Introduction. I wrote this article over 2 years ago, suggesting that inflation cannot be contained or lied about forever and that this will begin to have very serious adverse economic effects. Since 2020, when the original article was first written, the equities market has continued to be spoon fed massive inflows from Government(s) to counter the massive outflows due to rising rates. This is not sustainable.
We now appear to be at the beginning of the end of our fakery, so I felt it was time for a situation report. I have also updated some key statistics and added some comments relating to our current situation, economically and politically.
Some economists have been unable to figure out how we have had such low inflation during times of unprecedented increases in money supply, pointing to things like prolonged recession effects from 2008. As that is hard to reconcile with Government reported GDP, this article provides another possibility. And also how stocks were valued at well over the reported inflation rates over the last 15 years.
Welcome to the wheels coming off Western Governments (and our) debt nightmare.
If you do invest in stocks (and don’t believe anything I say here as I am not an investment adviser nor am recommending anyone buy or sell stocks specifically in this article nor do I own, rent, lease or have interest in any company owned by Hunter Biden and his Pop) you should at least know why the Stock Market is a tad overpriced and may want to plan accordingly. Since finance is boring, I will try to make this 10% interesting (the other 55% will be about math).
If you did not want to be a big investor in the stock market over the last few years because it was too opaque and no longer controlled by reliable economic factors over the long term, you (like me) may have a pretty big opportunity cost (losses from not investing in the market) and are maybe not as wealthy as some of your neighbors who were “all in”. At least my nest egg sits relatively secure, but sadly earning very little.
Since 2008, the stock market has been ramped up by two main factions: The Fed and other Central Banks (Quantitative Easing) and Corporate Boardrooms (The Buyback). In other words, the market goes up not because of objective economic factors but because of Government actions that lower interest rates and ignore the illegal buybacks that push prices up artificially.
This article is about how much poorer your “all-in” neighbors will be if they continue to listen to their “never sell”, “never time the market” investment advisors. These advisors help run the “Ponzi” scheme and submit to the “Greater Bank Fool Theory” where more and more Central Bank buyers are needed to support ridiculously high stock prices, while the people in the know (i.e. not us) will start a massive selloff. Mainstreet buyers are no longer needed to prop the market. And, when the fan gets whacked no stop-loss program will help you as you are just the “little guy” who will get as slaughtered as the Shoe Cobblers who became investment advisors in 1929.
The Fed has been “buying” the stock market that otherwise would have collapsed on its own, yielding the economic corrections to Big Government we should have had years ago. Although there is no proof (yet) I believe they do this directly through Bank purchases of stock indexes with QE monopoly money deposited to them that are awaiting some form of distribution via loans or US Treasury bond purchases (they are doing direct corporate bond purchases via index funds now). The NY Fed even has a trading floor and has JP Morgan manage trillions of their assets. This is presumably (wink wink) only to buy US bonds. Another big Central Bank, the Bank of Japan, has already been purchasing US stock indexes.
Stocks have gone up with the new FED policy supporting the Rich 401-Kers (Investors) over the Not Rich Working Classes (Savers) by forcing people, many of whom are my friends who don’t understand what is happening, to invest their meager nest eggs in the stock market because alternatives are simply off the table with near negative interest rates. Even though you have savings that you want to protect, you don’t want to earn nearly nothing. So most of Americans chose to buy stocks, or bonds which are even more inflated because of the near zero interest policy of the Fed over the last 16 years.
Stocks have gone up, a lot, coincidentally well over the Govt declared rate of inflation (14% S&P 500 annual return 2009-2022).
But playing in that game where there is no underlying economic reality can be deadly, you just don’t know when it explodes. Even if you do make money in the market, I suggest it is immoral to do so on the backs of future generations that essentially pay for your gains when they must pay off the astronomical costs of QE in higher interest rates to curb QE caused inflation. Who do you think will be paying for all that QE money going into stocks and government debt to assure further debt? Our kids, and theirs.
The Cost of Our Happiness. Future generations will be on the hook for well over $360,000 per capita and $940,000 per household for our Government’s vote buying and the unfunded liabilities related to Social Security, Medicare, Government pensions and the like. And since half of America have nothing in the bank and can sometimes afford to pay for a McDonalds dinner without a credit card, that means the actual debt on people with the ability to pay may approach $1,000,000 per person. Goodbye retirement plan.
From each according to ability; To each according to need.
