May You Live In Interesting Times

Jul 20, 2022Nicholas MitsakosArticle, Public Policy, The Marketcentral banks, economic growth, economic policy, inflation, interest rates, Public markets, public policy, the Fed, Uncertainty, Unpredictability, valuation, volatility

Risk is higher. Markets are more unpredictable, and valuations more volatile. So, when anyone says “this time it’s different” it usually makes good sense to stop listening. However, these days the markets have given us more frequent and intense volatility. The NASDAQ is down almost 30% so far this year, and shocks from the pandemic, the Ukrainian war, massive central bank interest-rate maneuvers, and China’s zero-covid policy, are all ongoing inputs for turmoil that will continue for some time. Persistent uncertainty creates higher costs of capital and less affordability, weakening business investment, slowing GDP growth, and reducing investment returns. Hyperbolic “this time it’s different” statements are turning out to be true. This time days look darker, uncertainty greater, economic growth lower, vulnerability to additional shocks higher, and investors fear many more dark days to come. More frequent and intense volatility will not be calmed anytime soon. It really may be different this time.

Sweltering, Chills, and Discontent

Jul 18, 2022Nicholas MitsakosArticle, Class Material, Inflation, Investment Strategy, Public Policycentral banks, china, economic growth, energy, Energy block, energy policy, Geopolitics, India, inflation, Interest-rate policy, investment strategy, natural gas, public policy, russia, Turkey, volatility

While most of Europe and the United States suffer sweltering heat, darkening economic skies and bitter winter of discontent are looming. Threats to the world economy are chilling. Rising interest rates are slowing activity for discretionary spending while rising prices for nondiscretionary spending are also slowing economic activity. It would be miraculous if the compounding of both effects would not lead to a recession in both Europe and the US. China’s growth has stalled. The Ukraine conflict will resolve itself to the West’s dramatic disadvantage and the West seems to be willing to let it happen – much to each economy’s long-term disadvantage. Don’t count on anything miraculous.

Hope Over Experience

Jul 1, 2022Nicholas MitsakosArticle, Investment Strategy, Public Policy, The MarketFed policy, inflation, interest rates, investment strategy, public policy, the Fed, volatility

The Fed’s latest projection was for annual inflation to fall from over 5% at the end of 2022 to about 2.5% by the end of 2023. At this point, we’re not taking the Fed’s projections seriously, and for good reason. They were spectacularly wrong when a depth of understanding and insight into critical future events was essential. In other words, the understanding of how the economy works, the Fed’s ability to predict the effects of economic shocks, and its policy actions have gotten no better over the last 50 years. More specifically, price stability doesn’t seem to be coming anytime soon because people simply don’t think it will. If we look at the combination of rising wages and inflation expectations for both consumers and businesses, it is these expectations that drive inflationary pressures more than central bank policy. Inflation levels will be stickier than first theorized by the Fed, and the time to resolution is likely longer. Expect more “surprises” that will be no surprise.

Folly and the Fed

Mar 21, 2022Nicholas MitsakosArticle, Book Chapter, Investment Strategy, Public Policyeconomic growth, economic policy, inflation, interest rates, investment strategy, prediction, public policy, recession, risk, volatility

The average prices of food and fuel rose more than 16% in February from a year earlier and are expected to rise further by the war in Ukraine. Consumers are paying much more for meat, bread, milk, shelter, gas, and utilities. Only a small amount of food consumed in the U.S. is imported, and most of that is from Mexico and Canada. But Russia provides 15% of the world’s fertilizer and other agricultural chemicals that are now in short supply as planting season approaches. Wheat futures are up 29% since Feb. 25 and corn is up 15%. There is no shortage of wheat in the U.S., but global supply was the tightest in 14 years before the conflict, and dramatic shortages and price spikes are expected. What data is the Fed looking at, and how is it assessing inflationary risks? It’s hard to feel confident that the right hands are on the wheel because the combination of extraordinary factors, such as extremely tight labor markets and wage inflation (at over 6% annually and accelerating) showed inflation was already a significant risk. Yet interest rates were left unaltered. This is even before the crisis in Ukraine. The Fed should do whatever is necessary with interest rates to bring down inflation, including movements of more than a quarter-point, and a rapid reduction of its balance sheet. It also means recognizing that unemployment is likely to rise over the next couple of years. Paul Volcker would not have had to take extraordinary steps, driving the economy into a recession to crush runaway inflation, if his predecessors had not lost their focus on inflation. To avoid stagflation and the associated loss of public confidence in our economy today, the Fed has to do more than merely adjust its policy dials — it will have to head in a dramatically different direction.

