All the valuation metrics that matter are screaming that the stock market is dangerous

Monday, 22 November 2021 — Laramie, Wyoming

[7 min read]

Dear Reader,

It’s not even Black Friday and shoppers are already going mad in the US. In fact, they’re so desperate for luxury goods that they’re literally looting stores in San Francisco. A Louis Vuitton store in Union Square was ransacked by a smash-and-grab flashmob first. Then, in Walnut Creek, more than 80 people armed with crowbars (and some with guns) pillaged a Nordstrom’s, an upscale department store in an upscale neighbourhood.

Bitcoin [BTC] does not fix this. Or does it? I’ll come back to that in a moment. But first…

‘Inflation has finished the process of moral decay that the war had started.’

That’s a line from The Dark Valley. It’s a book about the decline in money and civil society in the 1930s. That particular line was about Germany, where suicide, malnutrition, and even infant mortality all rose during the decade after the end of the First World War but before the start of the Second World War.

Faced with war debts they couldn’t repay in gold, the Germans resorted to the printing press. The Weimar inflation of the early 1920s is one of the best-known examples of how an affluent and advanced industrial civilisation can go backwards quickly. The resulting resentment and anger were perfect conditions to exploit for certain Austrian-born fanatics (Hitler).

Milton Friedman may have been right that inflation is always and everywhere a monetary phenomenon. But when it becomes a psychological one, all bets are off. There’s a lot of anxiety in American political circles that rising food, fuel, and rent prices will have an impact in next year’s midterm elections. But those morons better start taking a close look at what’s happening right now.

Why would ordinary people bring a crowbar to a department store? So they could shoplift a new jumper in time for the holidays? This is not normal behaviour in any society, especially one so nominally wealthy as the United States. But take a look at the chart below:

The chart shows the net worth of the top 1% of Americans (the red line) compared to the net worth of the bottom 90% (the blue line). In 2003, then Fed Chairman Alan Greenspan took target US interest rates to 1% and left them there for 12 months. That was the beginning of several consecutive bubbles, in which the top 1% made out like bandits.

First was the housing boom — which also suckered in a lot of subprime buyers who got wiped out — that wiped out trillions in household wealth. But the Fed stepped in again in 2009, after Lehman Brothers went bust. This time it was quantitative easing (QE).

Money printing by the central bank has been a boon for the top 1%. Bond yields plummeted. Bond prices rose. And so did stock prices. As of Friday’s close at 4,697, the S&P 500 is up 605% from its intra-day low of 666 on 3 March of 2009. With the Fed adding almost another US$2 trillion to its balance sheet since early 2000 (it now sits at US$8.6 trillion), the top 1% have finally shown the bottom 90% a clean pair of heels as they run like they stole something.

The S&P 500 is on pace to make more record highs this year than at any other time since 1995. As I wrote to readers of The Bonner-Denning Letter, all the valuation metrics that matter are screaming that the stock market is dangerous. But all the liquidity metrics that matter — fiscal policy, monetary, policy, margin debt — tell you the market could go higher before it goes (a lot) lower.

It really is a tale of two societies. In one where you earn wages and don’t own assets, the cost of living is going up and the quality of life is going down. This doesn’t even include the negative financial and mental health effects of lockdowns, curfews, and jab mandates. And in the other?

Work from home. Zoom it in. Have your food delivered. Do some research into NFTs. Try to find the next Bitcoin, Doge [DOGE], or Shiba Inu [SHIB]. Get as rich as you can, as fast as you can, before the whole thing comes apart.

When I say the ‘whole thing comes apart’, I don’t mean the decentralised financial revolution will fail. It’s too early to say. What I mean is that this is definitely a revolution. The clear winners are the early adopters of crypto and DeFi and investors who’ve ridden the surge in global liquidity to record stock and houses prices.

When formerly middle-class people are raiding department stores for luxury handbags, you know the revolution has losers too. These folks are not buying NFTs. They MAY be driving Teslas, but it’s unlikely they’re going to retire on their portfolio gains. It’s unlikely they’re going to retire, ever.

That’s what happens when the money goes bad. Everything else is falling apart. And that’s exactly what you’re seeing right now. It makes you wonder, as a thought experiment, if the infrastructure for lockdowns was put in place not because of COVID, but in anticipation that the entire global system was going to unravel and lead to chaos.

But THAT’S a subject for another day. As it turns out, I wrote about one possible end stage of the current financial revolution in the latest Bonner-Denning Letter. Paid-up readers should get it soon. Hint: central bank digital currencies are not about a more convenient payment system. They’re about fundamentally reorganising the economy around fighting climate change, partly through control of digital money.

Regards,

Dan Denning,
Editor, The Rum Rebellion

PS: Protests against mandatory vaccination are erupting all over Europe. Keep it up Australia. You won’t see hardly any coverage of these mass protests against medical apartheid. But people realise what’s at stake. There are more of us than there are of them. Don’t give up the fight.

