The boom of 2021

Preface: Explaining our market timing models
We maintain several market timing models, each with differing time horizons. The “Ultimate Market Timing Model” is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, “Is the trend in the global economy expansion (bullish) or contraction (bearish)?”

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don’t buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

The latest signals of each model are as follows:

• Ultimate market timing model: Sell equities*
• Trend Model signal: Neutral*
• Trading model: Bearish*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.

The Great MMT Experiment of 2021
As I watched last week`s CNBC interview with Stephanie Kelton, I became increasingly convinced that 2021 could see a great experiment in MMT. In that case, the market hiccup of late 1998 could serve as a template for the recent hiccup of late 2018. In that case, the best is yet to come!

Stephanie Kelton is one of the leading academic proponents of Modern Monetary Theory (MMT). I wrote about MMT before, so I won’t repeat myself (see Peering into 2020 and beyond). MMT postulates that a government which borrows in its own currency is only constrained by the inflationary effects of excessive debt, and until it hits that point, a government does not have to worry about deficits (for further background, see this Barron’s interview with Stephanie Kelton).

There are a number of myths about MMT. It does not mean that deficits doesn’t matter, deficits don’t matter until the bond market decides it matters. There is no free lunch. It does not mean that government doesn’t have to tax. Taxes are and remain a tool of fiscal policy. It is not Keynesian economics. Keynes believed that governments should try run deficits in bad times and surpluses in good times. MMT says that debt, by itself, is not a constraining factor.

With that introduction, I can sketch out a scenario in which MMT becomes the dominant ideology after the 2020 election, which could unleash a powerful fiscal stimulus on the American economy for the following reasons:

• The rise of millennial political power;
• A growing acceptance of government debt; and
• Stimulus will occur, regardless of who wins the 2020 election.

Fiscal stimulus will be reflationary and equity bullish. I have no idea if the implementation of MMT will be a boon, or if Kelton will become the Arthur Laffer of the Left. The bill will be payable much later. In the meantime, investors should be prepared to party. If the results were to turn out to be catastrophic, investors can then opportunistically position themselves to profit from the cleanup.

The full post can be found here.