Good morning! We are slowly coming out of the worst economic disaster of our generation. Record job losses, record contraction of economic activity.. and the Nasdaq is +4% on the year.
Truly amazing. However it was something I thought would happen many years ago. I've always said that the events of 2008/2009 and the unprecedented response by the FED opened the proverbial pandoras box. The FED from that point on, will and has done everything to keep asset prices aloft. To provide support. To keep money cheap. I mused that the next recession might trigger higher stock prices not lower... and that is exactly what we got.
With the Nasdaq near new all time record highs amid the worst economic disaster in modern history - I wrote this is in 2018 --->> $SPY $QQQ https://t.co/JxGbWHpOq6 pic.twitter.com/NRFp8WW0fE
— UPBOptionMil (@UPBOptionMil) May 20, 2020
And let's face it... if the FED was tightening, if they were reigning in liquidity, would stocks really be heading higher? At the end of the day stocks go up when money is coming out of the spigot . I don't care what p/e a company has, if money is expensive... so are stocks. If money is cheap.. so are stocks. And that is how its worked since 2009. The FED has and continues to make money cheap.
In 2008/2009 the bailouts were in the billions... in 2020 the bailouts are in the trillions.. and they are still coming. The amount of money thrown at this Virus has been mind boggling. And its not just the FED, the Government is on a borrow and spend binge handing out thousands of $$ to each American, expanding unemployment benefits to such an extreme that people are earning more sitting home doing nothing, than going to work.
The FED has gone out and started buying Bond ETFs. The next recession could see them buying Stock ETFs. Why not? The Pandoras box was opened in 2008/2009, asset prices can not and will not be allowed to fall?
However there has been one constant since 2008/2009 that has made all this possible. There has been one thing that has been working in the FEDs favor all these years. All the historic low interest rates, an unprecedented actions have done little to stoke inflation. Actually it has been the other way around.
Inflation has not been a concern since the financial crisis in 2008. The FED has been more concerned about deflation or even the dreaded stagflation. Inflation? Not so much, unless you are someone who needs to pay for medical care, or secondary education.
I think this Virus, and the actions from the FED and our Government to prevent an even Greater Depression, will finally stoke that inflation so many have been looking for the last 10+ years.
Inflation isn't such a bad thing right?
I'm pretty sure we are going to find out.
Right now the FED and our government are making Trillions of $$$ look like nothing. The FED is by no means out of fire power. They have that unlimited credit card I've talked about so many times.
But at some point all this massive expansion of debt has to have a cost right? There are credit rating agencies... no?
I've always said that low interest rates are a boon for companies large and small. AS long as rates remain low the serviceability of their debt is not an issue.
And then this Virus comes... low interest rates don't mean anything when you have zero revenue to pay your debt. But then the government steps in with forgivable loans to keep these companies alive through this Virus. Kudos. I have no problem with that.
But what if we come out of this on the other side with interest rates on the rise? Is that even possible? I think we are going to find out.
Interest rates on loans are determined by risk... right? In theory that is how it is supposed to work. Remember leading up to the financial crisis the issue was mortgages and securities backed by those mortgages were deemed low risk and treated as such, when it fact these mortgages were given out to people who had no business getting a giant mortgage. They were high risk individuals. The debt was high risk!
Low interest rates mask risk. I think the market is discounting the risk on the other side of this Virus. How many large and small companies coming into 2020 were prepared for a complete two month shutdown? How many of these companies were a week or two of zero revenue away from closing their doors?
How many of these companies were preparing for a new normal like the restaurants with 50% less customers?
How many of these companies can survive coming out of this Virus? How many can deal with the additional costs of keeping their employees safe?
What do I see happening? I see this Virus creating that long awaited inflation through shortages and the trillions of $$$ thrown at this virus equating to more money chasing assets than ever before. Demand > Supply. I see over the longer term risk starting to get priced back into the debt market, which means higher interest rates. I see the massive expansion of DEBT in the U.S. triggering another rating review by the credit agencies ala 2011. And I see this ultimately leading to cheap money becoming less cheap.
