By way of background, I’m a former Goldman Sachs equity analyst. So, IMHO, I appreciate the fundamentals of stock valuation and stock markets. When the markets started rising sharply in April, I wrote “7 Reasons Why The Stock Market Is Going Up While The Economy’s Imploding” to understand what many, including myself, were finding so perplexing.
Given our current economic situation, I believe that whatever party is in power, the U.S. will increasingly embrace Modern Monetary Theory (MMT), and that high growth, and highly loved companies (e.g. Tesla, Netflix, Nvidia…) will continue to rocket higher.
MMT Is QE Without The Pretense
The foundational belief in Modern Monetary Theory (“MMT”) is that we live in a fiat currency system where the government can print any amount of money it needs. In an MMT based economy, there is no need for government borrowing and no need for government taxation. The only limitation to printing more money is inflation.
While I appreciate that the above is heresy to many, we’re implementing core elements of MMT today, we’re just calling it quantitative easing (“QE”).
Traditionally, governments have funded themselves with taxes. When taxes haven’t been enough to pay for what government wants to spend, the government borrows money from investors by issuing debt (e.g. treasury securities).
However, with QE, the Fed doesn’t borrow money from investors. In QE, the Fed works with large private banks who buy Treasury securities from the Treasury at auction. Then the Fed buys those securities from the large private banks with newly-created dollars and puts those Treasury securities on it’s balance sheet as assets. Via QE, the government can send everyone $1,200 checks and extra unemployment benefits during a crisis without having to borrow that money from real lenders.
With QE, while the dollars are being created out of thin air, the process still goes through the motions of the U.S. government sending Treasury securities to the Federal Reserve (through an intermediary bank), and the Federal Reserve sending dollars to the U.S. government (again, through an intermediary bank). The Fed then pretends that this is a loan to be paid back at some time in the future.
MMT appreciates the silliness of going through those motions. The Fed can simply print money and fund the government. It’s QE with fewer steps by cutting out the pretense. The government no longer needs to tax or borrow to spend. If the growth in the supply of money is leading to inflation, the government can decrease spending to slow the growth of the money supply, or it can take money out of the system via taxing.
MMT is particularly attractive when the economy is operating significantly below its maximum capacity, like today, because growing the money supply is unlikely to cause inflation in the near term.
MMT is attractive to both the left and the right. A left led government can use MMT to spend more on social programs. A right led government can use MMT to provide massive tax cuts.
The shorter term risk of MMT is the government may not have the resolve to slow spending or tax when inflation appears. The longer term MMT risk is the public losing confidence in the currency when it realizes the government can just print as much money as it wants. But the massive unemployment and an imploding economy dwarf any concern most have today of inflation or people losing confidence in the dollar.
Most MMT proponents also favor perpetually low interest rates. In a 0% interest rate environment, there’s little incentive to save and lots of incentive to maximize borrowing to invest in the stock market, real estate, or other businesses.
MMT Will Lead To Dramatically Higher Valuation Of Equities
From a valuation perspective, if more money is expected to be pumped in to the system, and if interest rates are expected to be near near zero for the foreseeable future, than equity valuations should rocket higher.
I also believe that we’re in a period where traditional valuation is of less concern to many investors. Traditional investors, using traditional valuation metrics, have made Tesla the most shorted stock in history. Rather than looking at traditional valuation metrics, many Tesla investors are driven by their hearts.
The Tesla bulls simply LOVE Tesla. They love Elon Musk, the Thomas Edison of our day. They love electric cars, because they love the planet. They also love making money, and Tesla is great at making investors money.
At $10,000/share, Tesla would be worth $1.86 trillion. That would make Tesla the second most valuable company in the world today, after the Saudi Arabian Oil Company. At $10,000/share, Tesla would be worth more than Microsoft and Apple, which are both trading at $1.6+ trillion today. But I anticipate the value of those companies to continue to rise as investors begin to appreciate the impact of MMT. But they won’t rise as much as Tesla, because they just don’t engender the same love.
This Time Is Different
One of the best books to come out of the financial crises of ’08 is “This Time Is Different”, a look at 800 years of financial bubbles and crashes crises that were all preceded by false proclamations of “this time is different.”
So, is this time different? The smart money (e.g. the Tesla shorts) are betting that it’s not. While no one knows for sure if this time is different, what we do know for sure is that we’re in the early stages of an economic meltdown, and the government has no tools left to stave of calamity but printing money. And the quicker the government does away with the pretense of QE, and embraces MMT, the better.
I have a word to describe the tendency of markets and economies to become bubbles, and crash, and then become bubbles again. I call that “capitalism.” So buckle your seat belts and buy some Bitcoin. We capitalists are in for a wild ride.
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Thanks to Lyn Alden’s Quantitative Easing, MMT, and Inflation/Deflation: A Primer, which provided much of the insight, words and graphics in this piece.
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