Market are overvalued: Using DCF Analysis with a Fed Fund Rate of 5%

by hello-world-foo-bar

Everyone on here says stocks are not overvalued when interest rates are at 2%. But 2% is a short term anomaly. Historically, the Fed had to cut 5% to get us out of a recession. 5% fed fund rate is a healthy economy and full normalization.

Therefore, using a 5% fed fund rate for DCF, stocks are very overvalued.

BUYING at these prices is mainly chasing the repo liquidity, which is fine, but the long term, it seems like a dangerous play because its based on liquidity and not fundamentals.

THE other corollary is that we’ll be at 2% or lower for longer implying stock prices are elevated and not in a bubble. BUT if you hold that view you must also accept we are in a liquidity trap. IMPLYING that if the Fed ever reduces the balance sheet the financial markets will collapse.

tldr;

Buy CALLS while repo liquidity and balance sheet is expanding.

Buy PUTS when repo liquidity ends and balance sheet is neutral.

Distortion in the market are too great to be Theta Gang at this Late Cycle/Cusp of being End Cycle

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.