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Nasdaq 5,000 Is Different This Time... But Not In A Good Way!
Submitted by David Stockman via Contra Corner blog,
The robo-traders and Wall Street punters were busy painting the tape Monday, and did bump the Nasdaq composite across the magic 5,000 threshold for the first time since March 2000. But even as Wall Street urged home-gamers to “return with us to the thrilling days of yesteryear”, the caveats about this time is different were flowing with abundance:
This time, the Nasdaq at 5,000 is underpinned by substantial companies with strong sales and credible plans for growth, not wishful schemes to “monetize eyeballs” and sell pet food online.
Not exactly. This time is very different, but, as they say, not in a good way. Not even close.
Since the two days of March 9 and 10 in the year 2000 when the Nasdaq closed over the 5,000, the financial markets have been converted into central bank managed gambling halls and the global economy has bloated beyond recognition by 15 years of non-stop financial repression. Back then, a few hundred stocks were wildly over-valued based on monetizing eyeballs; now the entire market is drastically overvalued owing to the false financial market liquidity generated by $14 trillion of central bank asset monetization - mostly public debt - since the turn of the century.
As a result, the global financial system and economy are orders of magnitude more fragile and vulnerable to collapse than they were 15 years ago. Indeed, nearly all of the tail winds which managed to quickly revive markets and economic growth after the dotcom crash have now played out, and, if anything, will morph into stiff headwinds in the period immediately ahead.
For better or worse, for example, China proved to be a powerful tailwind after the turn of the century. It functioned as an enormous global locomotive that generated hyper-growth in the energy and resource industries; and which also ignited a supplier boom in a whole variety of EM industries from Brazil’s soybean and iron ore sectors to shipbuilding and semiconductor production in South Korea.
Yet this was accomplished not through healthy, balanced, market- driven investment and enterprise, but through the most spectacular credit bubble in human history. At the end of the year 2000, China’s debt was about $2 trillion and its GDP was about the same.
By contrast, today its credit market debt outstanding is about $28 trillion or 14X greater, according to McKinsey’s research. Notionally its GDP is up by 5X to about $10 trillion, but that doesn’t really mitigate the debt explosion. That’s because China’s GDP growth was a force draft concoction of state directed credit spending that resulted in massive waste and unproductive investment. Rather than catalyze permanent gains in wealth and sustainable output, its erected a phony hothouse economy which will inexorably implode and crater.
So doing, China’s imminent collapse will drive powerful waves of global deflation as its demand for iron ore, coal, petroleum, alumina, copper, manufactured components and intermediates and shipping and distribution services falters. In short, the world economy is drastically overbuilt owing to the “China bid” for materials and supplies—-meaning that what had been a source of extraordinary profits and margin expansion in the world materials and industrial economy will become a sledgehammer on prices, margins and profits in the years ahead.
At the peak in 2012-2013, upwards of 23% of S&P profits were attributable to energy and materials. But the China deflation now gaining a head of steam will vaporize these bloated profits in the years ahead, taking a huge bit out of aggregate corporate earnings.
Or take the hapless case of Europe. At the turn of the century, the single currency was an economic supernova just beginning its eruption. As is now evident, Germany’s credit rating was being seconded to inefficient, corruption-ridden welfare states all over the continent, but especially on the periphery. And for the first decade, the resulting one-time explosion of public and private credit generated by that false credit transfer did wonders for the reported GDP numbers and the profits of global corporations that answered the EU demand call. It was a tailwind on steroids.
But as is evident from the three charts below, the one-time credit boom that accompanied the euro is over and done. Public and private debt carrying capacity is tapped out. Consequently, eurozone growth hit a peak in 2008 and has flat-lined ever since. Now Europe’s traditional welfare state and dirigisme headwinds to economic growth will be compounded by an endless struggle of aging, uncompetitive economies with peak debt.



Today every European country has a total debt-to-GDP ratio in excess of 300% and many such as Portugal, Ireland and France have debt burdens above 400% of national income. And that means that Europe too will be a deflationary headwind in the years ahead. They cannot stimulate with Keynesian fiscal remedies because the have reached peak public debt; and they cannot grow out from under their crushing public debt burdens through easy money and private credit expansion because households and business in most of Europe are already at peak debt.
All that remains is for the ECB to indulge in a final burst of QE style money printing in a futile effort to reignite growth. But the Draghi monetary tsunami is nothing more than a last incendiary hurrah. It will cause the Euro to eventually plunge through parity with the dollar, meaning that the tailwind of translation gains that flattered S&P profits since the turn of the century will turn into a ferocious headlwind in the years ahead as the euro stumbles toward its final demise.
