Once upon a time, you had no choice – equities or nothing. This was referred to as TINA – there is no alternative. Bonds yielded you close to zero. (I’m rounding 0.2% to zero).
Today, two-year US government debt is now yielding 2.7%, which is still less than reported headline inflation, but at least it is something.
This is going to suck up liquidity from the market, and it is pretty obvious this has had a significant effect on broad market equities. Suddenly, instead of investing in bond-proxy equities like Microsoft or Apple, you can instead put the capital into everything-but-inflation risk-free government debt and earn your 2.7% yield this way. High-multiple stocks with promises to pay out in the distant future suddenly no longer look as good simply because there is an alternative.
We have a huge wall of worry ahead of us – the US Federal Reserve on May 5th will be raising interest rates and perhaps initiating quantitative tightening, we have China that is now making famous people in the white-bunny with blue stripe plastic suits enforcing Covid rules, we have the Russia/Ukraine dynamic and the threat of nuclear war, etc.
This is reflected in a high price for protection – the volatility index is once again has creeped upwards – paying for those put options is expensive!
With disaster always comes opportunity. I am sounding like a one-tune band, but those companies earning large near-term cash flows will be making their shareholders a fortune by the reinvestment in their own stock (assuming they have the liquidity to do so!). In some cases, the numbers appear to be extreme – if you could reinvest in yourself at 30% returns, would you? I sure as hell would. Some things are trading like as if everybody forgot how to read financial statements and perform the most cursory of forward projections.
$MEG #DOGI $ARCH $BTU