I think it was Stanley Druckenmiller who said that people think it is the stocks they pick that is going up, but in reality it is the money creation that pushes the stock up. Ray Dalio has said something similar too (though more nuanced).
I see a lot of people debating and arguing about why stocks are expensive (or cheap) and they should go down (or up). But in reality, it is first and foremost about the flow of funds. When liquidity is created, like water it has to flow somewhere. It almost doesn't matter what you own, a rising tide lifts all the boats. But the lowest ground is what will get the most flow.
To that point, falling interest rates, make the stocks most attractive b/c the earnings yield relative to bonds moves higher. They also push the commodities a little higher mostly because of stimulated demand, and also to a lesser degree because the relative value of cash drops.
This goes on until the interest rates hit rock bottom. When you have zero (and formerly inconceivable, negative) interest rates, then stocks will not move much higher because of falling interest rates. On the financial map, "we are here" or almost here. Money creation under the flat interest rate conditions (which is what zero interest rates are) primarily pushes real assets higher. This is why gold, but to a much bigger extent real estate has been going up like crazy (RE is better than gold b/c it actually pays some income).
Equities will continue to move up. But they will no longer take in the lion's share of the fund flow as they did under falling rates conditions b/c the only things that will move the stocks higher now are: (1) Productivity gains, and (2) supply/demand balance of the shares.
The #1 in the article (supply of available shares), is a very big deal too. It has two pillars: share buybacks, and IPO's. Personally I was shocked last year when I realized there are no about 3,000 public companies. That is less than half of what existed during the dot-com bubble. Remember, the money that funded those non-existent companies never disappeared; it just changed hands and still keeps flowing into something.
A hot IPO market will have a more pronounced negative effect on the stocks than it did during the 1990s b/c the interest rates can't fall further to support the market. So IPOs will have to be balanced by share buybacks. Look at it this way, every mutual fund (or investor) that buys into some IPO, has to sell some other share to fund the purchase. Now if the shares they sell are bought back by the management, then no harm done. Otherwise, down they go. This is going to be a theme going forward. It is one of the reasons why the breadth will get narrower b/c the R2K companies won't have much in the way of share buybacks, but OEX companies will.
In that article, rising profitability (#3) is not the result of share buybacks (they slicing the baloney here, yes buy backs do affect profitability, but that was not their point). The rising profitability is the result of technology advancement, and inequitable distribution of the profits (your #4 and #5 points here).
So the game plan should be to buy:
- Companies that have a strong share buyback program (mostly value stocks, but not most of the value stocks).
- Companies that have great growth (in a low growth/low interest rate environment those that can grow will be more richly valued).
- Real Assets, including commodities, RE, pipelines, infrastructure, etc.
Everything else, no matter how cheap they look, won't do very well unless someone buys them out. |
