More than the Mainstream: Media
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In reading Alexandra Scaggs' recent article in the Wall Street Journal titled "Dow Closes At Record High As Fed Reassures On Rates," I was struck how different the mainstream thinks from some of the people with whom I find myself in simpatico.
Scaggs quotes Curtis Holden, senior investment officer with Tanglewood Wealth Management, "We're not looking for any sudden moves by the Fed, and the comments were confirmation of that…Stocks look OK, and at the same time they don't look cheap either," said Tanglewood's Mr. Holden. "But relative to [bonds], stocks look pretty compelling…"
Nowhere in the quote or in the article is there any acknowledgement that the relative valuation game is the only game left, as the Fed has made capital so cheap that the actual money a security owner can extract is miniscule. Yet most journalists in the mainstream media analyze the Fed and its communications like some Vatican-watchers waiting for white smoke.
But in the comments in the mainstream media and bloggers outside of it you see hints of rebellion. User "HughDell" responded to Scagg's article with this rejoinder, "So interest rates are all you need to consider when analyzing stock valuations??!!"
Guess all that time I spent looking at free cash flows, multiples of earnings, comparable company values, forward looking earnings, EBITDAs, etc., was a complete waste of time.
HughDell probably shares my amazement at how many people can call themselves "free market guys" and yet say, in the same breath, they are "not macro guys." I often wonder—if you don't pay attention to the machinations up top where the money is created, how do you know the market is free down below? It's those sorts of people who don't realize that free money is just as distorting of a subsidy as giving free corn syrup to Coca-Cola, free steel to GM, or free servers to Google.
One has to understand macroeconomics if you are going to understand microeconomics. After all, macro and microeconomic analysis is just an attempt to understand the flow and stock of money. Clearly you have to have a firm understanding of economics before you begin your security analysis since the unit of account you use to determine value in security analysis, money, is decided by the actors on a macro level.
But you don't find many people integrating economics & finance in the mainstream media.
David Stockman, the former Congressman and managing director of Blackstone, shows how dangerous that is in his post, "Now We Are At The Lower Bound”: Draghi Reaches The Dead-End Of Keynesian Central Banking. In it he says, "zero cost money has but one use: It gifts speculators with free COGS (cost of goods sold) on their carry trades. Indeed, today’s [editor's note: Stockman published on September 6, 2014] 10 basis point cut by the ECB is in itself screaming proof that central bankers are lost in a Keynesian dead-end…the whole mindless drive by the ECB toward the zero bound, which Draghi pointedly claimed to have achieved this morning, presumes that balance sheets—the accumulated record of past actions—don’t matter."
Think of that next time you see the market surge after a central bank again assures the market that money would remain near free for even longer than they originally promised. The mainstream media always trots out someone to excuse the subsidy as the palliative the market needs to get to "escape velocity" from the comforting clutches of central planning.
But is that OK? After all, bonds look terrible because the Fed has hoovered up many of them at above-market prices and placed them on their balance sheet. Given that we all carry their debt in our collective wallets (it is called a "note" for a reason) should we not be looking at their balance sheet? Would the people "who claim not to be macro guys" ever trust a CEO who said, "Don't look at my balance sheet"?
Of course not—that's why you're more likely to see me visiting Stockman's Contra Corner and the Comment section in the Wall Street Journal as the central banks of the world continue to make my security analysis much more difficult than it should be. One day we will be free again.
Aram Fuchs, General Partner, Fertilemind Capital, is captivated by the ability of the Internet to change buyside research. He founded a website called Capitalist Collective, where he invites finance professionals to share their research and learn from others.
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