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If in early January, you’d have described to me everything that was to happen with the world and global economy and then asked me to guess where the stock market would be, I would not have guessed it would be at today’s level.

Looking at the stock market today, the first thought that comes to mind is that it is divorced from economic reality. The S&P 500 is only a few percent away from where it started 2020.

On the surface it looks like stocks discount one incredibly rosy version of the future. In that version everything goes back to normal like nothing happened; we basically just entered and quickly exited a sharp recession and earnings came back to pre-coronavirus normal. Though that is a possible outcome, it is not a probable one, judging by what is happening right now. We’d like to note that, in any scenario, we’ll exit with close to $10 trillion of additional debt on the government’s and the Fed’s balance sheets.

I used the word discount. To discount something you bring future earnings (cash flows) at a discount rate to today’s dollars. The Federal Reserve bought trillions of dollars of US Treasuries and corporate bonds of suspect quality through ETFs, taking interest rates to almost zero. This act has pushed the discount rate lower and wound up the spring of the music box in the Fed’s game of musical chairs. So the market behavior to a large degree reflects not the sum of future scenarios but the much lower discount rate by which these scenarios are discounted.