The Stock Market Has Never Been More Overvalued
wsj.com
wsj.com
No logic?? The fed has been spending like its no tomorrow and rates are effectively at zero. Investors have correctly realized there's a large backstop to how much the market can fall. If we see another crash, I wouldn't even be surprised if the Fed starts buying stock.
Until the pandemic has passed, rates will stay at zero and the fed will keep buying back bonds. This might increase real inflation (I kind of doubt it, inflation seems to stay low no matter what the Fed does), but it definitely has/will lead to asset inflation.
Even so, I think investors are still worried about short-term crashes that could easily evaporate 10-20% of the recent gains. This is why everyone has been piling into tech stocks, as they represent a "safe" sector in which the downside risk is limited by strong revenue and a great strategic position during the pandemic.
Commodity pricing is also affected by varying political, social and technological environments. And from my own personal observance of the economy we are in a more biflationary period. This would be evident by the stagnant pricing of oil and the high prices of certain real estate, property and stocks.
This is also evident with the knocking off of Exxon from the Dow Jones stock exchange.
The Fed’s data indicates that since the 2008 recession, the exchange of money from one party to another has decreased, only to tank in 2020 [1].
Despite the money supply being increased like no tomorrow, if it’s not getting spent and is just sitting in savings accounts the economy wouldn’t get stimulated. This would imply current wage stagnation and the cost of goods not increasing aside from real estate and college tuition. I would think that maybe the S&P 500 has probably also turned into a savings account for some since the ROÍ on any other investment is lousy.
"If we build a 350kph train from Los Angeles to Phoenix, people will ride it" or "If we build 30,000 slapdash condos in a modern-day Brasilia, people will want to live there" is not really that much different from "If build an app for people to sub-lease their spare kitchen cupboard space to strangers, they'll watch advertisements to gain access."
The nice thing is that tangible-world speculation has a lower downside potential, because you're actually building something that has real-world utility to anchor its value. The ghost city might have to mark down their apartments until they finally find a selling price, but it's probably not going to be zero. The bullet train can fit into a larger economic development scheme, or worst case be cut up for scrap steel. In the process, you probably created a nice long cycle of blue-collar jobs, and worst case, you exit by selling out at 25 cents on the dollar.
When they turn out the lights at a random "tech startup" for the last time, you've distilled a few million investor dollars into a few unloved snippets of code released to the dark corridors of Github, a handful of obsolete MacBooks, and ugly trade-show gift items. There's nothing left to flog to get your money back because there was nothing there of real-world value in the first place.
I feel like this could be a welcoming alternative for some more cautious money-- risk-tolerant but not completely gambling. You know you're not going to get a "call up AWS and order more severs" growth moment, but you're not going to completely lose your shirt, and if it's done with competent people, the process is slow and relatively surprise-free.
While e-commerce data does show that people are indeed spending and there are some pockets of increased spending, it doesn't seem like it nearly matches pre-COVID levels. I think people do want to spend their savings, but because of public health fears there's not much to spend it on.
Also real or physical assets such as real estate in proper areas are good investments, real estate in specific regions are going through the roof! This is also due to low interest rates from the fed as well as low supply of property and high demand in specific areas of the country.
The real question is how are commercial real estate investments and banks going to be able to absorb or handle these financial hits when small businesses can’t pay rents or when big corporations have their employees work from home and realize it’s more economical for them to work from home and no longer need office buildings?
I guess the Fed will just bail them out as well.
It's also worth realizing that finance is very global. If the whole world of reasonable investments were not also in countries with zero rates, there would be a huge painful exodus from the US market now. The fed is very wary of this and it's what has kept the rates nominally above zero.
Some smart volker-like creature will raise rates somewhere. That place will become a great place to live and invest. It just hasn't emerged.