I want to start by looking back to the
beginning of 2020. Life was simple then;
we could travel as we liked, hold social gatherings, go to the beach, attend
music concerts, go out to dinner and the movies, and generally come and go as
we pleased. After Covid was declared a
pandemic, the world’s health authorities closed the global economy, businesses
were shuttered, millions laid off and free money was printed as a temporary stop
gap to keep things afloat.
Twelve months later we are at the
beginning of a vaccine roll out that will take time to implement and who’s
effectiveness is being questioned but while we wait more money is being printed
but many businesses are still shuttered or gone for good. Some sectors of the economy have benefitted;
logistics, software, delivery, golf gear (one of the few sports that is allowed,
and which has seen a remarkable resurgence), video games, home health, fitness
and entertainment and several other industries are flying, however if you are
in the restaurant business, travel or leisure then you are either out of
business or fighting for your survival. One
of the largest and most important industries, housing (at least in the USA) is intriguing. Prices for housing are spiraling higher due
to the limited number of homes for sale but banks are not allowed to foreclose
on Covid victims who are months behind on their mortgage payments. Once this bandage is removed there should be
an avalanche of properties coming to market and this could undermine this
industry right as the stimulus ends creating a massive drag on any economic
growth.
Political unrest created by the Trump
supporters and Trump himself has created temporary political chaos. Biden takes office in a week and while I am
not convinced that he is the man for the job he certainly will be a welcome
change from what has turned into a barbaric exit to Trump’s presidency. A new President, a new Treasury secretary in
Yellen (another money printer) and an economy being kept alive with fake money
makes it anyone’s guess as to how the market will react but the reality of the
situation is that without depressed interest rates and trillions of fake dollars
being printed the stock market would be well below current levels.
Looking at some of the stock valuations
shows an amazing picture. Tesla with a
market capitalization of over $800 Billion produces 140 times less cars than
the top ten automakers but has a value higher than all those combined. It trades at 30 times sales and 1,550 times
earnings. It is the most overvalued
stock in market history, and this has catapulted Elon Musk into the position of
the world’s wealthiest person even though his company makes no money and is only
showing a profit due to carbon credits!
His net worth has jumped from $30 Billion at the beginning of 2020 to
$170 Billion today, an increase of $140 Billion in a year or almost $12 Billion
a month!
Apple’s market capitalization soared by
almost $1 Trillion in 2020 to $2.26 Trillion at year end. It was only 17 months ago that it was the
first company to reach $1 Trillion but despite lagging sales and profits the
stock keeps climbing. Although certainly
not a growth stock, it now has a price to earnings ratio (P/E) of 40.5 up from
24.7. In a normal market Apple’s P/E
ratio would have been in the mid-teens but now is three times that
valuation.
It is now the most overvalued stock
market in history and into the 13th year of the longest bull market
in history. The price to sales ratio of
the S&P 500 is now 20% HIGHER than it was at the peak of the Nasdaq bubble
in 2000, the previous record. There is
full blown stock mania in the USA where the small players are piling in just as
they always do at market tops. JMP
Securities estimated that a record 10 million new brokerage accounts were
opened in 2020. Most of these are
leveraged using margin to juice returns.
Options contract volumes have soared to 30 million contracts a day, 12
times the number traded in 2000. The
insane are running the asylum and this will not end well.
I was recently on the golf driving range
trying to fix my golf swing (a never-ending job) and I overheard a few youngsters
(market newbies) talking amongst themselves.
One of them was boasting that his day trading profits were so great that
he was quitting his job to trade stocks!
Sounds like 2000 all over again.
Another person recently called me (another market newbie) to ask why his
option contract had not gone up in value even though the market had moved in
his direction. There was no concept of
time value, volatility value or other market driven option values and yet here
he was trading options!
Another crazy metric is the SPAC
market. For those of you who have been with
me for a while you will remember that back in 2008 the SPAC market was
hot. A SPAC is a Special Purpose
Acquisition Company, essentially a shell of a company that raises money and
then buys companies with its cash. Most
of these have no credibility or plan; just invest your money and results will magically
follow. These companies raised $74
Billion in 2020 more than 5 times the previous record which also occurred at
the previous market peak! What are they
going to acquire with that hard earned money?
As before, a lot of these SPACs will go to zero.
The final stock bubble analogy that I
will mention is the ARKK fund. This is
now the largest active ETF (exchange traded fund) in the world, and it is run
by Cathie Woods. Cathie’s fund has
raised more money in the last two weeks than it did in its first 5 years, and
she is now a regular on CNBC where she is touting her positions. Cathie recently said that Tesla could go to
$15,000 a share making Tesla worth $15 Trillion. Tesla is the basis for her entire fund’s
returns, and therefore it is outperforming the market however, back in 2000,
there were similar Internet funds that went to the moon only to return to earth
in a hurry when the market cratered. The
Jacob Internet Fund, run in 2000 by a 30-year-old money manager Ryan Jacob, was
flying high on the New Era Internet stocks.
His fund lost 95.8% of its value when the NASDAQ bubble burst and I
anticipate a similar exit for Cathie and her investors. Interestingly today Cathie announced that she
was starting a new fund for Space Exploration where she will invest in public
companies involved in space exploration.
After the announcement Virgin Galactic stock surged 22%! No news just a supply demand play. This market has gone insane!
Behind this madness is a Federal Reserve
bent on printing money as the only way out of its hole and a government with a
mandate to continue to support the economy at any cost. The new mantra on Capitol Hill is Modern
Monetary Theory (MMT). Some people are
now referring to it as Modern Money Tree as apparently you can print as much
money as you like with no repercussions.
To the MMT proponents, history is irrelevant. The tales of woe of the Weimar Republic,
Argentina, Zimbabwe, and other economies that printed money without concern are
irrelevant. Their problems of
hyperinflation and economic collapse are due to their lack of understanding of
modern economic theory so it will be different this time! Not that I anticipate a return to hyperinflation
any time soon but if there is not a check on monetary growth, global inflation
will return and with it higher interest rates which any debt ridden individual
or country knows is the death knell for balanced budgets and repayments. This weakens the economy reducing tax
receipts and down we go.
While I am still not convinced that
inflation will rear its head soon there are already several warning signs;
copper is up 27% in 2020, oil has recently past $53 a barrel and this is before
the return to normal travel, the dry goods freight rate is up from below $400 a
day to over $1,700 a day, and the USD has declined more than 12% against a
basket of currency (all imports into the United States have increased in price). On the local front I have witnessed the cost
to construct a new property climbing from $200 a square foot to $250 a square
foot due to lumber and labor shortages.
While these metrics have not fed into the Federal Reserve’s measure of inflation,
they are showing some market froth, and this is starting to create a concern in
the inflation camp.
I cannot see a way for the Federal
Reserve to extract themselves from this mess without a market collapse and a
recession to wipe clean all the excesses.
The problem is that the market is so overvalued that anything short of a
75% correction will not do the trick and I doubt that the Federal Reserve (particularly
with Yellen now the Treasury Secretary) will stand by and watch that happen so
more money will be printed creating a larger problem and a bigger
collapse. Stay tuned but 2021 is going
to be a very interesting year it just remains to be seen whether the madness
will continue or whether reality will finally restore order.
As always, I will monitor the markets
daily. Once the music stops and the
market finally bakes the reality of the situation into stock prices, I plan to act
but at present I will wait until the bandage is ripped off and the true state
of the global economy revealed. In the
interim I will not be participating either long or short but will patiently
wait for the collapse, sidestepping the volatility and continue to produce
excellent returns for all of us throughout this crisis.
