For the past 13 years, Art Cashin and his “Friends of Fermentation” have gathered at the front bar at Bobby Van’s Steakhouse across from NYSE every December to celebrate the holidays, and we took the opportunity to take Art’s look at the throw next year. We couldn’t meet at Bobby Van’s this year, but Art wasn’t put off. Bobby Van sent Art a real bar stool to sit on, and we caught up with him through Zoom from his home in New Jersey. Edited excerpts from the interview can be found below.
You can see the full interview on CNBC Pro here.
Art, before we enter the new year, let’s take a quick look back at 2020. What did you notice? The amazing 30% in March and the quick recovery? Is the Fed the hero here, or is it just the resilience of the US economy?
A: I think it was the first and only self-induced recession. The government shutdowns and all the restrictions that have happened across the country. It was the government that basically imposed the fact that we were going through a recession. Other recessions are caused by interest rate shifts and the like. Since this happened directly, it had an immediate impact. We had the stock market slump and then it turned back, and I have to say the stock market did a lot better than the economy. People were talking about a V-shaped recovery, we have one on the stock market. We certainly haven’t had one in business yet, and we hope for that next year.
Is there anything else that caught your eye in 2020 beyond the market turnaround?
A: I think what has been helpful is, yes, the Fed has been helpful as you suggested, but I think what was even more helpful could have been those nursing packages, if you will, that the government is delaying and things like Has suspended evictions. You know, you tend to forget when you are driven out as Heaven forbids. It’s not just that you lose the apartment, you lose the furniture, the television, all sorts of things that need to be replaced at a great expense, by preventing that that kept the economy from absolutely collapsing. And so far, as we approach the end of the year here, the market is hanging on the idea of [wanting to] Get another incentive tradeoff to postpone another correction in the economy.
Let’s turn to the year 2021. Tell us what usually happens in the first year of a new presidency.
A: Yale Hirsch of the Stock Broker’s Almanac did some research a few years ago on what he called the presidential cycle and found the new president coming in and starting to work on some improvements on things that are important to him and maybe certain other things that they are committed to – dealing with taxes and the like, so the first year and sometimes the first two years of a presidential term is certainly the weakest of the four year cycle. Then, when we get to the end of the second year, the president is obviously thinking of re-election, or re-election of his party if he has served his full term. So I’d assume things will be hopeful this year, but may not be quite as robust as some of the things we’ve seen in the past, and Bob, what will be a real mystery to traders is that we know who that is President – at least we assume so – but we are not sure whether the Republicans have control of the Senate or whether it will be given to the Democrats, and that is very important. And that’s all about the runoff for the two Senate seats in Georgia, and that’s coming in early January.
Another question mark is inflation. It seems tame now, but commodity prices have risen quite a bit, often a harbinger of inflation.
A: No, I think you are making a good point. A good trader observes the entire environment around him. And as you point out, commodity prices – especially rural commodities – are generally increasing. This is always an indication of possible inflationary pressures. Number two, M2 – the money supply – the Fed has shoveled money in terms of reserves and free reserves. M2 is increasing at an amazing rate. But the only thing I’m warning about, Bob, is what is called the speed of money – how quickly people turn it over. I learned decades ago that the only way to inflate money is to have people lend it out and spend it. And so far, although the money supply has increased, the free reserves have increased into the trillions, we have not had any real inflation. It’s like the Federal Reserve flew over your house and threw a million brand new dollars on your lawn and you were so scared of what was going on that you picked it up and put it in the garage. So giving and spending or lending to others is not inflation. So there are early warning signs of possible inflation, but I would tell viewers to watch the speed of money you can get from the St. Louis Federal Reserve each week and look for that statistic. When the speed of money starts to increase, go to the basement.
We never talk about inflation in the stock market, but didn’t that happen? The Fed has flooded the economy with money, and much of that has found its way into stocks. Is it fair to say the stock market has inflated as a result of the Fed’s actions?
A: I think this is imminent, as we saw recently with things like the IPO markets. If you have cash and you are looking for a return, you are not going to be holding it in cash, you are not going to get it in debt. There is no yield anywhere. So it’s almost the old TINA – there is no alternative. You must own stocks. That is where the action seems to be, and that’s why we’ve seen people crash IPOs and some of them double up on day one. There is clear speculation and I think that is inflationary pressures on the stock market
The Fed is essentially committed to “doing whatever it takes” to help the economy. How far do you think this promise goes?
A: Well, I think Powell and the others have the will to do whatever it takes, but they are pretty frustrated. They can provide money, they can make money cheaply, but they cannot spend it on you. And the thing that drives the economy is, you know, 70% of that is consumers. So you need to see how much money is being spent, and that’s why we hear again and again towards the end of the year from Mr Powell and the rest of the Fed that they want to see fiscal incentives that they want from the government to give them more money . You will provide money. They will provide reserves, but in order to get the economy going, the government will need to spend some of the reserves they are building.
We’re closing 2020 with stocks at all-time highs, but the market is expensive. The S&P 500 will trade for more than 22 times its profit in 2021. This is a very rich rating. Is it justified?
A: I think that’s part of flipping the switch, clear that once the vaccine takes effect, once we get close to what is called herd immunity, the belief is that people will rush back to the theaters. that they will go to restaurants and bars, you and I can look forward to that, but where are you going and I think this is a little exaggerated and I think the reviews are a little abundant. If you look at the estimates for revenue as well, people think that the economy will see an upward trend. And I think it might be a puff that’s more gradual than many assume. I know people really want to get out of this place. People have cabin fever everywhere, so there is this urgency. But I think it has been overstated and I think the markets, if anything, are a tad rich in multiples as we move into the first year of the presidential cycle.
One of the most important developments this year has been the rise of the retailer. It is wonderful to see more people participate in the markets, but there is some concern that too much day trading could result in many being turned off as the markets correct. How do you feel about the whole Robinhood Effect?
A: So, as you’d say, you obviously want to see more of America’s own stocks owning the economy in order to grow it. It was one of the few very successful ways. You know we had a big time real estate was doing really well. And then that changed and the stock market did well, but as you say it was an increasingly tight step. I want to get to know new people. What bothers me is they think differently, and I think a good example is the vaccine, and the Millennials, the Robinhood guys, say with decent logic, “Hey, if the vaccine comes out in six months, in nine months, people will be back on cruise lines. People are obviously going to fly a lot more so I can buy the airlines. ‘So just keep going. They looked at a development today and figured they’d see a result in nine months and say I’ll buy it today – instead of waiting or going out to see how it goes. This can be a little unsettling, and I think that’s why we’ve seen some quick reversals in these spectacular moves in recent IPOs. And I think it’s this new generation of investors who haven’t had the experience, sometimes the painful experiences some of us have had, that have made us act a little more cautiously. All I’m saying is welcome aboard, but be careful of the volatility that you create.
Art, thank you very much for joining us. I look forward to seeing you again at Bobby Van soon.
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