The Curious Case Of Missing The Market Boom

Authored by Raul Ilargi Meijer via The Automatic Earth blog,

“The Cost of Missing the Market Boom is Skyrocketing”, says a Bloomberg headline today. That must be the scariest headline I’ve seen in quite a while. For starters, it’s misleading, because people who ‘missed’ the boom haven’t lost anything other than virtual wealth, which is also the only thing those who haven’t ‘missed’ it, have acquired.

Well, sure, unless they sell their stocks. But a large majority of them won’t, because then they would ‘miss’ out on the market boom… Some aspects of psychology don’t require years of study. Is that what behavioral economics is all about?

And it’s not just the headline, the entire article is scary as all hell. It reads way more like a piece of pure and undiluted stockbroker propaganda that it does resemble actual objective journalism, which Bloomberg would like to tell you it delivers. And it makes its point using some pretty dubious claims to boot:

The Cost of Missing the Market Boom Is Skyrocketing

Skepticism in global equity markets is getting expensive. From Japan to Brazil and the U.S. as well as places like Greece and Ukraine, an epic year in equities is defying naysayers and rewarding anyone who staked a claim on corporate ownership. Records are falling, with about a quarter of national equity benchmarks at or within 2% of an all-time high.

If equity markets in places like Greece and Ukraine, ravaged by  - in that order - financial and/or actual warfare, are booming, you don’t need to fire too many neurons to understand something’s amiss. Some of their companies may be doing okay, but not their entire economies. Their boom must be a warning sign, not some bullish signal. That makes no sense. Stocks in Aleppo may be thriving too, but…

“You’ve heard people being bearish for eight years. They were wrong,” said Jeffrey Saut, chief investment strategist at St. Petersburg, Florida-based Raymond James, which oversees $500 billion. “The proof is in the returns.” To put this year’s gains in perspective, the value of global equities is now 3 1/2 times that at the financial crisis bottom in March 2009.

If markets crash by, pick a number, 20-30-50% next week, will Mr. Saut still claim “The proof is in the returns”? I doubt it. Though this time he might be right. As for the ‘value’ of global equities being 250% (give or take) higher than in March 2009, does that mean those who were -or still are- bearish were wrong? Or is there some remote chance that the equities are part of a giant planetwide bubble?

Aided by an 8% drop in the U.S. currency, the dollar-denominated capitalization of worldwide shares appreciated in 2017 by an amount – $20 trillion – that is comparable to the total value of all equities nine years ago. And yet skeptics still abound, pointing to stretched valuations or policy uncertainty from Washington to Brussels. Those concerns are nothing new, but heeding to them is proving an especially costly mistake.

$20 trillion. That’s a lot of dough. It’s what all equities in the world combined were ‘worth’ 9 years ago. It’s also, oh irony, awfully close to the total increase in central bank balance sheets, through QE etc. Might the two be related in any way?

Clinging to such concerns means discounting a harmonized recovery in the global economy that’s virtually without precedent – and set to pick up steam, according to the IMF. At the same time, inflation remains tepid, enabling major central banks to maintain accommodative stances.

‘Harmonized recovery’ is a priceless find. But you have to feel for anyone who believes it. And it’s obviously over the top ironic that central banks are said to be ‘enabled’ to keep rates low precisely because they fail to both understand and raise inflation. Let’s call it the perks of failure.

“When policy is easy and growth is strong, this is an environment more conducive for people paying up for valuations,” said Andrew Sheets, chief cross-asset strategist at Morgan Stanley. “The markets are up in line with what the earnings have done, and stronger earnings helped drive a higher level of enthusiasm and a higher level of risk taking.”

Oh boy. He actually said that? What have earnings done? He hasn’t read any of the warnings on P/E (price/earnings) for the (US) market in general –“the Shiller P/E Cyclically Adjusted P/E, or CAPE, ratio, which is based on the S&P 500’s average inflation-adjusted earnings from the previous 10 years, is above 30 when its average is 16.8”– or for individual companies (tech) in particular?

The CAPE ratio has been higher than it is now only twice in history: right before the Great Depression and during the dotcom bubble, when tech companies didn’t even have to be able to fog a mirror to attract billions in ‘capital’. And the chief cross-asset strategist at Morgan Stanley says markets are in line with earnings? Again, oh boy.

No, it’s not earnings that “..helped drive a higher level of enthusiasm and a higher level of risk taking.” Cheap money did that. Central banks did that. As they were destroying fixed capital, savings, pensions.

The numbers are impressive: more than 85% of the 95 benchmark indexes tracked by Bloomberg worldwide are up this year, on course for the broadest gain since the bull market started. Emerging markets have surged 31%, developed nations are up 16%. Big companies are becoming huge, from Apple to Alibaba.

