Why Everyone Keeps Misreading The New Macro Regime | Ben Kizemchuk

This episode reveals a new macro regime where fiscal policy has supplanted monetary policy, creating a "stock market economy" where government spending and passive flows structurally favor technology and fixed-supply assets.

Introduction to a New Macro Thinker

Ben Kizemchuk, a portfolio manager at Wellington Altus, introduces himself as a practitioner who grew up in the wealth management world. He notes his focus on US markets is essential for any Canadian manager due to its global influence. Kizemchuk highlights a recent trend: an influx of clients from the crypto space seeking to de-risk significant profits. He observes that this cohort has an intuitive grasp of the major regime shift occurring in macroeconomics, correctly identifying that old models—like the yield curve inversion predicting a recession—have failed to capture the current reality.

The 4Fs Framework: A New Lens for a New Era

Kizemchuk argues that the global economy is in a transitional phase, moving away from industrial and knowledge-based capitalism but not yet fully in a post-scarcity AI economy. To explain this unique period, he introduces his 4Fs Framework, which describes the unprecedented simultaneous occurrence of four key forces:

• Fiscal Dominance: Government spending becoming the primary driver of the economy.
• Financial Repression: Policies designed to manage government debt and reduce volatility.
• Passive Flows: The automated, systematic investment of capital into index-tracking products.
• Fiat Money: The underlying monetary system that makes the other three forces possible.

Kizemchuk emphasizes that while these concepts have existed independently, their convergence in the US is historically and geographically unique, creating a transformative economic environment.

Fiscal Dominance: Government Spending as the Economic Engine

Kizemchuk defines Fiscal Dominance as the point where government fiscal policy becomes more impactful than central bank monetary policy. He argues this shift began after the 2008 Global Financial Crisis (GFC), not in 2020, as government spending became an integral part of GDP. What was once considered emergency spending (around 25% of GDP) is now the baseline.

This dominance was proven in 2022 when the Federal Reserve's aggressive rate hikes failed to trigger a recession. Instead, higher rates increased the interest payments flowing from the US Treasury to the private sector (corporations, individuals, pension funds), which then spent or invested that income, creating an economic expansion.

“What was supposed to be an economic contraction turned into an economic expansion. And so that's where now this fiscal component becomes dominant.”

Kizemchuk notes this is an "accidental" form of fiscal dominance, unlike the explicit Treasury-Fed Accord during World War II, where the Fed agreed to keep rates low to fund the war effort.

Financial Repression: Engineering Stability and Suppressing Volatility

While Kizemchuk personally believes financial repression isn't necessary, he explains that policymakers who view high debt-to-GDP ratios as a threat are implementing it to manage debt and reduce economic volatility. Financial Repression involves policies that channel capital into government debt and keep interest rates below the rate of nominal growth.

Key mechanisms being employed include:

• Stablecoins: Encouraging stablecoins to be backed by US Treasuries creates a new, captive buyer for government debt. Kizemchuk notes projections for stablecoin growth range from $2 trillion to $3 trillion.
• Bank Lending Incentives: Removing the Supplementary Leverage Ratio (SLR)—a post-GFC rule limiting bank lending—could unlock hundreds of billions in new credit creation.
• Soft Yield Curve Control: Instead of direct bond buying, the Fed may be using its Standing Repo Facility. This tool allows primary dealers to buy Treasury bills at auction and immediately pledge them for cash, effectively moving them onto the Fed's balance sheet and creating a soft peg for short-term rates.

The strategic goal is to create a stable spread between pegged interest rates (e.g., 4.25%) and nominal economic growth (e.g., 5%), providing a low-volatility environment where the private sector can profitably borrow and invest.

Fiat Money: The Unconstrained Foundation

Kizemchuk asserts that the entire 4Fs framework is built on the foundation of fiat money. In a fiat system, where a government is the monopoly issuer of its currency, there is no hard limit to the amount of debt it can sustain. Unlike a gold-backed system, the government can always create more money to pay its debts.

This fundamentally changes the nature of interest rates and recessions:

• Interest Rates as Policy: US Treasury rates are not set by supply and demand but are a policy tool managed by the Fed. The government can never be forced into default by the bond market.
• Recessions as a Policy Choice: Since the government can always create money to stimulate the economy, choosing not to do so (and allowing a recession) becomes a political decision, not an economic inevitability. This explains the dramatic reduction in recession frequency and duration since the US left the gold standard in 1971.

This structure allows government spending to provide a stable foundation for the economy, which in turn encourages private sector credit creation, leading to a "dual-engine economy."

Passive Flows: The Automated Capital Allocation Machine

The final "F," Passive Flows, describes the structural shift toward automated, index-based investing, primarily through retirement accounts like 401(k)s. This system channels a continuous flow of capital into the largest public companies, weighted by market cap.

This creates a powerful feedback loop:

• Government spending boosts corporate profits and wages.
• Wages are automatically invested into index funds via 401(k)s.
• This capital disproportionately flows into the largest companies (like the "Magnificent Seven"), increasing their market caps and attracting even more passive investment.

Kizemchuk argues this has created a class of "quasi-sovereign" companies that are deeply integrated into the state apparatus, acting as conduits for government spending (e.g., SpaceX for space exploration). He views this as finance having already achieved a form of autonomous capital deployment, a precursor to a broader AI-driven economy. He dismisses concerns about high valuations, suggesting that P/E ratios are structurally higher in this regime and that these mega-cap companies are becoming a new form of "risk-free" asset.

The Synthesis: The Stock Market Economy

When all four forces combine, Kizemchuk argues they create the "Stock Market Economy," a new paradigm where the stock market and the real economy are no longer separate but are instantaneously intertwined. Financial wealth itself is becoming a public utility, with ownership expanding from 30% of households in the 1980s to over 60% today.

This sets the stage for a future AI economy. If labor becomes less necessary, this system of ubiquitous capital ownership could be used to distribute income, ensuring money continues to circulate. The government could acquire stakes in major companies and redistribute the income to all citizens who own a share of this "national wealth," providing a foundation for a post-labor society.

Strategic Implications for Investors

Based on his framework, Kizemchuk outlines a clear investment thesis:

• Favor Stocks Over Bonds: In a world of financial repression and persistent inflation (which he sees converging around 3.5%), government bonds are unattractive. He has not held fixed income since 2021.
• Focus on Technology and Fixed-Supply Assets: His rules-based, trend-following approach identifies technology (e.g., NASDAQ 100) as a primary beneficiary of this regime.
• Acknowledge Gold and Crypto: Assets with a fixed supply, like gold and crypto, are deserving of attention in an environment of unconstrained fiat money creation.

He stresses that his strategy is to let the market tell the story—using a systematic process to identify trends and then building a narrative to explain them, rather than imposing a preconceived view on the market.

Conclusion

This episode outlines a structural shift where fiscal dominance and passive flows have created a self-reinforcing "stock market economy." For investors and researchers, this means old recession indicators are obsolete, and the primary drivers of returns are now government spending and automated capital flows, structurally favoring mega-cap tech and fixed-supply assets.