The Great Financial Crisis of 2008-9 was a major turning point. Bear Stearns and Lehman Brothers both failed. But many other companies that should have failed were instead rescued with taxpayer bailouts.
Bankruptcy is supposed to clear the brush and burn the dead wood. Instead, the bailouts covered up all the inefficiencies and bad decisions and left us with zombie companies that cannot grow to their potential – companies like Boeing, Intel, Ford…
Back in the 1950s and 60s, US GDP growth averaged 4%. In the wake of the GFC, U.S. GDP growth has averaged a little under 2%. The inefficiency is now part of the system.
In the 1980s, the value of financial assets (like stocks and bonds and mortgage loans) were roughly the same as tangible assets in the U.S. By the time of the GFC, financial assets were three times the “regular” economy…
Today, financial assets are worth 6 times the regular economy. Include shadow banking and private equity lending and it might 10 times bigger…
In 1998, the world’s billionaires controlled 2% of global GDP. As of 2022, the world’s billionaires controlled 12%.
Three companies – Blackrock, State Street and Vanguard – now own 20% of the U.S. stock market.
Financial assets and their owners now control the economy. And what they want in order of importance are:
- Stability – at the very least, values need to remain stable
- Upside – upside means they make money
- No Recessions – all of the world’s central banks and elected officials are doing their part
It took the Fed and Congress two years to figure out how to respond to the GFC. The COVID bear market lasted a month. The Fed and Congress money pump started a rip-snorting rally while the economy was still in lockdown!
Do you remember when Silicon Valley Bank became the third-largest U.S. bank failure in history in March 2023? Maybe not, because the Fed and Congress know the playbook by now. They snuffed out that crisis over a weekend – and the already rich folks over at JP Morgan got richer with a sweet deal on a distressed bank.
The powers that be have spoken.
The AI Connection
Money goes where it’s treated best. There is one sector that is nimble enough to grow: technology. AI is the tech flavor du jour. This is where the money is going…
In 2020, Nvidia was worth $145 billion. Not even 5 years later, it is worth over $3 trillion:
Data center construction has gone bonkers:
These moves are not normal…
It used to be that innovation took place in the small companies, biotechs and emerging tech stocks. Now it is the mega-cap stocks. Bloomberg cited an OECD study that found that productivity growth at the top 5% of companies in any sector was 4 to 5 times faster than companies on the “frontier.”
It’s because the mega-caps are the only ones that can handle the massive liquidity that’s looking for a return.
The Power of Finance
On September 29, after the Fed’s jumbo 50 point rate cut, I wrote:
The Fed is now pumping liquidity into the economy. And liquidity always finds its way into the stock market.
What’s more, if it turns out that the Fed actually is a little behind the curve on unemployment, don’t worry, the so-called “Fed put” is back, baby!
If you don’t know, a put option is an options contract you can buy to own through any broker. The value of a put option goes up when the underlying asset of the put option falls in value. If your goal is to make money (and I hope it is) a put option literally means that bad news is good news…
Like if you think there might (for some mysterious reason!) be bad news coming for Boeing, you could buy a put option whose value will rise when bad news sends Boeing’s share price lower.
The Fed put works exactly the same way. Now that the Fed is committed to fighting unemployment, if we do get bad unemployment news, it just means the Fed will be even more aggressive with rate cuts. More liquidity = higher stock prices. It is as simple as that…
So we are likely to get one of those “melt-ups” for stocks for the balance of 2024…
A melt-up now will take U.S. valuations to extreme levels pretty quick. That’s why I’m only willing to bet on things being simple through the end of the year.
A market “melt up” is a colloquial phrase describing an orderly rise in stock prices that has no other explanation than “stocks are rising.”
Well, looks like I was wrong. There’s no melting higher. What we have gotten is a full-on sprint for glory, a rip-snorting run for the roses.
How far will it go? How long will it last? We cannot know. But one thing is for sure: never underestimate the capacity for investors to delude themselves into thinking it really is different this time…
That record valuations are a sign not of hubris, but of a new era of economic prowess that cannot be undone by inflation or higher interest rates…
Where regional wars are a sideshow…
Where the Mag 7 and AI will drive revenue growth for decades to come…
Where owning an S&P 500 index fund is the equivalent of universal basic income that will put gourmet food on your mahogany dinner table in the dining hall of your estate for generations to come…
With the Fed and Congress, both aligned to guarantee outcomes for the wealthy investors that own the real economy, this melt-up could last for a while.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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