Finally, consider the debt-bloated US economy. At the turn of the century total public and private debt was $28 trillion and it represented 2.6X GDP. During the next 15 years total US debt erupted to nearly $60 trillion and 3.5X GDP. That latter ratio is unsustainable and a measure of the false economy embedded in the GDP numbers. By contrast, during the pre-1970 era of healthy and sustainable US economic growth, the peacetime leverage ratio against national income was never much above 1.5X.
The bottom line is that corporate sales and profit growth in the US domestic economy after the last Nasdaq bust got a booster shot from the final burst of leverage reflected in the above ratios. Yet that means that some portion of business sales and output were being stolen from the future, not erected from enhanced enterprise and productivity. Accordingly, domestic profit growth will inherently slump in the years ahead—especially because profit margins have soared far beyond any prior historical experience and have already begun to rollover.
Needless to say, the nation’s monetary politburo remains oblivious to these global realities of peak debt and the deflationary correction now emerging after nearly two decades of lunatic money printing by the central banks. The Fed’s balance sheet did indeed explode from $500 billion when the Nasdaq last crossed 5000 to $4.5 trillion today. But even Yellen’s merry band of money printers know that eruption was a one time parlor trick that has not worked. The jig is up, and the last 15 year’s egregious inflation of financial assets by means of central bank monetary expansion cannot be repeated or even sustained.
So today what is different is not the Wall Street spiel that Nasdaq is anchored by the likes of Apple rather than Webvan. What is really different is that the broad market represented by the S&P 500 is trading at the tippy top of its historic range - 20x reported earnings - in a world where PE multiples and profits are deeply imperiled. That is, the headwinds arising from the very central bank aberration that cushioned the collapse of Nasdaq the first time around will soon come to bear on the entire market, not just the narrow sector of high flyers that confused eyeballs with earnings.
This time is indeed different. Not in a good way. Not at all
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Companies "valued" at hundreds of billions that haven't made dollar one and don't deliver a tangible product...
The is a Charlie Sheen "market"...
"winning"
When one has the ability to print an infinite amount of dollars (or create them electronically)--doesn't one have the ability to control the price of anything in dollar terms? The stawk market is no longer a measure of the health of the economy---its like using a thermometer to try and measure wind speed. The PPT has unlimited dollars at their disposal to make the markets do anything they want. When you can't audit the Fed, how do you really know what their balance sheet is?
They can make the market move up OR down, and paint the tape any way they want. I am surprised they haven't let the market fall 10-12% just so everyone (Cramer types) can say see, we had a healthy correction, now we head higher again.
One Green but i will add that i think i know the answer to your quandry in the last couple sentences: "They can make the market move up OR down, and paint the tape any way they want. I am surprised they haven't let the market fall 10-12% just so everyone (Cramer types) can say see, we had a healthy correction, now we head higher again?"
I beleive it is no different than when we were children, and they are acting as such, and we KNEW we were together BSing a third "buddy". If one of us ad-libbed a bit off-script, the other would naturally not know that the other two may have together conspired to double-cross to dupe, just as we had. This could create quite teh opportunity for total chaos and implosion.....why run the risk when you are in total control?
When lies and theft become commonplace, possession is essential.
This makes Weimar style theft look bad.
This is a beautifully written piece.
Take a look at how academic pensions are constructed. They are equity-market-based and floating. So if they let this market drop, they are also slashing next years retirement income for every worker from the "education economy" - teachers, university staff and faculty, medical personnel. The CREF-style floating thing is great if you have an inflationary bias, in fact it might be better than the government inflator - when the government controls the index against which it has to pay retirees. The CREF thing looks pretty good in theory, but if the market drops hard and stays down, incomes are slashed by half? 3/4? Well, you won't be able to show your face in Cambridge anymore.
http://homment.com/usmilitary
Russia, domestic threats, or a combination thereof.
My guess is for the 3rd middle eastern war.
In some ways it is different this time, but unfortunately, in most ways it's the same.
To err is human. To really fuck things up we needed computers.
i suspect that will be an integral part of a soon to be released official narrative :-)
Yeah, I'm seeing the same bullshit dot-com ads and commercials popping up all over the place just like before the crash in 2000.
Yesterday I saw a GoDaddy commercial with Jon Lovitz: start your own business and be a successful entrepeneur by creating a web site that costs only 1 dollar per month :-)
Then why is the VIX < 20. Not pricing in the risk you speak of. Also, TED Spread is buried. No systemic financial risk. Stop blathering.
