Tuesday, March 17, 2020

Just so I'm clear, CORPORATE Socialism is good?

The Fed kept rates lower for longer which chased capital from investment pools into Wall Street to fuel speculative excess. Public companies sold bonds to fund stock repurchases, but when they struggle to pay their bonds the Government bails them out.  Capitalism in 2020.

Just four weeks after All-Time Highs in the stock market, we are back to being a bailout nation again.


Sticking with the theme - the markets continue to act like a fish out of water.  After the markets collapsed on Monday despite historic efforts by Congress, their lobbyist pals and the Fed failed to impress, the brain trust in Washington decided they needed to go big or go home.

Do I hear $850 billion? Maybe a trillion?  Maybe $1.2 trillion?  Boy, it's a good thing we are running budget surpluses so we can afford all of this extra spending.

What's that? You say we are already running budget deficits of $1 trillion/year?  Combined with a steep decline in GDP we might be looking at a $2.0 to $2.5 trillion deficit this year. 

I'm old enough to remember when Ross Perot won 19% of the popular vote by complaining that our deficits and the associated debt (then around $4.5 trillion accumulated over the course of 215 years!) was going to cripple us.  Now, the politicians in Washington are set to mortgage our future one more time to save the markets.  If there are two things the Republicans and Democrats can agree on it's bombing foreign countries and bailing out their corporate pals.

The message was received loud and clear and markets jumped 5-6% again today (though they've given up 60% of those gains as I write this overnight).

Who knows what insanity will be trotted out next:

* Ban short-selling? Reminder that after they did that in 2008 the financial index fell another 70%.

* Shorten the trading day?

* A chicken and a check in every mailbox by May 1st?

I still expect very volatile markets as the latest headlines will whip the markets up or down in a heartbeat. 

However, in the long-run this is my thinking - currently people expect the S&P 500 companies to earn $133 in 2020.  I think eventually estimates will come down drastically to $100-$105.  Now what do you think people will pay for earnings in a falling market?

20 times = 2000 to 2100 (this would be historically expensive)
15 times = 1500 to 1560 (this is the historical average)
10 times = 1000 to 1050 (this would be considered cheap)

Reminder, the S&P 500 closed at 2530 today. Oof.

The pandemic - We continue to make too many mistakes to adequately slow the growth in the US.  People are still congregating (see Florida beach photos), testing is taking far too long and we are running out of beds and supplies in major metropolitan health centers.  I suspect things will get much worse over the next 10 days.

There are rumors of US citizens being recalled from embassies around the globe and hints of further restrictions at the border.

Perhaps most disconcerting is news that places like Singapore, Hong Kong and Taiwan which were thought to be over the peak infection rates are seeing a second wave of infections.  This fits with my thinking that we need to learn to live with this disease because it's not going anywhere.


PS - you can always follow my up to the minute thoughts and snarky comments on Twitter at @brianlantier

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