wheat vs. chaff (vii)

from stay-at-home to return-to-normal

Two years ago, the domestic stock market was trying to figure out the economic consequences of having a rapidly spreading pandemic (dead bodies stacked in refrigerator cars because the funeral industry was overwhelmed) and a national government that folded under the pressure. A new administration quickly took action and appears to have the pandemic more or less under control.

Several pandemic-related issues remain, however:

–the fiscal stimulus applied by Washington to stabilize the economy now appears to have been too large (in contrast to the deeply inadequate government response to the 2008-09 banking crisis) and to have been applied for six months too long. The result of this is the highest level of inflation in the US in a quarter century, and a sense of urgency in raising interest rates to cool down a too-hot economy. Although the monetary authority always expresses a strong desire for a “soft landing,” i.e. an economic slowdown that doesn’t tip the country into recession, I can’t recall this aspirational outcome ever actually happening. The big question fo us as investors, I think, is what difference it will make in practical terms if the US contracts by, say, 1.0% in 2023 vs, expanding by 0.5%.

–speaking very roughly, consumer spending in the US is usually half on goods, half on services. During quarantine, that ratio shifted to 3/4 on goods. Although I have no idea of the details, let’s assume something similar most likely happened in the rest of the world. This rapid shift, which manufacturers have doubtless diagnosed as temporary–meaning they haven’t launched capacity-expansion programs– has created global shortages of goods. This has translated into higher prices for what has been available

–China continues to have pandemic outbreak problems, which it is treating by isolating affected areas. This has significantly slowed the flow of exports to the US, creating another source of inflation.

stock market issues

–as the economy shifts away from consuming huge amounts of goods toward services, who are the winners and losers?

–in particular, in a post-pandemic world, what are the prospects for the biggest quarantine winners, like Zoom or Teledoc or Robinhood (I have a small position in the last)? Do they remain relevant or fade back into obscurity?

–in a world where money is essentially free, all sorts of schemes that would appear crazy in other times abound. In the most speculative markets, black box companies, blank check companies, or ventures so lucrative they can’t be revealed emerge and go public. The pandemic’s equivalent is the Special Purpose Acquisition Company (SPAC). Do any of these have any merit in a world where government bonds trade at 4%?

–Over the past six months:

S&P 500 -14.2%

NASDAQ -25.8%

ARKK -63.2%

ZM -63.9%.

In other words, a lot of bad stuff has already happened, meaning that the market has already been struggling with these issues. How much bad news has been fully discounted?

more tomorrow

Leave a Reply

%d bloggers like this: