6-30-2020

 

None of the Below is Investment Advice. This memo was written across a span of 7 days, which might mean things are no longer relevant when you read them, as news changes frequently these days.

Nothing much has changed since March, except that the NASDAQ is now up 46% off its lows. This is certainly due to the ‘Powell Put’. Although this article is biased with a negative skew, up until only a week ago, I was extremely optimistic on the economy and American growth. This was before the Second Lockdown was announced for many states.

Of course, one need not look at anything else when money is printed to create demand. If everyone loses their jobs and the Fed gives everyone that same income, in theory, demand shouldn’t change. 

This is what has caused the roar upwards – not optimism about reopening or anything else. Headlines are easy to be priced in, but they never should be, and now is no different. Fact is that nobody really knows what’s going on and these headlines distract us from what’s obviously happening. 

**Even so, because this crisis has absolutely no historical comparison and because both earnings and forbearance resolution begin in the coming month(s), I take a cautious approach. After all, much of the capital in the market right now is chasing greed rather than fundamentals. Because of all this, it’s important to develop and stick to a ‘risk budget’ with a financial planner.**

So what’s happening?

The Federal Reserve (and all Central Banks) props up markets by creating demand out of thin air. Ok, but what does that mean?

Debt has grown to enormous proportions since 2008’s fallout, and most of us professionals agreed it wasn’t healthy capital allocation – buybacks and dividends were often paid for with debt. 

Debts are assets currently going bad with demand slowing and nobody wants to buy them, meaning there’s no “liquidity”. Liquidity is very similar to demand, since higher demand generally means higher liquidity, exceptions being scarce products/services, which have smaller relationships. For all intents and purposes, liquidity means demand.

There are many different ‘assets’ that need liquidity, and if there is no liquidity, prices drop (i.e. deflation). The theory behind the Federal Reserve’s stimulus is trickle down – truing up bonds of private companies like Wal Mart and AT&T (for instance) maintains and creates jobs at those companies. Thus, giving money to the richest companies will drop through the organizations down to workers.

When that money gets to workers, they will not have lost anything and will spend exactly like before. Nobody will lose their jobs because businesses are passing 100% of the money through to them, with spending unchanged also. That means mortgages, credit cards, commercial and residential rents, energy consumption, food consumption, airline travel, tourism, retail spending, and financial investment will completely be unchanged.

Of course, to make sure that this very large scale strategy is carried out with as little waste as possible, we will have the best and brightest overseeing the entire stimulus, providing at least weekly updates on the effects of inflation and deflation. The focus will also be on keeping that money within the organization and within the USA. Leadership of the country will make the focus on both communicating this strategy and solving the issue at hand (COVID 19). 

This still is the goal of the Fed and the White House.

A few thoughts I have in regard with corresponding Headlines I’d like to see:

  1. Businesses Chosen over People.
    1.  “Unemployment, Markets Shows People Irrelevant; Show Computers  Dominant”
    2. “Business Debt Encouraged, with Fed as Buyer #1”
    3. “Businesses Cut Costs, Employees Permanently in Search of Profits”
    4.  “Forbearance allows Massive Investment, Allows Massive Deflation”  
    5. “Businesses Scramble for M&A, Celebrities to Stay Relevant”
  2. Who is tracking the Fed’s Strategy?
    1. “Advisors say Prices Justified, Focus on Scale”
    2. “Crisis takes Back Seat to Election”
    3. “Crisis takes Back Seat to Interglobal Conflicts”
    4. “Crisis takes Back Seat to Twitter”
    5. “Fed Spending Haphazard With Little Communication, Guidance”
  3. Inflation vs. Deflation
    1. “Fed Says No Inflation as Assets Rise, Incomes Cut; Price of Staples Largely Unchanged”
    2. “People Buy Businesses as Massive Inflation Grips”
    3. “Market rises on Reopening, Rises on 2nd Lockdown”
    4. “More Debt Promises Less Investment, Higher Financial Inflation”
    5. “Investors Work to Keep the Market Higher, In Spite of Their Own Certain Irrelevance”
  4. VIrus in Check
    1. “States Keep Residents in Dark, Ask for Bailouts Anyway”
    2. “Rising Numbers Require Every Person Be Tested, Spending to Slow”
    3. “Vaccine In Focus, Fallout Not Considered”
We have seen massive inflation, to the tune of 46% increase in the NASDAQ. This isn’t traditional inflation that ‘survivors’ living paycheck to paycheck look at. This is inflation that ‘investors’ look at. Inflation that college students will be pummelled with and that entrepreneurs will find nearly impossible to overcome. 
 
Seems as though the leaders care more about keeping their jobs than leading through this crisis. Where in business does the Board and its chairman spend a disproportionate amount of time on attacking opponents and keeping the position than on running the organization? We are all flying blind. What’s worse – we aren’t talking about the long term effects at all. Seems disorganized to me. 
 
It is what it is.
 
Finally, Barry Ritholtz gave an interview this morning, in which he was very optimistic. I was right with him until he made a giant leap of faith. In his view, Tech companies prices of 50 to 100 times revenue are justified. He compared this revolution to the beginning of the Auto Industry, when ‘Companies were cheap because the capital required to produce automobiles was so high’. Today, anyone with a laptop and an internet connection can create a billion dollar company, so multiples are allowed to be much higher. 
 
I was discouraged to hear this one-sided, self-serving conclusion, for three reasons. First, because Ritholtz is an influential advisor for over $1 Billion in AUM; I respect greatly what that means, but only to the extent that his influence is well founded. To put forth a conclusion such as this on behalf of his company to such a large audience shows that his strategy may be self-serving in total. Seems he just wanted to sell a bullish stance with snake oil. It’s basically bad advice.
 
Second, the argument justifies pricing into oblivion for the wrong reasons. Yes, it’s true that computers have less overhead and that’s fine, but that also means that the barrier to entry is much lower. Just as anyone with a laptop can create a billion dollar business, anyone else can too. If you were going to compete with Ford in the early days, you would have a mountain to climb in terms of competing with him. 
 
Third, the argument paints a picture that it was easy to innovate the automobile, and almost paints a tech company as on the same level of innovation. This is an arbitrary argument that I would never make and nobody should. Ritholtz wasn’t around during those times and things have changed a bit since then….
 
I hope we get through all this without the stock market doubling. Why? Because we will never be able to live up to those expectations. In Silicon Valley, tech founders on Series A rounds are told to beware the “Runaway valuation”, which means a nosebleed valuation impossible to live up to. As the CEO of such an organization, if the Series B is a ‘down round’ or a lower total valuation, it can mean your business loses relevance and you gain the reputation of a burnout. 
 
Without any communication from leaders of USA or insight into businesses, it’s impossible to say if these valuations are or are not justified. 

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