The distorted truth about stocks

Friday, 27 August 2021 — Youghal, Ireland

[7 min read]

Dear Reader,

Are our views correct? Are we on firm footing?

Or are we slipping and sliding, with a cockeyed perspective?

We’ve already seen that the actions that produce wealth are those where people work to satisfy others’ needs and desires. Neither goods nor services have any value of their own. They are given value by the people who want them…whose desires are aggregated and measured in market prices.

Without the freely set prices, you don’t know anything about what the goods or services are really worth.

And if you dump money into the market…artificially suppress interest rates…impose tariffs…or any other kind of meddling, it saps the information content of the prices.

Then you don’t know if you’re making money or losing it…adding wealth or subtracting it.

Distorting the truth

This week, for example, the Nasdaq stock market index hit a new record high — it went above 15,000 for the first time. Fox Business reports ‘Nasdaq hits fresh record, Dick’s Sporting Goods soars’:

‘Both the S&P 500 and the Nasdaq Composite closed at all-time highs Tuesday with the latter topping 15,000 for the first time.’

And the most popular tech stocks — the FANGMAN collection…Facebook, Amazon, Netflix, Alphabet (Google), Microsoft, Apple, and something else that begins with an N — are now worth about US$10 trillion.

That should be telling us something. The economy is running hot? People are making more money?

Wait…here’s another item from Bloomberg:

‘Americans are officially borrowing more than they ever have.

‘Consumer debt soared to $14.64 trillion in the first three months of the year — even as credit card balances notched their second biggest decline on record. That’s because Americans are still sitting on an-ever increasing mountain of student loans and ultra-low interest rates spurred the housing market to new heights.

‘The amount of outstanding auto loans also reached a record as consumers shied away from public transit and clamored to purchase personal vehicles, despite soaring used car prices.’

What to make of it? Are Americans really getting wealthier…and boosting prices for their leading stocks? Are the FANGMAN stocks a lot more profitable than they used to be?

Or are the numbers — bent by federal policies — distorting the truth?

Lying FANGMEN

Let’s look more closely at the FANGMEN.

Whoa! What’s this? It’s not the earnings that have gone up…it’s only the prices.

That we can see by looking at the price-to-earnings (P/E) ratio. From under 16 times earnings 10 years ago, the FANGMEN are now trading at almost 39 times earnings.

In other words, every dollar earned was priced at US$16 in 2011. Now, the same dollar is worth US$39 in FANGMAN stock prices.

‘Price is what you pay,’ says legendary value investor Warren Buffett. ‘Value is what you get.’

What value do you get from the FANGMEN today? We don’t know. But the price won’t tell us.

Buffoonery

Why are the FANGMEN stocks so expensive?

Again, we don’t know. But a fair bet is that it has something to do with the US$4 trillion in new money the federal Reserve created since the COVID-19 scare began. That’s about US$7.5 billion every day since the beginning of March 2020.

The Fed prints money. It uses US$80 billion of it every month to buy US Treasury bonds. Naturally, with this powerful and unfailing bid under the market, the price of the bonds has gone up…pushing yields down.

At present inflation rates — 5.4% — it means that you lose 1.75% per year on a 10-year Treasury note. That’s the current negative yield.

And naturally, too, investors don’t want guaranteed losses, so they’re ready to try for capital gains in the stock market…driving up prices to their present goofy levels.

This buffoonery affects every financial decision…every investment…every purchase…every sale…every price — everything is queered by the Feds’ fat finger on the financial scales.

Heck, even junk bonds are trading at negative real yields. Sounds impossible. But it’s true. The Bank of America US High Yield Index is now in negative territory.

How do you like that, dear reader?

High-yield bonds are called ‘junk’ because the borrowers are poor credit risks. Usually, the yield paid to any investor willing to lend to these flight-risk companies is higher than average, to compensate them for the risk that they may not get their money back.

But now, thanks to the Feds’ distortions, even lending to businesses that aren’t likely to pay you back yields less than nothing!

Crazy? Or what?

What to do?

But what would you expect? Printing money never produces wealth…it merely bends the wealth that is already there in the money printers’ direction.

