Jesse LiverUpside Down Markets - Understanding Fiscal and Monetary Policy

**Patrick O'Shaughnessy** (0:00)
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Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_2** (1:27)
Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
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**Patrick O'Shaughnessy** (1:53)
My guest today is Jesse Livermore. I've worked with Jesse as part of our research partners program at O'Shaughnessy Asset Management for years now. Whenever there is a huge, important, and complex issue to be studied, I believe he's among the best minds in the world to tackle it. He did that recently on the topic of what he calls upside down markets, which is the topic of this conversation. We seek to answer a simple question, against a horrible economic backdrop, how can the stock market still be near all time highs?
Jesse explains in detail the impact that fiscal policy has had on the market and may have in the future. Please enjoy this masterclass on upside down markets.
So Jesse, the topic of conversation today is a short book that you put out on what we're going to call upside down markets. I think the best place to begin would be with you explaining that term. What do you mean in this piece by an upside down market?

**Jesse Livermore** (2:43)
Thanks for having me back on and I'll go ahead and start. So in the piece, I use the term upside down market to refer to a market where the normal relationship between the broad economy and the stock market is somewhat inverted. So to give some perspective on what that means, normally we would think that an organically strong economy would correlate with a strong stock market. But in an upside down market, you get a situation where the organic strength could be a negative for the stock market and where organic weakness could be positive for the stock market. It's a situation where good news is bad news and bad news is good news. Now we're familiar with that, at least the beginnings of that kind of an idea in the context of monetary policy. Sometimes there might be a piece of bad information that comes out and the inference will be that it could be good news surprisingly because it could cause the Fed to lower interest rates and that could make equities more attractive as a growth asset.
The problem with that thinking is that monetary policy is limited in terms of its stimulative effects. If growth ends up being weak because of the bad news or because of the bad condition in the economy, that could offset the benefit of a lower interest rate or a lower discount rate applied to stocks. You would lose on the growth end what you gain on the discount rate end. Fiscal policy is what changes that equation because fiscal policy, unlike monetary policy, is very, very powerful and can really achieve any nominal growth outcome that it wants to achieve. An economy that needs fiscal stimulus can therefore end up with a stronger stock market, stronger than one that doesn't need fiscal stimulus. It's almost like you get the same growth either way, whether you're organically strong or whether you're organically weak. The difference is just whether you get the added benefit of stimulus to get you there. I think, where to give a crude example, you can just imagine a disease that you can get or not get and the disease has a cure.