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After the V shaped recovery narrative seems to be panning out and reflation trades are all the rage we've moved on to Roaring 20s headlines in the Economist, Bloomberg Businessweek and Money Week. Predictions of a lasting global boom driven by post-pandemic animal spirts, re-building better, productivity gains from cloud etc., supportive fiscal and monetary policy, and so on. All of which could result in a multi year bull market.

 

How plausible is this prediction given we struggled to get much above 3% GDP growth pre-pandemic and we now have more debt than ever before and a lot of jobs are not coming back?  Obviously massive transfer payments can juice GDP figures considerably and show no signs of stopping and there will be even more spending with infrastructure programs up next. And there will be some pent up demand released this year resulting in higher consumption and investment.

 

But will the result of all of this be a much healthier and stronger growing economy or will we just revert to pre-COVID stagnant growth as soon as the fiscal and monetary stimulus starts to be tapered? And are we really going to achieve full employment or are we most likely heading towards being far more of a welfare state which if you look at Europe has never really been a source of a robust and fast growing economy.

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we've moved on to Roaring 20s headlines in the Economist, Bloomberg Businessweek and Money Week. Predictions of a lasting global boom driven by post-pandemic animal spirts, re-building better, productivity gains from cloud etc., supportive fiscal and monetary policy, and so on.  All of which could result in a multi year bull market.

 

How plausible is this prediction given we struggled to get much above 3% GDP growth pre-pandemic

 

The roaring 20s (like the roaring 1980s) were driven by very large cuts to top US marginal tax rates.  I bet none of those big name business/economics magazines mention that.

 

The top US Federal income tax rate fell from 77% at the start of the 20s down to 25% by 1925.  Coolidge is a very underrated US President.  (Reagan took it from 70% in 1980 down to 28% by 1986).

 

Since no one is talking about tax cuts and, in fact, a number of tax increases are being proposed by the new Administration, I don't think these 20s will be quite so roaring.

 

wabuffo

 

 

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What is super interesting today is we have so many significant experiments going on. Like QE. And governments spending like (almost) never before. At the same time we have significant one time things going on. Like a pandemic. And then a massive recovery. That is global.

 

And what are the linkages of all these significant events.

 

My base case is we get 12 months where economic growth surprises to the upside. But good luck predicting where we go from there. It depends on what happens to:

- virus - is it defeated? What does that look like?

- US economic growth - how fast does service sector bounce back? Travel?

- employment - how much does it bounce back? How fast?

- fed - what will they do as the economy heats up? Will they wait for markets to throw a tantrum before acting?

- interest rates - how fast and how high do they go?

- federal government - is an infrastructure bill passed? Higher corporate taxes?

- global economy - how fast does the global economy open up? Travel?

- debt - do debt levels matter? How much and how fast will they grow from here?

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Have they somehow forgotten that the Roaring Twenties ended in the Great Depression?

 

Yeah, if the stock market goes straight up the rest of the decade I'm selling everything in early 2029

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Have they somehow forgotten that the Roaring Twenties ended in the Great Depression?

Yeah, if the stock market goes straight up the rest of the decade I'm selling everything in early 2029

The 20s was a period when the decade started with a cyclically adjusted PE of 5 and ended at 30-35 (low and declining interest rate period).

Perhaps an unrealized aspect is the amount of real (and revolutionary) productivity enhancements that were happening: electrification, household appliances etc. The 20s (and the 30s) came with some noise (the type of noise JK Galbraith describes) but, with the initiation of consumer installment loans, the stage was slowly being set for the amazing inclusive growth that was to occur from 1945 to 1975.

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For the last few centuries, the first 1/3 of every century has had some kind of a boom. Obviously, different circumstances each time around, but they were all underpinned by crossing a tipping point, that resulted in a material 'go forward' change in how things were done. There is little reason to think that this time around will be much different.

 

Our own thoughts are a roaring post Covid recovery, a 'build-back' that uses blockchain in a big way, and a focus on ESG/sustainability; today's 'dirtiest' industries being amongst the biggest beneficiaries. For a time, lots of work &/or labour shortages and higher pay; then automation and a guaranteed minimum income (particularly for women). Great for a Canada where there aren't enough young people, devastating for a China or India with large young populations - without jobs.

 

Particularly beneficial for a Canada, where much of the economic drag is 'cemented' in old ideology (inter-provincial trade barriers); spanning everything from goods movement/production/taxation, through to immigration. Net positive, but a bumpy ride along the way.

 

SD

 

 

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