I said there would be many moons when we got the first signal to sell. I think that first moon is here. We got the most massive negative jobs print ever. Imagine that. I was waiting for the Jobs number to go negative, and not only did it go negative... it went historically negative. On this chart The 2008/2009 jobs losses look like a pimple on Saturn compared to what we've seen this year. The jobs report is a blaring in your face signal!
And so... this is what I was looking for year ago as one sign the time to sell was coming...
This most recent stock market recovery is a gift. And I think there is a good chance it keeps giving. Perhaps even new all time record highs on the NASDAQ and even the S&P500?
You would think trillions upon trillions of $$$ being borrowed and spent... you almost think we have to keep going higher. Or even... why aren't we there already?
But when this sugar high wears off....I think the set-up the next few years is for slow or even negative growth. Higher cost of capital. And ultimately down the road a real recession. Not a virus induced one. This wasn't a recession. It was a historic, once in a lifetime economic calamity. And it was met with more money than the world has ever seen. Rightfully so. I don't argue against the response. The depression has been averted.
But is the cure for this Virus worse than the Virus itself? I think we are going to find out.
Corporations are using the FED's entrance into the junk bond market to issue and raise as much debt/money as possible through debt and share offerings.
One of the primary reasons this market rallied from 2009 to 2020 is because the corporations were loving themselves every day. They were buying back stock hand over fist.
They were looking in the mirror everyday and no matter what was going on outside, they were liked what they saw.
Now sharebuybacks are being halted and corporations are raiseing capital through equity offerings. It's the offering Virus of 2020 and it currently has no cure....
We were already starting to roll over into 2020.
I think this will continue in the months ahead.
Look how the buybacks have taken the supply out of the market.
Listen... I've been bullish on this market since late 2009. It took me a while to get bullish after we began to rally in 2009. At the same time it took the FED many moons to get their ZIRP, QE, and 4 letter asset price protection schemes going. This time around they went to zero and launched the biggest asset price protection scheme the world has ever seen.
If there are no consequences to trillions upon trillions of fresh capital.... then why not do this every year forever... If there is no cost to our government handing out thousands of dollars to every American... to increasing unemployment benefits so people make more staying home than going to work... why not just keep doing it. If there is no adverse side affects to the FED buying junk bonds.. than why not have the FED buy everything.. forever?
Things are always clearer after the fact. Perhaps there will be no pull backs for the stock market again. Perhaps the trillions upon trillions upon trillions of debt will trigger a global paradise of love and peace where stock market highs never stop and everyone gets a first place trophy mailed to their homes every month....I don't know what that means but I felt like I had to write that.....
You can kind of see where we are now for the stock market. We are in the internet bubble phase. The 20 million out of work are buying stocks
. Debt is surging. All is good. I think the next phase is the housing bubble phase. And we are already starting to see that. Housing is surging.
and what is after the housing bubble phase? I think we are close to finding that out.
Crazy! So we are getting a mini-internet bubble and housing bubble all in one! How perfect is that?
I've been bullish on this market for a long time. Even as the virus hit I thought we'd rally big. And we have. I thought at the height of the virus that we'd come back and hit new all time record highs.... man are we close.
And I think the trillions upon trillions of $$$$ being thrown at this virus will create a DEMAND > SUPPLY scenario among a host of other things.
The corporate debt levels that many thought were a bubble years ago are going beyond that stage.
The proverbial... this won't end well?
Ironically enough those uber stock market bears got the most dire economic scenario the world has ever seen. I'm sure in their wildest dreams, as they were calling for a stock market crash every year since 2010, they could not have crafted a more sinister stock market collapse scenario than the one we just saw.
We get all that... and then some... and the NASDAQ is up nearly 5% on the year.
The great thing is... for those of us who missed the move lower... I think we are going to get another chance. I don't know exactly when.. it may even come from new all time record highs. But I think its coming and its going to send the S&P500 well below the March lows. And I think the only thing that is going to stop the downside during the next fall will be the FED buying stocks starting with the $SPY. Yes it's coming.
Enjoy your long weekend!!!