I've Never Seen A More Complacent Equity Market
I fear the equity market has been permanently distorted by the Fiscal and Monetary support that has been in place since March of 2020.
“GDP is healthy” the bulls say. Really? Nominal GDP is up as prices have skyrocketed since 2020. “Real” GDP is a fake measure because the Government intentionally understates CPI through two techniques - substitution and Hedonics, particularly the latter. Social security and other welfare payouts are tied to CPI growth, therefore it is in the Government’s interest to understate CPI, thereby tamping down welfare payment outflows.
Inflation used to mean growth in the money supply until the Federal Reserve changed that definition. M1 is growing at approximately 6% year-over-year, much too fast as credit standards are far too lax given the absence of a reserve requirement. The Fed retorts that a zero percent reserve requirement is fine because the market will impose discipline on lax bank credit standards. The problem is that the Fed sets an arbitrary Fed Funds Rate. If the Fed allowed the market to set an overnight rate, and if the Fed did not intervene in credit and equity markets, then under those conditions a zero percent reserve requirement would work. However, that is not the case, the capital markets are not free markets, they are heavily influenced by interventionist monetary and fiscal policy.
In the absence of an honest CPI measure, subtract year-over-year M1 growth from Nominal GDP to get an idea of Real GDP, which is to say that Real GDP is negative and has been negative for quite some time.
Today investors are cheering a favorable PPI read. However, has anyone noticed where the price of oil is? Oil prices have finally started to reflect the reality on the ground and has more upside from here. It is fair to expect that the “Energy” category will have a much higher CPI read in July and that total CPI will move higher for the month.
Equities ought to be trading down, but I’ve never seen a more complacent market with a more complacent investor cohort. What the heck are investors doing all day? I am talking about those of you that have a big smile on your face and think everything is hunky dory with the economy, valuations, and the world.
The rest are like me - more than skeptical - and wondering when the “Everything bubble” will burst.
Capital is walking away from datacenter deals. SpaceX and META are renting GPUs instead of using them. This tells you that AI end-user demand is starting to fall off (although I will use more heavily over time as I bring on people).
By the way, Trump subsidizing gasoline (Freedom Fuel), is another sign the punch bowl will be taken away soon.
Last word, did anyone notice yesterday that Bank of America (BAC) has $85 billion in unrealized losses on Debt securities? We started writing about that loss position in 2022 and the crap leadership team at BofA STILL has not dealt with that situation and the huge opportunity cost associated with that loss position.
