After a powerful rally to kick off the week, the stock market’s enthusiasm wavered yesterday. Does this mean it’s time to turn around and go short?

Not necessarily. It is certainly tempting, but we are waiting for certain technical signals to trigger our entry.

As the great macroeconomist John Maynard Keynes supposedly once said, “The market can remain irrational longer than you can remain solvent.”

But make no mistake. If there’s one thing I’ve learned in my 35 years in the markets, it’s that all bubbles pop eventually. And when this one pops, it’s going to be ugly…

Consider this: Even before the pandemic hit, the Federal Reserve was already pouring out massive amounts of liquidity. You can see this in the chart below.

Since March, the Fed has expanded its balance sheet by over $3 trillion. And it’s pumped it up by over $6 trillion since the Great Recession.

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This huge pile of money has floated through to the equity markets, but it is not circulating broadly through the economy. Instead, it’s creating gigantic wealth imbalances and massive market bubbles.

If you need proof that stocks are in a bubble, look no further than the market cap-to-GDP ratio, also known as the Buffett Indicator.

It tracks the value of the U.S. stock market relative to GDP, and it’s at nearly 173% today. It hasn’t been this high since the dot-com bubble of the early 2000s.

The stock market is buoyant, to say the least. People are clearly eager to allocate more and more capital to equities as they search for yield.

But what about the gigantic wealth imbalances? The answer to that is multi-faceted.

For one, as I’ve written before, the coronavirus has hit the lower-income segments of the economy the hardest. This breakdown from the Pew Research Center paints a pretty clear picture:

imageImage Source

You can see that low-income Americans have struggled the most to pay bills, put food on their tables, and keep a roof over their heads since the start of the pandemic.

How can this be, when the Fed has pumped so much money into the economy – supposedly to help average Americans?

You see, while the markets are fueled by monetary stimulus, those benefits are largely going to the wealthiest 10% of the nation.

Just to give you an example, consider the most infamous of these benefits – a tax change included in the CARES Act. As The Guardian explains:

Nearly 82% of the benefits from the tax law change will go to people making $1m or more annually in 2020, according to an analysis by the joint committee on taxation (JCT). Overall, 95% of individuals who benefit from the change make $200,000 or more.

It’s the people in the lowest income brackets who need the most help, so clearly there is something very wrong with this process. But the absurdities don’t end there.

Since March alone, the Fed’s market operations have created $3 trillion. At the same time, the government has taken on more than $3 trillion of new debt.

Despite this huge fiscal and monetary support from the government, the economy is almost a trillion dollars smaller than it was 2019.

Moreover, 11 million people are still without jobs, and the workforce has decreased by over 4 million people as some workers have been squeezed out entirely. You can see the drastic drop in employment in the chart below.

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Roughly 21 million people are still receiving some sort of unemployment benefits, or have applied recently and are waiting for approval, according to the latest data from the U.S. Department of Labor.

Most states provide 26 weeks of unemployment benefits, so millions of workers have already exhausted their regular state benefits.

And yet, against this backdrop, the Fed seems much more preoccupied with keeping the stock market floating on a pool of fake liquidity.

If you don’t believe me, just look at the table below. It’s a list of companies whose corporate bonds the Fed is buying on the secondary market.

Company Broad Market Index Weight
Toyota 174%
Volkswagen 174%
Daimler 172%
AT&T 171%
Apple 160%
Verizon 160%
General Electric 148%
Ford Motor 134%
Comcast 132%
BMW 125%
Microsoft 118%
AbbVie 104%
General Motors 101%

Source: Bloomberg

It is fascinating that the Fed has decided these are the companies that need its support.

Apple, for example, has $193 billion of cash on its books. How in the world can buying Apple bonds to boost the economy be a sensible expenditure of taxpayer money?

Remember, the Treasury gave the Fed $454 billion to leverage into more than $4 trillion to support Fed programs. Is this really the best Washington can come up with to help our economy recover?

I am disgusted that buying Apple bonds is deemed a wise way to spend our tax dollars – or future tax dollars – to boost our economy.

Perhaps the Fed was worried that Apple didn’t have enough liquidity to maintain its operations…

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Yup, it looks like Apple has really been struggling. The $193 billion of cash must feel like a great burden for them… which I suppose is why they were so happy to have the Fed buying some of their bonds.

So you can see how, despite Jerome Powell’s protests to the contrary, Fed policies have led to the creation of a gigantic bubble… and the stock market’s connection with the rest of the economy is becoming ever-more distorted.

Now, as Keynes noted, the irrationality of the markets could persist for quite some time, so I don’t know when the bubble will pop. But at some point, it will explode.

Regards,

Andy Krieger
Editor, Money Trends


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