"Peak Stupidity" - Where We Go From Here

Tyler Durden's picture

Submitted by Thad Beversdorf via FirstRebuttal.com,

So I’m currently teaching applied financial modeling at Marquette University in the beautiful blue collar town of Milwaukee, WI; home of the Harley, the (Miller) High-Life and SummerFest.  It’s a great town and a great school.  A few years ago the business college brought in a pretty savvy guy called David Krause who then started a program called AIM, where the top finance students actually manage more than $2M.  Because of the program’s success US News & World Report ranked Marquette’s finance program 21st in the nation this year.  Not bad for a small Jesuit school in the midwest.

Now I mention this because after 15 years in banking, teaching financial modeling has forced me to reacquaint myself with some of the basic tenets of markets and valuation.  Such things tend to get lost in the midst of “getting the deal done” and chasing paper profits.  This reacquaintance process has been quite illuminating for me and I thought perhaps for others too.

A reminder of what the market actually represents is a good place to start.  The stock market is simply an asset with some intrinsic value based on an expectation of future free cash flows to equity holders.  Those cash flows are generated from revenues less costs of the underlying companies that make up the market.  Let’s use the Wilshire 5000 Full Price Cap Index as the proxy market for this discussion as it is the broadest measure of total market cap for US corporations.  It’s level actually represents market capital in billions.

Screen Shot 2016-02-25 at 8.29.51 PM

So the market has put a valuation on those expected future cash flows to equity holders (as of today) at around $19.7T (a 55% increase from Jan of 2012) down from around $22.5T (a 77% increase from Jan of 2012) at the market peak last summer.  So let’s take a look at the growth in cash flows of US corporations over that same period. 

We should expect to find a growth pattern in free cash flows similar to the above growth pattern in the overall market valuation (the Wilshire is a statistically large enough sample to be representative of total US corporations).  Let’s have a look…

Screen Shot 2016-02-26 at 11.53.09 AM

The above chart depicts corporate free cash flows (blue line) indexed to 100 in Jan 2012.  It is obtained by taking the BEA’s Net Cash Flow with IVA and CCAdj adding back depreciation and net dividends and subtracting net capex.  (The actual definitions of these can be found here.)

What we find is that while the current valuation of expected future free cash flows to equity holders (i.e. market cap of Wilshire) has increased by some 55% since the end of 2011, the actual free cash flows of US corporations have only increased by 4%.

This becomes a very difficult fact to reconcile inside the classroom.  Why would market participants be baking in so much growth when the actual data simply doesn’t support it?

Well there are plenty of potential explanations.  For instance, rarely are investors rational.  While buy low and sell high is rational investing behaviour, often market euphoria comes at the market top right before a major sell off, leading to a buy high and sell low strategy.  Another reason is that the Fed has been providing a free put to all investors for the past 7 years essentially significantly reducing naturally occurring risk factors.  But whatever the reason this dislocation between expected and realized growth begs the question, how long can it last?  So let’s explore this issue.

Below is a longer term growth chart of the Wilshire vs US corporate free cash flows to equity holders both indexed to 1995 (i.e. 1995 = 100).

Screen Shot 2016-02-25 at 7.31.21 PM

And so over the past 20 years we’ve seen this same type of dislocation three times.  That is, we see expectations of growth far exceeding actual growth of free cash flows to equity holders.  In the previous two dislocations we reached a peak dislocation (peak stupidity) followed by a reversion to reality (epiphany) where expected growth moves back in line with actual growth. Let’s have a closer look at specific indicators as to when the epiphany takes place.

Screen Shot 2016-02-25 at 8.12.12 PM

What we find is that the epiphany trigger occurs when YoY growth of free cash flows to equity holders drops down to or below zero.  The last two bubbles began their burst when medium term moving average of free cash flows dropped to zero.  We see the very same pattern occurring presently.  Today we appear to have just passed the peak stupidity inflection point as seen in the two charts above.

But let’s be sure not to ignore the technical patterns, so let’s do some charting.  If we look to volatility and price level patterns between our current market and the last bubble cycle (credit crisis) we find incredible similarities.

Screen Shot 2016-02-26 at 1.56.24 PM

The above chart depicts weekly high vs low intra-week price spreads and price level.  What we find is that at this point in the last bubble cycle we had a period of reduced volatility (small green box in 08) that followed a period of increased volatility as the market slowly rolled over.  Today’s bubble is just entering that period of reduced volatility following the period of increased volatility as the market rolled over.

