December 15, 2020 Updated June 20, 2022
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).
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 it’s 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 you HAVE to buy stocks, or bonds which are even more inflated because of the never ending zero interest policy of the Fed.
Stocks HAVE gone up, a lot, co-incidentally it seems at the actual rate of inflation. 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 QE debt. Who do you think will be paying for all the Trillions of QE money going into stocks? Our kids, and theirs.
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. 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.
But they hide it, so far. 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 cost of living was even remotely close to the levels reported by the Government with a contrived CPI none of this could be happening. Half of America would be living with savings accounts having more than 2 weeks emergency backup pay. They wouldn’t be fearing a health crises that could put their family into bankruptcy.
So, why doesn’t the government just tell the truth on Inflation? They have no choice but to lie. Real inflation, likely in the neighborhood of 8-10% annually vs the 1-2%, cannot be reported because interest rates would have to rise to combat the ever declining dollar. Here is actual inflation (less the cost of rising taxes) as calculated before changes were made to make inflation artifically low for never ending QE: http://www.shadowstats.com/alternate_data/inflation-charts).
The results of all this are many, but your Government does not want to report real inflation because if the Fed Funds rate just regressed to the mean in the 20 year period prior to the Too Big to Fail Taxpayer Financial Bailout of 2008 (approximately 4.5%) we would be in big trouble.
Some people believe that the dollar is on the verge of near collapse up to 30% by 2022 due to real inflation and our $28 Trillion debt.
If inflation was truthfully told, bad things will happen:
- 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)
- Government Collapse (can no longer viably finance 28T when paying normalized rates to lenders)
People would bail on stocks because the reason they bought stocks in the first place (no interest on savings), even in times of near depression as we have today, would simply cease to exist. Are stocks too high now? Emphatically yes.
Stock Valuations. I could just stop right here with my TESLA example. TESLA is now worth Billions more than the stock market valuations of GM, Ford, Toyota, and Honda – Combined. TESLA is 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 bust (see chart below) 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 July 14, 2021 the current S&P P/E ratio is 38.15. This means that stock price valuation of the S&P 500 is 38.15 X 10 Year trailing inflation adjusted earnings. I have inserted a red bar to show how high that really is. Stocks are currently priced more than twice as high as the historical median, 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 this year when Covid-84 hit would have more impact over a 5 year period than a 10 year period.
Stock prices are even 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 the Dot.Com bubble in 1999/2000. I’m old enough to remember the Dot.com era and it was all about the birth of the Internet. Everybody was on board and the tech economy was rolling like a mile long freight train with Biden at the helm. It was the time of irrational exuberance. Clinton got credit for the economy he witnessed but he had zero to do with this organic new technology.
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 is at all-time highs.
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.
Buybacks at S&P 500 set a record $806.4 billion in 2018. S&P 500 companies repurchased another $728.7 billion of stock in 2019. Those numbers have massive effects on the market.
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 FED actions with Corporate Buybacks means that even in the face of economic disaster, as we have now, you can reach new – and ever more insane – highs.
The contrarian argument to the above is pretty simple. As long as the Fed keeps printing 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 game of chance WILL end when inflation takes hold so that it can no longer be hidden and interest rates go up. 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%. And as I said, investing in the market is immoral by putting our stock market gains on the backs of future generations.
The Final Showdown – Inflation vs QE. Nobody can say when the financial collapse will happen. 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 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 the old worthless currency replaced by Virtual.
Time for the Glen Livet.
Sic Semper Tyrannis