The Lure of Fed. Money-Printing And Artificially-Low Interest Rates (#GotBitcoin?)
Investing is about storytelling, but the narrative now has turned out to be a tall tale in the past. The Lure of Fed. Money-Printing And Artificially-Low Interest Rates (#GotBitcoin?)
Behind the facade of ratios and metrics, investing is about storytelling. The main narrative right now is one that has turned out to be the tallest of tall tales in the past.
The story is that cheap money justifies the market’s high valuations, so we need not worry that the S&P 500 hasn’t been so expensive since the dot-com bubble, or that the five biggest U.S. stocks are now comparable in size to the five biggest European stock markets.
As with all the best stories, it has a core of truth. Low rates do justify higher valuations, at least for companies that can reliably grow no matter what the economy does. And the solid tech companies appear to be able to ride out even this year’s atrociously bad economy. (Europe’s markets are more cyclical, so cheap money hasn’t helped so much.)
Low Rates Boost Safer Growth
Lower rates have prompted investors to look for reliable growth this century, giving safer stocks – such as consumer staples – a tendency to outperform as Treasury yields fall.
Management squanders the cash. When executives find themselves with cheap capital, they usually throw it at their pet projects, build a fancy new headquarters or, occasionally, splash out on a luxury commode. When reality catches up and competition or regulation erodes their elevated margins, shareholders may be surprised to find out how much was wasted.
The big tech companies have obliged with some of the most expensive HQs—and secondary HQs—in history. Actual moonshots, or Mars-shots, are run on the side as private projects of the founders, but the CEOs have found plenty of other ways to spend the money that has poured in from investors and from profitable early successes. The justifications they’ve given to shareholders—there’s a great opportunity!—are little different to uncountable failures in the past: If a company can build an online advertising business or an e-commerce platform, of course it is best placed to invent self-driving cars or make a move on Hollywood.
Maybe this time is different. Jeff Bezos has repeatedly succeeded in extending Amazon from its origins as an internet bookshop, with one venture, cloud computing, now its most profitable business. Investors are confident he can repeat his innovation success in areas such as video and Whole Foods, conveniently forgetting Amazon’s investment in Pets.com and multiple failed attempts at grocery delivery. Alphabet has created an incredibly popular operating system—not bad for a search engine-to-home-video conglomerate—although its failures in social media are swept under the carpet. Maybe the tech culture’s willingness to experiment and fail makes it more likely that these companies will find the Next Big Thing.
Alternatively, maybe their core businesses are so profitable, and so immune to competition, that they can afford to finance a few executive flights of fancy. Again, supposedly rock-solid earnings have always succumbed to regulators or new competitors in the past. Having been exactly those new competitors once, today’s tech winners should be well aware of the threat.
A bubble. Excitement about the growth prospects of the internet inflated into a bubble after the Federal Reserve slashed rates in 1998 to save Wall Street from the implosion of hedge fund Long-Term Capital Management. Many of the dot-coms—including Pets.com—vanished when the bubble burst.
But the forgotten story of the time was the extreme valuations reached by some very boring businesses as bond yields fell in the months before LTCM collapsed. From the start of 1997 to August 1998, the 10-year Treasury yield dropped from 6.4% to 5.4%. The fall justified higher valuations for companies with reliable earnings. The market, as usual, took it to excess. Coca-Cola led the way with a forward price/earnings ratio that almost doubled to 50 (!), while the consumer-staples sector as a whole went from under 19 to 25. When the Fed’s rate cuts restored confidence and bond yields rose, those valuations fell all the way back, even before the dot-com bust took down the entire market.
A similar pattern is visible today. Dot-coms have been replaced by speculation on electric cars, but many of the same safe, reliable earners are again trading on premium valuations because of low rates. With the 10-year Treasury now at 0.6%, a dividend yield of 3% on Coca-Cola or PepsiCo looks like a bargain. Until the story changes, and it doesn’t.
Inflation. In the early 1970s, the Nifty Fifty stocks offered investors a nice, safe way to avoid the problem of a bond yield sharply down thanks to the recession at the start of the decade. Reliable growth and decent earnings pushed companies such as IBM, Kodak and, again, Coca-Cola (then at 49 times trailing earnings) and PepsiCo to unwarranted valuations.
When inflation ran out of control and bond yields began to rise, the cheap money that had underpinned this excess vanished and valuations fell back. Hardly any lived up to their promise.
No one is paying 50 times for Coke right now, so there’s scope for stocks to rise a lot further yet. Wild speculation is still limited to a select group, led by Tesla. But we’re already at the point where extended valuations for the supposedly safe growth stocks are vulnerable to any surprise good news on the economy that pushes up bond yields. Investors need to remember that reliable earnings don’t make for reliable stock returns if they pay too much for them—and any sign that interest rates aren’t staying at close to zero pretty much forever will mean they paid too much.
Fed Expects Near 0% Interest Rates For Years, Potentially Boosting BTC’s Value Proposition
Bitcoin keeps looking better and better each time the U.S. devalues its own currency.
The U.S. Federal Reserve’s game plan going forward includes short-term interest levels between 0% and 0.25%, as decided by Fed brass in a Sept. 15 and 16 gathering.
The independent body plans to maintain low interest rates in order to increase inflation, based on a Sept. 16 report from CNBC. Such news shines a light on Bitcoin as a store of value. The blockchain-based currency is largely immune to such actions, as it is protected against inflation by its permanent cap of 21 million coins.
A majority of the Fed’s committee members expect interest rates to remain close to 0% for the next three years, CNBC said. The governing body said that they aim for inflation higher than 2%.
These actions could result in the dollar losing value amid the central bank’s attempts to right the country’s sinking economic ship — tossed by the waves of the ongoing pandemic.
Over the last few years, Bitcoin has solidified its position as a store of value, theoretically removed from traditional market prices and government control. Mainstream giants, such as MicroStrategies and Paul Tudor Jones, have recently added to the coin’s credibility by joining the ecosystem, although the technology has yet to see full mainstream approval.
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