Chamath Palihapitiya, billionaire venture capitalist and entrepreneur says that staying positive about the market will be rewarded. He cites two financial factors as his main reasons for being confident.
Palihapitiya examines the chart of M2’s money supply, which is on an upward trend.
According to the billionaire, M2 growth has been a major factor in driving the S&P 500 upwards.
If I were a bet man…I think that the trade for free money here should be leveraged long. You can earn a lot right now. What’s the reason? First, I’d like to present the money velocity chart. This is M2 money. This is an indicator of the amount of money circulating within the economy.
This shows the effect of the rates. We were able, through them, to begin to reduce the amount of money in circulation. As the economy stabilised and as people began to look at what they could achieve in the next 18-24 months, money started flowing back into the market. This is what’s given the equity markets a boost .”
A billionaire also keeps a watchful eye on his money in money-market funds. These are financial instruments whose yields are heavily influenced by interest rates established by the Federal Reserve.
Palihapitiya claims that when the Fed begins to cut rates, the money in money-market funds held by investors will be converted into stock.
Look at the money in money-market funds. This shows you that you have trillions and trillions in dry powder on the sidelines. It will eventually need a place to go.
Jerome Powell, [chairman of the Federal Reserve], is in a [untenable] position because people will see him as politizing the Federal Reserve. It is possible to justify a rate cut based on the available data. Two things happen if you reduce rates.
The first is that people will withdraw money from money market funds to seek higher returns elsewhere. This will also increase money velocity. When you combine these two factors, it is an offer to equity markets.
If we are at an all time high with the rates today at 4,5%, and Powell is facing a wall of resistance to reduce them, then the only way from here would be up.
“I think if Powell started an aggressive reduction program… You could see S&P at 7,000.”
S&P 500 trading levels are at an all-time high of 6,204 as of the close of business on Monday.
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Billionaire Chamath Palaihapitiya believes a “free money” trade has arrived, and says Trillions Of Dollars need to find a home. This post may change as new developments unfold.
