Is the market a bubble, or is it all different this time? That’s the million-dollar question. Not that there haven’t been enough bears out there, calling for an end to the evident exuberance and an imminent burst of what is an overshoot of investor behaviour. The Reddit revolution is yet another aspect that the skeptics are pointing to. How is it that an army of retail punter can bring mighty hedge funds to their knees by ganging up on them and putting lunch money to work from their basements?
As saner minds are saying, corrections will inevitably come, but crash there will be none any time soon. Let’s look at that scenario. One, how on earth else are investors employing funds except in the stock market? There is no value in any other asset class, least of all in bonds, full stop. America’s 10-year real rates are lingering in negative territory. In fact, 18 trillion worth of global bonds are trading on negative nominal yields. If you are out paying to get your principal back, well, then be my guest.
Two, we have to wonder, though, why real yields are negative in light of deficits at World War 2 levels. The 12-month rolling federal budget deficit is fast zooming in on 3.5 trillion dollars. US Treasury borrowing for this year will blow the lid off. Foreign demand for US bonds has been drying up. The only source of demand to reckon with is the central bank itself, and therein lies the reason why rates will not ascend as they should. The Fed is already on course of expanding its balance sheet much further.
Three, there is always the 2,000 dollar cheque from the government. But instead of boosting demand and providing a stimulus kick for the ailing economy, some of that disposable money seems to find its way into the stock market. And if it gets guided or even channelled by social media platforms, then it will become a massive force and source of volatility. We have seen what this means in the case of Gamestop. There are many others out there, and it does start to have an effect on the overall market.
Four, the economy is not well. Despite all the animated commentary about a traction-gaining recovery, we are realistically nowhere near such a scenario. While Q3 growth still clocked up a respectable rebound of 33%, Q4 faltered again into an annualised growth rate of only 4%. As I have claimed before, Q1 will not deliver anything like the upbeat estimates and will equally disappoint, and Biden’s administration will tactically save its real stimulus powder for Q2 to reap all the credit possible.
What this means is that the dynamic of the past 10 years is not likely to be broken, ie newly printed money will not reach the real economy and keep sloshing around in the financial system, driving asset prices further and further. There will no doubt be a point when infrastructure and green investment programs attract excess liquidity away from equities and into the economic process, and this may be the time when the market will correct, but such a prospect is months away I reckon.
Until then, however, five, inflation will hardly be an issue, despite the supply shortages opening up. And even if the economy were to run red-hot again, the technological advances, not least accelerated by the pandemic and that excess liquidity that is funding every new economy and energy company on the planet, will provide us with unprecedented productivity gains, propelling corporate results to catch up with all those lofty valuations.
In other words, absent any external shock that could bring risk assets down, we seem to be in a supercharged environment for a while longer. Never mind some profit-taking after a jubilant January, but pullbacks seem to be excellent opportunities to again employ some cash here and there.
