Photo via Wikimedia Commons
But we regard it like the “Shark Alert” flags you see on the beaches of Australia. (Down Under is the only country in the world to have a chief of state who was eaten by a shark.)
The “Shark Alert” flag doesn’t mean you can’t go swimming. It means if a shark takes a bite out of you, it’s your own damned fault.
When it comes to shark alerts, a white flag is actually not a good sign. A little aside on sharks: on the South African coast, there are not only plenty of white sharks, but also Zambezi sharks (better known as “bull sharks” elsewhere), which are actually far more dangerous to humans. The Zambezi’s specialty are attacks in murky water and it also swims up freshwater rivers – so if the sea is in turmoil and visibility in the water is poor, it is best to stay away (and one should definitely never enter the water near the mouths of rivers). The problem with this shark is that it will often attack in just knee-deep water, so it isn’t even safe to just wade in a little bit. Many of the disappearances and deaths that are popularly attributed to crocodiles in Africa are very likely actually due to Zambezi shark attacks.
Nutty Valuations
Why are we raising the flag again now? Economist and fund manager John Hussman, of Hussman Funds, explains:
“Last week, the CAPE ratio of the S&P 500 Index surpassed 27, versus a historical norm of just 15 prior to the late-1990s market bubble. [The CAPE ratio – also known as the Shiller P/E ratio – looks at inflation-adjusted earnings over a 10-year period to control for cyclicality in earnings.]
The S&P 500 price-revenue ratio surpassed 1.8, versus a pre-bubble norm of just 0.8. On a wide range of historically reliable measures (having a nearly 90% correlation with actual subsequent S&P 500 total returns), we estimate current valuations to be fully 118% above levels associated with historically normal subsequent returns in stocks.
Advisory bullishness (Investors Intelligence) shot to 59.5%, compared with only 14.1% bears – one of the most lopsided sentiment extremes on record. The S&P 500 registered a record high after an advancing half-cycle since 2009 that is historically long-in-the-tooth and already exceeds the valuation peaks set at every cyclical extreme in history but 2000 on the S&P 500 (across all stocks, current median price-earnings, price-revenue and enterprise value-EBITDA multiples already exceed the 2000 extreme).”
The water is full of sharks, in other words. And that’s why this is the best time to get out of the market in the next eight years, says Hussman. Over that time, he says, the likely return from a balanced portfolio of stocks and bonds is zero.
So nutty are US stock market valuations (in light of the economic situation) that SocGen equity strategist Albert Edwards is afraid he may be going bonkers too:
“We are at that stage in the cycle where I begin to doubt my own sanity. I’ve been here before though and know full well how this story ends and it doesn’t involve me being detained in a mental health establishment (usually).
The downturn in US profits is accelerating. And it is not just an energy or US dollar phenomenon – a broad swathe of US economic data has disappointed in February.
One of the positive surprises, payrolls, is a lagging indicator. The $64,000 question is not if, but rather when will investors realize what is going on?”
The inflation-adjusted S&P Composite since 1870 and the P/E 10 (or CAPE for “cyclically adjusted P/E ratio”). The current level of valuation is nearly at the 95th percentile of the entire history of valuations (in terms of the median stock, it is at the highest ever). Only the peak of 1929 and the tech bubble peak of 2000 saw a higher P/E 10 – click to enlarge.
Out of the Box
Previously, we looked at something so counter-intuitive… so contrarian… and so out of the box that many readers thought the craziness must have gotten to us. They urged us to get back into the box as soon as possible. But one of the advantages of being in Argentina, so cut off from civilization, is that we can’t find the box. We are largely out of touch with the news and cut off from popular opinion.
On a typical day, we rise at 7 a.m., chat with the farm manager, eat breakfast outside in the sunny courtyard… and settle into our work. We read a few headlines and stories on our computer. (Yes, we have solar power and a satellite Internet connection.) Then we read more… and answer correspondence. We have lunch. We read some more and we sit down to write.
Then when we are tired of sitting, at 5 p.m., we saddle up a horse and go for a ride. The ride usually takes a couple of hours – simply because it takes so long to get anywhere. Yesterday, we rode up the riverbed toward the old stone mill. A sluice brought water down from an irrigation canal and used it to turn a stone-grinding wheel.
