What are the Dots I hope to connect?
The short answer is that they are the signposts and policies that help us see where we are in the cycle.
The cycle is the pendulum swing between generally building or retaining income as a society, and spending or extracting previously retained income (wealth).
Among the economic and market signposts, I include inflation/deflation of various sorts, interest rates, yield curve slope, GDP growth rate change, financial leverage, credit spreads, volatility, financial transaction volume, unemployment, balance of trade, deficit spending, construction, shipping, trucking and rail volume, and consumer confidence.
If that list isn’t long enough, I’ll also be looking at tax policy, Federal Reserve action, credit tightening/loosening, financial institution debt issuance (contrasted with business, government and household debt), and fiscal policy, all while cutting through the noise screen put up by the politicians and “news” spinners as they try to disguise or justify their actions.
As a time frame, I see post World War II America as having built and retained income for the decades from the late 1940’s through the late 1970’s, and then stripping out that wealth from the 1980’s through the 2008 meltdown.
Along the way, the trends were never perfectly moving in one direction or the other. Some economic activities and policies did move the entire country toward the borrow-and-spend side of the balance, or toward the save-and-invest side.
My personal economic history really began in the 1960’s, and I became involved with markets in the 1970’s. I achieved “insider” status in the 1980’s, when I helped define the structured finance revolution.
Almost from the day I started on Wall Street there were those that condemned our activities, and those that thought we were saving the world. Neither was true, of course. We were simply responding to the policies that rewarded us.
I can say without reservation that taxing investment income at half the rate of earned income (1981 Tax Act) was probably the largest single factor in shifting America’s economy from an “earn and reinvest” economy to a “trade and monetize existing wealth” economy.
In simple terms, we shifted from building wealth to stripping assets. I see the last three decades as a long binge of cash-out refi’s, which came to a bad end when it was overdone.