Have you ever wondered how tech companies that have been losing hundreds of millions of dollars year after year can somehow be worth billions of dollars according to the stock market? Because I run a website called “The Economic Collapse“, there are naysayers out there that take glee in mocking me by pointing out how well the stock market has been doing. This week, the Dow is flirting with 21,000 and the Nasdaq crossed the 6,000 threshold for the first time ever. But a lot of the “soaring stocks” that have been fueling this rally have been losing giant mountains of money every single year, and just like the first tech bubble this madness will eventually come to an end in a spectacular fiery crash in which investors will lose trillions of dollars.
Anyone that cannot see that we are in the midst of an absolutely insane stock market bubble simply does not understand economics. Every valuation indicator that you can possibly point to says that we are in a bubble of epic proportions, and history teaches us that all bubbles inevitably come to an end at some point.
Earlier today, I came across an article by Graham Summers in which he persuasively argued that the price to sales ratio indicates that stock prices are far more inflated than they were just prior to the great stock market crash of 2008…
Sales cannot be gimmicked. Either money comes in the door, or it doesn’t. And if a company is caught messing around with its sales numbers, someone is going to jail.
For this reason, Price to Sales is perhaps the single most objective and clear means of measuring stock valuations.
This metric, above all others, you can point to and say, “this is definitively accurate and has not been messed with.”
On that note, as Bill King recently noted, today the S&P 500 is sporting a P/S ratio that is massively higher than it was in 2007 and is only marginally lower than it was during the Tech Bubble (the single largest stock bubble of all time for most measures).
To me, looking at profitability is even more important than looking at sales.
Large tech companies such as Twitter certainly have lots of revenue coming in, but many of them are deeply unprofitable.
In fact, Twitter has never made a yearly profit, and over the past decade it has actually lost more than 2 billion dollars.
But despite all of that, investors absolutely love Twitter stock. As I write this article, Twitter has a market cap of 11.5 billion dollars.
How in the world is that possible?
How can a company that has never made a single penny be worth more than 11 billion dollars?
Twitter is never going to be more popular than it is now. If it can’t make a profit at the peak of its popularity, when will it ever happen?
And guess what? ABC News says that Twitter actually just reported a decline in revenue for the most recent quarter…
Twitter has never turned a profit, and for the first time since going public in 2013, it reported a decline in revenue from the previous year. Its revenue was $548.3 million, down 8 percent.
Net loss was $61.6 million, or 9 cents per share, compared with a loss of $79.7 million, or 12 cents per share, a year earlier.
The only reason why financial black holes such as Twitter can continue to exist is because investors have been willing to pour endless amounts of money into them, but now that bubble is starting to burst.
In his most recent article, Simon Black discussed how Silicon Valley investors are starting to become more cautious because so many of these “unicorns” are now going bust. One of the examples that he cited in his article was a company called Clinkle…
(Given that investing in an early stage company is high-risk, investors might provide a few hundred thousand dollars in funding, at most. Clinkle raised $25 million.)
The company went on to burn through just about every penny of its investors’ capital.
There were even photos that surfaced of the 21-year old CEO literally setting bricks of cash on fire.
At the end of the farce, Clinkle never actually managed to build its supposedly ‘world-changing’ product, and the website is now all but defunct.
Most of you may have never even heard of Clinkle, but I bet that you have definitely heard of Netflix.
Netflix has revolutionized how movies are delivered to our homes, and that revolution helped drive movie rental stores to the brink of extinction.
There is just one huge problem. It turns out that Netflix is losing hundreds of millions of dollars…
Netflix might be my favorite example.
The company’s most recent earnings report for the period ending March 31, 2017 shows, yet again, negative Free Cash Flow of MINUS $422 million.
Not only is that a record loss, it’s 62% worse than in Q1/2016, and over twice as bad as Q1/2015.
Netflix just keeps losing more and more money.
But even though Netflix is losing money at a pace that is exceedingly difficult to imagine, investors absolutely love the company.
I just checked, and at this moment Netflix has a market cap of 68.4 billion dollars.
Sometimes I just want to scream because of the absurdity of it all.
Companies that are losing hundreds of millions of dollars a year at the peak of their popularity should not be worth billions of dollars.
Nobody can possibly argue that these enormously inflated stock prices are sustainable. Just like with every other stock market bubble in our history, this one is going to burst too, and I have been warning about this for quite a long time.
But for the moment, the naysayers are having their time to shine. Despite the fact that U.S. consumers are 12 trillion dollars in debt, and despite the fact that corporate debt has doubled since the last financial crisis, and despite the fact that the federal government is 20 trillion dollars in debt, they seem to be convinced that this irrational stock market bubble can keep inflating indefinitely.
Perhaps they can all put their money where their mouth is by pouring all of their savings into Twitter, Netflix and other tech company stocks.
In the end, we will see who was right and who was wrong.
