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Stimulus is like heroin, 'it doesn’t do you a lot of good long-term': Wall Street heavy-hitter

Brian Sozzi
·4 min read

Wall Street power player Rob Arnott — the founder of influential money manager Research Affiliates who is known to challenge conventional thinking in markets — is out with a double barreled warning to market bulls who continue to print money during the pandemic on the back of gobs of fiscal and monetary stimulus.

First, don’t forget the long-term ramifications of government spending. At some point, that money is going to have to be paid back and Mr. Market won’t dig that. And secondarily, remember the health of Main Street remains detached from the bullish realities of Wall Street this past year during the health crisis.

“Applying the word stimulus to spending large quantities of money on a fiscal basis that we don’t already have — creating new money from the central bank — it all feels good. Stimulus, think of it as a little bit like heroin. I have heard that heroin feels good, but it doesn’t do you a lot of good long-term,” explained Arnott on Yahoo Finance Live. The reduced spending from the lockdowns paired with the fiscal and monetary so-called stimulus, pours money into the markets. There is no alternative. With zero yields you may as well go into the markets at any price creating bubbles. And when fiscal and monetary stimulus don’t promote spending in the macro economy, it does into Wall Street and not Main Street.”

Arnott founded Research Affiliates in 2002 and it has about $145 billion in assets under management.

To be sure, the market is doing anything but pondering Arnott’s concerns right now. Actually, it remains distinctly to the opposite. Consider this factoid out of Deutsche Bank on Tuesday. Only 12% of 627 market pros in a new survey from the bank see no bubbles in risk assets. Looked at another way, 78% saw bubbles all over the place.

This herd mentality on the Street is heightening the worries of Wall Street power brokers like Arnott that bubbles in many asset classes (bitcoin, Tesla, electric vehicle stocks, etc.) are nearing their day of reckoning with a sharp pin.

Just take a gander at some of the euphoric action.

All three major stock averages have been on a tear in the past six months, led by a 24% gain in the Nasdaq Composite. The S&P 500 (trading at a record high price-to-earnings multiple amidst a major health crisis) and Dow Jones Industrial Average are up 18% and 17%, respectively, during that stretch. Tesla shares are up 180% in six months and trade at an inflated 204 times forward earnings on a P/E basis. Dying video game seller GameStop has seen its stock explode 180% inside of a month simply because it has shaken up its board.

Global economy and technology concept. Fintech Financial technology.
Credit: Getty

Bitcoin is up more than 315%. Largely unknown companies with no prospects for profits within three years are coming to market via SPAC deals to huge valuations.

It could be easily argued these are signs of bubbles brewing in the market as investors blind chase performance, fueled by ultra easy monetary policy and more recently — the prospect of a $1.9 trillion stimulus plan by the incoming Biden administration.

Arnott is not entirely sure what will trigger the bursting of these new proverbial bubbles.

“Bubbles can persist longer and take markets further than you can possible imagine. And so short-selling a bubble is very dangerous. The old cliche is that a market can remain irrational longer than you can remain solvent,” he said. “I could speculate on possible causes of today’s bubbles bursting. But the simple fact is it will happen. Bubbles burst. And so the question is do you want to be picking up nickels in front of a steamroller, or do you want to invest?”

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Julia La Roche is a correspondent for Yahoo Finance. Follow her on Twitter.

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