Guest Post: The Stock Market's Shaky Foundation

Tyler Durden's picture

Submitted by Chris Martenson of

The Stock Market's Shaky Foundation

According to the stock markets in the US and in Europe, the world’s economy is not just in good shape, but is in the best shape it’s ever been

The S&P 500 hit an intraday new record high of 1,858.71 on Feb 24, 2014, and is now 18.6% above the peak it hit in 2007, a moment everybody now recognizes was heavily overvalued.

An almost 19% gain above the prior all time high is an enormous and unusual event. Surely, you are thinking, there must be an equally compelling story and loads of fundamental data to support such a bull market?

Well, there really isn’t. 

Not a lot has changed between the prior 2007 peak and today. From a fundamental standpoint, not much at all. Per capita income is only up 8.1% between now and then, and yet the equity markets are rallying like the biggest income boom in all of history has occurred. 

Worse, the per capita income data is obscuring the fact that what little income gains have been recorded went almost entirely to the top ten percent of the population. So there’s no broad prospering middle class to drive an economic expansion of the sort that stocks seem to be pricing in.

Of course, the main narrative right now has nothing to do with anything fundamental. Rather, it centers on the idea that as long as the central banks of the west and Japan continue to print, everything financial will just continue to go up in price while -- somehow -- price inflation will remain tame.

Our view here at Peak Prosperity is that this narrative is wrong in every respect; except, perhaps, for those using a highly compressed speculation timeline that ignores both fundamentals and history.

In the immediate term, stock prices gyrate based on various assumptions that are often completely disconnected from reality.

But over the medium and longer terms, fundamentals drive prices; as it is ultimately corporate income and ultimately dividends that determine the value we ascribe to equities, and it's the prospect of future earnings growth that drive the price multiple.

We’ll show in a moment just how far equity prices have diverged from the fundamentals.

But First, The Big Picture

Over the long haul, which we think needs to be kept front and center at all times, equities are nothing more than a means of sharing the wealth that companies create, which itself is a product of the extraction and processing of real things from the real world. 

Everything we think we know about the ‘fair value’ of equities was developed over a period of time when the future could always be counted upon to expand exponentially. 

You know, sayings like "Over the long haul equities return 10%".

Such a statement can only be true in an exponentially-expanding world where exponentially more things are being extracted from the real world as time goes on.  In a world where there is only so much 'stuff,' it's not possible for said 'stuff' to always be present in expansive and expanding quantities.

[Wonk note:  Equities could also advance via productivity gains, assuming more utility was derived from the same amount of resources. Perhaps we might assume a world where productivity climbs by 10% per annum to deliver our desired equity gains – but that’s never happened, and certainly will never happen for very long because it implies a 100% improvement every 7 years.]

A huge enabler of the economic expansion of the past century has been oil. Without a doubt, petroleum is the master resource for a global economy. And it is no longer cheap.  The reason why it is no longer cheap, and never will be again, is a larger story than we have time for here, but recent data should suffice to show that global oil has averaged more than $100 per barrel for more than three years. That's 4x higher than the 1987-2004 average of $23 per barrel:


To me, the anemic economic growth in the OECD countries, with their horrible job creation statistics and generally tepid recoveries (at best), is the very predictable result of what you get when oil becomes expensive.

If you hold the view, as we do at, that the future economy cannot possibly grow at the same rates as it did in the past (and that likely someday all growth will cease), then equities are in for a serious correction at some point.

Perhaps that day is still far in the future. But there must always be an eventual reckoning between the number of claims on the world's wealth world and the actual wealth itself.

Further increasing the risk for equities is the fact that, as claims on wealth, they are the least senior of the lot.  The holders of bonds and preferred shares come first.  So when we wander over to that other, and much larger, corner of the financial universe where debt resides and note that all forms of debt, but especially corporate debt, have continued to grow exponentially both before and after the great 2008 credit crisis, we see that equities are whistling past this part of the story too.

