Some WISE OWL weekend thoughts (01-10-2021)

Over 18-months ago on the back of massive FED intervention, I predicted a melt-up in financial assets, and then I stated that I saw an equally tremendous market implosion...however I thought that implosion was stating in February 2020, and I failed to clearly see the massive FED & Government intervention in March resulting in a 55-to-65-degree parabolic rise to new highs...as all major stock indices globally are trading at record highs.  And as a result, real stock/index valuations have never been more stretched than any time in history as we can see from the Market Cap to GDP (the famed “Buffet Indicator”) has never been higher.

Nor has the market’s overall price-to-sales ratio:  The SPX-500 is now more overvalued than ever seen before via this measure; SPX-500 price-to-sales ratio is well above its dot-com bubble peak (WOW)... The chart below, from Ned Davis Research, shows that price relative to sales for the SPX-500 is at a record high, “well in excess of what they were in 2000 or 2007 at those peaks,” Other measures, like the median price to earnings ratio which excludes the very skewed effects of very profitable (like Apple) and very unprofitable firms like mega zombies show the SPX-500 overvalued by nearly 33% versus the typical valuation level seen since 1964.

But the SPX-500 is in my opinion vastly overstating earnings due to massive stock buybacks and another financial fuzzy math engineering! (for newbies: corporate buybacks reduce shares in circulation, increasing earnings-per-share even if overall profits have not risen and they mask deteriorating revenues and profits). Therefore, looking at the ratio of market valuations to overall profits suggests that real “apples to apples” comparison of P/E ratios are 70-80% above the long-term average.

So, will my prediction of a 25% to 45% plunge in equity prices this year come to be? Time will tell. But as extreme as that kind of drop may seem, history is on my side. Whenever massive and I mean massive debt has been the fuel for massive equity gains and enabled market multiples to distort upward to what I see as very unsustainably excessive levels which is what has been happening now on an unprecedented level a very and I mean painful correction to clear out the manipulative excessive speculation and bad debt and malinvestments have always followed. As I have previously written those who preserve their hard-earned capital throughout the coming crash will have the opportunity to redeploy it at very decent terms as the next recovery cycle begins. 

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We saw this past week pre-options-X week that Santa finally delivered (with massive sweets and no-stocking coal) with a strong rally this past week, pushing the markets to all-time highs. Interestingly, despite the now “Blue Sweep” of the Georgia elections, the markets quickly turned from worrying that such would be harmful to “great this means more deficit and reckless government bailout spending” as we saw that the markets quickly dismissed concerns of higher taxes by justifying it with more stimulus and more massive deficits. It was clear that the market participants especially the newbies quickly justify paying higher prices for risky investments. A proverbial greater fool type of market where no-one loses and winners abound; as for the time being memories are deficient as I noted last week, as it seems that everyone feels that there is no risk associated with chasing the markets and prices higher as the FED has your backs and there will always be a greater fool. As markets continue to levitate, investors are becoming overly confident that the markets are a one direction trend. But therein lies a massive risk as confidence breeds complacency. In the near-term, the bullish trends remain undamaged. 

After a month-long choppy process, the SPX-500 finally set a new all-time high in the near-term [remember this is triple witching options-X week] MACD signals and money flows are decent, suggesting prices could rise higher in the near-term. However, while the MACD, and money flow, are positive, the market remains significantly overbought on multiple time frames which suggests that while markets could rise, it could be somewhat limited relative to the real inherent risk lurking just below the surface. On an intermediate and longer-term basis, the markets remain grossly over-bought and very overextended. The only other times I have seen these massive amount of overextensions in recent years resulted in the loss of “all” of the recent short-term gains rather quickly. Almost everyone is incredibly “bullish” about the prospects for massive market gains in 2021 with hopes and prayers for massive “new” stimulus, infrastructure spending, and a real working vaccine that will eliminate the Covid-19 contagion...this comes as 10-11 million of Americans are still unemployed, but they expect that the real economy will shift into a “Golden Age” not seen since the 1950s despite being embroiled in a 12+ /- FED massive bull interventionist and manipulated market based on massive free-flowing money, from the March lows in 2009 at 666.30 on the SPX-500 to Fridays closing high of 3,825! However, therein lies the problem that no-one wants to address this openly and logically; as there have been only two previous periods in history that have had the necessary ingredients to support a rising cycle of interest rates, inflation, and economic growth over an extended period; and this cycle has no such ingredients!

