I haven’t written squat about the market in a very long while. That hasn’t stopped friends, mostly friends, not always friends, from pointing out how wrong my view of the market has been. The stock market that is.
I admit it. I panicked in March and sold some stuff. I never did embrace the things that rallied afterwards. And only now am I thinking about buying things that I don’t understand or comprehend other than to see the price action that’s left me behind. That will mark the market peak, trust me on that.
I’ve got one friend in particular who abrades me on how the stock market is looking forward to explain the price activity I don’t understand like Tesla being up 740% in 2020. “The economy’s going to rebound hugely, he tells me, they’re throwing money at it, free money!”
There is no such thing as free money unless it’s like the Mercury Head dime I found on Woodside Ave a couple of years ago.
To wit, let me show you why I think stocks are up. Note they are not all good reasons.
This chart shows you the Fed’s Balance Sheet. These are the assets the Fed BUYS for various technical reasons but since 2008 has been to shore up the economy. When the Fed buys Treasuries and mortgages from the market, they help drive interest rates lower and simultaneously provide cash to the world. In theory, that cash is spent on such things as bank lending to businesses, business investing in new plants, equipment and training, plus overall consumption.
The overlay is that balance sheet with stocks. Note both the correlation and magnitude of the Fed’s buying; it never stopped even as the economy was growing. Why? Slo-mo growth, low inflation, political pressures all come to mine. But the point is that this cash has to a very high degree been spent on stocks, not on investment, not on consumption and it worries me just how dependent the stock market is on this money machine. In the olden days, it was economic growth, profit growth, that fueled the stock market.
Get that? The Fed’s buying of assets that would normally be held by private entities has lowered interest rates dramatically even though inflation has not fallen that much. What a pain for smart savers like me. In addition to buying securities the Fed has set the short-term lending rate near zero at 9 bp. OMG. The funds rate has been aiding the systems since touching near 15 bp in 2009 and staying below 50 bp until Nov 2016.
And you would think, you would hope, that US corporations would take advantage of this largesse to expand. They did not, however. What they did was buy their own stock back, lifting the value of shares via artificially low interest rates SPONSORED BY THE GOVERNMENT. When Republicans cry about Democrat socialism, they miss that the wealth generated by the stock market — not economic growth — came from government spending and forced interest rates. In other words, US corporations have been the biggest buyer of the stock market in the last several years. It’s not supposed to be that way.
What happens when they stop buying? Will they have money left to actually invest in people and things? Dubious. Read on.
Here’s a picture of US Federal Debt as a % of GDP and outstanding amount of US corporate debt. First, you would think that a period of growth would be a time for the US government to borrow less, but no. The tax breaks of 2017 drove up the deficit as it fueled the stock market which is to say that Trump borrowed from the country’s future to buy stock-holding friends today. Why people think that’s a good thing I can’t fathom as that debt will have to be paid back and soon via higher taxes, less government spending, some way.
How will stock fare when Biden raises corporate taxes, as he should, as he must? How will corporations in the future be able to buy their own stock or invest give their extraordinary level of debt?
I heard a writer from The Atlantic, James Fallows, when asked to name something good that happened under Trump he cited the stock market. Fallows is smarter than that. I don’t think borrowing under my name, giving me the cash, and forgetting to tell me it has to be paid back a good thing. Do you?
