The Federal Reserve Bank in the U.S. released its meeting minutes recently. Those minutes revealed a debate which is still going on within the bank about more stimulus versus reducing the stimulus. It clearly shows that some policy makers still don't get it: stimulus as understood and propagated by them does not work at all. The proof has been clearly reflected in the sluggish economic recovery and constantly disappointing employment figures. The reason employment has not picked up is not due to lack of stimulus but just the opposite of it. The sole reason is the enormous stimulus itself.
As desired by Fed officials, what the stimulus really did was inflate asset prices without affecting or changing any other fundamentals. The result is hot money chasing around yield from one sector to another sector of the market. This actually gave rise to a one-two punch for every corporation and business. On the one hand, they saw their raw material and input costs soar to the sky, while on the other hand the stock market was bidding up shares of every company in every sector. Under these circumstances, which CEO or company management would dare to hire rather than maintaining the bare bones employee count because management has to justify their stock valuation as it is their prime, sacrosanct fiduciary duty to their shareholders. How does management justify the higher stock valuation in the face of sky high input costs and economic uncertainty? Answer is: by keeping at least one cost under control; that is employee head count.
So, artificially inflating the asset prices was never a good idea to start with.
In normal circumstances, as corporations compete with each other and the stock market reflects their fundamental valuation as closely as possible, corporations try to hire employees to attract the talent that will help them in changing the fundamentals of the company. But when stock is rising everyday on its own, management has the reverse problem. They want to justify that price by cutting costs first as they have minimal control on the demand in the short term.
The stimulus money was never meant for the common man. It was meant for corporations with the idea that if corporations have easy access to money, they will go out and hire, though I have never seen any corporation go out and issue new debt or stock just because it wants to hire new employees and pay them. I just wish that policy makers had gone to some business school to learn that. Most of the time, corporations issue new debt or equity because they want to change their business and not just the employee head count.
There cannot be a better example to substantiate my arguments than Netflix (NFLX). Netflix stock is trading at a P/E multiple of 83. After playing around with other possible camouflaging factors like overseas expansion and content deals etc., they finally got to business by raising the subscription prices by 50% in one day. Will Netflix hire more employees as long as their stock is trading at a multiple of 83? Probably not.
My suggestion to policy makers is to wind up the stimulus as soon as they can so that the economy returns to healthy growing ways based on fundamentals.
In the meantime, I would advise investors to stay away from Netflix until we can identify the customer reaction to a 50% price increase in one day for a commodity service.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
