David Stockman Warns The Market's "Chuck Prince Moment" Has Arrived... "Only More Dangerous"

Authored by David Stockman via Daily Reckoning,

On July 10, 2007 former Citigroup CEO Chuck Prince famously said what might be termed the “speculator’s creed” for the current era of Bubble Finance. Prince was then canned within four months but as of that day his minions were still slamming the”buy” key good and hard:

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” he said in an interview with the FT in Japan.

We are at that moment again. Only this time the danger of a thundering crash is far greater. That’s because the current blow-off top comes after nine years of even more central bank policy than Greenspan’s credit and housing bubble.

The Fed and its crew of traveling central banks around the world have gutted honest price discovery entirely. They have turned global financial markets into outright gambling dens of unchecked speculation.

Central bank policies of massive quantitative easing (QE) and zero interest rates (ZIRP) have been sugar-coated in rhetoric about “stimulus”, “accommodation” and guiding economies toward optimal levels of inflation and full-employment.

The truth of the matter is far different. The combined $15 trillion of central bank balance sheet expansion since 2007 amounts to monetary fraud of epic proportions.

The massive injection of fiat credit has drastically falsified prices in the debt and money markets. Through the channels of cap rates, carry trades and corporate financial engineering, the prices of equities and all other risk assets, have been falsified too.

20 Years of Massive Central Bank Bond Buying

Bond and stock prices are way too high, and that reality has infected the very foundations of the financial system. Like the hapless Chuck Prince last time, today’s traders and robo-machines have lost all contact with the fundamentals of corporate performance, macroeconomic outlooks and the political risks of a Washington.

Traders today are just dancing – blindly. That’s why the Russell 2000 hit 1442 the other day, capitalizing the earnings of small and mid-cap domestic companies at 87.5 times.

That’s crazy in its own right. As measured by valued added output of the U.S. business sector, the main street economy – where most of these companies live — has expanded at a tepid 2.1%  annual rate since 2002. By contrast, the RUT index has increased by 10% per annum since then.

At the same time, the level of speculation in the hyper-momentum tech stocks is even more stunning.

We are in the blow-off stage of the Fed’s third and greatest bubble of this century. Yet the stock market has narrowed drastically during the last thirty months, as is typical of a speculative mania. This narrowing means that the price-earnings ratio (PE) among the handful of big winners have soared.

FAANGs and Bubble Finance

In the case of  the so-called “FAANGs + M” (Facebook, Apple, Amazon, Netflix, Google and Microsoft), the group’s weighted average PE multiple has increased by 50%.

That’s caused the market cap of these six super-momentum stocks to soar from $1.7 trillion to $3.1 trillion during the period or by 82%.

The combined earnings of the group have grown by just 20%. 75% of this huge gain in market cap is attributable to multiple expansion, not operating performance.

The degree to which the casino’s speculative mania has been concentrated in the FAANGs + M  can also be seen by contrasting them with the other 494 stocks in the S&P 500. The market cap of the index as a whole rose from $17.7 trillion in January 2015 to $21.2 trillion at present, meaning that the FAANGs + M account for 40% of the entire gain!

If this concentrated gain in a handful of stocks sounds familiar that’s because this rodeo has been held before. The Four Horseman of Tech (Microsoft, Dell, Cisco and Intel) at the turn of the century saw their market cap soar from $850 billion to $1.65 trillion or by 94% during the manic months before the dotcom peak.

At the March 2000 peak, Microsoft’s PE multiple was 60 times, Intel’s was 50 times and Cisco’s hit 200 times. Those nosebleed valuations were really not much different than Facebook today at 40, Amazon at 190 and Netflix at 217 times PE.

The point is, even great companies do not escape drastic over-valuation during the blow-off stage of bubble peaks.

That spectacular collapse was not due to a meltdown of their sales and profits. Like the FAANGs +M today, the Four Horseman were quasi-mature, big cap companies that never really stopped growing.

For example, Cisco’s revenues have increased from $15 billion to $50 billion annually during the last 17 years and its net income has tripled to $10 billion. Yet Cisco’s market cap today is just $160 billion or only 30% of its 17-years ago bubble peak.

The reason is PE normalization. In this case, the company’s hideously inflated 200 times PE multiple imploded with the tech crash. It now stands at 15 times PE.

Amazon and the Chuck Prince Market Redux

Amazon is now set for that kind of PE implosion during this cycle. It’s stock price doubled from $285 per share in January 2015 to $575 by October of that year; and then it doubled again to $1026 in the 20 months since.

Along the way it picked up a hefty $350 billion in added market cap. That’s nearly $12 billion of value gain per month!

