Time to Re-Focus the Lens?
The camera is Kodachrome, not B&W!
Time to Re-focus the Lens?
A subscriber sent me a text message yesterday asking if I could delve into how Tom Lee, the strategist, is looking at the markets as well as perhaps a five year view on what lies ahead. My initial response was the easy one: Tom Lee likes stocks no matter the trend in the rate, EPS or inflation picture. If it is bad now, it will eventually get better. Is Tom an eternal optimist? Perhaps, but he mostly serves a long only client base and gets paid to give the bullish side of the ledger. Our subscriber wasn’t espousing we should all be Tom Lee, but rather an offsetting view to the current Street barrage of negativity from Marko, Wilson and Barnett at three major brokerage houses. Remember for every bearish talking point, there is likely to be a bullish one that holds merit. For today, I thought we should take our camera lens, turn around and look quickly at 2022 and early 2023 with an eye toward 2024.
The Fed tightening did not cause the 2022 market declines. In fact, they have been inept at their job on almost every level. The Nasdaq fell 33.1%, Russell 2000 down 21.6% and the S&P 500 down 19.4% mainly on EPS and growth disappointments which led to massive multiple compression back to our planet Earth. Amazon was a 20% grower masquerading as a 38% grower in 2020 which decelerated to less than 10% thereafter. AWS used to grow in the 40s percent range and is now almost in the single digits growth. The Fed didn’t cause this by raising rates, but instead their easy money policy during the pandemic along with government stimulus accelerated growth which we are now digesting. Apple has been a single digit revenue and EPS grower for years until 2021 when it grew 29%. Now, we are back to modest growth mode (yep, despite the 28x P/E the stock says otherwise). Rapid growers like ZS had three years compounding in the 50s percent growth which now looks to be 25-30% ahead (still impressive). Tesla grew revenues only 15% in 2019 and before accelerating to 71% in 2021 and coming back to earth this year in the mid 20s. Oodles of examples you can point toward for this.
You want to know what chart looks the same as the growth above? Federal Reserve Money Supply! M2 is a measure of total money supply including cash people have swashing around in their hands and bank accounts. In 2020, M2 went up around 25% overall followed by another 12% in 2021 (in total near 40%!). Lo and behold, 2022 saw a 1% decline in M2 and has remained in negative territory. In fact, M2 hasn’t been negative since 2003 in any month (Charts 1 and 2 below). Let’s add to this the Fed’s balance sheet as a percentage of GDP to see just how much money they have pumped into the system (Chart 3). For most of history, the Fed balance sheet was mid single digits as a percentage of GDP, 6% on average. Since the 2008 punch bowl additions to stop the financial crisis, it ballooned to the mid teens and more recently peaked at 37.5% of GDP! No surprise, it too has dropped with QT by the Fed to 32.5%, albeit popping again in March temporarily with the Fed “saving” the banking system yet again in 2023.
Do these three charts give you pause? Logically, they should.