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For the first time in a decade, US asset investors find themselves caught between two titanic forces. Quantifying the balance between the two is critical in assessing future risk:reward. 1/n
On one side, we have the Federal Reserve and it& #39;s massive $5.25 trillion (and climbing) balance sheet. If more "mature" political economies in Europe and Japan are any indication, the Fed will grow it& #39;s BS to ~40% of US GDP sooner, rather than later. https://fred.stlouisfed.org/series/WALCL ">https://fred.stlouisfed.org/series/WA...
2/ Assuming US GDP growth of -3.0-1.5% over the next 3 years, we get US GDP of $19.8-22.8T, and a Fed BS of $7.9-9.1T. Given close correlation between Fed BS growth and US stocks, this 50-73% boost should translate into big nominal $SPX gains.. https://fred.stlouisfed.org/series/WALCL ">https://fred.stlouisfed.org/series/WA...
3/ This force of PhD Man, however, must contend with forces of History & Nature. With cyclical downturns come lower margins, earnings, and most importantly, valuation multiples. Reversion to TMC/GDP of 80% implies $SPX ~33% lower, 40% TMC/GDP ~66% lower! https://www.gurufocus.com/stock-market-valuations.php">https://www.gurufocus.com/stock-mar...
4/ On balance, we get 3 year forward choices of Fed BS +50-73% vs. TMC/GDP -33-67%. A bastardized game theory gives us:
a) 73% gain * 33% loss, +14%, 4.4% CAGR
b) 50% gain * 33% loss, -1%, -0.3% CAGR
c) 67% loss * 73% gain, -43%, -17% CAGR
d) 50% gain * 67% loss, -50%, -21% CAGR
a) 73% gain * 33% loss, +14%, 4.4% CAGR
b) 50% gain * 33% loss, -1%, -0.3% CAGR
c) 67% loss * 73% gain, -43%, -17% CAGR
d) 50% gain * 67% loss, -50%, -21% CAGR
5/ While these scenarios could easily take 5-10 years to play out, they do rely on two major assumptions.
* Fed remains accomodative and grows balance sheet aggressively for years.
* US markets revert to mean valuation, probably overshooting to rock bottom later this decade.
* Fed remains accomodative and grows balance sheet aggressively for years.
* US markets revert to mean valuation, probably overshooting to rock bottom later this decade.
6/ Despite the bad look for US equity/assets ahead, investors need not despair! Overseas equity markets present attractive fundamentals, not to mention new frontiers in alternative asset classes like crypto and DLTs. Thanks for reading!
@jposhaughnessy @DiMartinoBooth @LukeGromen
@jposhaughnessy @DiMartinoBooth @LukeGromen
$SPX downside, 60% below..
The US Investor& #39;s Dilemma: high inflation, low expected returns..
Truthy inflation gauges Food, Fruit, Electricity have compounded at 4-4.5% since 1971 https://twitter.com/The92ers/status/1276579822714728449?s=19">https://twitter.com/The92ers/...
https://twitter.com/PeterSchiff/status/1287572747451801600?s=19">https://twitter.com/PeterSchi...
