Gordon Gekko: With that cover it should go up even more.
Q: Yes, but how much more?
GG: Until the FED begins lowering rates. There, a nice part of the recent improvement will have to be corrected. It’s manual. And it will be good if it is so. The 2022 record will serve as the floor and if it is broken we will have a ruckus.
Q: Is all this a hot air fever?
GG: No. But the advanced one, yes.
Q: Is it more than an enviable rally driven by NVIDA’s numbers, its more than generous valuation and a handful of other papers?
GG: Yes, it is much more. Although the foam, today, is very visible and attracts attention. Wherever you look there is an escalation of assets. Whatever.
Q: What is the solid that you detect behind what is bubbling?
GG: It is, essentially, a successful landing of the real economy. A feat. We had a recession embedded in prices, we paid the cost of a bear market in 2022; The recession never happened (and doesn’t have to happen in the near future) and we are just hitting new heights. Don’t get dizzy. We suffered from excessive inflation that the bond markets never fully reflected in their prices (a success). And that he laid down his rebellion and returned to the corral of the 2%.
P.: With its flats. In January we saw a rebound on all fronts.
GG: And if he resists, he doesn’t have much left to climb. The engines that caused it died long ago. Real interest rates are positive. The nominal amount of money fell throughout 2023. Expectations were never unanchored even in the worst of the storm. And the FED, and central banks around the world, can sit back and wait for the wind to calm down. If Powell and his colleagues managed to extend the economic cycle, without trauma unlike Paul Volcker in a similar situation forty years ago, recreating a bull market does not seem like an excess.
Q: But valuations, what is paid for each dollar of company profits, have swollen like in the best of times.
GG: That’s how it is. The S&P 500 multiples are similar to those at the end of 2019, before Covid. And they are lower than those of 2021. But, with Monday’s newspaper, health is substantially better. We have had all the checks done and passed all the exams and mishaps. The pandemic and a confinement, inflation that tripled its goal (or more), five points of rate increases in a year and a half. And where are the dead? And the bank crash? They’re not here. Nor stagflation. Not even a vulgar recession. What looks sparkling? Yes. But there was no other Lehman moment nor did zombies swarm the streets.
Q: After years of zero rates and free money, this was what was to be feared.
GG: Well no. Yes, we have the Tesla, the Nvidia. We went from excitement about electric vehicles to artificial intelligence fever. It is not easy to assess this dynamic. It’s easy to get excited about digital innovation. It is a non-negligible risk. But first we managed to extract gas and oil from the stones. And we dispatch the threat of peak oil, the lack of crude oil. China, finally, broke down and the world manages the same. Not to mention geopolitics. In short, a bull market can be sustained like this, with problems but solving them in time.
Q: What can we say about the dramas of commercial mortgage credit in the US?
GG: After the recession it is the most announced crisis. And it’s not a mirage, there he is, slowly bleeding out for more than a year, but the general count of red blood cells in the system is not bad. Some small banks will fall, Powell said, a month ago, on prime time television. It will not be a problem for your depositors.
Q: Is everything okay then?
GG: No. But it’s better than you thought. Whatever goes wrong now, when the FED lowers rates (which will be after long rates drop), will have its review and penance. And later we will be addressed by the uncertainty of a key election that the president should win by walking – with such an economy and markets – but that Biden has a very difficult time facing. Trump’s return to the White House, the mere possibility, should dampen the rise, but he doesn’t do it either. We will see.
Source: Ambito
