What do you say about a stock market that's doing things that it never has done before? Can we just act as if it is business as usual? That the market likes a good old-fashioned disputed election with a president firing off lawsuits in a state where the count is close? Is the secret to higher stock prices a cross over the 100,000 Covid-19 daily case count?
No, but we are beginning to hear of a new way to look at equities, a way that is driving the old-time professionals nuts, because it is so antithetical to how we are supposed to look at stocks. We are hearing that stocks have become repositories of value. We are hearing that the nature of the asset class is changing, and we need to reconsider their worth to us vs. other investments.
In other words, maybe stocks were ---- and are worth more than we thought, because everything is relative and, boy, oh, boy, is everything else worth less than we thought...
Today, I listened to the earnest, smart, terrific Federal Reserve chairman talking about how he will do whatever it takes to keep economic activity going, but he needs "all of government working together," as he put it, which we don't have. Nonetheless, he will do his part to keep the corporate bond side of the table strong. His team of investors will buy what's necessary to keep companies alive. Without him, so much of what we take for granted would be impossible to fund. I know that many want to bottom-fish in the airlines and the cruise ships and, normally, you would want to say to these people, have you looked at the balance sheet of those companies? They are on death's door.
But what Powell has done is take away balance sheet risk. I know that's almost impossible to believe, but if your company is public, and it has public debt, this man is an angel.
Not so much for the small- and medium-sized businesses. That's what the Treasury Secretary and Congress have to do. There are 14 million people in the hospitality industry who are hanging on by their fingernails and come cold weather, they are out as their employers' close. Jay Powell cannot extend his safety net to them. The Treasury and Congress has to do it.
Step back for a second, though, and consider that to save so much of the economy, the Fed has to keep rates extraordinarily low.
The real impact?
The bond side of the equation, the big repository of wealth, suddenly seems to be a lot more capricious and less certain than we thought. Yes, the Fed may be able to provide emergency liquidity as needed, but you simply do not make any money owning bonds. The risk-reward seems OK, but when Jay Powell is done stabilizing things, I can't imagine a reason in the world why you would want to be in any bond, let alone the trillions that are out there.
Against, those, for a moment, let's consider equities. I remember the day I first walked into Goldman Sachs (GS) 38 years ago, and I got schooled by an old friend about the value of stocks vs. bonds. I loved the stock market so much, and I had all of these tremendous ideas, and he let me go on and on until I had named enough stocks to create a Jim Cramer Index.
Then he looked at me and said, "Never mention those stocks or any other stock again. Ever."
I said, "What the heck are you talking about?"
He said, "Let me let you in on a little secret. Stocks go down."
They don't go down.
I looked at him and said that I couldn't take that pledge, because I wanted to make people money. The man is someone of great decorum, so I will leave out the various bombs to spare him of embarrassment, but he basically said to me that not only did I not know what I was talking about, but that the people I would be talking to were already rich. You only need to get rich once. All these people wanted to do was preserve wealth. Not make it.
"But what if they actually wanted to own stocks?" I asked.
He told me to discourage them at all costs, because if one stock went down, and they lost money, we would lose the account for that one darned stock.
I said, How about if we let them buy a couple of stocks?
He said, Make sure it's their idea. You keep your ideas to yourself.
Well, I kind of ended up doing both. I helped plenty of rich people to stay rich, and I kept my ideas to myself and invested in them and made enough money to go be a hedge fund manager on my own.
It worked well for everyone.
What does this story have to do with this miraculous rally?
You see, if I were to go to Goldman Sachs right now, and I were to be in charge of that hallowed division, I would say that when rich people come to see you, you have to say to them that they need to take less risk and preserve wealth. And that means they need to own a lot more stocks than bonds.
We are seeing this year a passing of the torch: The riskier assets at this moment seem to be the safest from back then in 1982 when Treasuries were yielding double-digits. Yes, you still only need to get rich once. But to stay rich, I think you may have to abandon long-held shibboleths about credit, because the equity side of many of the companies that we follow and talk about is a much better repository of wealth than the bond side.
We now have companies like Microsoft (MSFT) and Apple (AAPL) , or Facebook (FB) and Alphabet (GOOGL) , that have tens of billions of dollars on their balance sheets. They have survived the great recession and come out stronger. They aren't surviving the Great Pandemic of 2020, they are thriving. They have not been touched in any way, but the crazy presidential politics of our country. In fact, their CEOs, make our politicians look like they are from Fredonia. They are the statesmen. They are the thought leaders.They are the ones that are trying to solve the intractable problems of poverty, of race, of disease, of global warming and other destroyers of the planet. They tell the truth or the are punished. They are accountable, not as much as we would like, but they can't entrench themselves of their own accord.
Now, mind you, this is a new thesis, this repository of wealthy notion. Even newer than the love affair with another asset rival: Bitcoin. You may dismiss it, but in a world where some mysterious figure creates an invisible currency that's loved by the rich vs. the printing press kind, I think you would be nuts to consider equities as second class to bonds. And yes, gold's still got luster. So do the miners. I like it that you can feel bullion, vs. staring at a video ledger.
But the real lesson of this rally may be that stocks are the ones that don't need government help, bonds are. And that means, if you are a young, new and wet-behind-the-ears broker at Goldman Sachs, I would tell you to forget all of those bond ideas, buy the stocks of companies with balance sheets better than any central bank, and you'll do a heck of a lot better with a lot less long term risk.