Some stocks and corporate bonds can at least get you a decent dividend or yield but even then you are well below actual inflation in our economy. The inflation that is not reported. They do not want you to know this.
From Management Study Guide on Inflation:
The goal of the central banks is to keep inflation at a bare minimum. However, the policy of quantitative easing does the exact opposite. Since this policy creates money and uses this money to further amplify lending by using this money as reserves, it is inherently inflationary.
An increase in the supply of money is the root of inflation, though this can play out through different mechanisms in the economy. A country’s money supply can be increased by the monetary authorities by:
- Printing and giving away more money to citizens
- Loaning new money into existence as reserve account credits through the banking system by purchasing government bonds from banks on the secondary market (the most common method)
In all of these cases, the money ends up losing its purchasing power.
The Con. To get around this little dilemma, the powers that be devised a scheme that depends on propaganda and mass psychosis to convince us that our living costs have risen slowly (also justifying low wage demands) because inflation barely existed, but this was economically impossible. Why did they do this?
The Government and Central Bankers have hidden inflation for a very long time because of their actions to boost stocks, bonds and real estate (the basis of American wealth) without the Government they serve having to pay the bill of inflation via higher interest rates to keep the Government functioning – at the size it is.
The cost of living has been going up so rapidly in the last 20 years that half of America with two wage earners have virtually no savings in the bank. Part of the problem are medical and higher education costs that have had a massive impact on savings, along with no interest on said savings. You are forever in a Fed induced inflationary hole, that is unless you are a Wall Street investment banker or a tenured professor at the heavily endowed University of Lalaland.
Granted, some people are living well beyond their means and happy with their leased luxury cars and all that Bling, but many don’t engage in that phenomenon and still cannot make it on two wages. If the real cost of living was even remotely close to the levels reported by the Government with a contrived CPI none of this could possibly be happening. If inflation was as reported, half of America would not be living with savings accounts having less than 2 weeks emergency backup pay. They also wouldn’t be fearing a health crises that could put their family into bankruptcy because of medical costs that have gone up at twice the rate of reported inflation.
So, why doesn’t the government just tell the truth on Inflation? They have no choice but to lie.
Inflation Update. Real inflation, likely in the neighborhood of 15% annually vs the 5% “official” rate, cannot be reported because interest rates would have to rise much, much higher than we have seen this year to combat the ever declining power of the dollar as world currency.
Here is actual inflation (less the cost of rising taxes) as calculated before changes were made to make inflation artificially low for never ending QE and the permanent printing of our unbacked fiat currency:
The results of all this are many, which is why your installed Government does not want to report real inflation. If they told the truth, and the Fed Funds rate just went to half of what we had in 1980 to fight similar inflation, we would be in big trouble. In fact, we have moved to the mean Fed Funds rate over the last 20 years (4.5%). But this is not anywhere close to the rates needed to kill the inflation monster.
In June 1981, the Fed Funds Rate was at 19.1%. That was needed to squeeze out inflation of nearly 14%.
Our Big Problem. In order to kill inflation, we need significantly higher interest rates than even where we are at now.
But that will not happen. The Fed will simply cave to the pressure of people unwilling to sacrifice the present for the future and keep rates no more than in the 5% range. And to help this fakery along in a fools game, they will continue to redesign our inflation algorithm as needed, until the inflation lie can no longer be told and hyperinflation begins (more than 50% increase in prices/month).
Some people believe that the dollar is on the verge of near collapse due to the possibility of debt default from rising interest rates from real inflation. Janet Yellen talks about debt default a lot now but she misses the cause, blaming the possibility of default on those Wascally Wepublicans that may possibly come to their senses and not vote once again for the Bankers Proverb: A rolling loan gathers no loss.
But that won’t happen, because it involves things like living within your means and being the bad guy that won’t be reelected. That’s also our American People problem.
We can no longer simply print money to payoff domestic (80%) and foreign debt holders (20%) of our $31 Trillion debt ($28 Trillion debt when this article was first written in Dec 2020).
If inflation was truthfully told, and interest rates continues to rise, very bad things will happen:
- Government Collapse (can no longer viably finance 31T when paying normalized rates to lenders).
- Stock Market Collapse (no reason to buy insanely priced stocks, keep reading)
- Real Estate Collapse (can’t qualify to buy median price home when payments shoot up by half)
I won’t go into the overriding politics of government collapse, which is self explanatory. Let’s talk about stocks.
