Wall Street continues at yesterday’s close gaining altitude until reaching valuations that are already too high. As we can see in the following graph, the SP 500 has reached a projected per 24 of 24, the highest since 2000, it certainly seems out of logic that in the current macro situation this is possible.

We may have high hopes that corporate profits will rise a lot and make up for the gap in the equation, but with math in hand this is virtually impossible in several quarters. Political statements from White House advisers saying the third quarter was It will fix everything with the highest growth in history. They are demagogic and unorthodox from a serious economic point of view.

It is true that until now everything was very distorted by very few technological values ​​in this broad index of the SP 500, but in recent days we have seen how the rest of the index rose while these lagged values ​​have remained still.

We very much agree with this quote that we are going to reflect below in which two options are proposed, either a very strong recovery is coming or we are in a bubble, there is no longer a midpoint. See the quote:

There are two possible explanations for the divergence between stock prices and the real economy. The first is that the economy will recover much faster than many expect. This seems highly unlikely since it could take at least four years for economic activity to return to the levels seen in the fourth quarter.

The most likely explanation is that stock appreciation is explained by the Marshallian K, where liquidity exceeds nominal economic growth and overflows in asset bubbles such as the Internet bubble, the housing bubble, and the corporate debt. There will be more bubbles in the future.

The quote is from Scott Minerd.

Global Chief Investment Officer of @GuggenheimPtnrs

We can not agree more with him, we also do not get the accounts and the recovery in V, that is to say what the bags discount and that would justify this rise and these valuations, it is mathematically impossible and it will not happen no matter how much we let’s pawn. The stock market has a subjective and psychological component that cannot be measured but the economy is measurable and objective in its numbers, this recovery will not happen in V.

So we are left with explanation number two that we think is the correct one which is the K factor of Marshall.

See this quote from Wikipedia

Economists associated with the University of Cambridge, including Marshall, Arthur Pigou, and John Maynard Keynes (before he developed his own school) contributed to a quantity theory of money that paid more attention to demand than the classical, supply-oriented version . Cambridge economists argued that a certain part or fraction of the currency will not be used for transactions, but will be kept or accumulated for the convenience and security of having “cash on hand.” This portion of the cash is normally represented as k, and it is understood as that fraction of the nominal income that equals the currency to the money demanded:

{ displaystyle M ^ { textit {d}} = { textit {k}} cdot P cdot Y}

In which, { displaystyle M ^ { textit {d}}}

is the demand for money, { displaystyle Y ,} the national income, { displaystyle P ,} prices and { displaystyle k ,} the fraction that equals the equation. (or, alternatively, the amount of money that individuals consider convenient to keep as a liquid reserve).

In sum, the liquidity brutally injected by central banks, which reaches the figure of 2.4 billion dollars per hour, something that I never knew in history, overflows and causes asset bubbles. And here we have the first one. I already think that we all have experiences in recent bubbles and we know that they are unpredictable, we know that when they burst they take everything ahead and this will do it too, but we also know that their duration can be completely unpredictable, can last days or can last two years . You have to dance but near the door, we return to the little phrase but there is no other.

Possible punctures of the bubble could come, either because of the virus’s outbreak, or because the market for some reason realized that it is not discounting reality, or because the war between the United States and China gives headlines that return to frighten. Or of course any unforeseen factor that may appear on the horizon.