And the more money you print, the more confusing and chaotic the economic picture becomes. The economy begins to look like a Pieter Bruegel painting, with people doing all sorts of strange things…generally, destroying wealth rather than creating more of it.

Which takes us down to the bedrock question. What can the authorities do to actually improve the economy?

As we’ve been saying all week, there are some things you can change for the better. And many you can’t.

The burden of today’s Diary is that an economy is one of the latter.

Regards,

Bill Bonner,
For The Rum Rebellion

Adelaide, Australia

The political spin surrounding coronavirus is changing. Here’s why COVID could be ‘conquered by Christmas’.

We should all be happy that some sense is entering the crazy COVID discussion.

Naturally, common sense doesn’t hit everyone all at once, but those familiar with the spin-doctoring of our political class can see a change in rhetoric is underway.

That won’t mean every politician will ‘see the light’ in the darkness they have created. There is simply too much at stake for that to happen.

Make no mistake, despite the rhetoric of ‘all being in this together’, politicians have rules for us and rules for them.

The evidence is everywhere but rarely on such public display as with the person elected premier of South Australia. He handed over the state’s leadership reins to a bureaucrat over a year ago, but the marshmallow man, Steven Marshall still has the title.

Marshall is part of the ‘team’ that has made mask wearing compulsory in South Australia. Compulsory for us that is, not for him.

Here he is at a recent awards night, eschewing his own draconian (and hopelessly ineffective mask mandate) laws to get a selfie. He’s the one holding the camera.

‘Wow! I thought masks were compulsory in SA now.
‘Clearly not for the marshmallow man who can’t miss a selfie opportunity.
‘A new level in hypocrisy. One rule for them and another for everyone else. @marshall_steven #auspol pic.twitter.com/E9y1jSiIFG

‘Cory Bernardi (@corybernardi) August 23, 2021’

Little wonder so many politicians are considered hypocrites.

But Marshall isn’t a leader, he’s a follower. And his own disregard for rules he expects others to comply with is not the sign of change I noted.

Those signs are actually emanating from the federal political arena. Here’s the face of the national COVID advertising campaign, Dr Nick Coatsworth, on Twitter.

‘And balancing against the effects of the delta variant on children which is not measurable by case numbers alone, which serve only to frighten and mislead by inflating the health impact on kids. Don’t listen to me only on this, listen to @Fiona_M_Russell and @MCRI_for_kids

‘Dr. Nick Coatsworth (@nick_coatsworth) August 23, 2021’

After 18 months of crazy lockdowns that have broken the spirit and the finances of the nation, the ‘trusted authorities’ are now saying what some of us have been on about from the beginning.

The decisions taken have had deeply negative effects and now must be reconsidered.

These comments echo the words of the prime minister earlier in the week when he wrote:

‘Shifting our focus from just case numbers, to actually looking at how many people are becoming seriously ill and requiring hospitalisation will be increasingly what matters. After all, this how we manage all other infectious diseases.’

You’ll see more of this in weeks to come and my tip is that COVID will be ‘conquered’ by Christmas. Here’s why.

Firstly, there is a federal election coming up and the government will want some good news stories. They’ll generate the narrative that the worst is behind us and together we avoided a population wipe out.

This will coincide with the typical summer reduction in virus load. The PM has already flagged less reliance on case numbers and a focus on serious illness so the lower virulence of the Delta strain and warmer weather will help this claim along.

Then there will be the vaccine rollout.

By Christmas we’ll have a 70–80% uptake which is the threshold to ‘go back to normal’. Again, that will be nonsense as masks, lockdowns, and restrictions are all back in countries with high vaxx rates.

However, it will provide the necessary and convenient excuse to have a clear run into the election.

Countering this will be the Labor state premiers. They’ll want to make things as difficult as possible for the Liberal’s re-election prospects. They’ll keep running as much interference as they can to blame the feds for every problem.

They have proved spectacularly successful at it so far, aided and abetted by a media that loathes the Liberals.

If things come to pass as I predict, I guess we should be happy that at least one branch of government has seen the light.

Unfortunately, it’s hard to be buoyed by a change of heart that is almost entirely motivated by political ambitions rather than the good of the country.

Regards,

Cory Bernardi,
For The Rum Rebellion

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