Every December 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 the NYSE to celebrate the holidays, and we've used the opportunity to get Art's take on the year ahead. We weren't able to meet at Bobby Van's this year, but Art was undeterred. Bobby Van's sent Art a genuine barstool to sit on, and we caught up with him via Zoom from his home in New Jersey. Below are edited excerpts from the interview.
Art, before we get to the new year, let's do a quick look back at 2020. What stood out for you? The amazing 30% move down in March, and the quick recovery? Is the Fed the hero here or is it just the resilience of the U.S. economy?
A: What I think it was is, this was the first and only self-induced recession. The government shutdowns and all of the restrictions that happened around the country. It was the government that basically imposed the fact that we were going through a recession. Other recessions are caused by displacement in interest rates and things like that, so since this was done directly, it had an immediate impact. We had the stock market plummet, and then it reversed, and I must say, the stock market's done much better than the economy has. People talked about a V-shaped recovery well, we got one in the stock market. We certainly haven't had one yet in the economy, and that's what we're hoping for next year.
Anything else that stood out in 2020 beyond the market turnaround?
A: I think what was helpful is, yes, the Fed was helpful as you suggested, but I think what was even more helpful may have been these care packages, if you would, that the government put in to delay, suspending things like evictions. You know, you tend to forget it if you, heaven forbid, you get evicted, it's not just that you lose the apartment, you lose the furniture, TV, all manner of things that have to be replaced at great expense, so by preventing that, they kept the economy from absolutely collapsing. And so far, as we're approaching year-end here, that's why the market is hanging on the idea of [wanting to] get one more stimulus compromise to postpone any further correction in the economy.
Let's turn to 2021. Tell us what typically happens in the first year of a new presidency.
A: Yale Hirsch of the Stock Trader's Almanac several years ago did some research on what he's dubbed the presidential cycle and found that the new president comes in and begins to work on some improvements on things that are important to him, and perhaps certain other things that they pledged — grapple with taxes and things like that, so the first year, certainly, and sometimes the first two years of a presidential term is the weakest of the four-year cycle. Then by the time we get to toward the end of the second year, obviously the president's thinking of his reelection, or the reelection of his party if he's had his full term. So I would assume that this year things will be hopeful but may not be quite as robust as some of the things that we've seen in the past, and Bob what's going to be a real puzzle for traders is that yes we know who the president is — at least we assume so — but we're not really sure whether the Republicans will have control of the Senate or they will transfer it to the Democrats and that's very important. And that's all about the runoff for the two senatorial seats in Georgia, and that comes in the very beginning of 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 raise a good point. A good trader watches all of the environment around him. And as you point out, commodity prices — particularly rural commodities — are rising in general. That's always a hint to possible inflationary pressure. Number two, M2 — the money supply — the Fed has been shoveling money in terms of reserves and free reserves. M2 is rising at an astounding rate. But the one thing that I caution about, Bob, is the so-called velocity of money — how fast people turn it over. I learned decades ago that you can only have inflation with money when people lend it and spend it. And so far, even though the money supply has risen, free reserves have skyrocketed into the trillions, we haven't had any real inflation. It's as if the Federal Reserve flew over your house and dropped a million brand-new dollars on your lawn, and you were so afraid of what was going on, you picked it up and put it in the garage. So, giving and spending or lending out to others is not inflation. So, there are early warning signs of possible inflation, but I would tell the viewers, watch the velocity of money you can get it from the Federal Reserve of St. Louis every week, and look for that statistic. If the velocity of money begins to go up, then head for the basement.
We never talk about inflation in the stock market, but isn't that what has happened? The Fed has flooded the economy with money, and a lot of it has found its way into stocks. Is it fair to say the stock market has been inflated because of the Fed's actions?
A: I think that's imminently fair, as we've recently seen with things like the IPO markets. If you have cash and you're looking for a rate of return, you're not going to get it holding it in cash, you're not going to get it in debt instruments. There's no yield anywhere. So it's almost the old TINA — there is no alternative. You've got to own stocks. That's where the action appears to be, and that's why we've seen people rush into IPOs and have some of them double on the first day. There's clear speculation and I think that is inflationary pressure in the stock market
The Fed has essentially pledged to do "whatever it takes" to help the economy. How far do you think that pledge goes?
A: Well, I think that Powell and the others do have the will to do whatever is needed, but they're quite frustrated. They can make money available, they can make money cheap, but they can't spend it for you. And the thing that moves the economy is, you know, 70% of it is the consumer. So they've got to see money spent and that's why, again and again as we come to the end of the year, we're hearing from Mr. Powell and the rest of the Fed that they want to see fiscal stimulus, they want through the government to be giving them more cash. They'll make money available. They'll make reserves available, but to get the economy moving, you're going to have to have government spend some of those reserves that they're making.
We are closing out 2020 with stocks at historic highs, but the market is pricey. The S&P 500 is trading for north of 22 times earnings in 2021. It's a very rich valuation. Is it justified?
A: I think that that's part of the flipping the switch on, clearly, that once the vaccine becomes effective, once we get anywhere near the so-called herd immunity, that the belief is that people are going to rush back to movie theaters, that they're going to walk into restaurants and bars, you and I can look forward to that, but where will you go and I think that's a bit of an overstatement, and I think that the valuations are somewhat rich. If you look at the estimates even in earnings, people are assuming there's going to be a burst to the upside, in the economy. And I think it may be a touch more gradual than many assume. I know people desperately want to get out from this sheltering in place. People have cabin fever all over, so there is that urgency. But I think it's been overstated and I think the markets, if anything, on the multiples, they're a bit rich as we go into the first year of the presidential cycle.
One of the more important developments this year has been the rise of the retail trader. It's wonderful to see more people participate in the markets, but there's some worry that too much day trading could cause many to get turned off when the markets correct. How do you feel about the whole Robinhood effect?
A: So, obviously, as you'd say, you'd like to see more of America own stocks, own the economy to broaden it out. It's been one of the few very successful ways. You know, we had a big period when real estate was going very well. And then that changed and the stock market has done well, but as you say, it has been a narrower and narrower move. I want to see new people in. What disturbs me is that they have a different way of thinking, and I think a good example is the vaccine, and the millennials, the Robinhood types, say with some decent logic, 'Hey, if the vaccine comes out in six months, in nine months, people will be going on cruise lines again. People will be obviously flying a good deal more so I can buy the airlines.' So what they do is they just go ahead. They looked at a development today, and assumed they'd see a result nine months out, and say I'll buy it today — instead of waiting or phasing their way in to see how it goes. That can be a bit disturbing and I think that's why with these spectacular moves in the recent IPOs, we've seen some quick reversals. And I think it is this new breed of investors who have not had the experiences, sometimes the painful experiences, some of us have had that lead us to trade in a slightly more cautious way. All I say is, welcome aboard, but just be careful of the volatility you're creating.
Art, thanks so much for joining us. I look forward to seeing you again soon at Bobby Van's.
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