S&P 500 tech stocks have now fallen for 9 days in a row. The last time tech stocks declined for so many days in a row was in 2012, and that was the only other time in history when we have seen such a long losing streak. As I have stated before, the post-election “Trump rally” is officially done, and the market is starting to roll over as investors begin to realize that all of the buying momentum has completely evaporated. Tech stocks tend to be particularly volatile, and so the fact that they are starting to lead the way down should definitely be alarming to many in the investing community.
Of course it isn’t just tech stocks that are falling. The Dow was down another 59 points on Wednesday, and the S&P 500 has closed beneath its 50 day moving average for the very first time since the election. For those that have been waiting for a key technical signal before getting out of the market, there is one for you.
The price of gold was up again, and that is definitely not surprising in this geopolitical environment. The closer we get to war the higher gold and silver prices will go, and if we actually get into a major conflict we will see them blast into the stratosphere.
Another key indicator that I am watching very closely is the VIX. On Wednesday it shot up above 16 for the very first time since the day after Trump’s election victory, and many believe that it could soon go much higher. The following is an excerpt from a CNBC report…
The VIX measures the size of the S&P 500’s expected moves over the next 30 days, and consequently tends to run just a bit hotter than volatility over the past 30 days. Yet one-month realized volatility is just 6.7, meaning the VIX is at a roughly 9-point premium, which Chintawongvanich calls “highly unusual.”
That said, he notes that implied volatility was also at a large premium preceding the U.K. referendum to leave the EU and the U.S. presidential election. The obvious conclusion is that the market is now similarly preparing itself for the French presidential election, which is set to be held on April 23. Some fear that a populist candidate could prevail, which may cause more problems for the European Union and thus for economic stability.
As noted in that excerpt, the upcoming French election is absolutely huge. If the election goes “the wrong way” according to the globalists, it could literally mean the end of the European Union as it is configured today.
And of course of even greater concern is the global march toward war. It is being reported that North Korea is on the verge of a major nuclear weapons test, and such an act of defiance could be enough to push Donald Trump into conducting a major military strike.
But if Trump does hit North Korea, it is quite likely that North Korea will hit back. The North Koreans are promising to use nuclear weapons in any conflict with the United States, and if Trump bungles this thing we could easily be looking at a scenario in which millions of people end up dead.
Things also continue to get more tense in the Middle East. The Russians and the Iranians are promising to respond to any additional U.S. strikes “with force”, and on Wednesday Trump declared that our relationship with Russia “may be at an all-time low”.
Of course this came shortly after Secretary of State Rex Tillerson used similar language following his face to face meeting with Russian President Vladimir Putin…
Secretary of State Rex Tillerson and Russian President Vladimir Putin held more than two hours of “very frank” talks Wednesday in the Kremlin amid tensions over a U.S. airstrike against a Syria air base blamed for last week’s deadly chemical attack.
In remarks to reporters after the meeting, Tillerson said he told the Russian leader that current relations between the two countries are at a “low point.”
If the Trump administration conducts any more strikes on Syria, it is quite likely that the Russians and Iranians will make good on their threats and will start firing back.
And once U.S. aircraft or U.S. naval vessels come under fire, the calls for war in Washington will become absolutely deafening.
Unfortunately, Trump is not likely to back down any time soon because the recent missile strike in Syria has dramatically boosted his popularity. According to every recent survey, the American people overwhelmingly approve of what Trump did…
A Morning Consult/Politico poll released Wednesday found that 57% of Americans supported airstrikes in Syria, 58% supported establishing a no-fly zone over parts of Syria including strikes against Syria’s air-defense systems, and 63% of Americans thought the US should do more to end the Syrian conflict. Even more, 66% of respondents said they supported the Trump administration’s strike last week specifically.
This mirrored results of another recent poll from CBS News in which 57% of Americans said they approved of the US strike. A Pew Research Center survey from this week showed a similar level of support, with 58% of Americans approving of the strike.
Sadly, this is a time when the majority is dead wrong. Many of those that are supporting military action against Syria now were vehemently against it when Barack Obama was considering it.
Even Donald Trump spoke out very strongly against military intervention in Syria in 2013, and he was quite right to do so, and so what has suddenly changed that now makes it okay?
There is nothing to be gained in Syria, but we could very easily end up in a direct military conflict with Russia, Iran and Hezbollah which could ultimately prove to be the spark that sets off World War III.
And of course a military strike on North Korea could also potentially spark a global war. The first Korean War resulted in a direct military conflict between the United States and China, and the second Korean War could easily result in the exact same thing happening again.
Do the American people really want war with both Russia and China at the same time?
It has been said that you should be careful what you wish for, because you just might get it.
Are millions of Americans about to see the big, juicy pensions that they were counting on to fund their golden years go up in flames in the biggest financial disaster in U.S. history? When Bloomberg published an editorial entitled “Pension Crisis Too Big for Markets to Ignore“, it simply confirmed what a lot of people already knew to be true. Pension funds all over America are woefully underfunded, and they have been pouring mind boggling amounts of money into very risky investments such as Internet stocks and commercial mortgages. Just like with subprime mortgages in 2008, this is a crisis that everyone can see coming well in advance, and yet nothing is being done about it.
