From GMP’s recent White Paper: In order to make sense of today’s pricing, you need to believe in six impossible things:
- Secular stagnation is permanent and rates will stay low forever. As we have argued at length elsewhere, secular stagnation is a policy choice and we could exit it reasonably quickly by implementing appropriate policies.
- The discount rate for equities depends on cash rates. is is nothing more than a belief. It has no foundation in data and not a scrap of evidence exists that supports this hypothesis.
- Growth rates and discount rates are independent. is is a very questionable assumption. If, as I believe, it is false, then it makes the “Hell” outcome Ben has discussed in previous Quarterly Letters less likely, unless the rst two beliefs hold completely.
- Corporates carry out buybacks ad nauseum, raising EPS growth despite low economic growth. is would imply rising leverage, which is already close to all-time highs. Remember Minsky: Stability begets instability.
- Corporate cash piles make the world a safer place. Cash levels aren’t high by historic standards, and valuations are extreme even when cash is fully accounted for.
- The “Hell” scenario is the most probable outcome. is requires “this time is di erent” to be true and, unlike Jeremy Grantham, I am not yet ready to assign this exceptionally useful rule of thumb to the waste bin of history. Put another way, Hell requires that stock prices have reached a “permanently high plateau,” and I’m not about to embrace that statement.