To investors,
There is something different about financial markets today in comparison to decades ago. The government took us off the gold standard in 1971, but that was only the first step in what seems to be transpiring.
The accelerated currency debasement over the last 5-6 years has completely changed the market.
“This is an excellent chart that symbolizes that we are in fact living through Weimarica. Markets are now a political utility that are managed in order to finance government deficits. Normally central bank’s cut rates when markets make lows (chart below from Callum Thomas).
In this new world where a global fiscal super-cycle fuels nominal growth to pay for global boomer debts, global central banks ease when markets are at new highs. It’s a brave new world!”
Now it may scare you that we are cutting interest rates while stocks are at all-time highs, but there will be many other areas where this monetary policy decision shows an impact.
This interest rate cut comes as cash piles have been building in money market funds. Creative Planning’s Charlie Bilello says “total assets in money market funds have hit a record $7.7 trillion, tripling over the last 8 years.”
The academic theory would tell you that money market funds will see a drawdown as the interest rates get cut. There is no guarantee it will happen, but economists will promise you that it should.
This brings us to the impact of interest rates and currency debasement on the stock market. Stripe co-founder Patrick Collison asks “These companies [Apple, Microsoft, Google] are ostensibly in totally different businesses and yet seem to exhibit the same growth dynamics. What's the explanation? (Pictured: ~$200B -> ~$3T.)”
The answer is probably much simpler than anyone wants to believe.
Jon Kol writes “It’s the money supply, the best evidence for the hypothesis is that all four contract at the same period, or more likely these three [companies] followed M2 contracting.”
Is monetary expansion and contraction part of the equation? For sure. Is it the full story? That is harder to believe. We would see all stocks going up and down in unison if the only driver was currency debasement. If we dig deeper, there is something fundamentally different about these large cap tech companies than the broader stock market.
Balaji Srinivasan says his “explanation is that the legacy economy is being sunset in favor of the Internet economy.”
So just how big is the Magnificent 7 now?
Global Markets Investor writes “the top 10 stocks now make up 41% of the S&P 500, AN ALL-TIME HIGH. The Magnificent 7’s share has also hit a new record of 35%. Out of 500 stocks, just 10 are driving the entire index.”
This ridiculous outperformance is being noticed globally too. Global Markets Investor highlights “Foreigners own more US stocks than ever: Overseas investors now own a RECORD 18% of the US equity market. Foreign investors collectively own ~$20 trillion of US stocks and ~$14 trillion in US debt, including Treasuries, mortgage and corporate bonds, according to Bloomberg.”
As I said in the beginning, there is major change underway in the stock market. The currency is being debased at an accelerated rate. Interest rates are being cut with stocks at all-time highs. And large cap tech is pulling away from the rest of the market.
Plenty of people are betting on the end of the party, similar to the Dot Com Bust of 2000. But I wouldn’t be so confident. Things in motion tend to stay in motion and these large cap companies are driving record profits and revenue growth year-over-year.
Maybe, just maybe, these businesses are actually becoming more valuable at a rate we have never seen before. Time will tell. Hope you all have a great start to your week. I’ll talk to everyone tomorrow.
- Anthony Pompliano
Founder & CEO, Professional Capital Management
Jordi Visser Explains Why The Fed Has Capitulated
Jordi Visser is a macro investor with over 30 years of Wall Street experience. He also writes a Substack called “VisserLabs” and puts out investing YouTube videos.
In this conversation we discuss the market reaction to interest rate cuts, the rise of retail investing, Oracle, bitcoin, and how AI will change the future.
Enjoy!
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