Dear Reader, Same old, same old… Capital continues to pour into the largest, ‘safest’ stocks. In doing so, it pushes the main stock indices higher and masks the fragile nature of the economy after being ravaged by COVID. The Wall Street Journal reports: ‘Technology stocks pulled major U.S. indexes higher Thursday, as a handful of companies continued to power the newly minted bull market. ‘Shares of Apple, Facebook and Microsoft all rose more than 2%. The gains propelled the S&P 500 up 10.66 points, or 0.3%, to 3385.51 by the end of the session. ‘…investors stuck with a trade that has worked throughout the crisis, buying shares of highflying technology companies that have benefited from statewide lockdown measures that have accelerated the adoption of online shopping, digital communication and other services. The S&P 500’s tech and communications sectors have risen more than 60% and 40%, respectively, from the lows of March, helping to drive the broad index earlier this week toward its first record in about six months.’ As crazy as it sounds, the rising indices indicate a ‘defensive’ move by investors. That’s what they think, anyway. But there is no defence in an expensive stock. Not in the long run. As I showed you here last week, on a price-to-sales metric, the S&P 500 is now 20% more expensive than it was during the 2000 peak. Price-to-sales is the best metric to gauge tech stocks because the market judges them on market and market share growth, rather than bottom line earnings. In the land of tech stocks, earnings come later. Always later. Meanwhile, under the hood, all is not well. Recently, the NASDAQ has advanced while displaying negative breadth. For example, even though the index rose by more than 1% overnight, the advance-decline ratio was just 0.65%. That is, for every stock that increased, 1.5 stocks fell. You can see this lack of breadth in the chart below. The blue line shows the performance of the NASDAQ Index, while the red line is the advance-decline line. Positive breadth would see the advance-decline line making new highs with the index. That’s not happening here. There are two points to note on this chart. Firstly, the recovery to new all-time highs in the NASDAQ has not been accompanied with a rebound in the advance-decline line to anywhere near the highs reached in early 2020. And more recently, the advance-decline line turned lower while the index hit new all-time highs. That simply tells you capital is concentrating on the biggest names and leaving the others behind. It’s the sickest market recovery and all-time high I’ve seen. Which is why I believe the NASDAQ is a bubble waiting to burst. It’s rising simply because ‘everyone knows that everyone knows’ the big tech stocks are the ‘safest’ game in town. But history has proved time and time again that expensive stocks — no matter how solid — are far from safe investments. And even though the Aussie market isn’t priced as high as the NASDAQ, it has its own breadth of issues too. The chart below shows the ASX 200, with the advance-decline ratio deteriorating. While the market has moved sideways since June, the advance-decline line has fallen. None of this tells you that the market is going to tank tomorrow, or next week, or next month. It’s just one piece of the puzzle. But as for the epicentre of this stock market bubble — the NASDAQ — it’s an important piece. The concentration of capital is stark. This is not how healthy bull markets behave. When it comes to the Aussie market though, I’m not as concerned. For the most part, valuations are reasonable, at least in a global context. That reflects our market’s banking and industrial base. Even the big resource companies look cheap. That’s if you believe in the China perpetual growth story (I don’t). But we do have our outliers. Just look at Afterpay Ltd [ASX:APT]. The stock has a market value of $22.5 billion. Sales for FY20 are expected to be $500 million, producing an expected loss of $40 million. It’s a valuation full of belief and wild imagination in what the future might bring. How long it persists is impossible to tell. ‘Everyone knows that everyone knows’ that Afterpay is going higher. Until it doesn’t. Every bubble is different. But at their core, they’re all the same. Irrational valuations impervious to rational arguments. Bubbles are all about belief in the impossible. Regards, Greg Canavan, Editor, The Rum Rebellion ..............................Advertisement..............................‘Not since Hitler’s Germany have our relations with another country soured so badly, so quickly…’ China is boycotting Australia. And that is a very serious sea-change for our economy. As Bob Gregory, an economist from the Australian National University, puts it, when you have a benefactor like China behind you, ‘the size of the economy, the nature of the economy, shifts’. The same thing happens when that benefactor starts pulling away… To find out what this means, and how to prepare, click here. | ..........................................................................
