Stocks had their best week since November as the short squeeze related fears subsided. While GameStop and AMC may never get close to their recent highs again, that doesn’t mean Reddit raiders won’t try to attack again in a different way. It isn’t and wasn’t about us versus them. This is Wall Street. It’s all about making money. If those running the WallStreetBets boards think they can make money perpetuating another short squeeze, they will. Or they may switch tactics and move in a different direction.
As I noted last week, with the Fed continuing to pour money into markets, one can only expect more bubbles to form. Everyone with an investment reputation is creating a SPAC (Special Purpose Acquisition Company), or so it seems. The latest list includes Elliot Management, a high-profile hedge fund and Alex Rodriguez, or A-Rod to most, a high-profile athlete with some business experience. With everyone creating SPACs, we know two things. One, there must be a lot of money out there to be earned by the SPAC creators. No one is starting a SPAC as a benevolent undertaking. Second, for every SPAC, there must be a good and undervalued company available to merge into the SPAC. Otherwise, it can’t work. History tells us the latter statement is dubious and that many or most of the SPACs to be created will end up trading below their offering prices before too long. Once again, this is what happens when too much money gets tossed around chasing a limited number of good initiatives.
The unending flow of money has been coming from the Fed. Now Congress is getting into the act. Between the election and inauguration, Congress passed another stimulus bill. That one was only a few hundred billion dollars, extending and restarting aid programs. It was also filled with billions of dollars of pork for members of Congress to hand out. That’s the normal way to get everyone on board. Now the Democrats want to push through, on a straight-line party basis, another $1.9 trillion package. How big is $1.9 trillion? About 10% of GDP is one way to look at it. President Biden wants to dole out another $1,400 to families, most of whom got $600 last month. To be fair, some of that money is needed. One only has to look at the ongoing food lines to realize that. Hundreds of billions are going to vaccine distribution. That sounds sensible given the slow rollout to date. But is the problem to date a problem of money or logistics? There doesn’t seem to be a vaccine shortage, just a problem getting Americans vaccinated. And if there were a supply shortage, more money can’t get Pfizer or Moderna to make the vaccines any quicker.
Last year, several bills were passed to shore up the economy. According to a recent House Budget Committee estimate, over $1 trillion still hasn’t been spent. That includes $59 billion for schools, $239 billion for health care, and $452 in small business loans. The popular PPP loan programs expired with hundreds of billions of unused loan capacity. Monies in the new bill are to be used, in part, to aid state and local governments. But look at state and local budgets. Tax revenues have been surprisingly strong. State and local governments added 67,000 jobs, more than 8 times the private sector. It doesn’t sound like they are broke. Is there a need for more funds in targeted places? Most likely yes. The current bill may be presented as a pandemic relief bill, but in reality, it is a bill meant to fulfill Joe Biden’s agenda. And it will be filled with lots of pork as well.
Assuming it happens, even if it is a bit smaller than $1.9 trillion, it will undoubtedly be a near-term boost to GDP. Treasury Secretary Janet Yellen says that if only the new stimulus package is passed, our economy will return to full employment by the end of next year. If she is right, then what? Will the Fed stop flooding markets with money? Will Congress stop spending money it doesn’t have? Obviously, I don’t have the answer. But any answers I can conjure up aren’t very appealing. I understand the concept that if interest rates are zero, there are no current costs to service debt. But with an economy pushing toward full employment, and fiscal spending accelerating, expecting interest rates to stay at zero indefinitely would be a difficult presumption for me to swallow.
If full employment is still 18 months or more away, it would seem that shouldn’t be today’s problem. And if you look at the market’s behavior, I would say that’s a correct assumption. But markets won’t wait 18 months to react. Long-term interest rates have begun to creep up again. The last time it happened, the Fed quickly announced that it wouldn’t taper bond purchases any time soon. “Don’t fight the Fed” is a phrase most investors understand. But verbal jaw boning can only work for so long. Commodity prices are already increasing. Some are rising sharply. So are home prices. Thus far rents and other occupancy costs remain in check, but that won’t happen forever if the prices of homes for sale keep rising. If Ms. Yellen is right and full employment is just 18 months away, wage rates will start to rise as well. Rising inflation expectations will follow. And then the real battle begins. Rising earnings versus rising interest rates. Today, rising earnings are winning hands down. The strong markets and lots of new money are igniting investors’ animal spirits. The good times keep rolling on. But, the explosion of SPACs, the rise of the Reddit investors, and the surge once again in Bitcoin are all warning signs. Too much of a good thing usually leads to a hangover.
As for tactics, I offer two suggestions. First, stay to your asset allocation. Taking a little equity money off the table after a big run isn’t a dumb idea. Second, look at valuation. Do all your stocks still look sensible at today’s price? If a stock you own rides a rocket ship up due to a short squeeze, shouldn’t you take some profits? One should never be all in or all out. The world isn’t black and white. The economy is doing great. There are few reasons to run for fear that speculative excesses are going to wipe you out when they get corrected. But there are also few reasons not to be attentive and make mid-course corrections.
There is an old saw that says history never repeats itself. But it often rhymes. Bull markets start with cynicism and often end with euphoria. I think it is undoubtedly fair today to say we are a lot closer to euphoria than cynicism. But no one can tell exactly when euphoria gets extreme enough to burst the bubble. Why guess? Take a bit off now and have some dry powder available should a correction happen.
Today, folk singer Tom Rush is 80. Composer John Williams is 89.
James M. Meyer, CFA 610-260-2220