What To Buy When Assets Are Overvalued and Government Adds Fuel To The Fire
I am not smart enough (nor is anyone else), to know how much longer the U.S. can play this game of propping up markets, of bailing out companies and of subsidizing various welfare programs before the Dollar goes to zero. The remaining 2% of the Dollar’s value as measured in gold could have a long tail.
However, some things that are clear:
The Fed will continue to act as an agent of the Treasury and will support fiscal spending by buying Treasuries. This is inflationary.
Both Trump and Harris have different political agendas, both of which however require deficit spending, which is inflationary.
The Fed’s mandate is to support U.S. price stability and jobs. However, if you have paid attention, what the Fed actually does (grow the money supply to: 1.) support global markets and 2.) bail out various corners of the global economy) is in direct conflict with its mandate.
Clearly what is needed is fiscal austerity, but the U.S. will get more price inflation instead. The U.S. needs austerity in a major way. Take a page from Argentina’s playbook under Javier Milei (our cover image). Unfortunately, austerity is not in the cards in the near-term. You should expect the inflation game of musical chairs to continue until the music stops. Therefore…
I expect longer-term Treasury yields to move higher as the Treasury auctions some $2 trillion in new Treasuries to cover the fiscal deficit.
As a result, the Government will primarily be funded with T-Bills, which means short-term Treasury yields will move lower (i.e. the Fed will continue to lower short-term rates to help offset the U.S.’s growing interest expense line item).
I expect asset prices to move higher. This includes equities, home prices, art, classic cars – a crack-up boom of sorts.
I expect long-term Core CPI to sit in the 3-5% range, which means the lower and middle classes will suffer, which means less consumer demand. I believe that Real GDP is flat to negative depending upon the month and that this has been true since early 2022. However, U.S. fiscal policy is such that we could see reported Real GDP – as overstated as it is – move to zero percent on average for a decade or longer.
Does that mean that everyone should pile into NVIDIA (NVDA), Microsoft (MSFT) and Meta Platforms (META). The short answer is “no”.
While I do expect Blackwell to drive big orders for NVDA in the coming months, while Microsoft will benefit from 365 product price increases in the December quarter, and while I am a big fan of Meta’s open source approach to LLMs, how much long-term upside do these stocks have? Large Cap Technology stocks are clearly in a valuation bubble. You can’t justify paying ever higher multiples without commensurate long-term increases in Revenue and/or Earnings growth.
There are many risks to equity valuation multiples.
Ask yourself, what will happen to equity valuation multiples when baby boomers retire and pull liquidity out of the system?
What will happen when more young Americans choose to live off of Government handouts and do not contribute liquidity to equities? In other words, the passive trade will end.
What will happen to equities if the global geopolitical situation goes south? We have multiple conflicts that could escalate and knock the price of oil from $70-80 to $125-150 (or higher) instead of sitting at $30-40 which is where it should be if the Federal Government was not trying to do a solid for its Private Equity friends by driving artificial demand into green funds pursuing IRR by developing wind and related green projects that have zero probability of driving real world ROIC.
The punchline? Buy Gold and related commodities instead of chasing paper gains in overvalued asset classes.