And so what should we expect from here?

Well the fundamental charts above suggest we have significantly overvalued growth expectations and historically those over-inflated expectations can drop very sharply back in line with actual growth.  So from a fundamentals perspective we should expect a significant drop in overall valuations (i.e. market cap).

And from a technical perspective, if we are in fact following the previous bubble cycle pattern (which we seem to be), we should expect a nice bounce in price level from the recent lows (to perhaps somewhere between 2000 – 2030) accompanied by relative calm before an explosion of volatility and a market price plunge that sends us into the next crisis sometime around May (give or take).  Happy trading!

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FreeShitter's picture

These are not markets, they are policy tools.

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) FreeShitter Feb 26, 2016 6:42 PM




The question was, 'Peak stupidity, where do we go from here'?...


Disclosure: Generally, I don't up/downgrade my own comments, but I voted UP on this (IOW ~ PEAK STUPIDITY is on an exponential, Fibonacci, x/y chart)... My bet is that it eventually defied all physical laws and bend back upon itself, whereupon someone at Goldman Sachs will have a chart representation on (that Dennis Gartman will TRADE wrongly)...


Probably a couple sideways moves are in the mix.................

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) SILVERGEDDON Feb 26, 2016 6:43 PM

There's no 'sideways' in baseball! ~lol

Save_America1st's picture

as a very wise groundskeeper once said:  "I say keep playing...I don't think the heavy stuff's gonna come down for quite a while..."


Poundsand's picture

We haven't even scratched the surface of peak stupidity.  Onward.....  I used to think we were close when we elected Obama, but I realized after we elected him the second time, that there is still a lot of upside potential, and we definitely have a bull market for stupid.

Four chan's picture

the banks sold all their bad mbs to the fed at par now they have to get rid of that cash by buying the market. its all worthless who gives a fuck.


Like a good slider or a curve ball.

Or, a smack in the side of the head with a baseball bat.

Or, a destroy the catcher with a tackle / dive / slide into home plate for the win.

No sideways moves in baseball, indeed.

Where the fuck you been playing baseball, homey ?

OpenThePodBayDoorHAL's picture

LOL "applied financial modelling" LOL, good luck teaching that in college, it's like teaching that heavier than air flight is "impossible" the week the Wright brothers jumped off Kitty Hawk.

What possible model of "discounted future enterprise cash flows" can describe these so-called "markets.

Get over it, Professor-Boy, we used to have "markets", now, after decades of ridiculing the Soviet Union, we have centrally-planned economies.

Next up? The next CB trick, might be Japan monetizing oil, might be bail-ins, might be making cash illegal. These fuckers will stop at nothing. Shorts beware.

MSimon's picture

Human stupidity is infinite. So says that Einstein feller. You can never reach a peak.

zorba THE GREEK's picture

By "market participants " do they mean the PPT and the Fed's agents?

booboo's picture

Sell in May and run away.

DontWorry's picture

This will only be over when a whole generation of people will never invest in stocks, and there is political demand to regulate banks and thow bankers in jail.

Demdere's picture

Your faith in regulation is misplace : modern banking and securities dealing are the most over-regulated businesses in history.  AIG was legal via regulation, which trumped (sorry) basic legal principles that you can't use other people's property for your benefit without telling them and without compensation.  It was certainly material to the people with money in AIG's accounts that AIG was using their assets to backstop AIG's investments, nobody would have allowed that. But AIG was not required to inform investors of that material fact.


Wow.  Regulation seems to me to be the problem.  Without regulation there would be much more clarity in the contract with the client, how can it not be necessary to disclose material matters like that?

Uniformity of regulation means there isn't competition, they may all be equally dishonest, and there is no way to tell.  They don't need to tell you much.

runnymede's picture

You confuse regulation with enforcement. 2008 did one thing above all others: it removed any doubt of unaccountability for Wall St. It's now a drunken Yalie frat boy free for all. There will be no peace until there is rule of law. Anywhere ------

Hohum's picture

Only game in town?

Dapper Dan's picture

I can't find that guy Freds financial web site, does anybody know his last name?


starman's picture

Because the market always looks ahead?

A couple decades. 

