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Macro Is The Only Thing The Government Has Gotten Better At

Thirteen years ago Hillary Clinton rallied her fellow democrats to support the Iraq war, and then she changed her mind, regretted her choice, and opposed the surge because the war was unwinnable for some reason. I thought that reason was the realization that it's easy to topple 3rd world governments but harder to rebuild them, especially in tribal, illiterate societies featuring a small but scary fraction of the population that's attracted to that whole martyrdom thing. But then why'd Hillary as Secretary of State push for regime change in Libya, and Syria?

Libya was a great success - "we came, we saw, he died". As did thousands more in the civil war that ensued.

Syria is a work in progress. "Assad must go" but he hasn't, and there's hundreds of thousands dead, and like in Libya there's a multi-sided civil war going on. But don't worry, among the groups fighting the Assad regime are, yes, ISIS, but also some moderate rebels, nice guys I'm sure, who we and our/Hillary's Sunni "allies" have been supporting with people, guns, and encouragement since 2011.

In the best case scenario where the moderate Jihadi's win out over the government and over their de-facto allies ISIS, what then?

American revolutionary Thomas Paine said "live free or die." And what do Sunni revolutionaries say?

"Christian's to Beirut, Alawites to the grave."

Assad's people are Alawites. And he has every reason to believe that if he loses then his people, a minority in Syria, can expect genocide.

Christian's to Beirut, Alawites to the grave, say the Sunnis. "Assad must go", says Hillary.

Throw in the fact that the Syrian government is supported by multiple powerful regional players, and what happened next was utterly predictable. Hundreds of thousands dead in an inconceivably brutal death match.

And yet, in the Republican primaries everyone but Rand Paul and Donald Trump talked as if the problem with US foreign policy is that it's too cautious!

You'd assume that Trump has spent the last months sharpening his foreign policy command, so that he can hammer home clearly and articulately the insanity I just described above. And yet he showed up to the first general election debate, if anything, less articulate than he was 6 months ago!

On most issues the US ruling class is blatantly stupider, and stubborner - more sentimental and idealistic and yet less moral - than they were 50 years ago. (Which is why I'll be voting for Trump despite his hilarious flaws.) The exceptions are few.

Macro is one of them.

From ~1800-1982 recoveries lasted 3-4 years on average. But since then we've had just three recessions: 1990, 2001, and 2008. The last four recoveries have lasted 8, 11, 7, and now 8 years and counting.

The transition to a lower frequency of recessions occurred in the early 1980's across the entire developed world, and coincided with a change in thinking about monetary policy, the details of which I won't get into right now.

The point is that when the intellectual climate in DC and at Harvard is this degenerate - nothing is more patriotic than rioting or disrespecting the flag! - it's easy to overlook the exceptions where genuine progress has been made. (Did you know that Australia, a far less diversified more shock prone economy than ours, hasn't had a recession in more than 30 years? Try explaining that with out invoking a capable central bank.)

What is the baseline probability of recession each year? Historically it was about 25%. Recently it's been about 12%.

Further, recent recessions had specific, unusual causes, i.e. the S&L crisis, the tech bust, and the housing bust. Many people identified these causes ahead of time as threats to the economy.

So it's not hard to imagine that in 2006-2007 the probability of recession was not 12% but something much higher than that.

On the other hand, if you can't identify any developing threat/shock, then it's not hard to imagine that the probability of recession in, say, 2017, is much less than 12%.

For some reason many people have trouble simultaneously believing that, a) growth will remain low, yet b) recessions will be infrequent. But that's the way things have been, and a good bet for how they'll remain.

And, gazing at the historical record, it is the frequency and severity of recessions more than the rate of growth, that influences stock valuations.

That makes sense to me. When dumb money considers whether to stash their paycheck in a bank or a mutual fund, what do they think about? They don't compute discount dividend models, wiggling r and g around to see what's justified in this new normal. They're influenced by what they can remember emotionally regretting. They remember that 2008 hurt but that was a long time ago, and for most of the population that brief period is the only time they can remember it hurting to own stocks.

Do stocks ever decline much in the absence of recession?

Mostly, no. Now, they could. Like, if we avoided recession in 2001, but growth slowed down, and then there were those accounting scandals, and starting P/E's were 40, and NASDAQ P/E's were 80, hell yes stocks could decline.

But from 20 P/E's, don't count on it.

When it comes to stocks I like price target ranges better than point targets. If I'm gonna short a stock, how wrong can I be? How high could it go?

Those holding lots of cash hoping to re-deploy into a bear market need to think along similar lines, and I don't see how they can rule out the possibility that there are no significant declines for a much longer period of time than they're willing to wait.

People need to consider the possibility that we're living in a world where the only thing Western governments (excepting the constrained EU and ECB) do better than their forbearers is macro.

Central Banks are possibly the least democratic institution we've got. Isn't that interesting?