On a day to day basis, Americans generally don’t think very much about pensions. Most of those that have been promised pensions simply have faith that they will be there when they need them.
Unfortunately, the truth is that pension plans all over the country are severely underfunded, and this has already resulted in local fiascos such as the one that we just witnessed in Dallas.
But what happened in Dallas is just the very small tip of a very large iceberg. According to Bloomberg, unfunded pension obligations on a national basis “have risen to $1.9 trillion from $292 billion since 2007″…
As was the case with the subprime crisis, the writing appears to be on the wall. And yet calamity has yet to strike. How so? Call it the triumvirate of conspirators – the actuaries, accountants and their accomplices in office. Throw in the law of big numbers, very big numbers, and you get to a disaster in a seemingly permanent state of making. Unfunded pension obligations have risen to $1.9 trillion from $292 billion since 2007.
And of course that $1.9 trillion number is not actually the real number.
That same Bloomberg article goes on to admit that if honest math was being used that the real number would actually be closer to 6 trillion dollars…
So why not just flip the switch and require truth and honesty in public pension math? Too many cities and potentially states would buckle under the weight of more realistic assumed rates of return. By some estimates, unfunded liabilities would triple to upwards of $6 trillion if the prevailing yields on Treasuries were used. That would translate into much steeper funding requirements at a time when budgets are already severely constrained. Pockets of the country would face essential public service budgets being slashed to dangerous levels.
So where are all of these pensions eventually going to come up with 6 trillion dollars?
That is a very good question.
Ultimately, even if financial conditions stay as stable as they are right now, a whole lot of people are not going to get the money that they were promised.
But things will get really “interesting” if we see a major downturn in the financial markets. According to Dave Kranzler, if the stock market were to fall by 10 percent or more and stay there for a number of months, that “would cause every single public pension fund to blow up”. And Kranzler is also deeply concerned about the tremendous amount of exposure that these pension funds have to commercial mortgages…
Circling back to the mall/REIT ticking time-bomb, while the Fed can keep the stock market propped up as means of preventing an immediate nuclear melt-down in U.S. pensions (all of which are substantially “maxed-out” in their mandated equities allocation), the collapse of commercial mortgage-back securities (CMBS) will have the affect of launching a nuclear sub-missile directly into the side of the U.S. financial system.
The commercial mortgage market is about $3 trillion, of which about $1 trillion has been packaged into asset-backed securities and stuffed into yield-starved pension funds. Without a doubt, the same degree of fraud of has been used to concoct the various tranches in these CMBS trusts that was employed during the mid-2000’s mortgage/housing bubble, with full cooperation of the ratings agencies then and now. Just like in 2008, with the derivatives that have been layered into the mix, the embedded leverage in the commercial mortgage/CMBS/REIT model is the financial equivalent of the Fukushima nuclear power plant collapse.
I have previously talked about the ongoing retail apocalypse in the United States which threatens to make so many of these commercial mortgage securities go bad. It is being projected that somewhere around 3,500 stores will close in the months ahead, and this is going to absolutely devastate mall owners. In turn, it is inevitable that a lot of their debts will start to go bad, and pension funds will be hit extremely hard by this.
But the coming stock market crash is going to hit pension funds even harder. Stocks are ridiculously overvalued right now, and if they simply return to “normal valuations”, pension funds are going to lose trillions of dollars.
We are talking about a financial tsunami that will be absolutely unprecedented in our history, and yet investors continue to act like the party can last forever. In fact, we just learned that margin debt on Wall Street has just hit another brand new record high…
The latest data from the New York Stock Exchange show margin debt, or cash borrowed to buy shares, hit a record $528.2 billion in February, up from its prior high of $513.3 billion in January.
Of course my regular readers already know that margin debt also shot up to dramatic peaks just before the last two stock market crashes as well…
Prior periods when margin debt hit records occurred around stock market peaks, including 2000 when the dot-com stock boom went bust, and 2007 when stocks began to crater amid early signs of trouble in the housing market ahead of the 2008 financial crisis.
Margin debt jumped 22% from the end of 1999 before peaking in March 2000 at $278.5 billion, the same month stocks peaked. In 2007, margin debt shot up to $381.4 billion in July, three months before stocks topped.
We are perfectly primed for the greatest financial disaster in American history, and yet very few people are sounding the alarm.
This massive financial bubble is a ticking time bomb, and when it finally goes off it is going to wipe out virtually every pension fund in the United States.
The post-election stock market rally is officially over. After hovering near record highs for the past couple of weeks, U.S. stocks had their worst day in six months on Tuesday. For quite some time it has been clear that the momentum of the post-election rally had been exhausted, and a pullback of this nature was widely anticipated. But even though stocks fell by more than 1 percent during a single trading session for the first time since last September, it is going to take a whole lot more than that to bring stock prices back into balance. In fact, stocks are so overvalued at this point that it would take a total decline of about 40 to 50 percent before key stock valuation measures return to their long-term averages.