As rates rise, as we have seen, people bail on stocks because the reason they bought stocks in the first place (no interest on savings), even in times of Recession heading to total collapse as we have today, would simply cease to exist. Are stocks too high now? Emphatically yes.
Stock Valuations. TESLA is now worth $540 Billion. On 11/15/2021, TESLA peaked at an astronomical $1.1T, which put Musk in the top dog seat which he hasn’t left.
Even by today’s numbers, TESLA is worth Billions more than the stock market valuations of GM, Ford, Toyota, Volkswagen and Honda – Combined. TESLA remains as valued today as if every one of those companies are already dead and gone and there are only TESLAS being driven on the streets of America. If you have purchased TESLA stock, just make sure it’s with the same sort of Play Money that the Fed uses to prop the stock and bond markets. Also, like that gorgeous blonde in High School who was so popular that she was fighting off guys like bees to honey, TESLA is that woman to all the Left wingers who don’t know much about stocks or how they are valued as long as we are fighting Climate Change, their new Religion.
But, how should we value the market generally? Well, you can be a rosy Motley Fool guy who said just before the Dot.com busted that conventional valuation methods no longer apply because we are entering a “new paradigm” of value.
The Motley Fool Stock Valuation System at the time was a simple momentum play: Buy stocks that are going up. That is not so bad for short term day traders but these guys meant buy AND HOLD, which turned out to be horrific investment advice and some of their followers likely went bankrupt. The Motley Foolers had lived up to their name.
American people are largely ignorant and when combined with amnesia can be deadly for the rest of us.
P/E (Price/Earnings) Ratios. It used to be that the widely recommended trailing P/E ratio was a good tool for buying stocks. Then, almost all of the investment bankers and brokers decided to change the game by valuing on FORWARD P/E ratios. This is just a magic trick. Nobody knows what the future holds, just like myself when I bought GM years ago a few months before the heretofore unknown pension problem was exposed. I no longer buy individual stocks for that reason.
So, the best measure is a trailing P/E which is based on actual as reported earnings, not some broker’s pie in the sky estimate that may or may not happen. And everything is always rosy to someone on commission.
I discovered the Case Schiller Trailing P/E ratio some time ago and I believe it is a good measure of stock market valuation overall because it uses a 10 year Trailing P/E ratio, adjusted for inflation. This takes out the big bumps in the road. If you look at the Case Shiller S&P 500 P/E now, I think you can say it is a bit alarming:
As of May 5, 2023 the current S&P P/E ratio is 29.14. This means that the stock price valuation of the S&P 500 is 29.14 X 10 Year trailing inflation adjusted earnings. I have inserted a red bar to show how high that really is. Stocks are currently priced at nearly twice as high as the historical median, in the face of inflation and recession (stagflation), yet I hear people that were educated in College with MBAs in Economics or Sociology on Yahoo Finance say “It’s only up from here!”
Even more alarming is that if we were to use a 5 year trailing P/E it would be even higher still because the massive earnings reductions in 2020 when Covid-84 hit would have more impact over a 5 year period than a 10 year period.
Stock prices are almost higher now than in October 1929, Black Tuesday on the chart. I submit this as PROOF of the Fed buying stocks directly, it could happen no other way to keep stocks in record territory during massive Covid induced unemployment, a global recession and near Civil War. The pattern is as clear as Election Fraud – when the market suddenly dips on huge volume, it is suddenly bought on huge volume. If it walks like a duck?
Going back to the beginning of the 20th century, the only time it was higher and for a very short time, was Black Tuesday and the Dot.Com bubble in 1999/2000.
Then reality finally hit and even non Tech stocks went down 50% or more. Many Tech stocks lost 70% or more in value, most of the purely internet companies went bankrupt.
But at least back then there was an altogether new future that many could see, and that actually did occur as we are witnessing the Big Tech effect today – the virtuality of our economy. But today we have the highest trailing P/E ratio in US History (ex Dot.com) yet don’t even have the justification of a rosy transformative future. Today’s future includes more lockdowns and the destruction of the economy with a possible Marxist revolution. Small business (the backbone of America) is dying at the highest rate in my lifetime. But the market reached all-time highs in 2022.
Buybacks. Also juicing stocks to the unheard of levels we see today are Corporate Buybacks that have grown astronomically since 2008. Officers in large companies are highly incentivized to buy back their own stocks, pushing prices higher and higher in what may be the best Ponzi scheme imaginable for the upper crusters. If you ever worked for a large company, worked your tail off, met your performance objectives handily and still got a crappy 3% raise, now you know why. Profits that should have gone into salaries and capital investments for the future went into their own stocks and into the pockets of top management and others lucky enough to get in on the bump up the stock price game. Buybacks takes shares off the market. This makes stocks go up as earnings per share increases. And, surprise, the executives approving your measly raise got handsomely rewarded with their options and other stock price incentives. He who has the Gold makes the Rules.