Of course, a huge proportion of all the new corporate debt taken on since that little hiccup in 2009 has been used to buy back shares and thereby goose (through accounting, not by value creation) the earnings per share numbers so widely reported by the financial press. 

Eventually, though, all that corporate debt will have to be paid back, and that activity will drain future cash flows and earnings. Again, steadily rising – nay, exponentially rising – levels of corporate debt are a massive collective bet that the future will be exponentially larger than the present.

The only narrative I can imagine that can accommodate a long-term decline of per capita resources coupled to steadily worsening net energy from petroleum, AND simultaneously support the continued exponential expansion of claims against those resources, is one that steadily transfers this wealth into fewer and fewer hands.

After all, if relatively few people end up owning most of the remaining wealth, does it really matter to them that there’s less of it to go around on a per person basis?  No, not if they have plenty for themselves.

As the recent travails in Ukraine have showed us, there’s only so far that such a deranged, kleptocratic view can go before it breaks down.

Alternatively, and far more likely, there’s no actual rational narrative of any sort in play right now -- and so the center mass of the investing world is simply operating off of untested and unexamined beliefs that mainly rest on the notion that a prompt and perpetual return to exponential growth is what the future holds.

Again, we see this as dangerously myopic. But sadly, this view is not only rampant on Wall Street, but it's also prevalent with our government as well as endowments, pensions, and insurance pools -- entities with long-term fiduciary responsibilities that really aught to be asking themselves some hard questions these days.


In summary, over the long haul -- by which we mean the next ten to twenty years -- current equity prices are making a colossal bet that exponential economic growth (which itself is linked to cheap oil) is going to quickly resume and persist long into the future. Are you comfortable making that bet? I'm not.

Of course there are a lot of variables in this story; but one could do worse than to simplify one's economic prediction down to this: Until and unless the global supply of oil gets a heck of a lot cheaper, anemic economic growth will persist and therefore the holders of expensive financial assets that are priced for perfection will be badly disappointed.

Spoiler alert:  There are no new sources of cheap oil. We've already tapped the easy stuff.

So, there's lots to be concerned about for those holding stocks for the long term. But what about the short term?

In Part 2: The Time To Short The Market Is Approaching, we explain why 2014 is beginning to look an awful lot like 2008; only worse. The ability of stock prices to deviate further from the fundamentals appears to be topping, and a heck of a mean-reversion looks in the cards. 

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HedgeAccordingly's picture
Two 20 Year Charts Of The $SPY $SPX Following a RECORD SP500 Close Of 1,854 
Anusocracy's picture

Government maintains control through distortion of reality.

Hasn't changed.

Rukeysers Ghost's picture

I guess I should have stayed in the market instead of putting everything I had in Bitcoin.

buzzsaw99's picture

$100/bbl is cheap.

rocker's picture

So Chris would have you believe.  Let's see, FED pimps economy with all this extra Cash. So how can TPTB, (Bankster's), get your money. Most are NOT buying stocks. So they pimp the price of everything with free money. In a SAD way you buy your Oil from the Kock Brothers and the Bankster's. Who bought tankers of it using your money loaned to them by the FED's QE program at 0% interest. Some of which will never be paid back anyway. It's called capitalism. I don't buy the peak oil supply and demand theory. Afterall, look how JPMorque and others manipulate the price of Gold, which is in Demand far above what price dictates. The whole thing is disgusting beyond my understanding of how stupid the sheeple are who buy this crap. Yellen Smellin just like the Bernanke.

Bonapartist's picture

no shit- another catch me/fuck me thanks to the Bernank's loose $ sloshing around the globe

xamax's picture

This Martenson apparently doesnt know the S&P ALWAYS goes up, regardless what happens in the world

Charles Nelson Reilly's picture

It'll go up until it doesn't.

max2205's picture

It's all at the margin...cripe,  oil is not screaming And stocks are not dumping with a real shooting war staring us in the face. ...fuck me

The_Ungrateful_Yid's picture

When you have bernanke and yellen running the ship, these babylonian fucks think the sky is the limit.'s picture

we aren't talking about Bitcoin 

poor fella's picture

Well, according to their formulas the sky is the limit.