So we are still in a giant stock market bubble. All Tuesday did was shave about one percent off of that bubble.
Let’s review some of the numbers from the carnage that we witnessed…
-The Dow was down 237.85 points (1.14 percent)
-The S&P 500 was down 1.2 percent on the day
-The Nasdaq was down 1.8 percent at the closing bell
-Financial stocks were down more than 2.5 percent
-Overall, it was the worst day for banking stocks since the Brexit vote
-Bank of America is now down more than 10 percent since Trump’s speech to Congress
-The Russell 2000 (small-cap stocks) dropped about 2 percent
Some prominent names on Wall Street were warning ahead of time that this was coming. Marko Kolanovic was one of those voices…
Marko Kolanovic has done it again.
Last Thursday, one day ahead of the massive quad-witching where over $1.4 trillion in options expired in relatively tame fashion, the JPM quant warned of “near-term market weakness” and suggested “reducing US equity exposure. And, sure enough, JP Merlin’s Gandalf timed it impeccably yet again. To be sure, the jury is still out on what caused the selloff – lack of votes to repeal Obamacare, fears about Trump’s fiscal policy agenda, the market’s sudden realization that it is at 30 CAPE, or just a technical revulsion – what matters is that once again, like clockwork, Kolanovic called a key inflection point just days in advance.
Of course the mainstream media is telling everyone not to worry. They are insisting that this is just a temporary blip and that a market “correction” is highly unlikely. The following comes from CNN…
Few experts are predicting a correction — which is a 10% pullback from a market high. Even fewer see a bear market, a 20% drop or more, on the horizon.
Hopefully CNN is correct.
But it should be noted that experts such as Kolanovic are warning that more panic selling may be coming in the days ahead…
Furthermore, the modest but rising uptick in realized volatility is starting to cause outflows from volatility-sensitive investors the JPM quant calculated and, as a result, the break in short-term momentum may cause modest equity selling by trend following strategies.
In other words, in the absence of a positive catalyst over the next few days – and with uncertainty ahead of the Thursday Trumpcare vote only growing by the hour we fail to see one emerging – the double whammy of gamma positioning and the CTA momentum “flip” will be the catalyst for the next, extremely overdue, move lower.
It is going to take quite a few more days like today before we can talk about the kind of “financial crisis” that I have been warning about for a long time, but we may have already reached a key turning point.
So much of the post-election stock market rally was based purely on hope, and meanwhile the underlying economic numbers have continued to deteriorate. Corporate earnings are down, it is being projected that U.S. GDP growth will be about one percent during the first quarter, and used vehicle prices are dropping for the first time since the last recession…
In its March report, the National Association of Auto Dealers (NADA) reported an anomaly: dropping used vehicle prices in February, which occurred only for the second time in the past 20 years. It was a big one: Its Used Car Guide’s seasonally adjusted used vehicle price index plunged 3.8% from January, “by far the worst recorded for any month since November 2008 as the result of a recession-related 5.6% tumble.”
The index has now dropped eight months in a row and hit the lowest level since September 2010. The index is down 8% year over year, and down 13% from its peak in 2014.
When the Federal Reserve raised rates, that was very bad news for stocks, and if Donald Trump cannot get his Obamacare replacement through Congress that will be more bad news for stocks.
But even if there was no bad news, it is inevitable that stock prices would decline at some point anyway.
It is simply not rational to have price-earnings ratios up around 30. The only other times when price-earnings ratios have become so bloated were right before the stock market crash of 1929, right before the stock market crash of 2000 and right before the stock market crash of 2008.
Whenever it ultimately happens, the truth is that stocks always eventually return to their historical averages. And if a “black swan event” or two are thrown in, that could push stocks well below their historical averages.
Never before has there been this much debt in the world, and not even in 2008 were global financial markets so primed for a crash.
Many people get caught up in trying to predict what month or what day the markets will crash, and if you could predict that accurately you could make a lot of money.
But that is not the point.
What everyone should be able to agree on is that this temporary stock market bubble that has been fueled by reckless intervention from the Federal Reserve is not sustainable and that it is inevitable that stock prices will be a lot lower in the future than they are right now.
We should be thankful that this bubble has lasted much longer than it should have, because what is going to come after this bubble bursts is going to be absolutely horrible.
Markets tend to go down a lot faster than they go up, and when the coming crash finally occurs it is going to make 2008 look like a Sunday picnic.
So whatever you need to do financially, you should think about doing it soon, because the alarm bells on Wall Street are starting to ring.
Current stock market valuations are not sustainable. If there is one thing that I want you to remember from this article, it is that cold, hard fact. In 1929, 2000 and 2008, stock prices soared to absolutely absurd levels just before horrible stock market crashes. What goes up must eventually come down, and the stock market bubble of today will be no exception. In fact, virtually everyone in the financial community acknowledges that stock prices are irrationally high right now. Some are suggesting that there is still time to jump in and make money before the crash comes, while others are recommending a much more cautious approach. But what almost everyone agrees on is the fact that stocks cannot go up like this forever.
