The disconnect between Wall Street and Main Street continues to widen. Bubble-priced stocks have been rocketing anew, yet fewer individuals are participating in the labor force.
How bad is it? You’d have to return to the turbulent 1970s to uncover a participation rate as disheartening as 61.5%. What’s more, the sideways movement of the data point suggests that jobs will not return to their pre-pandemic levels anytime soon.
Why do stock assets keep inflating in price? Despite extreme overvaluation as well as economic uncertainty? Simply stated, there are too many dollars chasing a fixed number of shares.
In particular, the U.S. government has created 40 cents for every dollar that existed prior to the March lockdown. That 40% increase in the money supply went directly into financial markets (Wall Street), rather than go directly into the real economy (Main Street).
The result? Unabated asset price growth AND a belief that government stimulus can prevent prices from going down.
Indeed, the combination of monstrous money printing and monumental rate manipulation has caused parabolic price movement in a number of individual names. Consider Tesla. The idea that the electric car maker has done anything over the last year and a half to be worth 15x more than it was in 2019 is preposterous. The speculation is neither rational nor built upon sound fundamentals.
Then again, the lack of short selling activity currently reinforces the idea that the market can only go up.
There are those who believe the massive dollar printing may not justify stock prices, but justify cryptocurrencies like bitcoin. Unfortunately, the fear of missing out (FOMO) has created speculative silliness in bitcoin trading as well.
There have been three parabolic moves in bitcoin since 2017. (See the red boxes below.) The first two were met with huge sell-offs that provided many with opportunity to buy crypto significantly lower. Will the third time be different?
Although gold has rallied on the 40% increase in the money supply in 2020, its price might be low relative to the money supply. Investors looking to diversify and to manage risk should take note.