Greenspan found his 'flaw' that markets are self-regulating, Bernanke's "national housing never goes down' premise was wrong, and in 10 years (if we're lucky) we'll be hearing about Yellen's misinterpretation of market forces (more like 5 is my bet).

This house of cards of setting up for an absolute implosion. Emergency measures and panic will ensue while the financial elites fly around the globe for meetings while the streets burn. IF ONLY the media and politicians were truthful and we tackled the MYRIAD of issues facing us NOW, do we have a remote chance of getting through this with some semblance of civility and community. But NOPE, both sides of the isle will take up arms to protect their own percs and rights (the ones we don't have) to the bitter end. 

This is the best of times (for a long while) and the worst of times is coming up fast. Wish I could be more optimistic but because the systemic norm is to act like mindless 'consumers' maybe we deserve a zombie apocolypse...  :\   


Jim in MN's picture

OT but noteworthy...that 'impossible' accident, the little plutonium 'puff' at the WIPP in New Mexico, just got a whole new twist:

ALBUQUERQUE, N.M. -- Thirteen workers at the nation's underground nuclear waste dump in southeastern New Mexico have tested positive for radiation exposure after a recent leak, raising questions about whether the facility's safety systems worked as well as officials have said.

BullyBearish's picture

You can avoid reality, but you cannot avoid the consequences of avoiding reality

Cognitive Dissonance's picture

The lie stock market participants and their enablers (aka Wall Street) tell themselves is that the market ultimately represents fundamental economic truths.

The truth is that the only fundamental truths the stock market currently represents is the Fed's balance sheet and nothing else. Shrink that balance sheet back down to where it was just two years ago, let alone where it would be today if it were not ramped up starting in 2009, and we would see the market 'correct' well over 50%.

Spungo's picture

Author needs to learn MOAR economics. Of course the resources of the world are limited, but that doesn't mean wealth is limited in the same way. Wealth also includes value added. Work that you've done to materials to make them more valuable. If I turn a piece of metal into a car, I haven't added new material to the pot, but I've added value. There's a LOT of room for economic growth since about 40% of working age Americans do not have jobs. Even if they're not extracting resources, they could be doing something that adds value. Maybe someone will invent a more efficient car, someone will create a processor that uses less power, someone will create software to make other productive work easier.

El Vaquero's picture

work = force times distance

Energy is the ability to do work.  In order to add value, you need to do work, which requires energy.  Oil allows us to magnify the amount of work we can do, and it is not easily fungible with other stores of energy, yet it is very necessary in our globalized economy.  What we need is not a more efficient car, or a processor that uses less power.  What we need is a more efficient economy, but we will not get that so long as the big boys can pay off congress to stifle competition, ensuring that they can make money at the globalization game.  This will all continue until it crashes. 

MeelionDollerBogus's picture

The only way we can get a more efficient economy is to go full free market, meaning 'NO ONE IS ILLEGAL' and also meaning no more fiat currency. Deny one & we are doomed to this failure.

MeelionDollerBogus's picture

They're gonna invent a deep-fried pan-pizza that needs less pepperoni & dough.

Go on, tell me that's not the likely future.

Sure, not.

mblackman's picture

Thought provoking argument Chris but how can I use it to make money? If you are expecting an eventual inverse correlation between corporate debt and the price of oil, there has to be a delayed negative correlation currently and that is not the case. Further, if you are saying that there will be an expensive oil reckoning day in stocks, one would expect some sort of negative correlation between total stock market capitalisation and the price of oil. I plotted both on the St Louis Fed Site (Fred) - again not much of a correlation exists. A relative strength graph of total market cap (Nonfinancial Corporate Business; Corporate Equities; Liability, Level (MVEONWMVBSNNCB) to crude oil price did show a steady rise to about 1998 then a steady drop after which shows the market has continued to rise in the face of rising oil. 

