Waiting for the Last Dance
This is not going to be an article or Op Ed about Michael Jordan.
Since 2009 we’ve been in the longest bull market in history, that’s 11 years and counting. However a few metrics like the stock market P/E, the call to put ratio and of course the Shiller P/E suggest a great crash is coming in between the levels of 1929 and the dot.com bubble.
Mean reversion historically is inevitable and the Fed’s printing money experiment could end in disaster for the stock market in late 2021 or 2022.
You can read Jeremy Grantham’s Last Dance article here. You are likely well aware of Michael Burry’s predicament as well. It’s easier for you just to skim through two related videos on this topic of a stock market crash.
Michael Burry’s Warning
Typically when there is a major event in the world, there is a crash and then a bear market and a recovery that takes many many months. In March 2020 that’s not what we saw since the Fed did some astonishing things that means a liquidity sloth and the risk of a major inflation event.
The pandemic represented the quickest decline of at least 30% in the history of the benchmark S&P 500, but the recovery was not correlated to anything but Fed intervention. Since the pandemic clearly isn’t disappearing and many sectors such as travel, business travel, tourism and supply chain disruptions appear significantly disrupted — the so-called economic recovery isn’t so great.
And there’s this little problem at the heart of global capitalism today: the stock market just keeps going up.
Crashes and corrections typically occur frequently in a normal market. But the Fed liquidity and irresponsible printing of money is creating a scenario where normal behavior isn’t occurring on the markets. According to data provided by market analytics firm Yardeni Research, the benchmark index has undergone 38 declines of at least 10% since the beginning of 1950.
Since March 2020 we’ve barely seen a down month. September 2020 was flat-ish. The S&P 500 has more than doubled since those lows.
Look at the angle of the curve:
The S&P 500 was 735 at the low in 2009, so in this bull market alone it has gone up 6x in valuation. That’s not a normal cycle and it could mean we are due for an epic correction.
I have to agree with the analysts who claim that the long, long bull market since 2009 has finally matured into a fully-fledged epic bubble.
There is a complacency, buy the dip frenzy and general meme environment to what BigTech can do in such an environment. The weight of Apple, Amazon, Alphabet, Microsoft, Facebook, Nvidia and Tesla together in the S&P and Nasdaq is approaching a ridiculous weighting.
When these stocks are seen as growth, value and companies with unbeatable moats, the entire dynamics of the stock market begin to break down. Check out FANG during the pandemic.
BigTech Is Seen as Bullet Proof
Extreme valuations and a hysterical speculative behavior leads to even higher highs, even as 2020 offered many younger people an on-ramp into investing for the first time.
Some analysts at JP Morgan are even saying that until retail investors stop charging into stocks, markets probably don’t have too much to worry about. Hedge funds with payment for order flows can predict exactly how these retail investors are behaving and monetize them. PFOF might even have to be banned by the SEC.
The risk on market theoretically just keeps going up until the Fed raises interest rates, which could be in 2023!
For some context, we’re more than 1.4 years removed from the bear-market bottom of the coronavirus crash and haven’t had even a 5% correction in nine months. This is the most overpriced the market has likely ever been.
At the night of the dot-com bubble the S&P 500 was only 1,400. Today it is 4,500, not so many years after. Clearly something is not quite right if you look at history and the P/E ratios. A market pumped with liquidity produces higher earnings with historically low interest rates. It’s an environment where dangerous things can occur.
In late 1997, as the S&P 500 passed its previous 1929 peak of 21x earnings, that seemed like a lot, but nothing compared to today. For some context, the S&P 500 Shiller P/E closed last week at 38.58, which is nearly a two-decade high. It’s also well over double the average Shiller P/E of 16.84, dating back 151 years. So the stock market is likely around 2x overvalued.
Try to think rationally about what this means for valuations today and your favorite stock prices. What should they be in historical terms? The S&P 500 is up 31% in the past year. It will likely hit 5,000 before a correction — given the amount of liquidity added to the system and the QE the Fed is using that’s like a huge abuse of MMT, or Modern Monetary Theory.
This has also led to bubbles in the housing market, crypto and even commodities like Gold with long term global GDP meeting many headwinds in the years ahead due to a demographic shift of an ageing population and significant technological automation. So if you think that stocks or equities or ETFs are the best place to put your money in 2022, you might want to think again.
The crash of the OTC and small-cap market since February 2021 has been quite an indication of what a correction looks like. According to the Motley Fool what happens after major downturns in the market, historically speaking? In each of the previous four instances that the S&P 500’s Shiller P/E shot above and sustained 30, the index lost anywhere from 20% to 89% of its value.
