We’re at a fascinating crossroads in the world of investing, and in many ways, a truly unique place. While the adage: “this time it’s different,” always gets burned by the markets, this time, we’ve never been here before.
The best news: we’re almost near the end of the pandemic. The good news: the economy is screaming thanks to unprecedented monetary (the Fed) and fiscal (Congress) stimulus. The strange news: things are really out of whack in the markets, and this has quickly become visible in everyday life.
Lumber and building costs have skyrocketed, some things are still hard to find in the grocery store, and there are plenty of job openings, yet a high unemployment rate. There are also strange things like “meme stocks,” and skyrocketing crypto currencies nobody had heard of until three months ago. Let’s peel back the onion a bit.
So Much Money
Eight TRILLION dollars is a lot of money, and that’s a rough estimate of what has been dropped on the US economy by the Fed and Congress since the pandemic started.
The US government has sent checks to individuals, boosted unemployment, and supported almost all businesses in a variety of ways. The Fed has been printing money to the tune of an additional $120 BILLION every month.
While the pandemic raged, the nation attempted to keep everyone and everything flush with cash to minimize economic fallout, but this process set up some strange dynamics.
As the economy recovers from the pandemic, shut downs, and lock downs, money is once again flooding into goods and services as life returns to a new normal, and pent-up spending plays out. The economy is whipsawing from the tremendous drop in output we saw last year to something approaching pre-pandemic right now. That wave has a tremendous amount of momentum. Economists were aware this was happening, yet inflation still came in four times higher than predicted last month, raising many eyebrows.
We’re now seeing prices increase in everyday life, coupled with businesses raising wages and offering incentives to attract workers, which also stokes inflation. What do the financial markets say about this?
The Bond Market
The bond market tends to be intelligent, the smartest money in the room. The Fed’s message to the bond market has been: this wave of inflation is just a wave, and with the economy getting back to normal, inflation will return to long term averages soon. The bond market has priced this in as the absolute truth, because it is the absolute truth.
If inflation gets out of hand, the Fed will increase rates quickly, and force inflation back to long term averages. If you’re old enough to remember double digit mortgage rates from the 1980’s, you’ve seen the Fed do this in real time.
The risk: the Fed doesn’t react quickly enough, is forced to increase rates faster than anticipated, and chokes off the current expansion, possibly creating a recession.
The Stock Market
The stock market is “all in.”
In the world of “blue chip” stocks (think S&P 500 and Dow Jones Industrial Average), the market is behaving as if rates will stay low forever, and the current expansion will never end. It’s overpriced by most historic measures, and more money is ending up here because it has no other place to go with bond yields so low.
Then we get to strange places like “meme stocks.” The current example is AMC. The price of AMC increased by around 400% in one month when nothing really changed in the business of movie theatres. In the normal investing world this would have meant that AMC figured out some new technology, created a monopoly, or found tons of gold buried under a theatre. We’ve seen examples of this blind speculation recently with GameStop and others.
We’re at one of those places that feels like the dot com bubble where everyone seems to be trading stocks online, and making a killing because everyone else is buying like mad too. Remember companies like: Ask Jeeves, eXcite, and Geocities?
Other Strange Things
The crypto currency space is frightening, and this won’t end well. It’s difficult enough to justify Bitcoin, but these other crypto currencies, spiking almost randomly, make very little sense. Much like the AMC example, people are dumping their freshly printed money into crypto currencies. What is the long term purpose of these strange coins? They pay no interest, offer no dividend, and have no real utility.
The list of strange things goes on with things like tokenized art (non-fungible tokens or NFT’s), and SPAC’s, which are “blank check” companies, I give you money, and then you tell me what I bought.
Wrapping It Up
We’ve never been here, but some of these things look oddly familiar, and it’s strange to have them in the same room at the same time. Inflation may or may not take us back to the 80’s. Stocks may or may not take us back to the dot com bubble of the 90’s. Strange things may or may not take us back to Beanie Babies, and Cabbage Patch Kids.
But, we’ve never been in a place where humanity is coming out of a gut wrenching pandemic with so much money to spend, and not enough places to put it. This will surely end badly for some.
If you’re a regular reader of these blogs, you already know the punch line. A balanced, diversified portfolio will weather whatever comes as this unprecedented wave in the financial markets passes, and serve you well in the post pandemic new normal on the horizon.
Not as exciting as a Dogecoin, but just as cute, and you’ll sleep well at night. Please let us know if we can help, we’re here to help answer your questions.
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