The US economy is currently recovering at double the rate of past recoveries. No one has ever seen anything like this before.
Sometimes a trader can turn wildly bullish, not really understanding why. He is just responding the market price action. Often the reasons why don’t become obvious for months, or even years after the event.
This is one of those times.
A year ago, you could come up with all kinds of theories as to why stocks should rise in two years: valuation, QE, ultra-low interest rates, lack of alternatives, end of the pandemic. But they were just that: theories.
However, the price action was indicating that the biggest bull markets of all time was underway. That is exactly what we got.
Now, we are slowly starting to understand why.
It turns out the American economy coming out of the pandemic is very different from the one that went in. The end result is that stock prices will rise faster to greater levels than ever imagined possible.
I am looking for another 20% gain in the (SPX) to $4,800 by the end of this year, and $16,000 by 2030. If I’m wrong, we’ll get $16,000 by 2025.
There are an abundance of reasons why.
US corporations are now immensely more profitable and productive than only two years ago. All of the cost savings taken as emergency measures in 2020 will become permanent.
Perhaps one-third of all employees sent home to work will stay there forever. Workers who don’t have to commute are happier and work cheaper. And we didn’t really like them anyway.
As we reopen, some big tech companies are asking workers back to the head office only two days a week. You’ll have a Monday/Wednesday shift, a Tuesday/Thursday shift, and nobody comes to the office on Friday. This drops office expenses by half, a huge overhead item for many firms.
So will commercial real estate crash? No. Hypergrowth will refill that space in a year or two and they’ll sublease until then. Most big tech companies own their own office buildings in any case.
Legacy bank branches were cut by half and those remaining are chronically understaffed. Legacy banks have been trying to figure out how to unload these expensive branch networks for years. The pandemic just did it for them.
Customer support has virtually ceased to exist. Want to call Interactive Brokers with a question about your account? Expect to remain on hold for 2 ½ hours, as I did last week.
Business travel is now the equivalent to flying in a private jet. A friend of mine had to fly to New York and was required to fill out an 11-page form detailing the necessity of an in-person meeting. The cost savings will be enormous.
While costs are plunging, revenues are soaring. The pandemic hyper-accelerated the development of new technologies allowing us to be inundated with countless new products and services.
Zoom (ZM) is a perfect example. No one heard of it in 2019 except a handful of Bay Area tech nerds like me. Now, it's a daily factor in most people’s lives. Some people, like me, join a dozen Zoom calls a day, from staff meetings to customer calls, to Boy Scout meetings. Mad Hedge followers already know that this has led to a 12X move in the (ZM) share prices. (ZM) in San Jose is hiring as fast as it can.
Another effect of the pandemic has been to digitize the global economy far faster than once imagined possible. This is not a bad thing when you live in the digital capital of the world. Unlike a store accepting cash, you can’t catch a virus from a digital transaction. This is important not just in this pandemic, but the next one and the one after that.
Exploding digitization also automatically leads to vastly accelerated globalization. Another friend of mine runs an online business in Australia, but after a decade was only able to attract local interest. Suddenly, his business doubled. An analysis of the new subscriber addresses showed that all the new customers came from China. It turns out that there are a lot of Chinese surfing the net to kill time as well.
By default, America has evolved into a disease-free economy in a mere 12 months. The telling statistic here is that the Rite-Aid drug store chain saw earnings crash because no one catches the flue of a cold anymore. These viruses can get through a mask or survive hand sanitizers either.
Of course, I would be remiss not to mention massive government spending and Federal Reserve quantitative easing. Cassandras worry about a shut-off of the money spigot when inflation returns and an ensuing market crash.
Here’s a news flash for you: Inflation is never coming back.
The end effect of accelerating technology is to drive prices ever downward, especially the cost of labor. When Treasury Secretary Janet Yellen (I can’t believe I’m saying that!) says she won’t want interest rates rises until she sees the whites of inflation’s eyes, she means inflation is NEVER coming back. Deflation will be the greater challenge, as it has been for the last 40 years.
That means the US government could keep stimulating until the headline Unemployment Rate returns to 3.0%, with no consequences whatsoever.
If this sounds like a Goldilocks scenario, it is. Enjoy your bull market.
The Goldilocks Economy is Here