The question vexing Uber and Grubhub as they wrestle over a merger is which firm’s losses are worth more?
And for investors considering opportunities among stocks, a larger question: What companies or industries deserve better multiples on the Federal Reserve’s backstopping balance sheet and Congress’s operating loans?
Sure, I’m being cheeky, as the Brits would say. The point is the market isn’t trading on fundamentals. Undeniable now to even the most ardent skeptics is that something is going on with stocks that wears an air of unreality.
And there is no higher impertinence than the somber assertion of the absurd. It deserves a smart retort.
We’ve been writing on market structure for over a decade. Market structure is to the stock market what the Periodic Table is to chemistry. Building blocks.
We’ve argued that the building blocks of the market, the rules governing how stock prices are set, have triumphed over the conventions of stock-valuation.
SPY, the S&P 500 Exchange Traded Fund (ETF), yesterday closed above $308. It last traded near these levels Mar 2.
What’s happened since? Well, we had a global pandemic that shut down the entire planetary economic machinery save what’s in Sweden, North Dakota and Africa. Over 40 million people in the United States alone took unemployment. Perhaps another 50 million got a paycheck courtesy of the US Congress’s Paycheck Protection Program.
Which means more than half the 160 million Americans working on Mar 2 when stocks last traded at current levels have been idled (though yes, some are returning).
At Feb 27, the Federal Reserve’s balance sheet was $4.2 trillion, of which $2.6 trillion sat in excess-reserve accounts earning interest of about 1.6% (why banks could pay some basis points on your savings account – arbitrage, really, that you, the taxpayer, footed).
By May 28 the Fed’s obligations on your behalf (all that money the Fed doles out has your name on it – “full faith and credit of the United States”) were $7.1 trillion, with $3.3 trillion in excess reserves now earning ten cents and wiping out meager savings-account returns but freeing taxpayers of interest expense.
The nearest facsimile I can arrive at for this great workforce idling, casting about in my history-obsessed mind, is the American Indians. They were told, stop hunting and gathering and go on the government’s payroll.
You cannot idle the industrious and value their output the same as you did before.
Yet we are.
While I’m a pessimist about liberal democracy (classical meaning of “freedom”) because it persisted through a pandemic by the barest thread, I’m an inveterate optimist about American business. I’ve obsessed on it my adult life. It affords a fulsome lifestyle.
The goal of good fiction is suspense of disbelief. That is, do I buy the thesis of the story? (News of the World is by the way brilliant fiction from Paulette Jiles with a high disbelief-suspension quotient).
Well, the stock market is supposed to be a barometer for truth. Not a litmus test for suspension of disbelief.
Sure, the pandemic cut some costs, like business travel. But contending a benefit for bottom lines ignores the long consequential food chain of ramifications rippling through airlines, hotels, restaurants, auto rentals, Uber, Lyft, on it goes.
How about corporate spending on box seats at big arenas?
Marc Benioff is still building his version of Larry Ellison’s Altar to Self in downtown San Francisco (no slight intended, just humor) for salesforce. Yet he said to CNBC that some meaningful part of the workforce may never return to the office.
An empty edifice?
And nationwide riots now around racial injustice will leave at this point unknown physical and psychological imprints on the nerve cluster of the great American economic noggin.
Should stocks trade where they did before these things?
The answer is unknowable. Despite the claims of so many, from Leuthold’s Jim Paulson to Wharton’s Jeremy Siegel, that stocks reflect the verve of future expectations, it’s not possible to answer something unknowable.
So. The market is up on its structure. Its building blocks. The way it works.
Yes, Active investors have dollar-cost-averaged into stocks since late March. But that was money expecting a bumpy ride through The Unknowable.
Instead the market rocketed up on its other chock-full things.
Quants chased up prices out of whack with trailing data. ETF arbitragers and high-speed traders feasted on spreads between the papery substance of ETF shares and the wobbly movement of underlying stocks. Counterparties to derivatives were repeatedly forced to cover unexpected moves. The combination lofted valuations.
None of these behaviors considers The Unknowable. So, as the Unknowable becomes known, will it be better or worse than it was Mar 2?
What’s your bet?
Daily Market Structure Sentiment™ has peaked over 8.0/10.0 for the third time in two months, something we’ve not seen before. The causes are known. The effects are unknowable save that stocks have always paused at eights but never plunged.
The unknowable is never boring, sometimes rewarding, sometimes harsh. We’ll see.