On Tuesday, the Dow, the S&P 500 and the Nasdaq all set brand new record highs once again. Overall, U.S. stocks are now up more than 10 percent since the election, and this is probably the greatest post-election stock market rally in our entire history.
But stocks were already tremendously overvalued before the election, and at this point stock prices have reached a level of ridiculousness only matched a couple of times before in the past 100 years.
Only the most extreme optimists will try to tell you that stock prices can stay this disconnected from economic reality indefinitely. We are in the midst of one of the most outrageous stock market bubbles of all time, and as MarketWatch has noted, all stock market bubbles eventually burst…
The U.S. stock market at this level reflects a combination of great demand, great complacency, and great greed. Stocks are clearly in a bubble, and like all bubbles, this one is about to burst.
If corporations were making tremendous amounts of money, rapidly rising stock prices would make logical sense.
But that is not the case at all. Corporate earnings for the fourth quarter of 2016 were actually quite dismal, and this disconnect between Wall Street and economic reality is starting to really bug financial analysts such as Brian Sozzi…
The S&P 500 has gone 89 straight sessions without a 1% decline. Considering that Corporate America didn’t exactly light up on the top and bottom lines during the fourth quarter, such a streak is rather troublesome. Granted, the stock market is a forward-looking mechanism that appears to be trading on hopes that Trump’s unannounced stimulus and tax plans will be lifting economic growth in 2018. Even so, the inability of investors to at least acknowledge persistent struggles among companies and ongoing chaos in Washington is starting to become disturbing.
It is a basic fact of economics that stock prices should accurately reflect current and future earnings.
So if corporate earnings are at the same level they were at in 2011, why has the S&P 500 risen by 87 percent since then? The following comes from Wolf Richter…
The S&P 500 stock index edged up to an all-time high of 2,351 on Friday. Total market capitalization of the companies in the index exceeds $20 trillion. That’s 106% of US GDP, for just 500 companies! At the end of 2011, the S&P 500 index was at 1,257. Over the five-plus years since then, it has ballooned by 87%!
These are superlative numbers, and you’d expect superlative earnings performance from these companies. Turns out, reality is not that cooperative. Instead, net income of the S&P 500 companies is now back where it first had been at the end of 2011.
The cyclically adjusted price-to-earnings ratio was originally created by author Robert Shiller, and it is widely regarded as one of the best measures of the true value of stocks in existence. According to the Guardian, there have only been two times in our entire history when this ratio has been higher. One was just before the stock market crash of 1929, and the other was just before the bursting of the dotcom bubble…
Traditionally, one of the best yardsticks for whether shares are over-valued or under-valued has been the cyclically adjusted price earnings ratio constructed by the economist Robert Shiller. This ratio is currently at about 29 and has only twice been higher: in 1929 ahead of the Wall Street Crash, and in the last frantic months of the dotcom bubble of the late 1990s.
We can definitely wish for the current euphoria on Wall Street to last for as long as possible, but let there be absolutely no doubt that it is going to end at some point.
It would take a market decline of 40 or 50 percent to get the cyclically adjusted price-to-earnings ratio back to a level that makes economic sense. Let us hope that the market does not make such a violent move very rapidly, because that would likely be absolutely crippling for our financial system.
Markets tend to go down a lot faster than they go up, and every other major stock market bubble in U.S. history has ended very badly.
And this bubble is definitely overdue to burst. The bull market that led up to the great crash of 1929 lasted for 2002 days, and this week the current bull market will finally exceed that record.
Trying to pick a specific date for a market crash is typically a fruitless exercise, but market watchers are becoming very concerned about some of the signs that we are now seeing. For example, the “CCT indicator” is currently showing “the lowest bullish energy ever”…
The first factor is the CCT indicator. This indicator is a proprietary internal measurement of the general volume of the New York Stock Exchange. The measurements take into account the institutional participation as a ratio of the overall volume. Also measured is the duration of heavy block buying in rallies.
The sum total of all the measurements now shows the lowest bullish energy ever — even lower than in 2008, just before the market crash.
In other words, this current bull market appears to be completely and utterly exhausted.
The laws of economics cannot be defied forever. Traditionally, commodity prices and stock prices have tended to move in unison. And this makes perfect sense, because commodity prices tend to rise when economic conditions are good, and in such an environment stock prices are typically going to move up.
But now we are in a time when commodity prices and stock prices have become completely disconnected. In order to bring this ratio back into line, the S&P 500 would need to fall by about 1000 points, and such a decline would cause a level of financial chaos that would be absolutely unprecedented.
This current stock market bubble has lasted much longer than many of the experts originally anticipated, but that just means that the eventual crash will likely be that much more devastating.
In the end, you don’t need to know all of the technical details in this article.
