The US financial markets might just be at its tipping point
The global financial crisis of 2008 may appear to be a century-old event for many millennials, even though it's hardly been a decade since the US economy started getting back on track. I was in high school back then and the final verdict regarding university admissions had just rolled out a few days ago. Most of my friends who were anticipating a scholarship were denied one, simply because the US had officially entered a recession, and colleges and universities were trying to be cautious about spending their multimillion-dollar portfolio for more “useful” research projects. It was a scary day, one that made me realize the importance of keeping up to date with the economic cycle.
When the market took a nosedive, customers were cancelling orders, banks were being bailed out with trillions of dollars from the federal government, and businesses that had existed for more than a hundred years were being forced to file for bankruptcy.
But just like every market cycle, the economy recovered and so did the stock market. Within two years, everything was back to normal and companies were able to hire employees once again. Albeit, quantitative easing had implications of producing a weaker dollar, but inflation is a lifestyle cost that most of us have learned to live with. The cost of goods will, for better or for worse, keep on rising in nominal terms simply because governments will resort to printing excessive amounts of “paper money” whenever the economy is hovering.
Twelve years on, a stock market collapse may seem to be long overdue. I am not an advocate of market timing, but a majority of stock market experts such as Ray Dalio of Bridgewater Associates along with the “doomsayers” have come out from their bunkers and are forecasting a stock market collapse.
Anyone who is calling for such an inevitable collapse is now being labelled as “a prodigy with Warren Buffett’s soul minus the grey hair.”
Although the markets are unpredictable, there are always signs left behind in the sands of time. People will usually go back and analyze these little bits of historical evidence, but by that point, their portfolios are usually in a territory from where most never manage to return to “greener” pastures.
One such indicator is major executives and CEOs cashing out on some or most of their shares prior to such a crisis.
Amazon’s Jeff Bezos sold off one million shares (worth over $3 billion) of his “flourishing” Amazon stock. But with the revenue generation going upwards of $88.9bn for the second quarter alone, the stock dump for the tech giant seems especially worrying.
Public filings indicate that Bezos sold his stocks between $3,102 and slightly more than $3,183 per share. The company’s stocks have soared -- nearly doubling in price since March, when the coronavirus crisis in the United States pushed more and more consumers to shop online.
Thus, it begs the question: “why did Jeff Bezos cash out on his beloved stock? Does he see something other investors don't? Is it to fund the ongoing operations of his other venture -- Blue Origins -- or does he plan to launch another venture in the midst of this pandemic?”
Although it’s hard to predict what one might be thinking, visionaries are termed “visionaries” for a reason. They have a unique ability to see through most things, be it company operations or the stock market volatility. Any person deeply invested in Amazon or the US stock market for that matter should be a bit sceptical about the fact that at a time when the markets are rebounding and Amazon is exceeding all expectations, the company’s founder is cashing out on some of his precious holdings.
From a fundamental perspective, the financial markets are in an inescapable bubble. The bubble will continue to get bigger until it pops just like any other bubble, but as with most bubbles, no one can accurately predict when it will burst.
The rationale for this is quite straightforward: the Federal Reserve’s plan to support the financial market wasn’t meant to be long term, and as the ongoing coronavirus crisis surges across the US, assessing the fair value of financial securities is becoming a tough task.
Federal Reserve Chair Jerome H Powell himself stated that: “The path forward for the economy is extraordinarily uncertain, and will depend in large part on our success in keeping the virus in check,” and that it will “also depend on policy actions taken at all government levels to provide relief [...] for as long as needed.”
The Federal Reserve’s strategy of utilizing quantitative easing to maintain investor confidence was designed specifically for a small disruption to the economy. They tried to keep big businesses and corporates afloat by supplying them with the much needed “dollars” until things would rebound. But in a battle between expectations and reality, reality has triumphed and the harsh reality of the virus being beyond control does mean that the US economy will take some time to return to its pre-Covid days.
All this indicates to the Federal Reserve’s bias towards corporates and not individuals. Keeping the businesses alive with the aid of a “special printer” will imply a higher cost of living going forward, which the average American might not be able to afford with the $1200 CARES stimulus cheque.
What investors need to understand is that businesses always have a way out. Asset valuations may or may not be based on the future trend of earnings, hard assets, or cash flows but the damage done to one's portfolio will be irreversible, and blaming it on unfair corporate practices will be futile later on. The news will be based on false presumptions, the statistics will seem “too good to be true,” and everyone will ask you if they should purchase Tesla stock or any other stock for that matter. However, the average investor who loses his/her lifetime worth of savings won’t be bailed out by the government.
He/she will still be liable to bear his/her expenses and when that CARES cheque runs out, be rest assured that the Federal Reserve’s “special printer” will not be functional for their purposes.
Sayeed Ibrahim Ahmed is an experienced investment analyst, currently a Senior Lecturer of Finance at American International University Bangladesh (AIUB) pursuing research along the lines of capital markets and economic policy.