Monday, January 24, 2022

Obsessing Over the Fed Is Pointless

I don't understand investors' obsession with the Fed/rate hikes. The only thing Fed rate hikes would do is make it more expensive for leveraged HFs to borrow money and pump up the price of stupid profitless stocks, SPACs, and crypto, hence the correction we're seeing (HFs de-grossing in anticipation of funding costs going up).

BTW, we used to have laws in this country that prevented the Fed's liquidity provisions from flowing into financial markets. These were systematically dismantled in the 80s and 90s, culminating with the repeal of Glass-Steagall. These were actions taken by Congress, not the Fed. Unfortunately, the Wall Street echo-chamber's obsession with the Fed crowds out this reality from the mainstream narrative.

The idea that rate hikes from 0% to 1% actually impacts a firm's intrinsic value is asinine. No actual business owner cares if the Fed raises rates from 0% to 1%. There is no change in any self-respecting analyst's "discount rate" from that action. When rates fell, no one actually said to themselves "well, I better lower my hurdle/discount rate because Treasury yields are low." No one thinks they are a sucker, despite what Howard Marks says about "the Fed forcing people out on the risk curve."

The froth in today's markets (public and private) is a reflection of 1) stimulus checks sent to retail investors (fiscal policy, NOT monetary) and 2) decades' worth of pro-corporate public policy, particularly with issues related to antitrust. Inflation used to eat into corporate margins when we had more competitive markets; now, we are seeing decades' high CPI growth with record corporate margins. It's not sustainable from a societal perspective. This is why Buffett likes to use Market Cap / GNP to gauge the general level of stock prices - if too much of society's resources flow to large business owners, there is public backlash. That indicator is near record highs.

Congress and the Courts' lax antitrust enforcement for decades led to massive corporate consolidation and tipped the scales in favor large business owners at the expense of workers and small business owners. Peter Thiel inspired a generation of VCs and entrepreneurs to create monopolies, because "competition is for losers." This led to a massive surge in unprofitable, VC-funded "tech unicorns" who can only make money "at scale" (read: when they become a monopoly). Their equity price reflected the option value they would monopolize their industry. Many are now financially distressed, and are in need of fresh capital (see CSPR, SDC). The American public's attitude toward monopolies and big business is changing, which is why Lina Kahn was voted in as FTC chair with overwhelmingly bipartisan support. The insiders realize the gig is up and have been selling for close to a year, which led to the IPO and SPAC bonanza in 2021, leaving public markets and retail investors holding the bag. ARKK has been falling since last February.

(BTW, this is a net positive for real companies that generate real cash flows and can fund themselves with internally generated profits, while providing real goods and services that are actually useful to people).

Also, the stimulus checks gravy train has dried up.

Low go-forward earnings growth and antitrust are the biggest risk to investors' portfolios, particularly if you are long mega-cap tech, who arguably pulled forward a ton of sales growth during the pandemic. In addition, more competition in markets = broader distribution of profit pools, putting today's income streams at risk. What if Google can no longer rig auctions? What if Amazon can no longer copy small manufacturers' widgets and sell their own white label version on its website? What if Meta has to actually pay for the tort liability it created with its toxic social media platforms? What if these firms can no longer hide the fact that their customers' ROI's on digital ad spending are bogus? None of this has anything to do with the Fed. The current spread between ATVI's market price and MSFT's proposed offer price is ~16%, because of the risk that the FTC shuts it down.

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On Inflation

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