Ø  The first was during the great infrastructure cycle when the country became accessible from coast to coast via railroads and automobiles. America began shifting from an agricultural to a real industrial powerhouse economy; as we entered WW-I 

Ø  The the second cycle was post-World War II. As this terrible war left America the proverbial last man standing after France, England, Russia, Germany, Poland, Japan, and others were devastated (seems like we as a nation are bolsters via incessant wars). It was then that America found its most substantial run of economic growth in its history as the “boys of war” returned home to start rebuilding what they had just destroyed.

So, I hope I do not have to impress upon you that our once-great industrial nation is no longer the manufacturing powerhouse it once was, and globalization and massive corporate greed has exported our once decent middle-class and working-class jobs to the cheapest labor sources abound and now through robotics and almost endless technological advances that continue to reduce the need for human labor which in turn significantly suppresses wages despite massive productivity gains. Today, we see that the number of workers between the ages of 16 and 54 participating in the labor force is near the lowest level relative to that age group since the late 1970s. Worse yet my friends we have seen that a structural and demographic contagion continues to drag on real economic growth as nearly 25% of the population is now dependent on some form of governmental assistance a massive travesty in my opinion. So, without mixing words the ingredients required for a l sustained level of more robust economic growth and prosperity are definitely NOT available.

When the real economy is expanding organically, the real demand for capital increases as business increases production to meet rising demand. Increased production has historically led to higher wages (absent for the past 40+ years), which in turn fosters more aggregate demand. As consumption increases, so does producer’s ability to charge higher prices (this is inflation) and for lenders to increase borrowing costs. (Currently, we do not have the type of inflation that leads to more robust economic growth, just inflation in the real costs of living that weakens consumer spending, as we have seen rises in food prices, energy prices, rents and home prices, property taxes, education, durable-goods, health-insurance, and healthcare in general)! It is unfortunate that consumption that is dependent solely on increases in debt, or give-away stimulus programs, has a real negative impact on real growth. Currently, the so-called economic gurus being pranced about on CNBC hope and pray that with the “BS” so-called “Blue Wave,” more stimulus, massive new deficits, and infrastructure spending is soon on their way and that all will prosper. Goldman Sachs just upgraded their estimate of GDP (a bogus number) now based on the expectation of another $750 billion to $1 trillion-dollar deficit stimulus package.

The massive surge in deficit spending, combined with the pick-up in short-term demand for construction and manufacturing processes will only give the appearance of economic growth, and it will fade quickly, and such action will likely propel the FED and the “bond bears” on the wrong side of the very crowded trade. Mark my words my friends these “one-off” inputs into the economy will fade quickly after implementation as real organic productivity fails to develop (and the question remains will we be forced into this bailout economic trap). While many hopes these programs will lead to an ongoing economic expansion, a look at the past 40-45 years of fiscal and monetary policy suggests it will not (though the masses believe it will again be different this time)! Please remember from my past analysis and writings that you cannot create real economic growth when financed by massive deficit spending, massive credit expansion (debt enslavement) and a reduction in savings; all you can do is temporally create the “mass-illusion” for the economically uneducated of growth in the near-term, but the surge in massive debt reduces both productive investments and the output from the real economy [economics 101 my friends]. As the economy slows, wages deteriorate, forcing consumers to take on more leverage “debt” and decrease their savings rate (their disaster cushions and retirement). As a the result, of the increased leverage, more of their income is needed to service their reckless debt, which requires them to take on more and more debt becoming debt-slaves a very nasty vicious cycle! Of course, the bulls wanting and demanding more and more government and FED bailouts argue this time is different and inflation is NOT a real threat. 

Despite being the richest country in the world, food poverty has become a real problem during this Covid-19 pandemic. This will likely leave us with the next food inflation crisis “that is looming” as central bankers are mindlessly injecting a record $1.4 billion in liquidity into capital markets every hour. Soaring food inflation hurts the poor and working-class and will likely result in social destabilization; the question is where will it start?  

