“Increased borrowing must be matched by increased ability to repay. Otherwise, we aren’t expanding the economy – we’re merely puffing it up.” – Henry Alexander of Morgan Guaranty Trust
The original Potemkin Village dates to the late 1700s. At that time, Russian Governor Grigory Aleksandrovich Potemkin constructed facades to hide the poor condition of his town from Empress Catherine II.
Since then, Potemkin Village represents a false construct, physical or narrative, created to hide the actual situation.
As the pandemic ravaged the economy, the Federal Reserve, White House, and Congress went to work and built a Potemkin economy around the ailing economy.
As a result, the curb appeal of today’s economic recovery is beautiful. However, when our clients’ wealth is at stake, we understand looks can be deceiving. As such, we prefer to open the front door and explore the real economy. In the long run, it is sustainable economic growth that supports asset prices. In the short run, however, investors may continue to be mesmerized by the Potemkin economy. At some point, any differences between the Potemkin economy and the actual economy will become problematic for investors.
Selling A Narrative
Narratives of a booming economic recovery can only mislead the public and investors for so long. Toss in robust economic data, and the façade seems awfully real.
Consider the following:
Nominal GDP is now 4.5% above the high-water mark set pre-pandemic. Historically, economic recoveries do not get more “V-shaped!”
Retail Sales are running about 12% above its trend of the last ten years. The premium represents nearly five years of growth at the prior trend.
CPI and Core CPI (excluding food and energy) are nearly triple their respective growth rates of the last five years.
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