But what you do need to know is that current stock market valuations are not sustainable and that a great crash is coming.
It may not happen next week or next month, but it is going to happen. And when it does happen, it is likely to make what happened in 2008 look like a Sunday picnic.
The Dow Jones Industrial Average provides us with some pretty strong evidence that our “stock market boom” has been fueled by debt. On Wednesday, the Dow crossed the 20,000 mark for the first time ever, and this comes at a time when the U.S. national debt is right on the verge of hitting 20 trillion dollars. Is this just a coincidence? As you will see, there has been a very close correlation between the national debt and the Dow Jones Industrial Average for a very long time.
For example, when Ronald Reagan took office in 1991, the U.S. national debt had just hit 994 billion dollars and the Dow was sitting at 951. And as you can see from this chart by Matterhorn.gold via David Stockman, roughly that same ratio has held true throughout subsequent presidential administrations…
During the Clinton years the Dow raced out ahead of the national debt, but an “adjustment” during the Bush years brought things back into line.
The cold hard truth is that we have been living way above our means for decades. Our “prosperity” has been fueled by the greatest debt binge in the history of the world, and we are greatly fooling ourselves if we think otherwise.
We would never have gotten to 20,000 on the Dow if Barack Obama and Congress had not gotten us into an extra 9.3 trillion dollars of debt over the past eight years.
Unfortunately, most people do not understand this, and the mainstream media is treating “Dow 20,000” as if it is some sort of great historical achievement…
The average began tracking the most powerful corporate stocks in 1896, and has served as a broad measure of the market’s health through 22 presidents, 22 recessions, a Great Depression, at least two crashes and innumerable rallies, corrections, bull and bear markets. The blue chip reading finally cracked the 20,000 benchmark for the first time early Wednesday.
During the current bull market, the second longest in history, the Dow has more than tripled since March 2009.
Since Donald Trump’s surprise election victory, the Dow has now climbed by approximately 2150 points.
And it took just 64 calendar days for the Dow to go from 19,000 to 20,000. That is an astounding pace, and financial markets around the rest of the planet are doing very well right now too. In fact, global stocks rose to a 19 month high on Wednesday.
So where do we go from here?
Well, if Donald Trump wants to see Dow 30,000 during his presidency, then history tells us that he needs to take us to 30 trillion dollars in debt.
Of course that would be absolute insanity even if it was somehow possible. Each additional dollar of debt destroys the future of our country just a little bit more, and at some point this colossal bubble is going to burst.
But you can’t tell most of the “financial experts” these things. Most of them simply believe that the “market always goes higher over time”…
The “market always goes higher over time,” Todd Morgan, chairman of Bel Air Investment Advisors. “The lesson here is that through wars, recessions, elections, impeachments, financial crises, and on and on, investing for the long term in high-quality stocks is the key to building wealth. … We are telling our clients that you can’t time the market. Think long term. Stay the course. We expect the market to see Dow 30,000 in my lifetime, and for my grandchildren to see Dow 50,000 in their lifetime.”
My hope is that the market will continue to go up. But nobody can deny that valuations are already at absurdly high levels, and the only way that this party can keep going is to continue to fuel it with more and more debt.
But for the moment, there is a tremendous amount of optimism out there, and most experts expect the Dow to continue to set new highs. In fact, CNBC says that whenever the Dow crosses a new threshold like this it usually means good things for investors…
CNBC looked at market data from the past 30 years and zeroed in on the times when the Dow has crossed levels like 2,000, 3,000, 4,000 … all the way up to the 19,000 level it hit in November. At those times, investors can typically expect traders to push it up even higher, according to data from Kensho. Not only does the Dow go up, but it outperforms the S&P 500 index along the way.
But as USA Today has explained, not all Americans are benefiting from this stock market rally…
The breakthrough came just four trading days into Trump’s presidency, a whirlwind in which the billionaire has reaffirmed his commitment to strengthen the U.S. economy and create more jobs and higher wages for workers. Still, nearly half of Americans have not benefited from the so-called “Trump Rally,” which has generated more than $2.2 trillion in paper gains for the Wilshire 5000 Total Stock Index since Election Day. The reason: only 52% of Americans polled by Gallup last April said they “have money invested in stocks” — the lowest stock ownership rate in the 19 years Gallup has tracked the data and down sharply from 65% in 2007 before the financial crisis.
Hopefully the good times will continue to roll for as long as possible.
But there is no possible way that they can keep going indefinitely.
For decades, our debt has been growing much faster than our GDP has. By definition, this is an unsustainable situation. At some point we will have accumulated so much debt that our financial system will no longer be able to hold up under the strain.
Many were convinced that we would reach that point before the U.S. national debt hit 20 trillion dollars, and yet here we are.
So how much higher can we go before the bubble bursts?
That is a very good question, and I don’t know if anyone has the right answer.
But for President Trump, this is going to present him with quite a dilemma.
Either he can keep the debt party going for as long as possible, or he can try to get us to take some tough financial medicine right now.
