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Against The Gods: ‘Historically A Losing Proposition’
Bearish arguments which lean heavily on the idea that equities and credit have for years been artificially propped up by central bank largesse always suffered from a fatal flaw - namely, that the premise undermines the conclusion.
If you say asset prices have been artificially inflated by the benefactors with the printing presses, and you can't point to any evidence to suggest those policies are likely to be abandoned, then the only way to explain a habitually bearish bent is by reference to ma
“This crisis is different from any other in recent history in that it was not caused in any way by businesses or investors”, JPMorgan’s Marko Kolanovic wrote Monday. Really????
My take away is that a value market that the Bears envision will not likely happen because the Fed is the Bull.
The Fed has to fight the front page not the bear….and a few politicians. They could F it up.
Overlooked in these arguments is that the economy was weakening PRIOR to the virus shock. Nominal growth was slowing. We had a trade fiasco. And we have a credit unwind that was built by corporations binging on debt to pay dividends, buy back stock and buy other companies, not to improve capital stock or pay down debt. The virus could go away tomorrow and some of these problems/challenges/issues will remain. So to be bullish on stocks you need to also get your arms around these other problems as well.
“This will be the ultimate test of central banks’ capacity to engineer and maintain a disconnect between asset prices and the fundamentals.” Always and everywhere, at the end of the day fundamentals win out. People lining up for miles in their cars to claim a sack of food should tell us that neoliberal capitalism as we know it is on its last legs.
Good points Ria.
But sorry mfn, as right as you may be, in theory, investing on the basis of”fundamentals” has been a money losing proposition for at least ten years. The economy and the stock markets are only tenuously connected now.
Days of corporate stock buybacks used to “juice” EPS (but not total corporate earnings) are most likely dead.
Even if the Federal Reserve, and its designees, becomes a buyer of shares (replacing $700B in corporate buybacks) – those shares don’t get retired, and therefore reduce outstanding share count, as shares do when repurchased by an issuer.
C-suite will have to come up with a different strategy to secure their mega-bonuses. The BOD might change compensation criteria and/or CEO’s will have to focus on total corporate earnings growth and not just EPS growth.
So if the Fed does buy shares (a colossal error, currently being committed by the BOJ that now owns something like 70% of all the stock in Japanese companies) there is one big difference from a company buyback. When the firm buys its own shares, cet par, they get deposited in the corporate “treasury,” are therefore no longer outstanding, and thus get deducted from shareholders equity on the balance sheet. This creates an increased leverage ratio, while shrinking assets (check this effect on companies like KMB). However, if the Fed were to buy shares, the balance sheet of the target company would not change. No stock in the treasury, no increase in leverage, no shrinkage in assets, just a bigger obligation for tax payers who don’t get the dividends paid.
I used to enjoy analyzing the markets. It’s all just bullshit now. Blech.
Thanks Anonymous, This is one of the best comments I have seen lately.
“The Algo Wars were leaving a path of destruction in their wake. “HFT algos reduce the value of resting orders and increase the value of how fast orders can be placed and cancelled,” wrote Nanex researcher Eric Hunsader. “This results in the illusion of liquidity. We can’t understand why this is allowed to continue, because at the core, it is pure manipulation.”
― Scott Patterson, Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market
Share buybacks over the last ten years pushed shares higher, although the Fed helped. Buybacks are gone and 401k liiquidation to keep the lights on is ‘in’.