The surreal US
stock markets have continued melting up in recent months, spurred
ever higher by the Federal Reserve?s money printing and jawboning.
The resulting record highs in the headline indexes have been widely
trumpeted by Wall Street as evidence of a strong secular bull
underway, with years still left to run higher. But these records
are misleading, mere illusions conjured by the Fed?s relentless
inflation.
The flagship
benchmark index for tracking the US stock markets is the mighty S&P
500, often shortened to SPX. The whole financial world
literally revolves around this dominant index, with most global
equity markets and even some major commodities markets
like oil
closely mirroring it. American stock traders can directly trade the
SPX through a handful of gargantuan ETFs including the leading SPY
S&P 500 ETF.
As a broad-based
market-capitalization-weighted index comprised of 500 of American?s
biggest and best companies, for all intents and purposes the S&P 500
effectively is the US stock markets. So strings of new SPX
record highs are widely-celebrated events. This latest stretch
started on the last trading day of March 2013, when the SPX broke
out above its previous record-high close of 1565 in October 2007.
Since then there
have been no fewer than 70 new record closes, out of just 328
trading days. Over a fifth of these have happened since late May
2014, helping to breed the extreme euphoria and complacency rampant
today. Wall Street zealously believes these records are a powerful
testament to the underlying health and staying power of this bull
market. So each new record feeds into the overwhelming optimism.
Record highs
necessarily rely on long-term price comparisons. But thanks to the
Federal Reserve?s printing presses endlessly spewing out vast
torrents of new US dollars, the ultimate measuring rod of the dollar
is far from constant. We all instinctively know the value of the
dollar is perpetually eroding, but this insidious inflationary
process is so slow that it lurks below the perception threshold most
of the time.
The longer the
timeframe considered, the greater the impact of monetary inflation.
Back in January 1980 for example, the US median household
income was under $18k. New houses across this nation averaged just
$76k, while new cars generally cost less than $6k. With far fewer
dollars in circulation then, each one had relatively more purchasing
power. But the relevant SPX record-high span is much shorter.
The last secular
stock bull crested in March 2000, when the SPX hit the
then-staggering level of 1527. But a dollar back then went a heck
of a lot farther than one does today, so considering 1527 in today?s
dollars is an inherently-flawed and misleading apples-to-oranges
comparison. Back at those dazzling SPX record highs, the Fed?s
narrow and broad M1 and MZM money supplies were running $1109b and
$4463b.
Today, after the
epic money printing by uber-inflationists Alan Greenspan, Ben
Bernanke, and Janet Yellen, these money supplies have ballooned to
$2823b and $12484b! This is staggering growth of 2.5x and 2.8x
respectively, vastly outpacing underlying US economic growth. With
dollars worth much more back then, any given SPX level was much
higher in real inflation-adjusted terms than the same one
today.
While the Fed?s
money printing is pure inflation, Wall Street has always
preferred to focus on the effect rather than the cause. And that?s
rising prices. The dominant measure of general price levels
remains the US Consumer Price Index, which is published monthly by
the Department of Labor?s Bureau of Labor Statistics. Between March
2000 and today, this popular price index merely climbed from 171.2
to 237.9.
This 1.4x growth
greatly lagged the source of inflation, underlying money-supply
growth. Unfortunately the CPI is intentionally lowballed for
political reasons. The BLS systematically employs all kinds of
statistical trickery to keep the CPI from revealing the true price
picture in America. Have your family?s living expenses merely risen
by an average of 2.4% annually since March 2000? The reality is
likely double or triple that.
The government
actively manipulates the CPI because monetary inflation has such a
broad and detrimental impact. If true inflation was reported, stock
markets would be radically lower. Americans would believe
our economy was far worse, and would kick politicians out of
office. The huge welfare payments indexed to inflation, along with
interest on Treasuries, would soar. This would
threaten to
bankrupt the whole government!
