Denial Is Not A Trait Found Among Great Investors

Excerpted from Artemis Capital Management letter to investors,

Global equities are dependent on monetary expansion to justify elevated valuations in the regime of the Prisoner’s Dilemma. US stocks achieved the highest median price-to-earnings ratio in postwar history earlier this year and timetested valuation metrics like 10-year cyclically adjusted PE ratios, enterprise value to EBITDA, market value to replacement value, and price-to-sales ratios are on par with pre-crash periods like 2000, 2007 and 1928. 

Last year 95% of corporate earnings were spent on share buybacks which increased stock prices but did nothing to encourage fundamental growth or create middle class jobs. This is the only multi-year bull-market in history whereby trade volumes are declining rather than increasing.

Some investors claim stocks are in a new paradigm, an age of central bank omnipotence, where long-term valuation metrics no longer matter.

We have heard this fluff before, in 1928, in 1999, all the way back to 1716 with John Law in France – the original quantitative easing expert long before Bernanke, Yellen, Draghi, and Kuroda. It’s different this time works very well if you need to rationalize how to beat your return benchmark next quarter or win an election.

Denial is not a trait you find in great investors.

Beginning in 2012 a sharp divergence emerged between the performance of commodities and global equity prices (see red vs. green arrow in graph).

From the date of Bernanke’s Jackson Hole speech the CRB Commodity index is down -38.6% while global equities are up +28.6%.

The truth is that central banks cannot manipulate raw supply and demand the way they can financial assets. The global commodity super cycle is broken due to slower global growth, but risk assets continue to rise, showing an ominous divergence between the real economy and the surreal economy. 

Comments

[Yen Cross]

   It runs right through D.C. and ends at the Langley Delta.

[junction]

The hedge fund criminals who have become billionaires have used the same economic strategy as the Mafia, called a "bust out" operation.  Take over a business, load it up with debt, take out all the cash you can and then, if you can, use arson to sell it to a fire insurance company.  Otherwise, just walk away. This scorched earth economic policy has destroyed the manufacturing base in the United States.  The Mafia doesn't pay taxes and neither do most hedge funds.  Now that the United States is pretty much an industrial wasteland, the next "job one" for these thieves, many NWO types, is to turn the citizens of the USA into peasants, a project helped by the unlimited immigration of illiterate third worlders who will work for next to nothing. 

[jcdenton]

Actually it ends at that big geometric esoteric building on the Potomac. The spooks were only hired help along with Mossad et al ..

http://www.veteranstoday.com/2015/10/17/the-pentagons-biggest-dirty-secret/

http://www.veteranstoday.com/2015/10/04/americas-sad-terror-confession/

Now when someone mentions Lucifer, be sure we know what we are talking about ..

http://beforeitsnews.com/prophecy/2014/12/the-nachash-in-the-garden-of-e...

[AbbeBrel]

Yup Yup Yup sure thing - this time it is different. We got a GLOBAL problem, not some magic boost (besides C-suite financial manifinacialation of their balance sheet - less shares GREAT more debt WHO CARES the music is still playing! Gotta dance!

But what isn't different are the leading indicators. Two wit:

Buffett vs GDP - Dshort's graph shows a sudden flutter at the 2SD over mean:

http://www.advisorperspectives.com/dshort/updates/Market-Cap-to-GDP.php

Margin debt is tanking:

http://www.advisorperspectives.com/dshort/updates/NYSE-Margin-Debt-and-t...

Unemployment shows no sign of turning up, but personally I am finding it harder to believe these numbers - do part-time waiters and bartenders even get unemployment???

http://www.advisorperspectives.com/dshort/updates/Unemployment-Claims-an...

Meanwhile stories about a recover in "New Home Sales" are still a complete joke:

http://www.advisorperspectives.com/dshort/updates/New-Home-Sales.php

So what cracks first? My bet is still on some large Asian Country getting a case of Contagion, but time will tell. Keep your popcorn hot, ZHers. This is endlessly entertaining.

[vq1]

"This is endlessly entertaining."

This is an endless tease.

*fixed

[Yen Cross]

 From the date of Bernanke’s Jackson Hole speech the CRB Commodity index is down -38.6% while global equities are up +28.6%.

 At the rate central banks are printing the whole world is going to look like Easter Island, and every species of Squid [excluding Vampire] will be extinct.

 Ooops... My bad. The trees will be saved by NIRP.

[Tao Macro]

These are some great points. The entire commodity complex has crashed,while equities are way up.  This is based on what economic narrative?? There was no real boom, just central bank liquidity, which is flowing way lower that when QE3 was at peak. Valuations are very high for such a weak narrative.

A stock market crash could be imminent.  http://taomacro.com/a-stock-market-crash-is-imminent.html

[honestann]

What economic narrative?

MANIPULATION... pure and simple.

[MFL8240]

The truth is that central banks cannot manipulate raw supply and demand the way they can financial assets

They are too arrogant to believe this!!

[GooseShtepping Moron]

I've been thinking about an academic question lately: In an unmanipulated market, should Tobin's Q Ratio act as a hard ceiling on market capitalization? Or to put it another way, what conditions would have to prevail in order to justify a market capitalization above the total replacement value of the enterprise?

Intuitively, I would think that a well-established company with smooth internal operations and reliable clientele could perhaps command a premium over the replacement value of its assets, since those things take time to build and are difficult to replicate or replace. However, consulting the relevant chart I see that, historically speaking, this has not been the case and in fact Tobin Ratios spend most of their time at a value less than unity. This suggests to me that either markets frequently undervalue the benefits of good leadership and strong community ties, or that any such "intangible" assets simply didn't exist in the first place. Certainly both possible explanations can operate simultaneously; but since I trust the valuation mechanism of unmanipulated markets (and the markets have not always been as manipulated as they are now), the answer is skewed in favor of the latter disjunct.

And with that realization, the world begins to make a little more sense. American firms, in the main, have not been managed well nor have they sought to build indispensible relationships with employees, communities, or clients. In essence, they are operating in liquidation mode, having been reduced in importance to the mere salable value of their physical components. No real emphasis has been placed on human capital, on systemic stability, or on quality of any sort, including quality of life. The resulting coarsening and fragmentation of our economic and cultural existence may be difficult to descibe, but it is a real force which is affecting everybody for the worse. Happiness and peace are the results of social stability, reliable benchmarks and standards, and meaningful human relationships. Financialization inevitably destroys all of that, leading to conflict and chaos.

I would define "true leadership" as the ability of individuals or institutions to foresee such deleterious effects and work to minimize them, to promote long-term stability and harmony. Hence the worldwide appreciation that Vladimir Putin is presently enjoying, in contrast to the derision heaped upon the the Empire of Chaos, the United States of America.

[bid the soldier...]

IN PRAISE OF THE COMMON INVESTOR

He knows his main chance, and that of the status quo of all American upper middle class investors, depends on him acting exactly the way the Wall Street 'casino' or 'house' wants him to.

He can buy the dip, but after the big firms have bought it.  He can sell the peaks, but after the big firms have sold it.  Forget gold, real estate and burying crapola in your back yard.   And just 

                               SIT TIGHT

Wall Street got us into this mess. They're the only ones who can get us out of it.

[Seal]

This reminds me of the spontaneous collapse of WTC 7. What if there is another actor here in the markets instead of the Fed? You'd feel faint too giving a speech.