Your argument also does not take the overall price of energy into account which is an important factor as demand shifts from oil, to natural gas and other forms of energy like electricity to power transport.

geno-econ's picture

That is the problem ! Everyone wants to make money by not working or creating wealth. Make money by outsmarting the system of fiat currency and debt financing gone astray. Obviously there will be a correction when confidence game collides with reality.

AccreditedEYE's picture

It is beyond even my great powers how this crowd posts stories about absolute government control but still believes that same government will actually allow the market to drop. Just BTFATH and margin it to buy gold.

MeelionDollerBogus's picture

Dropped in 2001, dropped in 2007, rigged to do so. Do you deny the rigging or deny the prior drops? Trick question.

They can see your total portfolia, as per NSA, and can see your income, as per IRS, and can figure out your breaking limits up and down in advance before you even know them.

AdvancingTime's picture

This market has far exceeded the upside expectations of many bulls while the economy has languished and in many respects failed to regain all the ground lost since 2007. The question I put forth is, are we reaching the turning point?

The Final Straw's picture

Easy answer ~ government subsidized corn ethanol.


/sark - unless we drink it

MeelionDollerBogus's picture

Oddly, Monsanto is now telling farmers that market is tapped out & they should not rely on such income anymore.

devo's picture

If it's up tomorrow I plan to sell. 20% is enough for me. Gotta dump this shit onto Joe Sixpack.

Ghostdog's picture

The issue is with the Dems looking to get slaughtered at the mid terms because of the ACA, higher food costs, energy, insurance and lack of real jobs its hard for me to believe Obama is going to let the market falll apart, Seems like the spigot will simply double or triple per the usual insanity. The only thing that could make it sane is the bond market geting way from them which could happen but with global demand in the shitter it makes Ms Felon's job easy in the short run... I agree this should be the year but these fucking idiots are going to make it hard.

MeelionDollerBogus's picture

You don't really still fall for that dems vs repubs puppet show, do you?

q99x2's picture

Equities are controlled by FED computers. They have backups upon backups of them. No Fear. BTFATH.

Look it has been over 5 years since the collapse. At the end of 2011 the FED took over the control of the stock indexes. Since then they have refined their software. If you don't know it by now you never will. But it is up to the FED as to when they choose to pull the plug.

Try to go after them with the military or the courts and see what happens if you don't think the indexes are'nt FED software applications.

MeelionDollerBogus's picture

Then why did the 2007-2008 crash happen? It's no more controlled now than it was then.

WhyWait's picture

Martensen's one-note tune about how it's peak oil stupid is interesting - but it relies on an unfounded assumption that nothing else will work to meet our energy needs. There are some logical flaws in the argument, but this time I just want to emphasize that the crisis caused by high oil prices and stagnant growth of oil production is not an act of God; it's the result of choices made by people.  Powerful people.

We're still stuck in an oil economy because the Oil Barons and Coal Barons have been blocking every attempt to escape from it for going on 40 years.  Carter's Solar Energy Research Institute in Colorado had 1000 scientists working on I don't know how many projects to support energy independence.  By 1989 it was down to 30 or 40.  Fuel efficiency standards languished for decades.  Our antiquated electrical grid is decades overdue for replacement.  Our gas transmission lines all leak.  Thorium reactor technology that I did some work on has gone virtually unfunded and fusion technology has disappeared from view.  Battery technology is taking off now, decades later than it could have.  

And climate science?  I've watched it being punked by the oil barons, a new pseudo-science of climate change deniers created fromwhole cloth with barely a shred of scientific legitimacy, purchased with oil money, adopted as doctrine by a major political party and even rolled into religious doctrines!

Why?  Profits?  Yes, but perhaps it's something more.  