Nevertheless,
since the myth of low inflation helps boost stock prices Wall Street
happily plays along with this political charade. Since it
dramatically understates real-world inflation, the CPI is
probably the most conservative way possible to view the SPX in
constant-dollar terms. So this first chart uses the CPI to show the
real inflation-adjusted SPX since 2000 in blue, overlaid on the
usual nominal unadjusted SPX in red.
The only honest
way to do long-term market comparisons is to use constant dollars.
And in real terms, the SPX has not seen a single new record high
since March 2000! All 70 of the nominal record closes over the
past 16 months are mere illusions driven by the eroding value of the
Fed?s inflated dollar. The SPX peaked at 2123 in today?s dollars
back in March 2000, and hasn?t returned anywhere near there ever
since!
In fact, as of its
latest nominal record close of 1985 just a couple weeks ago, the SPX
was still 6.9% below that March 2000 record high. The implications
of that fact are incredible. In the 14.3 years since the
peak of the last secular stock bull, US stock prices have still
not recovered! As this chart reveals in stark terms, all the US
stock markets have done since early 2000 is grind sideways at
best. This is ominous.
The only market
environment where stock prices can consolidate and make no progress
for over a decade is a secular bear. The stock markets
gradually meander in great third-of-a-century cycles that I call
Long Valuation
Waves. 17-year secular bulls, like the monster ending in March
2000, are followed by 17-year secular bears. Stocks blast
higher in secular bulls, and then drift sideways in the subsequent
secular bears.
The reason is
quite simple. Towards the ends of secular bulls, widespread
euphoria catapults stock prices to levels far beyond where
underlying corporate earnings can fundamentally justify. Stock
prices are driven to such expensive levels that they then need to
consolidate sideways for the better part of the next couple decades
to give earnings time to grow into those lofty stock prices.
Secular bears bleed off overvaluations.
The
single-most-important question in all the stock markets today is
whether we are still in the 17-year secular bear that started in
March 2000 or a new secular bull that was allegedly born in March
2009. The latter is fervently believed by the legions of stock
bulls cheering this past year?s long string of new nominal record
highs in the SPX. And these very records are trumpeted as
some of the best new-secular-bull evidence.
As a professional
student of the markets and speculator, I have CNBC turned on all day
every day. As usual it has done an outstanding job of chronicling
prevailing stock-trader sentiment during this past year?s big streak
of new nominal records. And the times I?ve heard analysts and money
managers claim these new records confirm a new secular bull is
underway are countless. These records greatly fed the bullish
sentiment.
But by merely
recasting the SPX in constant-2014-dollar terms using the lowballed
CPI, this thesis is irrefutably shattered. The SPX?s 70 new nominal
record closes since last April are not the product of an
exceptionally-strong stock market, but the result of the value of
the dollar measuring stick falling thanks to the Fed?s relentless
inflation. In real purchasing-power terms, stocks are still lower
after 14.3 years!
There have been no
real new SPX record highs yet, not a single one, since March
2000. And none are coming before SPX 2123 at best. I say at
best because with each passing month?s money printing by the Fed,
each dollar?s value keeps falling and continues to push up that
March 2000 real high in today?s dollar terms. The bulls? belief
that record highs show how special these stock markets are is total
garbage.
These stock
markets are indeed special, but only because the Federal Reserve has
recklessly and foolishly incited a stock-market levitation. Secular
bears, those great sideways drifts, are comprised of an alternating
series of smaller cyclical bears and cyclical bulls. The cyclical
bears generally cut stock prices in half, and then the cyclical
bulls double them again. This continues over the secular bear?s
17-year lifespan.
The stock markets
functioned normally between most of 2000 to 2012, consolidating
sideways on balance to give corporate earnings time to grow into the
lofty stock prices of the last secular bull. Note in particular the
normal cyclical-bull advance after the last cyclical bear bottomed
in March 2009. It enjoyed a normal healthy ascent in its first
four years, strong uplegs punctuated by occasional corrections
to rebalance sentiment.