We’ve spent time studying its primitive technology. And we pray civilization will not collapse: We don’t think we could ever figure out how to make it work again. The ride was gloriously beautiful – through huge clumps of pampas grass, across the marshes, up the side of the hill, along a stone wall that led to the mill. A few white puffs of clouds flew across an otherwise pure blue sky; yellow flowers covered the hillsides.
Retail money market fund holdings as a percentage of US stock market capitalization have never been lower. As can be seen above, this is a kind of “early warning” indicator – whenever it dips into “excessive optimism” territory, the market usually still has 2 to 4 years of bull market ahead of it before it crashes and burns – click to enlarge.
Why the Rich Get Richer …
Having cleared our head, we returned to our thoughts. Lately, we have been thinking about how we – and almost everyone else – misjudged the potential inflationary effects of central bank policies (ZIRP and QE). As we mentioned yesterday, central banks are not really “printing money.” Nor are they really stimulating the economy.
Instead, they are putting credit on sale. Yesterday, Chris provided some detail on how US corporations are using this cheap credit to buy back their own shares. February set a new record for share buybacks. US corporations spent a staggering $5 billion a day on their own shares. That brings the tally to $2 trillion since the bottom in US stocks in 2009 – or about 10% of the total value of the S&P 500.
This is the effect of cheap credit: It gooses up asset prices. It encourages speculation and quick-buck gambling. It does not raise consumer prices or help the real economy. Instead, the rich get richer – because assets go up in price. And the poor get poorer – because real investment, the kind that produces jobs and incomes, goes down.
Curiously, even former Fed chairman Alan Greenspan, now at liberty to speak the truth, said so. “The single biggest problem in our economy,” according to Greenspan, “is a lack of real capital investment.”
The pro-cyclical nature of stock buybacks: corporate managers are buying back almost nothing when stock prices are low, and indulge in record buybacks when prices are in nosebleed territory. This is however the exact opposite of their personal buying and selling behavior: insider sales have rocketed higher concurrently with buybacks – click to enlarge.
Cash Will Be King
Instead of the kind of patient, sensible, capital investment that we would see in a genuine boom, the Fed’s EZ money policies encourage bubbles. Hussman:
“When investor preferences are risk seeking, overly loose monetary policy can have a disastrous effect by promoting reckless speculation and enhancing the ability of low-quality borrowers to issue debt to yield-starved investors.
This encourages malinvestment and financial distortions that then collapse, as we saw following the tech and housing bubbles. Those seeds have now been sown for the third time in 15 years.”
All bubbles burst. They burst whether the Fed is raising rates or lowering them. And all bubbles burst in a way that destroys credit but raises up the value of cash. This is the curious phenomenon that almost nobody but us sees coming…
The Fed pumps up the monetary base – made up of commercial banks’ reserve accounts at the Fed plus physical currency circulating in the economy – to about $4 trillion. But instead of a falling dollar, the greenback becomes so valuable that people cannot live without it. Cash will be king. Emperor. Rock star. And Oscar winner. Briefly…
Meet the once and future emperor
Image captions by PT
The above article is taken from the Diary of a Rogue Economist originally written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.
They’re Ringing The Bell Real Loud At NASDAQ: Record Company Buyback, Heavy Executive Sales
by ZeroHedge • March 7, 2015
In the aftermath of Marc Cuban’s oped from two days ago, that the current, second tech bubble is worse than the first dot com bubble of 2000, there has been much anguish by those deeply invested (on margin) in (bio)tech stocks, to demonstrate that the Nasdaq at 5000, or Biotechs trading at 50x or 5000xP/E, is perfectly normal and the global central banks’ $13 trillion in liquidity has nothing to do with it. Of course, the answer who is right and wrong on this issue will not be revealed until after the current bubble pops.
Luckily, there are some very clear clues.
As Sundial Capital’s Jason Goepfert notes, the best way to figure out whether tech stocks are overvalued is to look what the insiders are doing: those public tech company directors and senior executives who know their companies better than anyone, and who may keep silent as the Nasdaq crosses 5000, but are quite vocal with their shares.