It’s Already World War III

Mar 11, 2022Nicholas MitsakosBlog, Public Policy, The Marketpublic policy, risk, volatility

China will strengthen its position via Russia. Now the United States has to assert itself as a global leader not only in the allocation of financial resources and trade but, in dealing with a nuclear-armed tyrant and a totalitarian regime on a global stage.

what did we learn?

Dec 28, 2021Nicholas MitsakosInvestment Strategy, Prediction, Public Policyinnovation, investment strategy, public policy, risk, technology, volatility

What did we learn this year? Well, not too much. Observing is not learning. Acting is. But we’re not going to do that. A call for action is sufficient, as long as someone else does it. That much we’ve learned. Pandemic Time What used to take several years now takes a fraction of that –…

Stupidity and Misery by Another Name

Nov 21, 2021Nicholas MitsakosBook Chapter, Investment Strategy, Public Policycapitalism, competition, industrial policy, investment strategy, investments, market, misery, NIA, public policy, risk, socialism, stupidity, volatility

A National Investment Authority, an idea gaining traction among the administration, would be responsible for “devising, financing, and executing a long-term national strategy of economic development and reconstruction.”

This is not the job of a government; this is the role of the free market. The market does this quite well, and government does this quite poorly. An NIA is another way to bring misery and inefficiency.

Policy reflective of central planning, socialism, or industrial policy brings misery to all. This discredited philosophy that tortured so many in Eastern Europe and Soviet Russia seems to be getting more traction today bewilderingly. It leads to nothing more than bureaucratic idiocy, waste, and disregard for any consumer needs.

When up is down

Nov 16, 2021Nicholas MitsakosInflation, Investment Strategy, Public Policy, The Marketinvestment strategy, investments, public policy, risk, valuation, volatility

Investors expected that the Fed would not only end its bond buying program, but many believed it would also raise interest rates. While the Fed did agree to taper its bond buying, essentially decreasing its $150 billion monthly bond buying program by $15 billion per month, ending the program in 2022. However, the Fed kept interest rates the same and clearly signaled that it would not raise interest rates anytime soon, and almost definitely not until the taper of its bond buying was completed – in other words, not for at least one more year.

Investors who had been betting on the Fed raising interest rates wagered on the yield curve flattening for Treasuries. Therefore, they invested in short-term Treasuries believing those would outperform longer-term Treasuries, as well as 10-year and 30-year bonds. Instead, we are seeing the opposite happen. Short-term bonds are dropping in price and yields are approaching their highest levels since March 2020. Meanwhile, prices for long-term bonds have climbed. This same phenomenon is happening for government bonds that only in the United States, but also in the UK, Canada, and elsewhere.

Lessons on inflation

Nov 6, 2021Nicholas MitsakosBook Chapter, Inflation, Investment Strategy, Public Policycentral banks, corruption, fiscal policy, government policy, inflation, investments, irresponsibility, risk, valuation, volatility

Central bank independence and fiscal responsibility matter, even though the Western world is acting as if these rules no longer apply. Well, perhaps. But the world has given us three examples where the consequences are extreme when these basic foundations of economic policy are ignored or violated.

Decentralized Finance and Central Governments

Sep 17, 2021Nicholas MitsakosAdvanced Technology, Book Chapter, Investment Strategy, Public PolicyBitcoin, central bank, central bank policy, central government, decentralized finance, govcoins, investment strategy, investments, public policy, stablecoins, technology, valuation, volatility

Decentralized finance (DeFi) can disrupt global finance – but only if Defi systems and central governments cooperate. Yes, sworn enemies cooperating for the greater good.

While each seems to be the sworn enemy of the other, ultimately, a cooperative relationship between decentralized and efficient (versus anachronistic and cumbersome) financial infrastructure and government central banks with stable currencies is absolutely necessary.
Defi transactions, to scale globally, require stable and predictable value. Government-issued currencies are the only reliable and foreseeable foundation. Cryptocurrencies, such as Bitcoin were never currencies. They are a sideshow that will remain a speculative asset, and increasingly unimportant.

Cryptocurrencies represent an architectural shift in how financial infrastructure and technology interact, and therefore, it is disrupting how the financial industry works globally. It is neither a new kind of money system nor a danger to economic stability. It is more important than that.

Nicholas Mitsakos

Executive, Entrepreneur, and Author