Today is a day for Don Henley, and his solo tune The Heart of the Matter. While the markets groove to Life in the Fast Lane by his group The Eagles, I choose to focus on the lyric from Don's solo output. "The more I know, the less I understand."
That describes today's markets perfectly. I like to screenshot the news and this morning I noted that CNBC had highlighted the following three things in its "Things to Watch" section:
- China prepares for possible Evergrande demise, says WSJ
- Weekly Jobless claims unexpectedly rise to 351,000
- The Fed decreased its forecast for growth, increased its forecast for inflation.
Which one of those is "good news?" Spoiler, they are all bad news for equities, or would be if people even paid remotely close attention to equity valuations. It just doesn't matter these days. The market is going to rally because Evergrande paid off some but not all of its creditors (CNBC reports that Evergrande has an $83 million payment due to holders of its dollar denominated bonds today.)
That's weak sauce.
We are just bombarded by such a bunch of junk coming from all sides. It's almost as much of a joke as the real return on the S&P 500, which according to multpl.com is lavishing investors with a fulsome 1.30% yield as of today, alarmingly close to dotcom bubble-era yields.
But I wrote "alarmed" and who is actually alarmed? The bond market, that's who. Today's spike in Treasury yields has driven the 10-year UST yield to 1.39%. That is a big move off recent lows, but historically, it's still bupkes.
The bond market is telling you the Fed is going to taper and that the dotplot indicates a rate hike in 2022. Who cares? People who actually do math for a living. Note that does not include Powell, Yellen or any of the other know-nothings in DC.
They have created a wave of inflation not seen since the late-1970s and now they are you telling you how great things are because your house and stock portfolio are worth so much more. In nominal terms, yes, but not in real terms.
The bond market is the real arbiter of economic truth. But rates are so low on an absolute basis that it is impossible to generate economic returns from bonds.
You have to click through a few menus to find it, but the yield on iShares QLTA A-AAA-rated bond ETF is 1.59%.
So do I take 1.30% from stocks, 1.39% for USTs or 1.59% for high-grade corporates?
First I have to clear my head before I can do any trades.
What is wrong with these markets? I will tell you what, and believe me when I tell you, the folks on CNBC will be the absolute last ones to realize this.
The cost of money implied by the current valuations accorded to fixed-income instruments does not at all reflect the opportunity cost of lending money (which buying a bond effectively is) and the equity risk premium - 4.61% as of September 1, 2021, according to NYU valuation Guru Aswath Damodaran - is actually slightly below its 4.83% reading on February 14, 2020. Thanks, COVID! Really? Seriously?
This is what happens when top-down metrics and hero worship replace good, old-fashioned honest equity research. This week we have seen FedEx (FDX) and Disney (DIS) miss earnings estimates, and believe me when I tell you there will be many more earnings misses to come.
Inflation is awful for companies.
Spiking natural gas prices have already killed a passel of independent energy suppliers in the UK, a phenomenon we saw in Texas last winter. But it's not just energy prices... it's prices for everything that's rising. Shipping, intermediate goods, uranium, labor, can you please name me an industry that isn't impacted by this inflationary monster?
Wall Street. Ha, I answered my own question. They don't care that inflation makes your life worse any more than Powell or Yellen do. The more I know, the less I understand.