by Daniel McMurtrie via themedium.com
I have been spending a lot of time trying to observe not just what is going on in the world, but also what’s going on in my own head. I’ve realized that I may have a blind spot right now. Most of the people I know in my hometown of Richmond, VA work in the industries which have been hit hardest by the virus — restaurants, bars, hospitality, healthcare. Speaking to people I care about, it has felt like doomsday. I’ve felt unable to be optimistic given their pain and knowing how so many others are dealing with the same or worse. It has felt that things are so bad and the ways in which they could get worse for a very extended period are numerous. But my job is to invest in the stock market, and the stock market appears to many to have completely diverged from the “real economy.”
So… why could that be? What’s the bull case here for stocks? Let’s set aside long term existential concerns for a moment and look at what things could look like to a bull in the next 4–8 months.
The virus and its impacts are increasingly socially normalized and tolerable for Americans after 2 months stuck inside. A re-shutdown appears unlikely unless there is a radical increase in lethality / risk from the virus. If deaths are steady, the cumulative death toll that is socially allowable may be quite high (>500K over 18 months).
Monetary policy has collapsed discount rates globally, with risks more to deflation than inflation. The Fed has made it clear a liquidity crisis will not be allowed.
Fiscal stimulus has made consumers more than whole, with aggregate consumer purchasing power now UP versus pre COVID. Short term, the market is presuming additional significant fiscal stimulus. If it does not come, the market will try to force it. This is a major risk + downside trigger, but it requires you to presume the Democrats or Ron Paul type Republics will have both the will and the ability to gamble the economy for election plays.
If a combination of Monetary Policy and Fiscal Stimulus can / did fix this crisis practically overnight, equity discount rates will lower / multiples will increase as the probability of systemic failures is lower. Failure is being made impossible so long as a firm does not fail alone. Long term, the market will now know it can force any of these measures and more from the government. This is very bullish equity beta generally. At a high level, the sovereign and the system is so levered that it cannot allow material downside, so they are putting on a martingale betting strategy and assuming all risk on the USD. This could fail at some point, but it’s a much bigger issue than equity prices.
If the consumer is strong and tolerance for virus risk is increasing, the prospects for SMEs re-opening are better than our base case. While it will not be overnight, consistently improving business performance will have a reflexive impacts on increasing business confidence.
Capital markets remain extremely accommodating with debt and equity financing available for nearly everyone who seeks it. Covenants, loan payments, and rents are being adjusted as needed almost universally. Everyone is playing ball.
I think I speak for a lot of people when I say I was blown away by earnings this quarter. The large index weightings are virtually unaffected in ways the market will care about, and most of the companies we cover have reported robust recoveries in weekly data in April. Even existing home sales are sitting over 90% of normal with people not being able to go out and look at houses. Pretty wild to me.
Georgia’s reopening data is really robust, having based and now uniformly moving up in all categories steadily.
Mark Cuban did some surveying on reopening weekend. The data was not very positive, but the signal in this data will be how it changed over time. It should not be surprising that most business operators did not have the risk tolerance to burn cash to be open during the first few days they were allowed to.
Specific individual companies and assets may require a repricing, but there is more than enough liquidity for those assets to not become stranded. Isolated firm failures are not terribly economically relevant if the underlying economic output is not impaired. Candidly, there is an absurd amount of money looking to buy distressed individual situations.
Within the stock market, retail investors are participating in recent upside more than any other investor group. This is bullish for overall business and consumer confidence. While it is true that retail inflow spikes tend to end badly, they also have been historically predictive of extreme bull market runs.
Investors as a whole remain extremely bearish, to the extent that even entertaining a bullish view induces fairly violent responses. But these people are already out of the market. Their views do not impact price unless they are forced to capitulate, in which case they drive the market up.
News flow is consistently incrementally positive and forms a reflexive loop where negative news is looked through and the bears and bearish views become thought of as annoying “boy who cried wolf” claims.
At a high level, all of this feels so, so, so wrong. It feels that it should not be this way. The economy should not be simply a function of immense government money, right? Or has it always been that way and we are bound by the comforts of having invested in the United States? But it is now, and the cognitive dissonance here combined with the immense amount of financial liquidity equates to the perfect setup for a massive bull move / equity bubble until such a time there exists a feedback loop to stop these dynamics.
I’m not yet at a point where I have positioned my book based on the above, but I am thinking about it. My hope is that among the hundreds of people who post nasty things about me after reading this, a few may have some interesting insights.
For now, I think the bear case is dead until either momentum breaks and/or information above changes. The biggest potential catalyst for bears in my mind is congress refusing to do additional fiscal stimulus. Having said all of this, the top is now likely in, as I have become my own contra and in doing so I offer myself to be nailed to the cross as the messiah of the bears.