According to MarketWatch, Goepfert said insider selling by tech execs is now at the heaviest pace seen in at least eight years.
Then again, we have seen record insider selling before: surely that can’t be the punchline.
It isn’t. According to Goepfert, as well as to Zero Hedge which first revealed that companies had announced a record amount of stock buybacks in February, the punchline is that these tech insiders are selling a record amount of personal stock… to the very companies they control!
Per Sundial, technology companies have been buying back a record amount of their own shares. And who is selling: why the management teams and directors that make the decision whether to allow the company to buyback stock in the open market.
“It seems odd that insiders would be selling their stock at the very time they’re directing their company to buy back that very same stock,” Goepfert said, adding that “it’s a better sign for stocks when insiders are buying, or at least not selling heavily,” Goepfert said. “When they do sell en masse, it’s a yellow flag.”
We would be less politically correct: when the same management teams that sell record amounts of their own company stock to the companies they control – companies which are now buying back record amounts of stock, this is not only the worst possible conflict of interest, it means, for lack of a better word, that the Nasdaq, bubble or not, has become the biggest circle jerk in history!
A circle-jerk which will continue until the Nasdaq itself, with its trademark zero cashflows, ends up as loaded up with debt as any mature, late cycle company. Because by now it is clear to everyone that if and when rates do rise, and all that all time high corporate, financial, household and sovereign debt has to be services, nobody is getting out alive.
http://www.zerohedge.com/news/2015-03-06/nasdaq-has-become-biggest-circle-jerk-history
Stockman: Corporate America Is Cannibalizing Itself
by Newsmax • March 9, 2015
American businesses are borrowing at historic high levels, but the only thing growing as a result is how fast their equity capital is vanishing, according to David Stockman, White House budget chief during the Reagan administration.
Stockman, a reliable critic of Federal Reserve policies, said much of the blame can be laid at the feet of the central bank and the bank’s Wall Street cheerleaders.
He said the Fed’s balance sheet has ballooned by 9 times since 2000, yet real net investment in the business sector has cratered by 33 percent during the same time period.
“Once upon a time businesses borrowed long term money — if they borrowed at all — in order to fund plant, equipment and other long-lived productive assets,” Stockman wrote.
“Today American businesses are borrowing like never before — but the only thing being liquidated is their own equity capital. That’s because trillions of debt is being issued to fund financial engineering maneuvers such as stock buybacks, M&A [mergers and acquisitions] and LBOs [leveraged buyouts], not the acquisition of productive assets that can actually fuel future output and productivity.”
In Stockman’s view, central bank “financial repression” — in the form of artificially low interest rates that have been orchestrated to provide a false prop to the economy — is responsible for fueling stock market bubbles that makes stock repurchases and other short-term financial engineering maneuvers profitable.
For 2015 to date, corporate bond issues total $241 billion — a giant $1.4 trillion annualized run rate, or nearly double the run rate prior to the 2008 financial meltdown, he noted. “Yet virtually all of this massive debt issuance has been cycled into after-burner fuel for the rocketing stock market. During the month of February alone, stock buybacks for the S&P 500 were a record $104 billion,” he added.
“Is it any wonder that Wall Street threatens a hissy fit upon even a hint that the Fed’s rotten regime of ZIRP [zero interest rate policy] might be ended after 80 months?”
Stockman explained that the titanic splurge in corporate debt issuance conceals the fact that real net investment in the U.S. business sector shrank sharply from $400 billion annualized in the fourth quarter of 2007 to only $300 billion annualized in the fourth quarter of 2014.
“This drastic shrinkage is something totally new under the sun, and not in a good way at all,” he declared. “So thanks for the corporate bond bubble, Fed. It’s just one more nail in the coffin of capitalist prosperity in America.
With the European Central Bank expected to start a $1 trillion quantitative easing (QE) program next week, an echo of the Fed’s QE binge, European companies could follow America’s corporate lead, Reuters reported.
“European companies are likely to join a boom in share buybacks as central bank cash floods the economy, risking criticism that they are recycling capital rather than investing to promote growth,” Reuters said.