But in early 2013,
Ben Bernanke inexplicably took it on himself to convince stock
traders the Federal Reserve was effectively backstopping the stock
markets. It had to be one of the dumbest things an elite central
banker has ever done, crazy-dangerous. The Bernanke Fed fell all
over itself communicating that if a significant stock-market selloff
arrived, it would be quick to spin up its printing presses and spew
money.
So selloffs
vanished,
with traders quick to buy every slight dip on the belief the Fed
wouldn?t let the stock markets fall. Without necessary and healthy
selloffs to rebalance sentiment, it soon became wildly euphoric.
This led to stock prices being bid up far faster than underlying
earnings, pushing stocks back near
bubble
valuation territory! Stocks just rose and rose, without
meaningful selloffs, in a
bull-killing
trajectory.
And the stock
bulls rejoiced! Rather than scold the Fed for single-handedly
spawning a dangerous stock-market levitation, they claimed stocks
were rallying because the US economy is recovering strongly and
corporate earnings are surging. And they claimed the many nominal
record highs were evidence of these blatant rationalizations. But
the records themselves never really existed, they too were
Fed-driven illusions.
This next chart
zooms out to a really-long-term view of the real SPX, since the
start of the last secular bear before today?s in early 1966. It
reinforces the damning perspective that today?s US stock markets
remain trapped in a 14-year-old secular bear. And if that is indeed
true, then today?s lofty stock markets have a long, long ways to
fall once today?s overextended cyclical bull rolls over into the
next cyclical bear.
This long-term
chart highlights the critical truth that today?s euphoric bulls have
totally forgotten, that stock markets are forever cyclical.
17-year secular bulls are followed by 17-year secular bears,
and these sideways grinds are made up of smaller cyclical bears and
bulls. The last secular bear ran from 1966 to 1982, a period of
time where the SPX actually gained 8.9% nominally but lost a
staggering 64.3% in real terms!
As the Fed ramped
up its printing presses in the late 1970s to try and stimulate a
stagnant economy, the value of the dollar kept eroding. So though
stocks were flat on balance over that last secular-bear span, the
purchasing-power losses investors absorbed were massive. That last
secular bear didn?t end until the S&P 500?s trailing
price-to-earnings ratio fell below 7x earnings, which signals
secular bears have run their course.
The subsequent
secular bull was mind-blowingly awesome, catapulting the SPX 1391%
higher in nominal terms and 751% in real terms over the next 17
years or so. The final couple years of that secular bull marked its
terminal bubble phase, when stocks rocketed straight up on unbridled
euphoria to hit an astounding 43.8x earnings in SPX terms. But with
valuations so extreme, that secular bull gave up its ghost.
And that ushered
in today?s secular bear, which is only 14.3 years old so far. That
is well under the 17-year average. And if today?s wildly-optimistic
stock bulls are right, then the secular bear actually ended in March
2009 which would have made it last only 9 years. It is hard to
imagine a secular bear surrendering after just 9 years, just over
halfway into its normal duration. And valuations were far too high
to kill it then.
Remember secular
bears are valuation phenomena. And near the March 2009 lows
the elite 500 component companies of the SPX had only retreated to a
trailing P/E ratio of 11.6x. This was still a whopping 2/3rds
higher than the 7x levels seen at the ends of secular bears! So
the idea that the secular bear magically ended back then makes
absolutely zero sense. It is a typical bull fantasy, a
rationalization ignoring hard facts.
That leaves us
14.3 years into a not-yet-mature secular bear today, still trading
at real levels below those seen at the last secular bull?s peak in
March 2000. Even with today?s lofty stock prices, the SPX is only
up 30.0% in nominal terms over that entire span. That means the US
stock markets have returned a piddling 1.9% annually at best
over the decade-plus since the last episode of extreme euphoria,
utterly terrible.
