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I found his comments on the Fed policy and its affect on big tech's stock performance interesting and wrote about them over the weekend [0]. In short, according
by bko 6y ago
I found his comments on the Fed policy and its affect on big tech's stock performance interesting and wrote about them over the weekend [0]. In short, according to him a big reason the largest tech companies are up 60+% since beginning of 2020 is due to low interest rate policy of the Fed. Low rates juice equity returns and the biggest beneficiaries are large tech companies with really strong cashflow and low capital requirements. The 5 largest tech companies now comprise nearly 25% of the S&P500.
This was the single largest line item of covid spending. $3 trillion of the $12 trillion has gone directly into asset purchases (treasuries and mortgage backed securities) [1]
Another interesting thing I read about is how companies work around inflation. You see this in candy bars where the company shrinks the size of the bar rather than raise prices, eventually creating a "king size" to accommodate higher input prices. Other examples of include cutting corners and using cheaper material.
[0] https://mleverything.substack.com/p/where-did-the-12-trillion-of-covid-5e8 https://mleverything.substack.com/p/where-did-the-12-trillio...
[1] https://www.covidmoneytracker.org/ https://www.covidmoneytracker.org/
- Scoundreller 6y ago> Low rates juice equity returns and the biggest beneficiaries are large tech companies with really strong cashflow and low capital requirements. Shouldn’t it really juice okay companies with high debts? Or with high capital requirements because the interest cost on capital projects just went down?
- bko 6y agoThey would have to refinance to benefit from lower interest rates. And you have this additional credit variable. It would definitely cause some companies to change their capital structure, essentially increase leverage to benefit from lower rates. But I don't think this would help companies with existing debt more than less levered companies
- smabie 6y agoLow interest rates also raise company valuations due to a lower discount factor in the DCF model.
- devoutsalsa 6y agoReminds of the pressure to do away with big candy a few years ago. Instead of having one "King Size" candy bar, we'll cut it in half & provide 2 "Sharing Size" candy bars. [1]. Instead of getting fat by yourself, stay skinny with your friend, unless you are your own best friend. [1] https://www.npr.org/sections/thesalt/2012/02/15/146929211/goodbye-to-the-king-size-mars-to-downsize-candy-bars-in-2013 https://www.npr.org/sections/thesalt/2012/02/15/146929211/go...
- 1stranger 6y agohttp://reddit.com/r/shrinkflation http://reddit.com/r/shrinkflation