Here we are again.
Indexes are still hovering around their all-time highs and Fed Chairman Powell is speaking to Congress. What is he going to say? What can he possibly say to make you believe that the stocks you are massively over-paying for now are going to be even more massively over-paid for by the next sucker down the road? How much money will they have to pour into the system to maintain this farce? Will there ever be consequences or were we just being silly for the past 245 years having a budget?
Money can just be printed when you need it. No matter what you want to spend, you just print more and buy whatever you need, right? That's our current fiscal policy and, as we noted yesterday, the Fed is responsible for most of it and yes, we need the stimulus and we need the liquidity BUT THERE IS A COST – and we haven't even been considering it.
Since the financial crisis, the Fed has kept the cost of borrowing money for banks at near-zero percent interest. That allowed those banks to borrow money to buy their own stock (as did many corporations) to inflate their value but not, of course, the value of their service to Main Street. When money is cheap because interest rates are low or near zero, the beneficiaries are those with the most direct access to it. That means, of course, that the biggest banks, members of the Fed since its inception, get the largest chunks of fabricated money and pay the least amount of interest for it.
Let’s recall that on September 15, 2008, Lehman Brothers crashed. That bank had been around for more than 150 years. Its collapse was a key catalyst in a spiral of disaster that nearly decimated the World financial system. It wasn’t the bankruptcy that did it, however, but the massive amount of money the surviving banks had already lent Lehman to buy the toxic assets they had created. In the wake of Lehman’s bankruptcy, $16 trillion in bailouts and other subsidies from the Federal Reserve and Congress were offered mostly to Wall Street’s biggest banks. That flow of money allowed them to return from the edge of financial disaster.
This is year 13 of money-printing. 35 year-old traders have never been in a market where the rates were not near zero and the Fed bought all the bonds that came up for auction. In 2007 we were testing Dow 15,000 and now we're over 30,000, even though our GDP is "only" $20Tn, up less than 50% from $14.5Tn in 2007. Mathematically, that simply does not make sense, does it? How can the global economy only be up 50% but the price of stocks is up 100%? Doesn't that indicated stocks are due for a 25% correction? Or maybe the GDP will pop 33% instead – yeah, let's be optimists, right?
That, unfortunately, is what is now baked into the cake and that means that anything that takes away from that fantasy is now going to be considered a tragedy – especially since so many people already paid prices as if the 33% jump in our economy already occurred. Since adding $6Tn to our GDP took 13 years of non-stop borrowing, easing and spending by our Government, even at the current pace, we have another 13 years ahead of us to grow into this valuation. That's what the bulls are paying for.
It's still a stock-pickers market and of course there are individual companies that are fairly-priced and should increase their earnings down the road but the broad market is at the edge of a very big cliff and only needs a very small push to send it tumbling down 25%, back to Dow 23,500, S&P 2,850, Nasdaq 10,000 and Russell 1,680.
Please, PLEASE make sure you have hedges and make sure you have plenty of CASH!!! on the sidelines. It's been a very exciting ride but it will come to an end at some point and it would be crazy to give up the gains we've made in the past year, wouldn't it?
- Key Short-Term Bond Spread Hits Lowest Level in Nearly a Year
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- Companies Put the Best Face on Covid-19’s Financial Impact
- Consumer Demand Snaps Back. Factories Can’t Keep Up.
- Questions for Chairman Powell