How on earth can
that excite anyone? Since secular bears are sideways grinds in
nominal SPX terms, in real terms they tend to be downtrends. This
was readily apparent during the last secular bear that straddled the
1970s. And the same thing happened in today?s secular bear before
the Bernanke Fed unleashed its crazy SPX levitation in early 2013.
The entire stock rally since then is Fed-manufactured.
While the lack of
new real records is damning, that is trivial compared to the
extreme
overvaluations in the stock markets today. As of late June, the
S&P 500 component stocks were trading at a trailing
price-to-earnings ratio of 23.5x! That is dangerously high, way
above 14x historical fair value. And that is if these components?
individual P/Es are weighted by their market caps, which makes it
more conservative.
In simple-average terms, the SPX?s trailing P/E ratio in late June
was a jaw-dropping 26.4x earnings. This isn?t far from the
28x historical threshold for bubble conditions! The last
cyclical bull topped back in October 2007 at much lower valuations,
and the fact that valuations are so extreme today virtually
guarantees that we are not midway through a new secular bull as the
bulls so desperately try to convince themselves.
Again secular
bears don?t end until the general-stock-market valuation falls down
near 7x earnings. So if a secular bear remains in force as all the
evidence strongly suggests, US stock prices would have to be slashed
by a catastrophic 70% to hit those bear-slaying valuations! I
really doubt they will plunge that far, as earnings will gradually
grow over the next couple years while stock prices slide. But they
will get cut in half!
Making long-term
stock-market comparisons in nominal terms, which is necessary to
declare records, is inherently misleading. With the Fed continuing
to aggressively print money like there is no tomorrow, the value of
the dollar is not a constant long-term measuring stick. It has to
be adjusted for inflation, even if it is lowballed CPI inflation, to
get a more realistic perspective on what is really going on out
there.
And when you
consider the SPX in today?s dollars, the past year?s long string of
nominal record-high SPX closes is merely another Fed-conjured
illusion. The S&P 500 has not made a single new record close yet in
real terms, and remains far from its last secular-bull peak in March
2000. But even more damning than that is the extreme
overvaluations, which all but prove we aren?t midway through a new
secular bull.
All the
stock-market upside of the past 18 months or so, and all the
resulting euphoric sentiment, was simply manufactured by a reckless
Fed. All investors and speculators have to ask themselves what is
going to happen as the Fed?s implied backstopping is soon removed
when the QE3
bond monetizing ends later this year. Odds are the levitated
stock markets are going to come crashing back down to reality.
Only hardcore
contrarians, which is what we are at Zeal, will thrive in such a
challenging environment. We?ve spent decades fighting the crowd to
buy low and sell high, earning a great deal of hard-won and
priceless experience, knowledge, and wisdom. And we continue to
tirelessly refine that through our ongoing research and trading.
For a mere pittance, you can put our world-class expertise to work
for you.
We?ve long
published acclaimed
weekly and
monthly newsletters for speculators and investors. They dig
deep into the markets and help you learn how to think like a
contrarian, the only way to thrive. And they also document our
ongoing trading as opportunities arise. Since 2001, all 686
newsletter stock trades have averaged stellar annualized realized
gains of +22.6%!
Subscribe today, get informed, and start growing rich!
The bottom line is
this past year?s long string of new record highs in the flagship S&P
500 is merely a Fed-driven illusion. Once this flagship stock index
is adjusted for inflation, it reveals that these stock markets
haven?t achieved a single real record yet. Even today, stock prices
remain way below those seen at the end of the last secular bull in
early 2000. All the past year?s euphoria based on record highs was
misplaced.
And without any
new highs, the case that we remain mired deep in a not-yet-mature
secular bear is even stronger. Couple that with the extreme
overvaluations rampant in stocks today thanks to the Fed?s crazy
levitation, and the markets are perfectly set up for a new cyclical
bear. This is going to eviscerate the deluded bulls trapped in
their own euphoria, but will offer vast opportunities for prudent
contrarians.
|