Amazon is now 24 years-old, not a start-up; and it hasn’t invented anything explosively new like the iPhone or personal computer. Yes, it is taking retail market share by leaps and bounds, but that’s inherently a one-time gain that can’t be capitalized to infinity.

Indeed, 91% of its sales involves sourcing, moving, storing and delivering goods — a sector of the economy that has grown by just 2.2% annually in nominal dollars for the last decade.

Amazon embodies the speculative mania of the current market. It is simply ludicrous to put a multiple of 190 times PE on a company that runs a profitless $130 billion e-Commerce sales juggernaut.

Even as its stock price has tripled during the last 30 months, AMZN has experienced two sharp drawdowns of 28% and 12%, respectively. As shown in the first chart below, both times it plunged to its 200-day moving average in a matter of a few weeks.

A similar drawdown to its 200-day moving average today would result in an immediate 16% sell-off. But when, not if, the broad market plunges into a long overdue correction the ultimate drop will exceed that by a greater magnitude.

200-day Moving Average Amazon

In the meanwhile, the market mindlessly melts-up because the Fed has destroyed all of Wall Street’s natural forces of financial discipline. Eight years of central bank money printing and intrusion have destroyed short-sellers and caused day-traders and robo-machines to be wired to buy every dip.

Never mind about the gong show in Washington. Or even the fact that the Keynesian economists in the Fed’s Eccles Building does actually intend to normalize rates and shrink the Fed’s balance sheet.

The talking heads wandering around Wall Street have come to the delusional belief that the bubble can live forever without help from Washington or the Fed.

With only a small share of companies having reported, LTM earnings for the S&P 500 have already dropped below $105 per share on a GAAP basis. That’s still below the $106 per share posted way back in September 2014 and barely above the $100 per share reported in 2013.

What Earning Growth Oil Material Busy Cycling

Make no mistake, this is the Chuck Prince Market Redux. Only the daredevils and Wall Street dancing machines would dare buy the S&P 500 at 25 times PE, the Russell 2000 at 88 times PE, Amazon at 190 times PE.

For everyone else, the present blow-off top is surely a godsend.

Never has there been a better opportunity to get out of harm’s way, nor a clearer warning that a thundering crash is waiting just around the bend.


GUS100CORRINA max2205 Sat, 07/22/2017 - 17:35 Permalink

Article text: Stockman said: "Make no mistake, this is the Chuck Prince Market Redux. Only the daredevils and Wall Street dancing machines would dare buy the S&P 500 at 25 times PE, the Russell 2000 at 88 times PE, Amazon at 190 times PE."My response: Is the Russell 2000 really at 88 times PE? If it is, maybe it is time to load up on TZA because the risk/reward looks very good. Below is a long term chart of TZA.http://www.finviz.com/quote.ashx?t=TZA&ty=c&ta=0&p=mBy the way, the only way one gets a chart like this is if the CENTRAL BANKS have been buying the market. Umbelievable.

In reply to by max2205

Creative_Destruct Thorny Xi (not verified) Sat, 07/22/2017 - 15:17 Permalink

"The Fed and its crew of traveling central banks around the world have gutted honest price discovery entirely."Real markets with real price discovery dissappeared years ago.And the MASSIVE  liquidity bubble they've created, is the ONLY thing propping up the super-indebted world economy.There are no markets anymore, there are only Central Banks.And they HAVE to continue with the money-pumping to avoid triggering a super defaltionary debt death-spiral.This madness can keep going, because the Fed and the other CBs have NO CHOICE but to keep it going.It WILL end, eventually ( badly) but it will likely go on FAR longer than Stockman and others expect.

In reply to by Thorny Xi (not verified)

idontcare Sat, 07/22/2017 - 11:07 Permalink

I don't disagree with Stockman and his ilk, but its seems Keynes has been right for a while (the market can stay irrational longer than you can remain solvent).

Batman11 Sat, 07/22/2017 - 11:09 Permalink

The Central Bankers strategy relied on trickle down, but it didn’t exist and inflation never picked up.Central Banks flooded the markets with liquidity to create a “wealth effect”.Central Banks waited nine years and found nothing had really trickled down; inflation was going nowhere.All the stimulus has gone into asset price inflation and artificially inflated asset prices will just crash when the liquidity supply dries up.The Central Banks have disproved the trickledown theory and set up the next crash.

