Tuesday, June 27, 2017

COTW: The Market Knows No Fear

Wall Street is profiting from the third longest bull market in recorded history at 96 months.  Stock prices have not been this high since 1999 and 1929, just prior to the largest crashes in Wall Street. One would think that the world economy must be booming, yet look at this well-respected leading indicator of economic activity, the Baltic Dry Index:

So is the Baltic Dry index wrong, trading at over 90% below its highs? US Person does not think so because what is driving the bull to new heights of excess has little to do with economic health, but more with the effect of a lot of capital with no where else to go. Stock prices are trading at 29 times earnings. There are few bargains to be had, but the bond market is even more expensive with yields of 2% or less.  Here are some factors pushing Wall Street further into blissful delirium:
  • corporations are not using their 'yuge profits to invest in business expansion, a risky business, but buying their own stock, a much safer way to obtain return on their idle funds, thereby keeping demand for equities high.  Firms in the SP 500 index have purchased $536.4 billion worth of their own shares;
  • central banks of some nations, such as Switzerland and Japan, buy equities as well as bonds, and the US market is still considered a safe haven for their sovereign investments;
  • central banks are printing an enormous amount of money, even though the Fed has stopped increasing the US money supply ("quantitative easing"), at the rate of $200 billion a month. Increasing the money supply is no longer an emergency program to stave off depression, but a regular part of economic policy;
  • baby boomers, scrambling to provide for their retirements, are fully invested in the market through their savings programs at work, providing another source of demand for equities.
So what we have once again in the span of one decade is another market bubble. Market bubbles burst when stocks become too ridiculously expensive that even die-hard bulls get out in anticipation of a "correction". The market does not reflect economic reality anymore, but the free flow of capital around the globe in search of financial profit. This chart is much more related to the reality of a financialized economy where the "real" unemployment rate is above 20%: