With the Federal Reserve having thrown trillions of dollars into the economy, many people ask where inflation went?
Look at your portfolio.
What should have happened in March was that helicopter money would go into spenders’ pockets. That money would have then gone into rent, into food, and into other necessities, increasing the value of companies that made and sell those goods, keeping the economy going.
Instead, the money went to investors who, with bonds priced near zero, bought stocks. Meanwhile the economy collapsed.
Anything that works now carries a ridiculous price. Amazon.com (AMZN) is a great company, but is it worth 110 times earnings? Apple (AAPL) faces huge supply chain problems, so is it worth 27.5 times earnings? Microsoft (MSFT) is at 35 times earnings, and slow-growth Walmart (WMT) is at 25 times.
Money is also flowing into things that should be worthless. AMC Entertainment (AMC) admits its movie theater chain may have to go out of business. Yet the stock is worth $5.50 per share, the market cap is still $575 million. Luckin Coffee (LK) is practically Enron. It lied about its revenues and is facing delisting. But it still trades, at $2.61 per share, a market cap of $650 million.
There’s your inflation. It’s hiding in asset prices.
There’s supposed to be a way for companies like Luckin, AMC or (for that matter) Macy’s (M) and L Brands (LB) to get a bailout. It’s called bankruptcy. You write off the equity, you write down the loans, you create a plan to go forward or, if no such plan is possible, you liquidate.
There is life after bankruptcy. New restaurants can get used equipment, sign new leases, and go into business quickly after the pandemic is over. The same with retailers, airlines, cruise lines, amusement parks or gambling palaces. Instead, many of the companies trading today are zombie companies. But their bonds are now guaranteed by the government, and the equity has been bailed out. Managers and investors have learned nothing.
Maybe I’m frustrated because I’m losing out. I have a lot of cash in my investment account. I’d like to get some bargains. I’d like to buy Amazon at somewhere around $1,500, which is where it should be trading right now. That would be a PE of around 60 which, given that most of it is a retailer, would be about right.
There is some evidence the world is catching on to the game. The value of the dollar keeps dropping, and technical indicators still call it a strong sell. The Euro now trades at $1.12, and it’s heading higher. Even Bitcoin, which is nothing more than an encryption key, is up to $9,600.
Inflation is coming and, when it does, there will be little the Fed can do about it. There’s too much cash floating around the equity markets that should have disappeared by now. When people do start making money again, when young investors find they can get a grub stake together again, they’re going to find there’s nothing they can buy.
Just as tear gassing peaceful protestors is destructive to democracy and letting police act like armed thugs is destructive to liberty, so bailing out investors is destructive to capitalism. It lets people think they can act with impunity. It removes the risk necessary for the system to function. It turns the rich into a class apart from their fellow men and women.
There is no good reason why the stock market should be rising while the economy collapses. A price is going to have to be paid for that. Every system is a contract. When people find that they’re subject to that contract, but others aren’t, that’s when revolutions happen.
“It is the Right of the People to alter or to abolish (government),” Jefferson wrote, “and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.” That’s America’s founding document. It states that when the system ceases to work, and when it won’t reform, you create a new system.
Since 1776 revolutions have happened around the world, on every continent. Economic and political systems have failed. Kings and Presidents and prime ministers have been executed. We’re not immune to the impulse, nor should we be.
Our economic elite is playing with fire, and small investors are dancing in the flames.
