There have been many articles written about financial engineering and the fact that many companies have been making their profit numbers look better by buying back their own stock, laying off employees and other gimmicks to reduce expenses, and even having two sets of books to, in my opinion, convince investors into paying a higher price than is fair.
One number that is very hard to massage is the sales number. Sales get made or they don’t. While many can argue (mainly because many times different numbers are being used) about how expensive this market (S&P 500) just may be, the sales number is telling a frightening story.
If we go back to the last two crashes in 2000-2002 and 2007-2009 the price-to-sales was around 1.6 in 2000 and 1.75 in 2008. This means that you were actually paying $1.60 and $1.75 for each dollar of sales. By the bottom in 2009 the price-to-sales fell to around .75 per $1.00 of sales.
Just as the booms and busts are getting exponentially larger, so too are the anomalies in pricing.
Believe it or not, the .75 is closer to any historical norm.
Currently, there is no historical precedent in the last 30 years for where the price-to sales are today. If you buy the S&P 500 today you are paying OVER $2.50 for each $1.00 in sales- not PROFITS but SALES. Profits are generally a small percentage of sales. Information received from Hussman Strategic Advisors (John Hussman)
Of course, many of the “investors” are none other than entities that can “print up money” and buy stuff so the actual cost- if you think about it- is nothing!
Anything they buy is worth more than they had before so any price considerations are moot. Since we regular people do not have that luxury- we actually have to EARN our money and be prudent with our spending to have some assets left over to invest the price we pay is exceedingly important.
Regardless of if there is upside left- even if it may be substantial- I believe the risk being taken now is off the charts. I would rather be years early getting out than a minute late. I believe a MINUTE late could be too late this time.
Anyone who thinks that there is any sanity left in the stock, bond and real estate markets is drinking the financial game show kool-aid and could be in for a whopper of a surprise at some point in the near future.
On the other side of the equation where there is obvious pressure on the price of gold and silver- my opinion is that this is being done to hide the damage that is being done to fiat currencies. Too bad that there is now another metric in town- one that many are starting to pay attention to- bitcoin and other cryptocurrencies.
These “assets” are exploding higher in value relative to how many dollars they are worth. I, like many others, am not quite sure what to make of this new “asset” because I am not so sure it is an asset at all. It seems to be a means of exchange but I will need a bit more proof that these assets will hold value and be a store of value over time.
I still have a major fear of central banks and governments causing an “event” that could shatter confidence in these new assets and they, of course, would ride to the rescue with Fedcoin, ECBcoin, etc. to save the day and take control of the space and take more control over our spending than they have even today. My main point here is that these cryptocurrencies are rising by leaps and bounds which may be showing that people globally are in fear against what appears to be a dying fiat currency regime globally.
This could also be a reason for some recent weakness in the metals markets as some of the fiat currencies that may have bought gold as a hedge against falling currencies are buying cryptos instead.
While the gains in bitcoin and others have been staggering my belief is that the pullbacks could be equally as staggering particularly if they get too popular and the powers that be decide it is time for a lesson of who still runs the show. That may present a buying opportunity or it may be a nail in the coffin- we’ll have to see.
Here in the USA most of the public seems to be blissfully ignorant about the recent happenings in Congress. It appears that many know about the new sanctions on Russia but probably not one in a thousand are contemplating the consequences of these new sanctions.
The prior sanctions that were imposed upon Russia were largely symbolic. These new sanctions aim right at the heart of Russia’s economy- the oil and gas sector and forbids any meaningful cooperation in that area for virtually anyone. This may hurt our oil companies and other natural resource companies around the world.
There is already discomfort with these new sanctions in Germany and other European states. Many of these European states get the bulk of their energy supplies from Russia. This latest action could move Germany closer to Russia and China and away from the US. I wrote many years ago that this was likely to happen over time and that this would likely be the last straw for America’s economic dominance of the world.
Another unintended consequence of these sanctions is that Russia, along with China and many other countries, are moving more swiftly to reduce their dependency on using US dollars and payment systems. According to Reuters “Russia will speed up work on reducing dependency on US payment systems and the dollar as a settling currency, RIA news agency cited Deputy Foreign Minister Sergei Rybakov as saying on Monday. It is becoming a vital need”.
During last year’s sanctions many Russian banks were unable to transact with Mastercard and Visa so they set up their own payment system called MIR. It was introduced last year when several Russian banks were unable to use Visa and Mastercard due to US sanctions. They issued 30 million national payment cards in 2016.
In 2017 the Russian Central Bank and Bank of Japan are issuing co-badged cards and the system is taking off. Russia, China and many other nations have been setting up payment systems outside the dollar since October of 2014. (Tass 5-2-2017 and RT 9-27-2016)
While we can’t really know when critical mass will be reached and the dollar may have a real problem with its value it is obvious that the day is approaching and some plans should be made to protect against the loss of value in the US dollar. Again, being years early may be better than being a minute late. It may move that fast at some point.
Many people may be buying stocks also to try and preserve their purchasing power at this time. My only question is would you rather buy an asset that appears to be on sale like gold and even more so silver, or an asset that is getting bid up to historical extremes by those who are “printing” money and artificially holding up asset prices to delay a needed reset of the entire system?
Personally, I will take the asset that not only appears to be on sale but has also functioned as a store of value for over 5000 years. I will look to buy those other assets that are being propped up when the valuations make a lot more sense than they do today.
Changes are coming. Be Prepared!
Mike Savage, Financial Advisor
2642 Route 940 Pocono Summit, Pa 18346
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