Great Depression in a single tweet. 1920-1928 was a period of avg growth including 2 recessions. The stock market did 4x between 1921-1929(leveraged purchases). Valuations did not reflect economic reality. Fed hikes-stocks collapse-aggregate demand collapses & rest is, history. 
Fast Forward 100 years. Over past 9 years the SP500 was up 2.3X. US Real Economic growth avg 2% at same time. History doesn't repeat but does rhyme. Valuations didn't reflect economic reality and even after a brutal 2022, they still don't reflect reality.
So the question is why then is economy still not entered recession? Simple answer. Aggregate demand. Unemployment is low. Wages are rising. Consumers still spend because they have some confidence in the future. We haven't yet seen demand destruction. Sequencing matters.....
First shoe to drop. Unemployment rises above specific threshold. Aggregate demand drops. Wages fall. Inflation drops. Now here is the real catch-22 and ultimate point of this tweet. #Powell sounds insistent in hiking and holding rates/PAUSE despite economic slow-down. The problem
he has is that deflation is more problematic to deal with then inflation. As inflation slows due to demand destruction. Real rates become more & more positive. That in-turn creates a demand-shock, that in-turn begins process of deflating prices as suppliers compete for last buyer
Deflationary spiral is a confidence shock. The kind of shock that destroys wealth. Once wealth is destroyed, the cycle just feeds on itself and can only be rescued by large-scale intervention via fiscal/monetary policy.
So why am i telling you this? Because sequencing matters
So why am i telling you this? Because sequencing matters
Stock are overvalued relative to real-economy. The valuation of last 9 years was driven by #CentralBanks policy in combination with fiscal policy in last 2 years. That cycle is up and now in reverse. The #Fed is no fool when it comes to history. Heck they a smart bunch of folk
The reality? The Fed can only go so far. They do not control what comes next. They have always & wil always respond to economic outcomes. If unemployment starts to rise they will PAUSE. If there is a demand-shock they will PIVOT. If real-rates rise too high they will aggressively
slash rates to 0 and likely negative. If there is one lesson I have learnt about modern-day monetary economics? Throw the textbook out the door. Anything goes in the modern-era & the mandate is no longer price-stability but system-stability. #trading #traders #history
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