However, the news source predicted, “Political pressure will probably grow on companies to use ultra-cheap funding for creating jobs rather than simply buying back their own shares.”
After reading through the many commentaries regarding Llpoh’s eventual exit from the US and the contentious arguments about this, it’s tough to consider other topics. Admin, just doing your job (excellent as usual) but Llpoh’s article and this one about our dysfunctional and grossly misleading financial system are all part of the same story.
I can’t believe that any financial system can be propped up indefinitely simply because everyone believes in the economic lies of the Fed, government, and media – even if many are pacified and placated by government subsidies. If as I always suspect, resource depletion isn’t the definitive end to our economy then what will trigger actual economic collapse that overwhelms Fed and government lies?
Most who visit this site likely see collapse coming – some more than others and some see collapse happening earlier than others. But we are all faced with the personal decision about how to prepare. This and many other sites deal with (and have dealt with) this topic and this becomes more urgent when more “heavyweights” on this site start putting their plans into action.
Deep down I agree with Stephanie that the corrupt bastards need to be fought but there’s so few citizens who have the backbone for this that it seems a lost cause. Too many citizens are either just plain weak or love the idea of being completely exploited and controlled by government. as economic slaves. They have no self-respect or self-worth.
VERY difficult to want to stand and fight for people like this.
This line from a news source reminds me……However, the news source predicted, “Political pressure will probably grow on companies to use ultra-cheap funding for creating jobs rather than simply buying back their own shares.”….That Said: You Can Lead a Horse To Water but You Can’t Make Him Drink. mike
“Cash will be king…briefly”. I agree. The question is how brief? Days? Months? Years? I bet on the first.
Archie, a response to a crisis will take time to produce. Government is the “ultimate committee,” and always the last entity to act.
It will take months, if not years, to develop the political will to attempt to reflate a credit-collapsed economy with greenback cash.
And I absolutely agree with your (implied) view, that the denouement of that will by hyperinflation. Once Congress seizes monetary management from the Central Bank (a prospect I consider highly likely in a crisis, as the Fed will in no way possible escape blame for the debacle), the urge to simply print endlessly will in all likelihood irresistible.
Bonner is right, here. The Fed is putting money (credit money) on sale, AND NO ONE (except the late-to-every-party morons in Congress) WANTS IT. (Exception: Corporate executives are using it to strip-mine the value of the firms they manage.)
Credit is on sale, zero price. What does that tell you about DEMAND?
Every powerful person on the planet is busy burning down the businesses and temples they rule in an effort to hoard every bit of PERSONAL wealth they can get their filthy mitts on.
CEO’s are burying their firms in debt to drive up the price of the shares (and stock compensation) in their bank/brokerage accounts, and they are selling like Mad Hatters into the highs.
Politicians are all neck-deep in insider trading (legal, for THEM) and are in all likelihood using every opportunity to launder money from the public treasury into their own bank accounts.
Public employees are demanding their phenomenally lucrative pensions be protected even if it means taxing their fellow citizens (the few who PAY taxes, that is) into poverty.
Everywhere you look, people with power are “prepping” in ways we can’t imagine, for an Armageddon they absolutely see coming.
Get ready for the gloves to come off.
In 1933 FDR seized people’s gold and got away with it.
Once the coming decline (whenever it really arrives, that is) gets into its Full Roll, I suspect that everything visible, everything that’s not nailed down, will be seen as fodder for seizure.
The tax eaters outnumber the tax payers. Also, the tax eater class INCLUDES the very people running and enforcing the political system’s demands. Cops, legislators, judges and prison guards are all of the same Tax Eater class as the welfare families and armies of social workers demanding their cut. None of these people produce, they all consume.
This is the main catastrophe of the de-industrialization of America. We are a land of consumers, not producers, and the last 40 years of debt-addled consumption was the Last Hurrah.
Imagine the last 40 years like eating a lavish 9-course meal at a 5-star restaurant, before they discover you’re broke and they toss you into the kitchen to mop floors and clean dishes for the NEXT 40 years.
If you want to know where the path of auto-cannibalism leads read Stephen King’s short story “Survivor Type.”