So what’s what we too are due for. Reversion to the mean will be realistically brutal after the Fed’s hyper-extreme intervention has run its course.
Of course what the Fed stimulus has really done is simply allowed the 1% to get a whole lot richer to the point of wealth inequality spiraling out of control in the decades ahead, leading us likely to a dystopia in an unfair and unequal version of Big Tech capitalism.
Of course the Fed has to say that’s its done all of these things for the people, employment numbers and the labor market. Women in the workplace have been set behind likely 15 years in social progress due to the pandemic and the Fed’s response.
While the 89% lost during the Great Depression would be virtually impossible today, thanks to ongoing intervention from the Federal Reserve and Capitol Hill, a correction of 20% to 50% would be pretty fair and simply return the curve back to a normal trajectory as interest rates go back up eventually in the 2023 to 2025 period.
It’s very unlikely the market has taken Fed tapering into account (priced-in), since the euphoria of a can’t miss market just keeps pushing the markets higher. But all good things must come to an end.
Earlier this month, the U.S. Bureau of Labor Statistics released inflation data from July. This report showed that the Consumer Price Index for All Urban Consumers rose 5.2% over the past 12 months.
While the Fed and economists promise us this inflation is temporary, others are not so certain. As you print so much money, the money you have is worth less and certain goods cost more. Wage gains in some industries cannot be taken back, they are permanent — in the service sector like restaurants, hospitality and travel that have been among the hardest hit.
The pandemic has led to a paradigm shift in the future of work, and that too is not temporary. The Great Resignation means white collar jobs with be more WFM than ever before, with a new software revolution, different transport and energy behaviors and so forth.
Climate change alone could slow down global GDP in the 21st century. How can inflation be temporary when so many trends don’t appear to be temporary? Sure, the price of lumber or used cars could be temporary, but a global chip shortage is exasperating the automobile sector.
The stock market isn’t even behaving like it cares about anything other than the Fed, and its billions of dollars of buying bonds each month. Some central banks (like the European) will start to taper about December 2021. However Delta could further mutate into a variant that makes the first generation of vaccines less effective.
Such a macro event could be enough to trigger the correction we’ve been speaking about. So stay safe, and keep your money safe.
The Last Dance of the 2009 bull market could feel especially more painful because we’ve been spoiled for so long in the markets. We can barely remember what March 2020 felt like. Some people sold their life savings simply due to scare tactics by the likes of Bill Ackman.
His scare tactics on CNBC won him likely hundreds of millions as the stock market tanked. Hedge funds further gamed the Reddit and Gamestop movement, orchestrating them and leading the new retail investors into meme speculation and a whole bunch of other unsavory things like options trading at such scale we’ve never seen before.
It’s not just inflation and higher interest rates. It’s how absurdly high valuations have become. Still correlation does not imply causation. Just because inflation has picked up, it doesn’t guarantee that stocks will head lower. Nevertheless, the weaker buying power associated with higher inflation can’t be overlooked as a potential negative for the U.S. economy and equities.
The current S&P500 10-year P/E Ratio is 38.7. This is 97% above the modern era market average of 19.6, putting the current P/E 2.5 standard deviations above the modern era average. This is just math, folks. History is saying the stock market is 2x its true value. So why and who would be full on the market or an asset class like crypto that is mostly speculative in nature to begin with?
Study the following on a historical basis, and do your own due diligence as to the health of the markets:
- Debt-to-GDP ratio
- Call to put ratio (historical)
- Historical P/E Ratio
- Schiller P/E Ratio
- Buffet Indicator: The Buffett Indicator is the ratio of total United States stock market valuation to GDP.
- Percentage of S&P and NASDAQ for Tesla, Apple, Alphabet, Amazon, Microsoft, Facebook and Nvidia relative to the total and their ETF exposure in pension funds, etc…
- Cost of housing compared to annual family income of city (housing prices adjusted for household income)
Bitcoin, Ethereum, Cardano and Dogecoin prices (relative to what they are correlated to, which is copper and oh, sentiment).
- China’s corporate debt and housing bubble risks
- Levels of market optimism vs. consumer sentiment
- Stock market risk behaviors vs. wealth inequality
You can only draw a single conclusion. Sadly the Fed doesn’t have a historically great track record. You can almost trust the predictions of Burry and Grantham more. The stock market of late 2021 looks more like a pyramid scheme of the ultra rich than a capitalism instrument of opportunity. That’s rather unfortunate for the majority of us.
At a certain point false confidence, saying it’s the roaring 20s and printing money only gets you so far. There is a reckoning coming, a lance dance of the Bull market of 2009, if you will. A point of no return in how stocks keep going up. The Fed did this to itself, it did this to us.