There are 2 general trains of thought:
Some Economists and Stock Market Pundits believe we are headed for huge growth in the stock market. Their reasoning (as far as I understand) is the economy is mostly doing well and the stimulus money will drive prices forward.
– The money spent by the government and the money created by the Fed is only preventing deflation and holding up our economy while we get past the effects of COVID.
– The concern of stocks being over-priced compared to their earnings is short sided because it’s using 2020 revenue numbers and not 2019. Or even the 2021 potential earnings since there is a lot of pent up demand.
There are other Economists and Stock Market Pundits who think the market is headed toward extreme volatility and a big crash.
– The money spent by the government and the money created by the Fed may be preventing deflation but will also cause inflation since a lot of people are holding on to their wages, and now several stimulus checks.
– The government cannot spend its way into prosperity.
– There is a significant lag between fiscal policy and it’s effect on the economy, so decisions made yesterday and today will continue to influence the market and inflation for some time.
– Also, there is concern for the housing market (long term) because people driving up the price of homes are the top 20% in the country and may stop buying, especially if interest rates go up (a typical response to an increase in inflation).
Also, the eviction moratorium has led to many not paying their mortgages even if their income wasn’t affected by COVID.
My thoughts:
Personally, I believe we are on the cusp of 3 major bubbles:
- The stock market
- The housing market
- The dollar
It only takes one of these bubbles to cause the other 2 to burst. It’s a landmine that’s also an atomic bomb attached to a timer. Pressure can set it off or time – when it goes off its destruction will be unpredictable and unimaginable. I don’t think every person will die of starvation, but some will.
1. Stock Market:
Unemployment numbers are typically difficult to track accurately and it’s even harder to track when small businesses close since they don’t report it, they just close their doors. In my opinion, a lot of businesses are struggling and barely hanging on while only a small percentage are doing well (large corporations like McDonalds, Target, ect…). A good economy needs the money to be changing hands and flow from person to person. Large corporations don’t typically do a good job of distributing the profits to all faucets of the American people.
I believe the stock market is overvalued. Even when we are done with COVID (whenever that will happen) and the economy kicks into gear the earnings will not justify the price of stocks. I realize a lot of the stock market is held up by the biggest companies, but I struggle to believe the stock market (S&P 500) should be 20% higher than its pre-COVID peak. I think stimulus money is inflating the price as well as money from novice investors who got into the stock market because they were bored during lockdowns. Look at the Price to Earnings of some top companies (Tesla is 1,000, Netflix is 93, the S&P is 43) when the stock market typically trades around 13 – 15. A growth company with a huge upside can trade around 25 in a normal market. Of course, there are plenty of industries who typically have higher P/E’s but things seem extremely out-of-whack.
Remember that a short period of extreme inflation is bad for the stock market in the short term and good in the long term. While there is uncertainty, (what companies will survive, what industries were affected) people will pull their money out and when predictability is restored the money will flow back into stocks.
2. Housing Market
When the housing market crashed in 2008 it was largely due to “artificial demand”, meaning people were getting approved for mortgages when they had no reason to be getting a mortgage. What’s interesting is the median housing price for the country recovered pretty fast (according to https://fred.stlouisfed.org/series/CSUSHPINSA). I suspect TARP and other measures were put in place to protect the economy but it seems (in my opinion) it wasn’t regulated enough and things have escalated well beyond expectations.
Sometimes, you can just look at the state of the things and know something isn’t right. It doesn’t make sense that a man and a wife who are individually making very good money can’t afford a home.
3. Dollar Value
The value of the dollar comes down to a few basic components: a) how it stacks up with other currencies (imports and exports), b) the amount of money out there and c) the flow of money.
a) I’m not in a position to speak about how the dollar stacks up with other currencies because I know a lot of countries have tried to “spend its way to prosperity” and it’s proven difficult for me to track in any quantifiable way.
b) There is a lot of money sitting in bank accounts. Firstly, from people who were not financially hurt from COVID lockdowns. Secondly, there was a lot of stimulus money given to people who didn’t need the money and they weren’t doing much due to the lockdowns. The government is sending out a second round of stimulus and economies are starting to open up. Third, the government is now passing a $1.9 Trillion infrastructure bill that will only only flood the economy with more liquidity. All that money that is sitting around is about to be unleashed into the market. It’s like opening a large hole in an above ground pool, it will pour out on the ground so fast the dirt won’t be able to absorb it. It will be both massive in the quantity at once and go on for a while.
Lumber has tripled in a few months and people are starting to see “sticker shock” at the grocery store. This is just the beginning and I’m afraid of how long and how extreme it will get
c) Money isn’t flowing the way it normally does. It is feast or famine for most companies and generally it’s the corporate giants who are feasting while smaller businesses are starving. A strong economy needs money to be transferred through several layers in the economy but the lack of flow, with the increase in inflation is going to pinch everybody except the select few even further.
My Final thoughts:
We are on the precipice of one of the most intense periods of strain on the economy and valuation of assets.
We don’t know how the government will respond and we don’t know how the economy/market will respond.
If people take appropriate action to protect themselves, I am scared but hopeful.
If people don’t take appropriate actions to protect themselves, I’m just scared.
ATC 