Tricky title for a tricky subject for sure.
Investors typically invest based on information they have gathered from various sources. From company PR, from The Wall Street Journal, NY Times, CNBC and numerous other sources. The expectation is that the information they are giving you has been vetted from reliable sources and your faith in those news agencies ability to ferret out bad information allows you to believe that information. I am a big believer in my news sources and tend to look askance at other sources that give you the impression that their information is credible.
The reason I bring this up is because I subscribe (trust me, I don’t pay) to several business newsletters and more and more I find those sources unreliable. For instance, one such source stated that the S&P was trading at a Median P/E ratio of 16.3 and that was very near the 3 year average Median P/E ratio of 17.0. Hmm. Given that metric, the markets are pretty close to fair value. I don’t think so.
The P/E ratio of the S&P 500 is 24.53 and that is down from last years overinflated P/E ratio of 44.63 at this time. That is what I look at. What is the average P/E ratio over time for the S&P 500? Around 17.7, if I remember correctly. Given that info, I think the S&P is overvalued, still.
So, who’s right? Truthfully, only time will tell but the bigger point here is that you can use statistics and data and stroke them and bend them to create pretty much any scenario you like.
I like to believe that there are places you can go and get raw data and with some patience you can dig into these data hotspots and come up with a much clearer unbiased view of what the economy looks like. One place I like to go is the St Louis Fed’s website. FRED for short. This is the repository of every piece of data known to mankind. No actually it has an incredible amount of information. It has charts, It has graphs. It has years of data, useless and otherwise, that the Fed uses to make its decisions about monetary policy. I use it as well.
Any data maven can go and manipulate data any way they want. You want to tell a story? You get all of the data available, cull out what doesn’t fit your story, go with the rest. That happens everyday, everywhere, by pretty much everyone. That is why the data we see sometimes is dubious at best. It’s an economic pandemic.
I believe that the Fed has a first look at all of this data and it does the very thing that everyone who manipulates data does. They look at it. See what fits the narrative. Then they go with it.
That is the only way to explain how the Fed has dropped the ball on inflation. I said this over a year ago that inflation, on the ground, was way worse than the Fed was acknowledging. They at first said it was “Transitory”. I said BS. They said they would keep an eye and see how deep and long lasting this inflationary cycle was going to be. Another misreading of the tea leaves I suppose. They waited a full year to pull the trigger on the one tool in their arsenal that they believe would slow inflation, raising rates. Yet, one of the main causes of this inflationary cycle, excess money supply, was untouchable.
Do I smell some political bias here?
Let me explain. Based on passed inflationary cycles, it is pretty clear that when the US Federal Government starts spending like a drunken lottery winner, inflation is soon to follow. So, knowing that our government pumped upwards of 1.4 trillion dollars into the economy at the beginning of the pandemic, what did everyone think was going to happen? At the time, I felt it was needed and I had no problem with it and I still don’t. However, from experience, we should have all known that there would be an increased demand for pretty much everything at that time and suffering with restrictions and shutdowns, those demands would not be met for a while. I don’t think “Hindsightedness” is at play here. These are just facts and we all (especially The Fed) should have known that inflation would be the result. We knew it and yet we wanted more money in the system and the government obliged. What the hell do you think was going to happen with over 2 trillion dollars added to our money supply? The Fed didn’t act, thats what happened.
The fed is a non partison group of economists who’s main function is to create full employment and keep inflation to a stated goal. Seeing a huge increase in money supply, the Fed should have stopped its bond repurchase program right away. Who needs 100 billion dollars a month in a system already flush with cash? The banks, thats who.
The original idea was to do an end run and give banks plenty of cash to lend and stoke an expanding economy. Banks did well, borrowers did well, the economy did well. Yet, when a new stream of cash came directly from the Federal government, the banks still wanted their stream of cash and they wanted the increased deposits that came along with the government largess. Keeping everyone happy, the Fed continued its repurchase program and spoke for months about ending it so the banks had time to readjust to the new paradigm.
Thats not the political part however. The political aspect is that the Democratic Congress so enjoyed pushing more and more cash into the system (lets be honest here, the vast majority of the population loves getting free money from the government and they will reelect those that got that money into their hands) they kept trying to do it. The Fed aware of the disaster that this influx was going to cause, did nothing, or should I say they did something, just too late. But why? Well Fed Chairmans and Fed Governors are all appointed by the President and voted on by Congress. Delaying action by the Fed coincided with Jerome Powells reappointment. If the Fed had acted forcefully last April, let’s say by stopping the bond buyback program, inflation might not have been mitigated but it certainly would not have had that additional cash to deal with. Everyone was looking to save their jobs and appeasement doesn’t only happen in Europe.
Excellent article. It amazes me that these "intellectuals" didn't or refused to see the obvious outcome. This country is blessed with intelligent citizens, and this is the outcome of our leaders policies, Shocking, just Shocking. I might also add, disgusting.