Debt & Deflation
Here's a great thread that was dropped over the weekend by our good friend James O'Beirne and has flown under the radar that I think you freaks should check out. In it, James clearly lays out the case that the act of investing, particularly in stocks and bonds, has become completely detached from reality. Fundamentals do not matter in this brave new world. Only the promise of a greater fool matters.
For example, I was recently baffled as to why anyone would want to be long bonds with rates so low.
— James O'Beirne (@jamesob) October 3, 2020
It used to be that you bought bonds because there was actually a sizable coupon; you might expect, say, a 5% return on your money; meaning a 3% "real" return after inflation. pic.twitter.com/eEfPtoMyhM
Sorry, back to bonds.
— James O'Beirne (@jamesob) October 3, 2020
With the 10yr at 70 basis points and the 30yr at 125bps, you're not even beating inflation! You're losing money for the privilege of loaning the US government money!
Who in their right mind could be bullish these things!? pic.twitter.com/47nZfRii96
So if you'd (rightly) assume that the Fed is going to continue huge, structural purchases of bonds to keep their cost of borrowing low (and heavily-indebted businesses alive), you'd expect that these already insanely low rates could go lower. pic.twitter.com/YGZaWfmC86
— James O'Beirne (@jamesob) October 3, 2020
But my point is that this is a huge divergence from the fundamental reason people used to buy bonds: used to be they'd get their money back with a little extra (in real terms). *Not* necessarily because they'd expect someone else would buy their bonds for more before maturity.
— James O'Beirne (@jamesob) October 3, 2020
Price-to-earnings (P/E) TTM (or trailing twelve months) is essentially telling you "if I paid P for this stock, how many years would I have to wait for the earnings it generates to get me to breakeven."
— James O'Beirne (@jamesob) October 3, 2020
As you've probably heard, the values here are ridiculous at the moment.
And guess what, freaks? The Fed, via its promise to backstop markets and failed companies at all costs, has all but guaranteed there will always be a greater fool in the markets looking to scoop up assets and ride the wave of capital flows that will undoubtedly artificially inflate the value of stocks and bonds. Actually, they have guaranteed this. Individuals are no longer deploying capital into these assets because they believe the US economy will grow over the duration of the bonds' maturation or that companies will provide goods and services in a way that make them profitable to a point that they will drive returns to investors via higher stock prices reflecting the health of the companies' finances or dividends. In this brave new world, asset allocation and expected returns are driven solely by unnatural market intervention.
The question that remains is; how long can this go on? How long can TikTok traders and Davey Day Trader disciples get their nut off before all of this hits a head? At what point does the Fed's policy begin to have less of an effect on the markets? How long can this go on? Your Uncle Marty has no idea. But the exploding debt in this country doesn't give him much hope that this will continue unabated without serious structural damage being wrought on the markets in the form of distortions caused by a massive misallocation of capital spurred on by unnatural incentives created by the Federal Reserve. For this reason, I feel very comfortable parking my capital an asset that cannot be manipulated in such a wanton fashion. Despite what the haters say, and there are many, I find comfort by parking my capital in Bitcoin.
Final thought...
One time, right after college, I locked myself out of my apartment and spent an hour trying to scale the facade of my building as my future wife sobbed on the side walk.
