The market is trading on speculation. Fundamentals don’t matter now. Fundamentals will matter again.
The Fed can print only so much money before inflation rears its ugly head. We can’t continue to devalue the dollar as a matter of long-term monetary policy without consequences. Our “print first, ask questions later” monetary policy and “subsidize everything” general governing policy has assured the weakening of the U.S. Economic Engine. Look no further than Venezuela to get a sense as to what the long-term outcome of our present policies may be 20 years from now.
The U.S. will no doubt experience lower productivity in the coming quarters and years as a result of prioritizing the equity markets and near-zero interest rates over productivity and sustainable growth. Quantitative easing, government subsidies, artificially low interest rates, whatever you want to call these near-sighted, temporary, debt-heavy, solve nothing government programs that have come to be par for the course since 2008 are entirely un-American. The only thing that is certain is that:
- Our policies are creating moral hazard among companies and Americans;
- Our policies are causing bubbles. Look no further than equity valuations, (in particular SaaS multiples);
- Our policies will reduce productivity.
Mr. Market’s appetite for speculation is not without limits:
- Interest rates can’t go materially lower without going negative;
- A vaccine if it comes is no guarantee to drive customers back to restaurants, hotels and air travel. A vaccine will not solve the reduced demand caused by:
- Restaurants, hotels and retailers that have permanently closed for business…
- …that have lost market share to competitors…
- …that are having difficulty reopening because former employees prefer to stay home and collect a government check.
- We can’t print money in perpetuity without causing hyperinflation (that will be $25,000 for that roll of toilet paper Mr. Maietta).
Fundamentals will matter once again:
- Revenue and EPS growth will matter;
- Valuation and downside risk will matter;
- The rate of the economic recovery will matter;
- GDP growth will matter;
- Unemployment levels will matter.
Mr. Market is speculating that the best-case-scenario will occur for all outstanding macro questions. What will Mr. Market do when he’s disappointed by one or more outcomes?