On the Trail of Stolen Property By Bill Bonner A dear reader, Mario P, challenged us… ‘Bill, I think you are full of it. “Money stolen from the public…” Give me a break! Yes, there are people who are making a lot of money illegally or unscrupulously, but not all rich people are thieves. Get a grip.’ OK. We are on the case. Rich people have gotten a lot richer. We want to know where the money came from. But before we begin our investigation, let’s clarify the charge. We didn’t accuse rich people of stealing the money…we said they were the ‘recipients’ of the loot. There’s a big difference. We may enjoy watching a murder mystery; that doesn’t mean we want to kill anyone. Two choices And here, we’re rubbing up against an important question. Reducing the issue to its bare essentials, there are only two choices. Money is either gotten honestly…or dishonestly. Which is it? And framing the discussion further, we’ve seen that the Federal Reserve can successfully inflate Wall Street prices at will. We calculated that, over the past 30 years, Fed intervention in the stock market has given the average family of four in the richest 10% of the population an extra million dollars. That family did nothing wrong. But the money it got was fundamentally dishonest. It came from the Fed’s counterfeiting program, not from honest work. Long wait Let’s look at one example to see if this makes sense. Yesterday, tech giant Apple’s market cap cruised over the $2 trillion mark. Here’s Reuters: ‘Apple became the first publicly listed U.S. company with a $2 trillion stock market value on Wednesday, as Wall Street investors put aside challenges to its iPhone ecosystem in favor of bets it will only prosper more in the post-coronavirus world.’ That makes Apple’s market cap higher than the GDP of 178 foreign countries. Even Canada — in an entire year — doesn’t turn over that kind of money. It also puts the company’s P/E ratio at 35. So based on current earnings, if you bought the whole company, and put every dollar of earnings into your pocket, you’d have to wait until 2055 to get your money back. Real wealth The problem with technology is that it doesn’t stand still for that long. Apple is a great company today. Tomorrow, who knows? 30 years from now, will people still be using Apple phones and tablets? Or, like Digital Equipment, Kodak, Wang, Sperry, Control Data…the list goes on and on…will it be forgotten? You can’t blame investors for buying Apple. But the company is now worth $1 trillion more than it was five months ago. Where did the money come from? The answer given by Wall Street is that sales are ‘surging’, thanks to the tech bonanza during the COVID shutdown. This would allow investors to anticipate a more ample stream of future earnings. These earnings, of course, are real wealth…honest money! In other words, they say the company is actually worth more. Full Weimar But Apple’s current price does not plausibly reflect expected earnings discounted to present value. The company’s revenue has been growing at less than 3% per year, on average, for the last four years. Even the ‘surge’ of the last quarter left its profits lower than they were for the same quarter two years ago. We suspect most investors are not doing a careful analysis. Instead, it is more likely that a lot of the 10 million investors who opened accounts at stock trading app Robinhood are admirers of Apple products…and don’t know any better. And we also suspect the levitation of the stock market in general, and Apple specifically, is the work of the magicians at the Fed… They’ve been at it for 30 years — cautiously, at first…and now, they’ve gone full Weimar. Very effective This monetary ‘inflation’ by the Fed seems to be very effective in the stock market. The Fed puts money into Wall Street — lent at rates below the level of consumer price inflation. Prices rise. Had not the Fed backed up the bond market in September…and even more in the COVID-19 lockdown…Apple stock would probably be less than half what it is today. The extra $1 trillion would vanish. That may lead you to say that today’s stock prices are ‘fake’…that they are not real…or that they could be cut in half tomorrow. You would be right. But as long as the Fed continues to interfere, an investor can sell his stocks at their ‘fake’ prices…and use the money to buy real things. That is, he can buy the plumber’s time…or his 1967 Corvette…or the bread the baker just brought out of the oven. Rotten system Has he ‘stolen’ these things? Of course not. But the whole system is rotten. The stock market investor ends up in possession of wealth that somebody else earned. In effect, it is property stolen away from the public with fake money. The seller may feel he’s gotten a good deal. The buyer may be happy, too. No charges will be filed. No one will go to jail. But ultimately, trillions of dollars’ worth of real wealth is changing hands — bought with unearned, counterfeit money. Somebody’s getting ripped off, in other words… …though he may never understand how. Stay tuned… Bill Bonner, For The Rum Rebellion ..............................Sponsored..............................‘Every country, from the United States to China, must participate, and every industry, from oil and gas to tech, must be transformed. In short, we need a “Great Reset” of capitalism.’ That was published on the World Economic Forum website on 3 June 2020. If you’re familiar with the work of Jim Rickards, you’ll know how many times he’s been on the right side of history. You’ve a matter of months to take the actions Jim suggests, or this time next year you could find yourself on the wrong side of what could very likely be the biggest global monetary event in 50 years. 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