Updated: Apr 28, 2020
A friend of mine recently posed the question to me:
"Louis, why are stocks rallying despite the economic calamity on main street?"
Here was my response:
So think of the economy as a body.
There’s the heart (which is Wall Street and the banking system at large), the feet, the hands, and all the various extremities.
During 2008-2009, the U.S. Fed and U.S. Treasury waited until the heart had become very sick.
Parts of it had shutdown entirely.
Blood (credit) stopped flowing. The patient went on life support.
Only after the heart attack (liquidity crisis aka credit crunch aka banks stopped lending to anybody) did the U.S. Fed and U.S. Treasury intervene by purchasing toxic assets, printing money, and generally “providing liquidity”.
Today, the U.S. Fed and U.S. treasury began flooding the heart (which is simultaneously creating massive inequality) with blood and ensuring that its various tubes remained open (credit was easily accessible and there was no risk for a credit crisis, where money couldn’t be lent).
This is what causes a wealth transfer to asset owners, but it also ensures that we don’t face a “heart attack”, aka a great recession, aka a credit crisis, aka a liquidity crisis.
Also, major banks are exceptionally better capitalized meaning their reserve ratios are higher, their balance sheets consist of significantly less risky assets (due to regulations imposed following the Great Recession), meaning these major banks are less likely to go bankrupt as Bear Sterns and Lehman brothers did in 2008-2009. So the heart is very healthy.
Also, the Great Recession was caused by a sub prime mortgage situation wherein everyday men and women couldn’t service their mortgages.
There were securities, held by institutions throughout the banking system, were called “Mortgage Backed Securities".
Today, the Fed has already begun aggressively purchasing MBS’s in preparation for the growing number of mortgage defaults.
Now, let's discuss the bad:
We have all the extremities: travel and leisure, small businesses, airlines, casinos, etc., etc. We are going to lose extremities.
We are going to lose toes, hands, etc., but the heart is healthy. There’s little risk for catastrophic death.
Wall Street understands this, hence the rally. Will we decline due to the loss of feet, toes, and arms? Probably, but we’ve already priced in a lot of it.
The only people who will be hurt by this are the small guys. The panic, fear, and insanity (euphemism for outright stupidity) will destroy the small business owners, but much of America will make out just fine, especially the wealthy. If you want to prevent this from happening, you should call your local government reps and express concern about the shutdown. I have begun doing that already, despite the shutdown benefiting many of my holdings in a monumental way.
I own TDOC, AMZN, ZM, and ADBE, to name a few that are massively outperforming SPY, and all these software stocks that are soaring!
But I see massive injustices being committed to small business owners and everyday Americans due to fear and panic by our leaders.
The ramifications of destroying livelihoods, and thus families, will ripple for a decade. America needs to wake up to the fact that the current policy is hurting tens of millions. There needs to be nuance. -Louis