The last few days of selling notwithstanding, I think the market is more likely to “melt up.” Past its prior highs and up to Lord knows where.
As that last phrase implies, I don’t think “valuation” per se is the main driver. Or even a useful way to think about it. Per prior pieces, its pretty hard to figure out a “fair” value for anything in a world of negative interest rates (getting paid to borrow). The only certainty is that past analogues, patterns, and rules of thumb are useless. They depend on a positive rates dynamic that doesn’t currently exist.
So we are left stumbling along in a foggy world where North has shifted to someplace unknown on the compass rose. That dead reckoning and inference are deeply discomforting. But its smarter than seeking comfort from a map that is guaranteed to yield garbage coordinates.
So why do we go higher? Because the money has to go someplace.
- “At the end of March, about $7.7 trillion in debt was trading at negative rates. Two months later that number is $8.2 trillion (Bloomberg, Bianco Research).“
- People getting paid to borrow need someplace to put that (borrowed) money. If I give you 1% to borrow and you buy a 4% yield US utility stock, you make a 5% return. But if the stock gets bid up and the dividend yield goes to 3%, you still get a 4% return. Etc. Etc. Unless that US utility goes bankrupt. Which seems pretty unlikely…
Fighting that wall of money is a wall of skepticism. It is dressed up in a lot of reasonable sounding arguments about valuation and ya ya ya. But much of that “analysis” is just recycling the past to avoid facing a discomforting future. They are navigating off maps where North is still where it “should” be. And/or shouting loudly for the gods (ie the Fed) to move North back to its normal place. Anything to avoid facing the reality of uncharted waters.
I think the wall of money will win. And Lord knows where we end up. There is probably a very ugly reckoning ahead somewhere. But only after the skeptics become enthusiasts…
Anyway. Going camping in the Sierras this weekend. At least the maps still orient to North out there…. 🙂