Situation Report. When I first wrote this article in Dec. 2020 stock buybacks in the S&P 500 set a record $806.4 billion in 2018. Since 2018, there has been an amazing 25% increase in buybacks. The effects on the market are nearly as consequential as the QE and the astronomical Biden US budget designed to financially boost and keep in line the now Woke American Corporations and the Too Big to Fail Banks that make up at least 50% of the S&P 500. And remember, in a normal world where the Corporate/Govt partnership would not make each other powerful and wealthy beyond measure, this money would otherwise go into mundane things like pay raises and capital spending to boost productivity. Beyond the stock market, the only thing that has been boosted since the 2008 defaults/recession has been top management bonuses.
I contacted the SEC to make the case that buybacks were actually ILLEGAL stock price manipulation. I based this on a simple premise. Companies have to report to the SEC how much of their own stock they will purchase in any given buyback plan but they do not have to report when they will buy. So, without the timing requirement, they can buy their stock whenever they want to effectively put a floor on the price if there is bad news on earnings or other calamity, like the Boeing fiasco. Not surprisingly, Boeing had one of the biggest buyback programs in US history. Boeing spent $11.7 billion in 2017-2019 on repurchasing stock before suspending buybacks in April 2019 because of the 737 Max crisis. I would suggest that they knew what the 737 Max was going to do to the company and it’s better to have your stock drop 50% after you boosted the stock by 100%.
Now, if they were to buy at prescribed times reported to the SEC unaffected by market timed purchases like dividend payouts, this would be credible, although still not a wise use of funds for most companies long term future.
The end result of all this is that companies boosted share prices well beyond natural market valuations because they manipulated the market. And when these stocks go up, others that don’t have big buyback programs also go up because so many of these companies are in index funds which are tracked and bought by individuals and big institutions. Ultimately, reality sets in (like inflation will) and stock prices will fall but not after massively inflated gains have occurred.
So, combining Govt/FED actions with Corporate Buybacks means that even in the face of the economic disaster we find ourselves in, you can reach new – and ever more insane – highs.
Now that interest rates are moving up, cash is moving out of the stock market as fast as the pudding is disappearing from Biden’s cup. It’s going into CDs and money market accounts paying normalized rates, which is finally something good for your Grandma. With this going on, how the market has not crashed yet and stayed in the stratosphere is a question for the ages, but as we have seen continued to be largely the results of Government spending, obscenely low rates (still) relative to actual inflation, buybacks and foreign investments. Please note that these factors have nothing to do with economic prospects on macro or micro levels, which is unsustainable
The contrarian argument to the above is pretty simple. As long as the Fed keeps rates low relative to inflation – which it is even now – and prints money that finds its way into the market, you can’t go wrong. There will always be a quick and rapid rebound from any selloff. But this Ponzi game of chance will end when inflation takes hold so hard that it can no longer be hidden and interest rates go up to the Volcker levels in the 1980s. Then, none of us in the market will be able to catch the falling knife greased with lies about inflation and the bubbling economy. The market can easily collapse all at once by 50-70%.
Still, investing in the current equities market is immoral by (1) supporting largely Woke corporations and (2) putting our temporary stock market gains on the backs of future generations through higher debt and much higher inflation.
The Final Showdown – Inflation vs QE/Fed. Nobody can say when the financial collapse will happen, but time is running out for our spiked financial system. Having an unbacked reserve currency gives you options to keep big Government big. But when you start to see that the inflation lid can no longer be kept closed with fake Government Inflation reports and rates begin to rise slowly, and then more rapidly to combat what will become hyperinflation, if you aren’t already out of the stock market it will be too late.
All said, if the coup is successful and America goes Communist Reset and you are not in a free economy Secession State, you eventually won’t have any private wealth or property to speak of anyway. Then it’s all moot when a loaf of bread is $100 and you can just light your Cigars with our old near worthless currency.
Unless we can return to some level of free market normalcy, we will apparently be happy owning nothing but our on/off virtual money and renting our walk-in closet flats in a 15 minute city.
So says Santa Klaus.
Time for the Glenfiddich.
Sic Semper Tyrannus