We can only laugh when smart people ascribe wisdom to Fed pronouncements about its supposedly new approach. In many ways, we seemed to have entered the “if you’re not cheating, you’re not trying” era of monetary policy. More broadly, policies and behaviors that would have been universally derided as incredibly irresponsible or anti-capitalist ten years ago are widely accepted and thought to have no bad consequences.
A little over a decade ago, $5 trillion seemed like a lot of federal debt. Now we are pushing $30 trillion and few seem to care. A $4 trillion deficit is no cause for concern according to the powers that be. Corporate enterprise values (equity plus debt) north of the 10-15 times EBITDA range used to be unusual and companies could be bought below 5. Now, we see analysts recommending stocks with multiples north of 20 like it is nothing. Corporate America further levered itself after issuing $1 trillion this year to ward off a liquidity crunch. All risks related to leverage are ignored.
From a market perspective, Jay Powell seems to have decided that virtually encouraging the market kids to toss around the lit dynamite of call options on bubble stocks is sound strategy. We might term recent weeks as peak “Fed put” confidence. No wonder traders demand promises of new central bank intervention almost hourly to keep the market disconnect with the economy alive and well. Otherwise, these positions might blowup in their faces as some already have.
Let’s keep it simple. As part of its $120 billion of monthly purchases, the “new” Fed policy is to buy up whatever government debt the private market cannot handle and keep rates near zero for years to come while trusting that Wall Street will only recognize that this is a road to nowhere when it becomes too obvious to ignore. Jay is choosing to call it “average inflation targeting” with much fanfare. To each his own.
We think this latest Kabuki theater of monetary policy is simply an acknowledgement that all hopes to escape the Japanese scenario of QE forever are falling by the wayside. The Fed will not say that. We have been warning about this for years. It is not some grand new policy choice when the Fed has never meaningfully reversed course since 2008, Jay. It is not a novel idea when Europe and Japan have done the same thing for years as well. It is not exciting when you have no other choice.
Unfortunately for equity investors, the Land of the Rising Sun has not been called the Land of the Rising Stock prices since about 1989 when the bubble there peaked. Perhaps the recent pullback after months of manic buying of popular names with poor breadth is a recognition of this. The unhealthy fascination with option trading has created a circus-like atmosphere that we guess only a central banker craving market approval might love.
Stocks are enormously expensive from a top-down perspective with the P-E expansion being driven by glamour tech. This “extended” P-E will drive returns over an investment horizon, but not over short time frames. It is not a favorable factor to say the least.
We do wonder why participants still seem to be in such a rush to rid themselves of cash at current levels when future returns for stocks and bonds are likely to be the lowest ever and when uncertainty about the course of events is so high. We continue to advise waiting for better opportunities. No reason to needlessly compress time frames at these prices.