Lmao !

I need more asshats's picture

$2 mil in asshats is nothin! Punk kids.

rahtidmon's picture
rahtidmon (not verified) Feb 26, 2016 6:49 PM

There is that 'peak' word again, excuse me I have to go throw up...see I told ya


gmak's picture

"The stock market is simply an asset with some intrinsic value based on an expectation of future free cash flows to equity holders. "


substitue "Was" for "is"  (Take that Billy Clinton), and you start to get somewhere.  Right now, the stawks market is one of the ways the Fed steals money from the muppets  middle class and transfers it to the sociopathic financial elites.

paperjoe's picture

Peak stupidity is caused by smoking too much George Bush, which is an indica dominant hybrid strain with an 80:20 indica/sativa ratio. With an incredible 20% THC content, the strain produces some of the finest buds and is dark green in color with hues of purples, pinks and oranges. The buds are dense and quite large and look completely different from any other strain you have medicated with before. However, the buds are flakey and dry and may not appeal to most cannabis users. On the other hand, George Bush has a strong smell and it really feels as though you are smoking a high grade strain. As for the taste, it is just as strong as its smell during the inhale and is exceptionally sweet and smooth at the same time. George Bush has plenty to offer for almost all cannabis users.

The strain got its name because most cannabis users are unable to make a sentence after medicating with it due to its potency. You will experience symptoms of euphoria and will feel extremely happy. As soon as you take a hit, you will feel relaxed and stoned in no time. Considering George Bush's numbing and relaxing effects, it is often recommended to patients suffering from medical conditions like pains, aches, insomnia, muscles spasms and peak stupidity.

I need more asshats's picture

Go peddle your dope somewhere else you reefer freak.

tarabel's picture



Well, he is saying that peak stupidity is caused by getting high.

As someone who spent a lot of time in a business that I will not mention on a public forum, I have to say that I quite agree.

franzpick's picture

NIRP spreads everywhere, except stawks, and monied refugees escape to dividend-paying equities, pushing INDU to 25,000.  God Help Us All.

surf0766's picture

Peak stupidity  -------> voting for a reality show fraud man

roisaber's picture

We have to go stupider.

tarabel's picture



Not sure about have to.

But want to? You bet.

Consuelo's picture

Soul Glow...   Are you rippin' off 'ole Thad...?   Be honest now...



Professor Know Nothing's picture

If this market ever does attempt a triple lindy, which party takes the loss on all the stawks bought by team plunge protection?

Sorry_about_Dresden's picture

It goes on the Feral Reserve Balance Sheet



This is the entry, 1A. Memorandum Items page 3, I like to point out and ask everyone who will read this comment: Who is this foreign owner

Securities held in custody for foreign official and international accounts $3,254,251,000,000

This $3.25 TRILLION has been of the FRB balance sheet since, at least 2012.

tarabel's picture



Looks good to me. Let's rip em off and run the government for a year on their money. Drop the tax rate down to zero for twelve months and put a genuine stimulus program into the pockets of the public.

honestann's picture

No way this PPT manipulation keeps the pants up until May.  They'll be lucky to keep markets up until "the ides of March".  Now, what's that saying about the ides of March?  :-o

Or maybe the appropriate saying is April Fools!!!

That is, unless the start QE4ever... soon.

Sorry_about_Dresden's picture

Smart money cashed out last year :)

adr's picture

What I see is a chart that shows the market exists in a permanent state of stupidity.

The market is always overpricing corporations. There will never be the growth the stock market predicts.

The stock market exists to make people who are worthless to society very rich. There is no real fundamental reason for the stock market to exist. It provides no value, does not raise general economic standards, it does not provide a good use of capital, and it is not necessary for the general function of business.

If the stock market truly mattered it would be impossible for a private corporation to exist or get started. Only a publicly traded company would be viable. In fact the existence of the stock market is what destroys the ability for private corporations to exist. The misallocation of capital thanks to the compulsive gambling the stock market represents can only lead to economic decimation.

Fuck Wall St and the tribe it wandered in with.

East Indian's picture

Waiting for the fat lady to sing. She is nowhere in sight.

Truth Eater's picture

Stawks will never go to zero, but they could all be owned by the federal reserve.  Endless digits beats ridiculous prices.

T-NUTZ's picture

pitchforks and rope beats endless digits.