The Era of Easy Money


A trader at the New York Stock Exchange last week.



Photo:

Courtney Crow/Zuma Press

The Federal Reserve has created more than $3.5 trillion since the start of the Covid panic and all those dollars have to go somewhere. Lately they seem to be going everywhere. Great companies, decent companies, weak companies with entertaining Internet memes and even businesses created as jokes are now getting funded.

Some highly valued assets combine the best elements of both jokes and memes. Before its Tuesday slump the Journal’s Caitlin Ostroff and Caitlin McCabe reported on the spectacular rise of one particular asset:

A cryptocurrency that was created as a joke exploded into plain view on Wall Street on Monday, with a surge in dogecoin sending its 2021 return above 8,100%—more than double the gains on the S&P 500, including dividends, since 1988.

Dogecoin’s rise from a quirky meme into a widely traded asset worth about $50 billion—more than

Marriott International Inc.

or

Ford Motor Co.

—is the latest act of financial alchemy by rapidly moving individual investors who have used access to no-fee trading platforms and a wave of government stimulus money to transform markets over the past year.

The cryptocurrency’s rise is reminiscent of

GameStop Corp.’s

stunning advance earlier this year, an episode in which traders congregating on Reddit and other social-media platforms made a past-prime mall retailer into a stock-market superpower.

Many individual investors are naturally focused on stock markets but debt markets have also been flush with ready cash. “Banks are now competing with bond investors to see who can give away the most money on the easiest terms,” writes Brian Reynolds of Reynolds Strategy in a Tuesday note to clients. He doesn’t see the party ending anytime soon and argues that the “competition to give away money is going to intensify as a result of record-setting bank bond deals” and this “competition is likely going to result in even more debt-fueled stock buybacks.”

How and when will it all end?

Last week hedge fund Greenlight Capital’s letter to investors raised the latest example of an astounding valuation in the equity market:

Someone pointed us to Hometown International (HWIN), which owns a single deli in rural New Jersey. The deli had $21,772 in sales in 2019 and only $13,976 in 2020, as it was closed due to COVID from March to September. HWIN reached a market cap of $113 million on February 8.

The largest shareholder is also the CEO/CFO/Treasurer and a Director, who also happens to be the wrestling coach of the high school next door to the deli. The pastrami must be amazing.

The CEO really is amazing at coaching wrestling but doesn’t seem to have much to say about the value of his pastrami. Another passage in the Greenlight letter may help explain the bold new thinking of Fed officials, who don’t seem too concerned about inflation risks as they continue to hold short-term lending rates close to zero, even as they have continued to create new money by expanding the Fed balance sheet. Greenlight writes of the Fed:

Behind the curve is fine on the way up no matter how frothy the stock market the recovery is. Now, it says it is only going to react to actual inflation that exceeds its 2% target for a period of time.

Furthermore, the Fed has indicated that it believes any abnormally high inflation will be transitory. We wonder, how will the Fed know? Do price increases come with a label that says “transitory”? Our sense is that no matter how hot inflation gets in the coming months, the Fed will continue with zero interest rates and large-scale asset purchases. After all, the U.S. Treasury has a lot of debt to sell and it isn’t clear who, other than the Fed, can absorb the supply.

The bipartisan idea that deficits don’t matter has even reached popular culture.

This column is old enough to remember when financial policy makers thought inflation was a bad thing and that high levels of debt were also dangerous. History says they will again.

Yet today brings more news that the current Fed and the White House are bound to view as “transitory.” The Journal’s Sharon Terlep reports:

Procter & Gamble Co.

this fall will start charging more for household staples from diapers to tampons, the latest and biggest consumer-products company to announce price hikes.

The maker of Gillette razors and Tide detergent cited rising costs for raw materials, such as resin and pulp, and higher expenses to transport goods.

The announcement, which came as P&G disclosed its quarterly financial results, follows a similar move last month by rival

Kimberly-Clark Corp.

Isn’t it time to stop stuffing emergency funding into an economy awash in cash?

***

James Freeman is the co-author of “The Cost: Trump, China and American Revival.”

***

Follow James Freeman on Twitter and Parler.

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(Teresa Vozzo helps compile Best of the Web.)

***

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