If an attempt is made to deal with our debt problems now, we will experience severe economic pain almost immediately.
But if the can keeps being kicked down the road, our long-term prognosis is just going to keep getting worse and worse.
And if we try to delay the inevitable indefinitely, at some point the laws of economics are going to make our hard choices for us.
So let us celebrate “Dow 20,000”, but let us also understand that it is far more likely that we will see “Dow 10,000” again before we ever see “Dow 30,000”.
Optimism about the future of the U.S. economy has not been this strong since Barack Obama’s first presidential election victory in 2008. Donald Trump promised us an economic resurgence, and what is not to like so far? As I discussed earlier this week, stocks are soaring, businesses are already announcing that they are bringing jobs back to the United States, and the U.S. dollar has been lifted to levels that we haven’t seen in many years. Many are referring to this post-election surge as “Trumphoria”, and I think that is quite appropriate. Personally, I couldn’t imagine financial markets behaving this way if Hillary Clinton had won the election. Right now tens of millions of Americans are feeling deeply optimistic about the future for the first time in a very long time, and this is clearly reflected in the results of the most recent CNBC All-America Economic Survey…
The CNBC All-America Economic Survey for the fourth quarter found that the percentage of Americans who believe the economy will get better in the next year jumped an unprecedented 17 points to 42 percent, compared with before the election. It’s the highest level since President Barack Obama was first elected in 2008.
The surge was powered by Republicans and independents reversing their outlooks. Republicans swung from deeply pessimistic, with just 15 percent saying the economy would improve in the next year, to strongly optimistic, with 74 percent believing in an economic upswing. Optimism among independents doubled but it fell by more than half for Democrats. Just 16 percent think the economy will improve.
It is funny how our political perspectives so greatly shape our view of the future. Because Trump won, Democrats now have an extremely dismal opinion of where the economy is heading, while Republicans suddenly believe that happy days are here again.
Of course the truth is that the president has far less power to influence the economy than the Federal Reserve does, and so most Americans greatly overestimate what a president can do to alter our economic trajectory.
But for now most Americans (excluding Democrats) are feeling really good about where things are headed. In fact, we just learned that the University of Michigan consumer confidence survey has soared to the highest level that we have seen since 2005.
And of course the financial markets continued to roll onward and upward on Friday. The Dow was up another 142 points, and it is now less than 250 points away from the magic number of 20,000.
I never thought that we would actually get to 20,000, but thanks to “Trumphoria” we may actually get there before the wheels start coming off.
This post-election run has really been unprecedented. The following comes from CNBC…
All major indexes have been hitting record highs since the election. In fact, the Dow has notched 14 record closes since then and gains in 20 of the past 24 sessions.
The Dow, S&P 500, and Nasdaq also did something they haven’t done in more than five years: all three rose each day of this trading week. The last time all three rose every day during the same trading week was September 2011.
Wouldn’t it be great if every month during Trump’s presidency was like the last 30 days?
Trump promised that we would start winning so much that we would actually start getting tired of winning, and so far we are off to a tremendous start.
As I discussed yesterday, some of the biggest winners from “Trumphoria” have been the big banks…
The shares of Wells Fargo, the most hated bank in America these days, soared 28% over the past 30 days, Citigroup 25%, JP Morgan 26%, Goldman Sachs, which is successfully placing its people inside the Trump administration, 37%.
But is this momentum in the financial markets sustainable?
Of course not.
There are signs of emerging economic trouble all around us. For instance, Sears just announced that it lost 748 million dollars last quarter and that it plans to liquidate even more stores.
How in the world do you lose three-quarters of a billion dollars in a single quarter? If you had employees in every store literally flushing dollar bills down the toilet all day I don’t think you could lose money that quickly.
And the moment that Trump takes office, he may immediately be faced with a major financial crisis in Europe which has been sparked by the meltdown of large Italian banks. The following comes from a Forbes article entitled “Italy’s Banking Crisis Is Nearly Upon Us“…
There is a high degree of probability (approaching 90%, I’d say) that Italy will experience a severe banking crisis in the next few quarters. Perhaps they can stave off the problem for a year, but something will have to be done about the banks.
Unfortunately, it looks like things are about to get very real for Italian banking giant Monte dei Paschi di Siena. According to Reuters, the European Central Bank has turned down their request for more time to raise needed capital…
The European Central Bank has rejected a request by Italy’s Monte dei Paschi di Siena (BMPS.MI) for more time to raise capital, a source said on Friday, a decision that piles pressure on the Rome government to bail out the lender.
Italy’s third-largest bank, and the world’s oldest, had asked for a three-week extension until January 20 to try to wrap up a privately funded, 5 billion euro ($5.3 billion) rescue plan in the face of fresh political uncertainty.
The ECB’s supervisory board turned down the request at a meeting on Friday on the grounds that a delay would be of little use and that it was time for Rome to step in, the source said.
But most Americans have no idea what is unfolding in Europe right now.
