Many people have heard me say that the most recent stock and bond bubble is worse than any other in the past 100 years. I often hear many reasons why it is different this time and that the central banks will just keep buying and adding liquidity so the market can’t go down.
I also heard that I was crazy in the late 90s when it was different that time when earnings didn’t matter anymore- it was eyeballs and mouse clicks. Hmm.
I also heard that “houses only go up” in value over time. That probably appeared true for a long time as wages grew throughout the 1970s into the late 1990s. Ever since it has been one scheme after another to keep home prices elevated. This is to help the banks that made loans to people who bought at the top of the market with little or no money down and now find it easier to walk away rather than be saddled with a payment that is hard (or impossible) to make with no real hope of turning a profit or selling the home.
As a matter of fact, approximately 50% of new foreclosures are REPEAT foreclosures. HARP, etc can make things better but not necessarily affordable. Look for another downturn in this area sooner rather than later. With no income gains there is no sustainable reason properties should be rising in value other than hedge funds and sovereign wealth funds driving the prices higher by buying in bulk. That doesn’t help us in any way but it helps the bank and the hedge funds as they package the homes into “rental reits” and market them to the public- earning even more while putting our children and grandchildren at a disadvantage if they would like to purchase their first home in an area where this is taking place.
I have taken a large loss on a property on Long Island so I knew the “it only goes up” story was incorrect.
When the debt went bad that was on the assets that supposedly “only go up” we had the financial panic of 2008-2009. Of course, it started out slow and we were all told not to worry and in what seemed like an instant the whole financial system seemed to be imploding.
That leads us to where we are today. After a financial meltdown that was caused by too much debt and risk-taking we have a situation where the main cause of our problem- debt- has grown exponentially since the latest bubble burst.
The national debt, not including unfunded liabilities which could make the number as high as $200 trillion dollars, has grown from about $9 trillion in 2008 to over $18 trillion dollars today.
The velocity of money- or how much economic activity is taking place is lower now than it was in 1960 and is still a far cry from where it was in the early 2000s. (Economic activity is SLOW!)
The margin debt (money borrowed to purchase securities) is higher now than at any time in recorded history. Add to that the fact that many major banks have leverage of up to 70 times (ie $1 trillion in assets, $70 trillion in leveraged bets on securities) and you have a large problem if there are any hiccups.
Another reason that this IS different this time is that in the past the market manipulation has never been this blatant and long term. The effects of ZIRP (zero interest rate policy) has been that firms can borrow money virtually free and make bets with it. Because of the liquidity that this provides- plus leverage anyone who was short the market is long gone.
Short interests (people betting that the stock will fall in price) were a stabilizing force. As the stocks would fall in price many short-sellers would buy the shares to cover their short position and put a bid into a falling market. They would book their profits and many times would stop a stock from plunging.
This part of the market has been systemically dismantled over the last few years. In the long run it just makes the stocks that are falling that much more dangerous.
Possibly the most dangerous aspect to this market is the misinformation that is fed to us daily on the financial shows. Don’t kid yourselves- this is entertainment and propaganda.
Many people will spout out the “truths” they hear on the financial shows and I will give you a great example.
Even Janet Yellen, chair of the Federal Reserve remarked that stocks were slightly “on the high side”.
Looking at the numbers and seeing that the Wall Street estimate of 19.9 times earnings for the Russell 2000 I would have to agree that the market overall seems a little high but not crazy.
In reading a David Stockman piece (Stockman was Ronald Reagans budget director and a founder of Blackstone Group) I found this gem:
“The implied forward ex-items EPS for the Russell 2000 disseminated by Wall Street was exactly $63.87 per share.”
“By contrast the actual 4-quarter GAAP result through December 2014 reported to the SEC was $14.18 per share. Needless to say, to blithely ignore this blinding difference –as Yellen surely did-is an egregious dereliction of duty.”
Based upon these numbers the actual Price to earnings ratio goes from a benign 19.9x earnings to – 90X earnings. That means that, based upon current earnings it will take you 90 years to recoup your investment. That would be information that I would like to know but have seen NOWHERE other than sites like Mr. Stockmans.
I wrote about this a few weeks ago and now have a prime example of two sets of books- one for the SEC which better be real or you face jail time (we earned $14.18 per share) and the “all is great” (we made $63.87 per share) report for investor consumption.
In my opinion anyone buying at these nosebleed levels, Fed backed or not, has little chance of decent profits. Patience is a virtue that will be rewarded in my view.
Does this mean sell all stocks? No. If you have good positions, particularly in companies that produce things people always need or want, long term they will probably still be ok.
Personally, it appears that most bonds, particularly domestic and developed world bonds, are not priced attractively at all.
Gold and silver are mounting a mini-rally as I write this. It is good to see that the Shanghai exchange opened on March 20, 2015. Since that day there haven’t been any wild swings and there has been a steady advance upward. There is a lot of speculation that this exchange will take the power away from those who manipulate the market and front-run trades. Hopefully, in a while we will get a price that reflects true supply and demand and not a manipulated mess so that a few can make a fortune while others are left wondering what the heck is going on!
Oil is bouncing around between $43.00 and $50.00 per barrel as I write this. Long term I am bullish on the oil sector but concerned that another low may be coming in the short term.
As Mr. Stockman says “There is no true price discovery”. In english, he means that people are “printing money”, buying “stuff” and moving the price. There is no willing buyer or seller to determine what a fair price is. – Think Spanish 10 year bonds trading at below 2% yield! Only someone with free “money” would buy something like that- not a normal thinking person.
As the curtain is lifted on these shenanigans that have been carefully hidden from most of us the changes in asset prices could truly be startling in their scope and in their swiftness.
As always- don’t bury your head in the sand! Diversify your assets and BE Prepared!
Mike Savage, ChFC Financial Advisor
2642 Route 940 Pocono Summit, Pa 18346
Raymond James Financial Services, Inc. Member FINRA/SIPC
Any opinions are those of Mike Savage and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information contained in this report does not purport to be a complete description of securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.
Diversification and asset allocation do not ensure a profit or protect against a loss. Raymond James is not affiliated with and does not endorse the opinions or services of David Stockman.