Low Rates Pushing Up Asset Values

Head-scratching has resulted from asset valuation increases in the face of a rocky economy. On the surface, the increasing value of companies or properties does not make sense. Dubious prices are due to the uncertainty about our future; many say there must be some bubble. The purpose of this post is to explain such exuberance as lowering interest rates may be leading to exponentially higher asset values.

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Cheap Vaccine, Growing Stocks

It has been suggested by multiple news outlets that Moderna, if they do get their vaccine ultimately approved, would not be that profitable. 

The problem is as follows: if Moderna were to market their approved vaccine, they would be looked at like greedy animals for overcharging for it. They would probably spend a boat-load to get it approved, but could not price the vaccine exorbitantly to take advantage of that work and capital put into doing so. Optics would prevent Moderna from “overcharging”. 

On the other hand, if Moderna were to charge only a small amount for the vaccine, it may be heavily used across the globe but Moderna itself would not show a very high profit, even though they caught lightning in a bottle. Chances are that they would be pressured by governments, domestic and foreign, to lower the price as much as possible.

If Moderna’s profitability is most likely capped, then what is the upside for them? 

There is a lot of hype around their vaccine and that hype be unwarranted given what we talked about above. However, a more nuanced look might show that large asset managers, like BlackRock, Vanguard, and State Street, could (should) be rooting for Moderna to work out their vaccine. 

The theory goes that as soon as a vaccine can enter the market, other stocks will benefit as consumers gain confidence, revenues increase, and subsequent earnings grow. If investors have large portfolios of companies, supporting one company where the profits would be minimal but whose product is impactful to the economy, should raise the values of all of their other holdings. Moderna’s stock could go to zero and the large asset managers would still do very well.

This brings about the second-level thinking that, if large asset managers were to take a seat on the Moderna board, and guide their corporate strategy, that the Moderna employees could potentially receive incentives that are not typical. Why would an asset manager want Moderna to maximize profits if that a) would limit the vaccine’s positive impact that it could have on the economy and b) not maximize benefits to thousands of other companies they may also be invested in? Instead, as we said in the last paragraph, they could manage Moderna to an extremely low, unprofitable value, but pay Moderna’s staff based on how well other company’s do? It would make sense for Moderna to do so. If you are a Modrona employee, why take a $2MM share price surge on Moderna stock when you can get a bonus from your rich diversified shareholders of $10MM…and look like a good guy for selling your vaccine at dirt-cheap prices?

One does not have to own Moderna stock in order to benefit from their hopefully positive vaccine trial, but everyone, particularly in the stock market, should be rooting that they are successful. A positive vaccine is a big step towards the economy and stock market fully recovering. 

Hidden Labor Force Fluctuations

What is the unemployment rate made up of? It is fairly simple. The formula is those unemployed divided by the labor force.

Unemployed are those people either actively looking for a job or those that have been laid off but are waiting for a recall.

The labor force are those people on payrolls plus those that are unemployed. 

In tracking unemployment, most people will track those that are in the unemployed group. What are the new weekly unemployment claims? What are the continuing jobless claims? These are what people who track the economy fixate on. 

On the other hand, the labor force is not looked at though it is an important part of the employment figure. The labor force tells us who is working or who intends on working. The fluctuations in the labor force tell us a lot about the psychology of the labor market as well. 

Great Recession Labor Force

Let’s look at the Great Recession which is where I first saw that labor force changes do happen and are impactful. 

In October 2008, the labor force hit its peak at 154.9MM workers. The low in the labor force came in December 2009 at 153.1MM workers. To restate that, 1.8MM workers left the workforce in 14 months. They either did not want a job or were too discouraged to look for one. The economy took until almost four years later, June 2012, to reach that previous peak again. 

The unemployment rates in December 2009 was reported at 9.9%. If those that have exited the labor force are counter, the adjusted unemployment rate would be more like 10.9%.

The Great Recession was child’s play compared to what we are currently experiencing.

Coronavirus Labor Force

Let’s look at the recent employment figures. In January 2020, the labor force was reported at 164.6MM and the unemployment rate was reported at 3.6%. By April 2020, 3 months later, the labor force was at 156.5MM, which is a reduction of 8.1MM. The reported unemployment rate was 14.7%. Once those that temporarily left the labor force were accounted for, the adjusted unemployment rate was 19.0%. 

Of late, the labor force and unemployment figures have slightly recovered. The reported unemployment rate was 11.1% in June 2020. The adjusted unemployment rate, accounting for those that have still left the labor force, is 13.6%

The Labor Force Is Still Evolving

A lot of the employment picture has yet to come. It will be a few years from now where we fully grasp not only the unemployment rate but the overall labor force.

Here are some questions that come to mind that I will leave you with:

  • What happens to employment once the unemployment insurance relief of $600 extra per-week ends after July 2020?
  • When will the labor force get back to previous peak levels?
  • If the pandemic continues, will more people leave the labor force?
  • Will those that have left the labor force need to re-enter it if they run out of savings?
  • Will people that leave the labor force cause the reported unemployment rate to decrease?