Here's a possible model:

The Oil Barons have had a virtual lock on the world oil market. We've seen how that and the insistance on buyers obtaining dollars to buy have supported the dollar's position, which in turn supports the Empire with all its bases and web of corruption.

THen it would be about power.  And the efforts to keep the world locked into oil would be about protecting and expanding that power.

I doubt I invented this model myself - I'm not sure where I heard it.  Not sure how you'd test it.  But it seems to give good predictions.

MeelionDollerBogus's picture

Solar is worthless except to give you spare heat without using another source of energy.

Oil & gas mean portable power: that's important & batteries, thorium, solar, wind, can't take its place. I guess if you really like boats, then you can go wind-power but history shows even then it can be fickle enough it could cost you your life or ship to have only wind to rely on there.

Otherwise +1. Tempted to -1 for the solar nonsense but the rest was just too much & +1 it had to be.

WhyWait's picture

Thanks.  We could argue solar, hydrogen, etc. but you're right, that's not the heart of what I was saying.

btw. I left out the bitter opposition to a straight-up carbon tax and substitution of the carbon credit swindle.  Has anyone been following the carbon credit derivatives market?  I would think it's fully distended and about to burst by now.

MeelionDollerBogus's picture

I have no reason to follow it.
I would evade it as much as I would evade anything else that's a fraud I'm expected to pay for.

MeelionDollerBogus's picture

grr. People can't do math.

100% improvement = 2.0 factor

10% improvement = 1.1 factor

log(2)/log(1.1) = number of periods to double at 10% improvement per period, and it isn't 10.

socalbeach's picture

All true, but what are you referring to? Article says,

"Wonk note: Equities could also advance via productivity gains, assuming more utility was derived from the same amount of resources. Perhaps we might assume a world where productivity climbs by 10% per annum to deliver our desired equity gains – but that’s never happened, and certainly will never happen for very long because it implies a 100% improvement every 7 years."

Closer answer is 7.27 years, but 7 is close enough.

MeelionDollerBogus's picture

That's called creative editing. It said 10 years when I read it. It's been modified since my comment was left - which is fine by me because I think it's really good when stories improve accuracy in reaction to comments.

Pareto's picture

No offense, but, every time I read something like this: In Part 2: The Time To Short The Market Is Approaching, we explain why 2014 is beginning to look an awful lot like 2008; only worse.....I feel like we should be going long.  At least - thats what seems to always happen - a slew of articles calling for the end of the bull run and the market rallies another 500 pts.

The FED cannot let things go....nuu uhh.  For if it does, it loses control over the bond market.  Just whispering taper, and yields on the 10 year smash through 3%.  Of course, it retraces because as Michael Salemi (2008) points out "Its not what they say, its what they do."  If the FED ever got serious about taper, or even reversing QE, yields would sky rocket.  Its ironic actually.  For all intents and purposes they own the bond market and yet, they have absolutely no control over it - if by control we mean that the FED can at will exit its position from the market without consequences. Last summer and winter we see clearly and unequivocally, that they can't.  They can't even think it.

This aint about peak oil.  This is about how long the rest of the world is going to allow the FED to continue butchering purchasing power at the expense of everybody and everything.  Peak oil can be mitigated, as somebody on this thread has already pointed out, by alternative and eventually affordable substitutes.

I'm not afraid of peak oil.  But, I am shit scared of the FED.  

whidbey-2's picture

Look it is OK to call a top in the market, but it seems to be well known that Yellen can turn the market any time she wants by simply hinting that the Yellen put is in place: you know lower the taper, or do some more QE.  Of course it is at the price of the Fed's credibility, if it has any left.  The whores of wall street will buy any line that promises to keep the liquidity stable or growing and they care not which, since they think there is some reliable growth started.  But, the investor are not listening to reason, your arguments or anyone else is not going to be heard.  But watch bonds, when the inflows increase the turn is starting.