You know why so many people keep getting this market wrong, staying negative no matter what?
It's the Fed. On a day when the Fed presented the results of its monthly meeting, results that, totally and predictably kept rates low, we had to hear endless chatter about how the Fed has created the bubble that we find ourselves in.
Yep, the Fed is all-powerful and has created an environment where equities are the only class to invest in and if you invest in bonds the Fed is telling you that you are a loser. That's why stocks go higher, that and through monopolistic practices that big tech companies routinely embrace, at least according to a Congressional antitrust panel that grilled top tech executives today.
And you know what? I am sick of it. I have heard enough about the Fed and about the overinflated price of stocks because of the Fed's desire to keep rates low to get the economy moving.
Let me disabuse you tonight of some of the biggest canards that people routinely spout involving the Fed and stocks, and I have explained the ridiculous nature of the congressional hearing about antitrust and Alphabet (GOOGL) , Amazon (AMZN) , Apple (AAPL) and Facebook (FB) earlier in the day (see here).
First, the Fed does matter. No denying it. Could the Fed take short term rates to 3% and break the bubble? How about four? Maybe 5%? I know that would please a lot of bears out there who do not care about stocks but do care that inflation never comes back. They would dance in the street. You could just hear them come on television, on CNBC, and praise the Fed for giving investors an alternative with high short rates.
Do you think, for one minute, these critics actually believe that higher short rates would actually be good for any assets? Do they think, for one minute, that it would product more jobs, that it would allow us to better provide for the common defense or promote the general welfare during a pandemic that, if handled badly can threaten the entire republic?
I do not believe that the Fed has created a bubble but I am even more adamant that what the bears want, what the managers with little in the market need to stay in business is what they think is a rational Fed, one that wants to combat the inflation that the giant stimulus package must end up causing. They have a smattering of history on their side: 1. The Fed has to take way the punch bowl before people get carried away and, 2. An inflation spiral is hard to stop.
But what they are forgetting is deflationary spirals are equally hard to stop and the Fed doesn't want to push values down even further. We have seen both inflation and deflation help produce wars, collapses, dictators, fascists. Have any of these bubble mongers even thought about the idea that Jerome Powell has studied history and knows that heroic actions, the actions he is performing, can be the difference between a government that could ignore rule of law or ignore basic values in order to restore order. I know, extreme. But unless you lived through the Civil War - and I think that such longevity - you have never seen anything like this in the populace. And unless you lived in Germany in the Twenties you don't know exactly how brilliant Powell has been when he understood the truly pernicious nature of the pandemic.
Two, there is only so much that a Fed chief can do to avoid a collapse of the economy and to quote Scotty, that fixed income savant, Jay's given her all she's got. I think his decision to buy some really crummy bonds to keep companies afloat, including the cruise ships, was brilliant. The bears and the journalists continue to cite the huge number of bankruptcies we have had since the pandemic and it's simply not true. Yes, Penny and Brooks Brothers, Neiman and J Crew filed for bankruptcy, but I think they would have gone broke even if we had a decent economy. Powell's strategy has had the unthinkably brilliant outcome of keeping many companies with legitimately strong business afloat until Moderna (MRNA) or Pfizer (PFE) or Johnson & Johnson (JNJ) or AstraZeneca (AZN) comes up with something. The bears would have loved a laissez faire approach that would force Carnival (CCL) , Royal Caribbean (RCL) and Norwegian (NCLH) into Chapter 11, wiping out their common stocks. Same with the airlines. Without the Fed's back up who in his right mind would buy an airline equity offering. But what happens if the day after he drops the practice and millions more are thrown out of work, we get a vaccine. Oops. Too late. Do over? I don't think so.
Again, I do not think he is causing a bubble which raises all asset prices. I think he is being prudent to recognize that there are some companies, through no fault of their own, have been turned upside down and he doesn't want the workers to pay for the mess. Maybe he's just plain kind. He's not the Tin Man before he got to Oz.
Third, let's take the nature of the bubble head on. If you have studied the history of the market you will know that there have been multiple times that the Fed has been accused of creating an asset bubble. Yet here we are, a few percentage points from the high, watching zoom video and wearing masks and we can't believe it's "happening again." But what is it that is happening? Have the markets truly failed us during this period? Individual stock pickers have been able to isolate some very big winners. Are the winners too big? Well, this is an interesting Washingtonian supposition. If you are in the bubble camp then you have to believe that the Fed created the trillion dollar enterprises. But if you walk across the street you find out that monopolistic practices created the trillion company.
Or you can believe, like me, that hard work, really smart people at the top and a share base willing to stick with them through good and bad times, allowing for more money to be raised if necessary. You can believe this whole Washington focus is a total sham and these companies got their valuations not because of the Fed and not because of monopolistic practices, but because they build the proverbial better mousetraps that are extremely popular. What do they want? An Eastern European bloc, post World War II where no one did well except a small ruling class party, the proverbial rich? I don't think so. That's an anathema to the innovation that really caused the trillion dollar runs.
Finally, on days like today when stocks levitate, you can easily say "well where else is the money supposed to go, the Fed has taken away all the alternatives."
That's just nonsense. There are so many high and higher yielding stocks out there that you can buy. It's just a question of doing some work to find them. But if you think that single stock risk is a worry or if you only buy either the S&P 500 or the NASDAQ 100, sure you have a problem. A creative person could create a solid 5% yield right here. The point, though, is that the stocks that are going up are going up because they deserve to go up based on their earnings, where we are in the comeback cycle, and their forecasts. It just so happens that two companies, Advanced Micro (AMD) and Starbucks (SBUX) - both great and owned by my charitable trust which can be followed by joining the Action Alerts PLUS - both did something they wouldn't do before: give forecasts. Yep, things have gotten that better. If you want to know what I think caused the rally, it isn't Jay Powell with low rates, it's U.S. companies with higher forecasts, including profits from a weaker dollar, and how that, not low rates, forces money into their stocks.
(Alphabet, Amazon, Apple, Facebook, Johnson & Johnson, Advanced Micro Devices, and Starbucks are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)