As Americans, we tend to be largely oblivious to what is going on in the rest of the world, and at this moment “Trumphoria” has gripped our nation.
It is certainly not wrong to celebrate the fact that we are getting Donald Trump instead of Hillary Clinton, but let us also not lose sight of the fact that we are likely to be facing some tremendous challenges very early in 2017.
Will the financial bubble that has been rapidly growing ever since Donald Trump won the election suddenly be popped once he takes office? Could it be possible that we are being set up for a horrible financial crash that he will ultimately be blamed for? Yesterday, I shared my thoughts on the incredible euphoria that we have seen since Donald Trump’s surprise victory on November 8th. The U.S. dollar has been surging, companies are announcing that they are bringing jobs back to the U.S., and we are witnessing perhaps the greatest post-election stock market rally in Wall Street history. In fact, the Dow, the Nasdaq and the S&P 500 all set new all-time record highs again on Thursday. What we are seeing is absolutely unprecedented, and many believe that the good times will continue to roll as we head into 2017.
What has been most surprising to me is how well the stocks of the big Wall Street banks have been doing. It is no secret that those banks poured a tremendous amount of money into Hillary Clinton’s campaign, and Donald Trump had some tough things to say about them leading up to election day.
So you wouldn’t think that it would be particularly good news for those banks that Trump won the election. However, we seem to be living in “Bizarro World” at the moment, and in so many ways things are happening exactly the opposite of what we would expect. Since Trump’s victory, all of the big banking stocks have been skyrocketing…
Financial stocks in particular have been on fire. Citigroup (C) and JPMorgan Chase (JPM) are up about 20% since Donald Trump defeated Hillary Clinton — and that makes them laggards!
Morgan Stanley (MS) has gained more than 25%. So has troubled Wells Fargo (WFC), despite the lingering fallout from its fake account scandal. Bank of America (BAC) is up more than 30%.
And so is Goldman Sachs (GS) — the former employer of both Treasury Secretary nominee Steven Mnuchin and Trump chief strategist Steve Bannon.
But are these stock prices justified by the fundamentals?
Of course not, but during times of euphoria the fundamentals never seem to matter much. Stocks were incredibly overvalued before the election, and now they are ridiculously overvalued.
Earlier today, a CNBC article pointed out that the cyclically-adjusted price to earnings ratio has only been higher than it is today at three points in our history…
“The cyclically adjusted P/E (CAPE), a valuation measure created by economist Robert Shiller now stands over 27 and has been exceeded only in the 1929 mania, the 2000 tech mania and the 2007 housing and stock bubble,” Alan Newman wrote in his Stock Market Crosscurrents letter at the end of November.
Newman said even if the market’s earnings increase by 10 percent under Trump’s policies “we’re still dealing with the same picture, overvaluation on a very grand scale.”
And of course a historic stock market crash immediately followed each of those three bubbles.
So are we being set up for a huge crash in early 2017?
There are some out there that believe that this is purposely being orchestrated. For example, Mike Adams of Natural News believes that the markets “will be deliberately and destructively imploded under President Trump”…
Right now, the U.S. stock market is surging, with the Dow leaping toward 20,000, a number rooted in fiscal insanity and delusional expectations. There are no fundamentals that support a 20,000 Dow, but fundamentals have long since ceased to matter in a financial world hyperventilating on debt fumes while hallucinating about utopian economic models that will soon prove to generate fools instead of real wealth.
Today I’m going on the record with a prediction that I’ll offer with near absolute certainty: The rigged markets that now seem to defy gravity will be deliberately and destructively imploded under President Trump for all the obvious reasons. There will be financial chaos like we’ve never seen before: Investors leaping off tall buildings, banks declaring extended “holidays” that freeze transactions, and California pensioners slitting their wrists after they discover their promised pension funds were just vaporized by incompetent bureaucrats.
On the other hand, there are others that believe that Trump is just walking into a very bad situation and that a crash would be inevitable no matter who was president.
History tells us that there is no possible way that stock prices can stay at this irrational level indefinitely. But for now a wave of optimism is sweeping the nation, and many of those that are caught up in it will get seriously angry with you if you try to inject a dose of reality into the conversation.
But like I said yesterday, let’s hope that the optimists are correct. A survey that was just taken of 600 business executives found that 62 percent of them were optimistic about the U.S. economy over the next 12 months.
Incredibly, that number was sitting at just 38 percent the previous quarter.
For the moment, business leaders seem to be quite thrilled that we have a business executive in the White House.
Hopefully Donald Trump’s business experience will translate well to his new position. And it is certainly my hope that he is as successful as possible.
But even during the campaign Trump talked about how stocks were in a giant bubble, and the euphoria that we have seen since his election victory has just made that bubble even larger.
Throughout U.S. history, every giant financial bubble has always ended very badly, and this time around will not be any exception.
Trump may get the blame for it when it bursts, but the truth is that the conditions for the coming crisis have been building for a very, very long time.