OpenThePodBayDoorHAL Batman11 Sat, 07/22/2017 - 18:06 Permalink

The Fed knew that debt-based money creation was finished (look at new commercial loan volumes) in a world stuffed to the gills with debt that is only serviceable at negative real rates. Velocity grinding to a halt. So they had to have another "transmission channel", they decided it was equities, but 85% of gains go to 5% of people. No soup, or money, for you.It's like an episode of Prison Break where a brother named "Horse" is let into your cell, you're like "I can do this, it'll be over soon". But there's a line of brothers down the hall waiting their turn, and they paid off the guards to join in.

In reply to by Batman11

b-sugar Sat, 07/22/2017 - 11:09 Permalink

"Amazon is now 24 years-old, not a start-up; and it hasn’t invented anything explosively new like the iPhone or personal computer. Yes, it is taking retail market share by leaps and bounds, but that’s inherently a one-time gain that can’t be capitalized to infinity."... Pat Dorsay will like a word

kehar857 Sat, 07/22/2017 - 11:20 Permalink

It wont last forever. physical metals will trump(pun intended) paper, and the stock/bond/real estate multi bubble will pop like your 3 year olds best bubble!

MrSteve Sat, 07/22/2017 - 11:29 Permalink

When the FANG turns into FANGOL, you'll know alright what it means in Italian! If not, ask Tony Soprano.Anyone believing stocks have reached a permanent, high plateau is invited to search out that phrase's history.

geno-econ Sat, 07/22/2017 - 11:49 Permalink

Loss of Financial Discipline combined with loss of Presidential, Congressional and FED Integrety can make for a big meltdown ---but when ?  Stockman has not said when in this article, although in the past suggested during Debt Ceiling Impasse.  Mark your calandar---we may need another  Harvard Divinity Preacher by November or anoint Stockman the Financial Saint of Greenwich.

silverer Dragon HAwk Sat, 07/22/2017 - 11:35 Permalink

A lot of people are liquidating their securities because their investments are no longer generating enough interest to pay their daily expenses and buy groceries. We are already witnessing the destruction of capital in this manner, and it sucks now. What happens when the DOW loses 20-30% or so, and as you say, no buyers? You might want to stay in the house.

In reply to by Dragon HAwk

geno-econ silverer Sat, 07/22/2017 - 12:03 Permalink

Old Chinese Proverb----"Wealth lasts only three generations".  With current wealth destruction, middle and upper middle class will disappear with our children and newly created wealth will be concentrated in  less than 1% of population causing a consumer demand collapse, unless wealth is somehow redistributed.  Think taxation of rich, social programs or change in governmnt through election or upheval

In reply to by silverer

fattail geno-econ Sat, 07/22/2017 - 13:02 Permalink

You are correct.  After the bubble collapses, pensions will get torched by the collapsing stock and bond market and the subsequent run by their pensioners on the pension fund.  There will be a huge deflationary impact as checks get slashed 40-80%.  I suspect our representatives will be inclined to preempt the mobs of pitchforks and torches.  Easiest way to do that is medicare for all, bigger ebt checks, free shit for all.  More socialism.

In reply to by geno-econ

HRH Feant2 (not verified) fattail Sat, 07/22/2017 - 16:29 Permalink

Some of these retired people (not all but most) are sitting around fat and happy thinking they are set for life. What could go wrong? Everything is my answer.

It is going to be like 2000 / 2008 on steroids. People will be saying, "but no one told me! What happened?"

We will be the ones at gatherings thinking to ourselves, "we tried to tell you many times but you didn't want to listen."

In reply to by fattail

Sonny Brakes Dragon HAwk Sat, 07/22/2017 - 12:35 Permalink

I think you're right about that, but why haven't people started taking in boarders to help cover the expenses? Why have people made contingency plans to save themselves? TPTB are great at standing behind a podium and lying to their victims that no one will suffer, but who believes them anymore. Why can't you convenience a group of your friends to work together instead of working against one another? A little humility might be in order.  

In reply to by Dragon HAwk

HRH Feant2 (not verified) Sonny Brakes Sat, 07/22/2017 - 16:24 Permalink

I live near a Catholic university in a quiet suburb that is about 2 miles from campus. I plan on doing exactly what you just said. My summer project is to clean out my spare room and get a secondary cable / internet box set up, furnish the room with a bed and desk from summer yard sales and advertise on campus.

The good news is I was able to refinance my house down to a 2.875% interest rate and my monthly PITI is $1000. You can't rent a crappy apartment in my area for that price, let alone a house in a good neighborhood. I know some of my neighbor's are not as smart. I have one neighbor that is a shopaholic and headed for divorce as soon as the teenager goes off to college. I am guessing she is not the only one living on the edge, either. Some people are young and don't realize how fragile the economy has become. They will learn, eventually. Probably the hard way.

In reply to by Sonny Brakes