I see more and more often, these days , asserting that monetary policy justifies the high valuations of the stock markets. In particular this was said in the forum of Davos.
Monetary policy explains the high stock market valuations, but it does not justify them.
It’s very different.
As different as saying that the spirit of the game justifies that the lottery bets are valued at 10 million before the draw but 4 million after the draw, that is to say after the state has exercised its levy. The price of all tickets is 10 million, but their fundamental value is 4 million.
The total price, the market capitalization of the stock market is for example 20 trillion, but it is the value of all of the bets, when the drawdown will have taken place, ie when the monetary crisis policy is either no longer possible or will have been overturned, the value will be 9 trillion maximum. The fundamental value.
The value of the Ponzi scheme should not be confused with what will remain of it after the discovery of the « rose pot », and it is enough to think of Madoff to understand it.
The value of the share of a company is not determined by the game the players play among themselves, except for those who sell along the way, but it is a minority. It’s always the public who ends up with the mistigri at the end. The value of a share is on the long run, intrinsic.
The value of a share is the discounted sum of all the cash flows that the company will have paid to the shareholder, and this is independent of monetary conditions and independent of Powell’s will.
If the discount rate is low it is because we expect economic growth and that of the series of cash flows to be very weak, weaker than historical growth and we demonstrate that this does not justify any valuation premium compared to the past. On the contrary.
Do not forget, we are in secular growth durably slowed down, that is why the real rates are zero. Saying that stocks are priced is nothing more than saying that stocks are priced … to bring a real return of : zero, like the US Treasury 10 years bill! But of course, they don’t finish the sentence!
The markets say nothing other than this: when growth is weak or zero, we cannot hope to have a good return; if there is a performance it is thanks to the stock market lottery which has been connected in the meantime by monetary authorities.
The players pay for the tickets higher and higher prices because the authorities sprinkle the financial market with liquidity with no return attached, liquidity which burn the fingers. They are like hot potatoes … precisely they want to make you play, that’s what they call risk-taking, and thus overvalue the financial assets .. they want institutions and company look solvent and avoid bankruptcies. It is an operation of rigging of the accounts, we add zeros in the books of accounts.
Alas when we do this we can not get out, because the valuation of the market is the cost, the memory of the remedies you have used. The valuations are your addiction. It always ends badly. It looks like a free lunch but it is a very expansive one at the end. No exit, nowhere to go, you have to pay the price. When the bubble is blown, it must burst. One day or another.
The fact that the rates are low does not intervene in the calculation of the real profitability of an investment because the rate of return on the investment is an internal calculation or if you want, endogenous. It depends on the company and its management and economic conditions and entrepreneurial performance.
It is the company who pays you your products / dividends with her cash flows. Not the Ponzi chain.
.The stock market performance is linked to the game, it is exogenous it depends on the Ponzi.
The reasoning that we hear supposes that the holder of a security has sold or will sell before the end of the Ponzi, before things normalize; those who will come after him, after the one who sold at the right time, will find themselves to wear the mistigri. Or hot potato.
The profitability of an investment is the rate which equalizes on one side the price paid today and on the other side the sum of the flows to come until maturity. It is estimated that the maturity for an action is 40 years.
In the future, corporate profit margins will contract. It is a systemic necessity. It will not be the result of a choice of the government or central bankers. It will appear to everybody as a necessity not a choice.
Because if margins are high at the moment, it is because wages have not increased in 25 years: but this has only been possible because to ensure their livelihood households have become over-indebted. Debt have been the alternative to salaries.But debts have their limit. Workers will not be able to go into debt in the future, it is difficult to lower rates below zero for loans to individuals. We are almost at peak debt and at peak margins.
Wage growth will resume and corporate margins will decline. Maybe it has already begun.
And if companies raise their prices to compensate then it will cause inflation and the currency will devalue more and more rapidly, so that the financial flows that will be returned to the shareholders will be « monkey money. »
The real systemic problem is the excess of fictitious capital, the excess of capital that cannot find it’s profitability. this fictitious capital tries to find its profit through finance and the problem instead of being solved is aggravated. The excess of fictitious capital is deflationary.
Present monetary policy is stupid it create more and more fictitious capital.