How can actual "systemic risk" appear when what used to be private credits (banks etc) are now on the public balance sheet (well, the Fed, anyway)? Um the $4 trillion hedge fund at the center of all this is "creditworthy" um until it isn't. They can't possibly inflate that all away so the choice will be haircut or devaluation or both.
Alice in Wonderland seems to be the operating doctrine nowadays, the question is how fast can you run just to stay in the same place...
Alice laughed. "There's no use trying," she said: "one can't believe impossible things."
"I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for half-an-hour a day. Why, sometimes I've believed as many as six impossible things before breakfast."
Another WOLF! Over there! Really... no... really... ZH and it's contributors: crying wolf since 2009.
Of course, the moral of that story is that the wolf eventually shows up.
Yeah.... when my grandkids finally retire. By then, the wolf is emaciated and sick and probably needs to be put out of its misery... like ZH.
So everything is rosy in the world then? Seems to me like there are shitstorms happening at an unprecedented pace all over the world. Sure, the stawk markets are at all time highs, but those numbers are simply numbers on a piece of paper or a computer screen. We are sticking our troops on Russia's doorstep and we think everything is going to be OK? Remember the Cuban missile crisis? Not to mention the rest of the shitstorms Obama has managed to unleash. You will be lucky to have grandkids at this rate.
It always looks bad... all the time. The end of the world has been nigh for 2000 years.
You'll have to wait billions of years for the end of the world.
As for the end of the world as we know it, that happens an awful lot.
and the next one is just around the corner, like it was last year, and the year bofer that, and so on...
A simple, relatively easy way of creating TEOTWAWKI in the US and the West is by ending King Dollar.
Just be patient.
If you think this pile of crap system can continue indefinitely .. let me kow what you are shooting up or smoking .. just figure out whether the implosion will be like the end of the old Soviet Union or more like ............ zombie apocalypse on steroids.... hope you have a nice hoard of something of value to leave your kids or grandkids besides delusional status quo forever BS.
How did you fare in 1999-2000...?? 2008-2009...??
I'm guessing you're a 21yo snot-nosed millennial punk.
We don't know when, but rest assured, this WILL end badly.
I really hope you remember your juvenile taunting on ZH and whatever other websites you're trolling. One day you'll eat your words. However, I suspect you have a rather short attention span and will quickly move on to some other venue to spew your nonsense.
Those of us with arable land (ideally abroad), physical gold, and the ability to defend the first two will be the winners in the future. Best of luck, young man.
Nope. I'm nearly 51. Not hurt too badly in 2000. out of the market in July 2008. I own a farm in a rural location. As for "One day you'll eat your words." Well maybe but that day may never come. This is the thing about die-hard ZH gold bugs, they are always wishing for the end of the world and how much pain everyone else will suffer. Its a sad way to live your life, son.
Mr. Stockman may criticize TPTB well, but I suspect he really doesn't have a clue on how to get "growth" rising faster than debt.
Do tell us, Hohum. I'm dying to know...
Oh, I think growth net of debt is over. It's about managing contraction. Although I disagree with many ZHers from time to time, I do acknowledge that some of them are the ones with the skills to thrive in the next phase.
"Oh, I think growth net of debt is over. It's about managing contraction."
totally agree. that's the challenge(and next phase) of the world right now, so far, much of the world are still trying to paddle their way up a river in Egypt.
They are both exponential so no divergance there--you just allocate the growth more toward TPTB and the debt more toward --you know who
What a killjoy. Don't burden me with facts and reality.
there is no market there is only old yeller
Maybe someone can trace the source, as I've long since forgotten, but to paraphrase some...
"A man can make shambles of his own affairs, with whiskey, greed, women, etc... but to orchestrate a truly epic tragedy, you're gonna need central bankers"
maybe the big avalance will start with big price fall in PM market, and it looks like silver will lead the way in near future
I tend to agree with you . does not mean I won't buy more silver or gold... but its going down hard before it rises... I am taking some now to buy luxury items.. or items that will likely sky rocket in pirce when there is an implosion .. heard one source say count on deflation except in food .. I guess we will find out probably Sept. or October.
maybe the big avalance will start with big price fall in PM market, and it looks like silver will lead the way in near future
Better get you some, Fool, while it is still available then.
Time to increase a short book significantly. Good short ideas you can find here:
http://prudentvalueinvestor.blogspot.com
Another punter refusing to tell us WHEN ....and the style of his prose was loud years ago, now it's been balls to the wall for the last 10 posts.
To make it real simple for a 5 year old... your going to have a wheelbarrow full of Money, but nobody will sell you anything worth while.
But, But, This time it different, we dump some sheep.
very bad way!