that may be lurking in urban center office buildings and hotels. NAREIT estimates there is approximately 27.5 billion square feet of office, retail, and hospitality space worth c. $6.5 trillion. How much of this is now in or near distress? 

Anecdotally, we have seen this first-hand during visits to our office in the Chicago Board of Trade, a 41-story building. Since March, we have yet to see or interact with another tenant.

Bubble Dynamics Create Unhealthy Realities

Fundamental gravity-defying asset inflation is how the Fed changes the playing field and heads to a new world order. Large companies that should be bankrupt survive, while our neighbors who own small businesses are walloped. This deeply corrupts and weakens the country and the economy.

While 20 million Americans need jobs, Elon Musk is now one of the wealthiest individuals in the world. Tesla’s valuation is fundamentally indefensible and indicative of the broader market.

Tesla has raised $12 billion in capital via these Fed induced valuations perhaps forever changing the auto industry landscape. Auto workers are on furlough and sales are down as the profits of their employers are used to subsidize electric vehicles. These same workers should know that through its actions the Fed essentially handed their competitors free money to build factories and conduct research aiming to put them permanently out of a job.      

Likewise, Amazon and its Chinese supply base have benefited from lockdowns. Count Jeff Bezos among the world’s billionaires who have collectively added over $10 trillion to their net worth this year as central banks have pumped over $8 trillion into markets.  

On the metrics that are hardest to manipulate, U.S. equity markets have vaulted into an epic bubble and no longer reflect any fundamental reality beyond the Federal Reserve’s deeply disordered policy to obscenely inflate assets.  

Investors will likely pay a dear price for these policy mistakes. Low returns are the most likely outcome. Disappointing growth will be another result as weak, over-indebted companies fail to invest in the future.  Unless things change, a diminished opportunity set for the young awaits.

The United States is endowed with the best resources, institutions, and citizenry in the world.  This past year illustrates in clear terms that American leadership seems incapable of deploying these strengths for the good of the country or its people.   

Betting everything on future growth may not be as prudent as the current market momentum suggests.


About the Author


Chris Recker
Partner & CIO

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AZA Capital Management ("AZA"), its affiliates or its employees. This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such.

The factual information set forth herein has been obtained or derived from sources believed by the author and AZA to be reliable, but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. Past performance is not a guarantee of future performance.

This material is not research and should not be treated as research, and does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AZA. The views expressed reflect the current views as of the date hereof and neither the author nor AZA undertakes to advise you of any changes in the views expressed herein. It should not be assumed that the author or AZA will make investment recommendations in the future that are consistent with the views expressed herein, or use any or all of the techniques or methods of analysis described herein in managing client accounts. AZA and its affiliates may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this document.

The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially and should not be relied upon as such. This material should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy.

The information in this document may contain projections or other forward-looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and they may be significantly different from that shown here. The information in this document, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.

Information contained on third party websites that AZA may link to are not reviewed in their entirety for accuracy and AZA assumes no liability for the information contained on these websites.

No part of this material may be reproduced in any form without express written permission from AZA.