The Bonner-Denning Letter is co-authored by Fat Tail Investment Research founder Dan Denning and legendary investment writer and publisher Bill Bonner. It connects the dots between markets, politics, and history as one of the only macroeconomic, ‘top-down’ newsletters in Australia. For a big picture perspective on the past, the present, and your investment future, click here for details on how to subscribe.

‘Fish gotta swim

‘Birds gotta fly

‘Rain gotta fall

‘And it’s gotta go somewhere’

Bill Bonner, with apologies to the writers of Show Boat

When you see someone setting fire to a federal building, shouldn’t you say something?

And what if the matches and gas can are in your own hands?

The Federal Reserve printed up nearly 5 trillion brand-spanking new dollars between August 2019 and today.

Surely, there must have been at least one alert economist among the 1,000 PhDs on the Fed’s payroll who noticed that they were about to cause the whole economy to go up in flames.

But what was he thinking? Was he thinking at all?

This was classic monetary inflation on an unprecedented scale. Never before had any government ‘printed’ so much money in such a short period of time.

But nowhere in the history of the economics profession is there an instance where such prodigious effort on the part of the money printers led to genuine prosperity.

Instead, many centuries of history show us that monetary inflation leads to price inflation…which then leads to bubbles and busts…confusion…and finger-pointing.

And if it’s not stopped, it can lead to hyperinflation, depression, hunger, poverty, riots, and revolution.

Obvious question

The finger-pointing was on display on the front page of The Wall Street Journal yesterday, with the headline ‘President Calls for Inquiry Into Price of Gas’:

‘Biden, in letter, alleges wrongdoing by energy firms.’

There will be a lot more finger-pointing…as the real culprits try to divert attention from themselves.

But shouldn’t our aforementioned PhD have asked the obvious question back when it started?

‘Uh…Chairman Powell…I hate to be a Debbie Downer…but we’re, like, pumping US$5 trillion into the economy. That’s, like, nearly a quarter of annual GDP.’

‘Uh…what is supposed to happen? I mean, isn’t it likely to cause some…well…distortions?’

Fish gotta swim. And dollars gotta buy something. And therein hangs the answer to the one question Fed economists should have asked…

…along with another they should be asking now.

Obvious outcome

Supply chain disruptions were relatively unknown back in March 2020, when the spree of money printing began in earnest. Now, they’re as common as strip malls.

How they came to be?

When the offices, restaurants, and bars closed, people turned to their home computers…found that they had stimmy money from the feds in their accounts…and determined to spend it.

Some ordered consumer goods. But since the US doesn’t make much anymore, these had to be shipped from the other side of the world.

And in a few months, the ships were backing up in the harbours…docks were stacked with containers…and trucks laboured night and day to deliver them to every Middlesex, village, and town in the country.

Hence, the ‘supply chain disruptions’.

It seems so obvious, now. Shouldn’t our man at the Fed have seen it coming?

Deadly combination

Then, shipping rates soared. Trucking costs, too.

And so did prices on some items that were in short supply…as well as on other items that were plentiful. Milk…eggs….bacon…gasoline…houses.

The supply of houses doesn’t change much, month to month. But by September of this year, new house prices in the US were up 18% over the year before. And as prices bubble up…so do mortgage rates, a deadly combination for new homeowners.

Prices for investment assets also caught a bid. Zombie companies, meme stocks, NFTs, cryptos, options — people who didn’t know an option from a hole in the ground a year ago are now seasoned ‘day traders’.

Tesla, Inc [NASDAQ:TSLA] has doubled since this time last year. Grant’s Interest Rate Observer tells us that on 5 November, the price-to-earnings (P/E) ratio of the S&P 500 went over 40 for the first time in 21 years.

And at the beginning of the month, Grant’s reported that there were some 528 special purpose acquisition companies (SPACs) with blank cheques, looking for acquisitions.

Wasn’t that also completely predictable? After all, the money had to go somewhere.

Shouldn’t our man at the Fed have said something?

Big quit

Perhaps less foreseeable…but with so much liquidity weeping from the clouds, many people just decided to stay home permanently.

In what came to be known as the Great Resignation, some 4.4 million workers went AWOL, in September alone.

And then businesses, eager to meet the increased demand, found they had to pay higher wages and benefits to keep their workers happy. Our friend David Stockman tells us that the latest Employment Cost Index figures show labour costs rising at a 6% annualised rate.

Compensating workers is the number one expense of US industry. So, any rise in labour costs is important…and must be passed along.

It is also the most ‘sticky’ of cost increases. Prices for raw materials may go up and down, but once an employee gets a raise, it is hard to take it back; there’s nothing ‘transitory’ about it.

Benefit of hindsight

And thus, it was that prices rose…not for any mysterious reason, but for an obvious one — people were buying stuff.

But not with real money that they earned (which would have increased the supply of goods and services as well as the demand for them). They were spending fake money delivered unto them by the Fed.

It would have taken years of advanced study…and perhaps at least a master’s degree in economics…not to see it coming.

And so we’ll prompt our PhD friend at the Fed. Here’s a question to put to your comrades now:

‘Well, what did you expect?’

Regards,

Bill Bonner,
For The Rum Rebellion