Facebook, Google & The Fed – QE insanity.

It is raining money that does not exist.

• The scale of the insanity sweeping the market became clear yesterday as dire predictions for digital advertising were made and yet both Google and Facebook rallied strongly (7% and 9% respectively)
• While Facebook is seeing a huge spike in usage of its Digital Life services in the hardest-hit countries, its customers are dramatically cutting spending on marketing.
• A big jump in advertising inventory supply combined with fewer dollars basically means that the price of the advertising falls precipitously.
• A lot of this extra traffic is occurring on its messaging apps which are very badly monetised.
• Advertising demand may have fallen by as much as 50% across the board and up to 90% in the hardest-hit industries (transportation and hospitality).
• The net result is that Q1 2020 and Q2 2020 are going to be hard hit and earnings may decline this year.
• This is really bad news for Facebook because it costs money to host all this extra traffic for which there will be no revenues meaning that margins may well tighten further.
• The net result is that in reality, the valuation of both Facebook and Google is rising sharply as the decline in earnings is likely to outpace the fall in the share price.
• Rising valuation going into a recession is not where anyone wants to be.
• This is happening across the entire economy which is now clearly in a sharp recession from which the recovery may be very slow.
• The market was already expensive before the crisis hit and now that earnings and dividends are likely to decline, a big correction in equity valuations should logically follow.
• Instead, the Fed is fighting against the free market by pumping cash into the system to prevent interest rates from rising and stocks from crashing.
• The problem is that the Fed has no choice because the system is so saturated with debt (far more than in 2008) that if it allows interest rates to rise a wave of defaults could trigger a tsunami that will threaten the entire financial system itself.
• This intervention would be fine if the Fed actually had the money that it is currently dumping into the system, but the coffers are empty.
• Consequently, it is printing money and creating liquidity out of thin air.
• Furthermore, the Fed has said that there are no limits to how much money it will print, and the likelihood is that this bailout will have to be extended beyond investment-grade and government-backed debt in order to prevent the first domino from falling and setting off all the rest.
• The net result is a huge increase in the money supply which has not been backed by any physical asset since 1971.
• The Fed is relying on the world continuing to consider the US dollar as an unimpeachable reserve currency but the more it prints, the more unsustainable this becomes.
• The net result has to be inflation which will eventually put pressure on the value of the US dollar.
• It is this inescapable conclusion which has caused the number of articles and views on physical gold as the ultimate reserve currency to sharply increase.
• I do not see this as the bottom as what is going on does not represent the reality of the economic situation and so I am still staying out.