I am looking for a dollar rebound (DXY, UUP)!  Despite reassurance from lecherous central bankers has emboldening investors that have been feasting on FED locoweed for years now to add significantly to their risky assets (stocks, mostly zombie firms). Regardless of what he says Powell has confirmed the FED plans to continue their role as the great massive asset-bubble inflator and bullish market enabler. Every time the FED signals additional easing or that it will keep rates low well into the future it raises the ability of other central bankers to do the same and governments add to their fiscal stimulus packages. This is why those demonizing the dollar may be dead wrong as all fiat currencies that are under pressure from this expansion of the money supply.  Central bankers across the globe have been able to lower their rates (many into negative levels) or add additional stimulus without causing their currency would crater. The fact that so many loans across the world are based and loaned in dollars means countries and businesses must buy dollars to repay their ballooning obligations. In my opinion, this puts a bit of a floor under the deteriorating dollar!

Our proverbial US “drunken-spending-sailors” are carrying the world on our economic shoulders. Rather than pay rent, or making their mortgage payments, auto-payments, during the Covid-19 debacle as it seems from the exploding trade deficit numbers that we have seen that Americans are taking a significant portion of the bailout monies they get from Uncle Sam and buying imported goods.

Not only is the current FED policy totally uncalled for (JMHO) but it does little to strengthen the real economy or address our real ballooning economic problems. What it does do is continue to prop up asset prices, enabling zombie firms to remain alive and significantly encourage risk-taking and massive malinvestments.  Due to the artificially historic low cost of credit (and massive debt increases) and an unsustainable increase in the money supply...bubbles are forming everywhere.

Their actions these past 4-years suggests that the global the financial system was in big trouble even before Covid-19 entered the picture and the pandemic has been used to shift blame and focus away from the governments and central bankers that have implemented very flawed economic processes that enrich the elite/most-wealthy at the expense of the taxpayers and working-class. What we have been witnessing is not a failure of injecting enough liquidity into the system, but that liquidity is being diverted from where it is needed most. The idea more liquidity can make up for a solvency problem is unrealistic and turned failing firms into zombies. 

Unfortunately (unbeknownst to many) the market has reached what I believe is a massive tipping point where profits are no longer needed to generate a return on investments as crazy as thet seems. These Hindenburg type of bubbles represent a major disconnect from reality. Firms borrow money extremely cheaply (close to 2%) by issuing “BS” corporate bonds, then they use it almost solely for massive corporate stock buybacks and shareholder dividends, thus furthering the massive disconnect between the value of stocks and the economy that resides in the real-world!

The recent rise in stocks is also linked to the expected future economic relief packages (front-running) that will soon roll out of Congress. Also, the FEDs massive easy money policies strongly favor’s big business; resulting in the destruction of many small and medium-sized business (advanced by Covid-19). We have yet to see the massive economic contagion resulting from folks working from home will have office buildings vacancies or the total devastation online shopping has unleashed upon local retail property owners as the fact that many businesses cannot pay their rent or mortgage payments due to displacement and the Covid-19 pandemic has a significant lag time.

Reflect back on economic-101 in the Austrian business cycle theory, malinvestments are poorly allocated business investments, A strong case can be made that we already suffer from far too much leverage in our markets, and this rate reduction these past few years only encourages savers suffering from historic low-interest rates to take on more and more risk in search of higher yields. I have pointed out in many of my writing that historic low-interest rates do not extend down to low-income individuals with poor credit and far too many folks fall into this category. Instead, over time these historic low-interest rates fuel inequality and punish the poor and working class.  Government, FED, and Wall Street money is driving this trend. While retailers close and buildings go empty across the land new buildings are being put up on speculation and bogus public-private partnerships are plowing vast sums of money into projects geared to compete with those that already exist. the fact is all across our great land the FED is putting the small guy out of business.

At some point to reestablish true price discovery it will be necessary to break the well-ingrained habit of buying the dip. This method of investing has worked since October 19^th, 1987 wherein the Dow dropped 22.5% in a single daily session. That is the day the actions by Greenspam galvanized the mantras buy the dip and do not fight the FED. Greenspan did this by affirming the FED would be there to serve as the primary source of liquidity to support the economic and financial system as they were economic demi-gods. This new trading premise “buying the dips” is now fully ingrained in the robotic algorithms embedded deep inside the bot-computers that significantly too much of the stock market's action these days. 

Powell has repeatedly confirmed the FED and FOMC’s plans to continue as the great stock market enabler. As the massive rapid expansion of debt and credit during the past 12+/- years could not have occurred without the FED being extremely complicit.