Look, emerging markets and developed economies have borrowed up the wazoo. Because they could. Often in US dollars. That may cause a -temporary- gain in stock markets, but it casts a dark spell over the reality of these markets. If it’s that obvious that a substantial part of your happy news comes from debt, there’s very little reason to celebrate.

Technology megacaps occupy all top six spots in the ranks of the world’s largest companies by market capitalization for the first time ever. Up 39% this year, the $1 trillion those firms added in value equals the combined worth of the world’s six-biggest companies at the bear market bottom in 2009. Apple, priced at $810 billion, is good for the total value of the 400 smallest companies in the S&P 500.

To cast those exact same words in a whole different light, no, Apple is not ‘good for the total value of the 400 smallest companies in the S&P 500’. Yes, you can argue that Apple’s ‘value’ has lifted other stocks too, but this has happened in a time of zero price discovery AND near zero interest rates. That means people have no way to figure out if a company is actually doing well, so it’s safer to park their cash in Apple.

Ergo: Apple, and the FANGs in general, take valuable money out of the stock market. At the same time that they, companies with P/E earnings ratios to the moon and back, buy back their stocks at blinding speeds. So yeah, Apple may be ‘good’ for the total value of the 400 smallest companies in the S&P 500, but at the same time it’s not good for that value at all. It’s killing companies by sucking up potential productive investment.

And Apple’s just an example. Silicon Valley as a whole is a scourge upon America’s economy, hoovering away even the cheapest and easiest money and redirecting it to questionable start-up projects with very questionable P/E ratios. But then, that’s what you get without price discovery.

Overall, U.S. corporate earnings are expected to rise 11% this year, on track to be the best profit growth since 2010. And after years of disappointments, European profits are set to climb 14% in 2017, Bloomberg data show. The expectations for both regions are roughly in line with forecasts made at the beginning of the year, defying the usual pattern of analysts downgrading their estimates as the months go by.

Come on, the European Central Bank has been buying bonds and securities at a rate of €60 billion a month for years now. How can it be any wonder that officially stock markets are up 14%? Maybe we should be surprised it’s not 114%. Maybe the one main point in all of this is that the ECB is still buying at that rate, and thereby signaling things are still as bad as when they started doing it.

Meanwhile, Asia is home to some of the world’s steepest rallies, led by Hong Kong stocks that are up 29% this year. Shares in Tokyo also hit fresh decade highs this week, bolstered by investor confidence before the local corporate earnings season and a snap election this month. “Asia will benefit from continued improving regional growth, stable macroeconomic conditions and undemanding valuations,” said BNP Paribas Asset Management’s head of Asia Pacific equities Arthur Kwong. Any pullback in Asian equities after the year-to-date rally presents a buying opportunity for long-term investors, he wrote in a note.

In Japan, so-called investor confidence is based solely on the Bank of Japan continuing to purchase anything that’s not bolted down. In China, the central bank buys the kitchen sink as well. How, knowing that, can you harp on about increased investor confidence? As if central banks taking over entire economies either isn’t happening, or makes no difference to economies? Buying opportunity?

Global economic growth has been robust in most places, with Europe finally joining the party and the euro-area economy on track for its best year since at least 2010. The region’s steady recovery has eclipsed worries about populism, which a few years ago would have been enough to derail any stock market rally.

No, global economic growth has not been ‘robust’. Stock market growth perhaps has been, but that’s only due to QE and buybacks. Still, stock markets are not the economy.

“I’ve never been so optimistic about the global economy,” said Vincent Juvyns, global market strategist at J.P. Morgan Asset Management. “Ten years after the financial crisis, Europe is recovering and we have synchronized economic growth around the world. Even if we get it wrong on a country or two, it doesn’t change the big picture, which is positive for the equity markets.”

Oh man. And at that exact moment the ECB announces it wants to cut its QE purchase in half by next year.

Nowhere is the shifting sentiment more pronounced than in Europe, where global investors began the year with a election calendar looming like a sword of Damocles. Ten months later, the Euro Stoxx 50 Index is up 10%, Italy’s FTSE MIB Index is up 17% and Germany’s DAX Index is up 13%. The rally is even stronger when priced in U.S. dollars, with the Euro Stoxx 50 up 23% since the start of the year.

Sure, whatever. I don’t want to kill your dream, and I don’t have to. The dream will kill itself. You’ll hear a monumental ‘POP’ go off, and then you’re back in reality.


FactDog BullyBearish Sat, 10/14/2017 - 15:05 Permalink

NO!  We are buying shares, not because we do not see the upcoming crash but because we know it will happen and it will be bigger than anything we have ever seen -- with whole nation states failing. This time it will be different -- it will be worse. I am an active investor because I  want tokens  (shares)  from working companies that will survive the upcoming crash. And yes; I also have gold, bitcoin and land. 

In reply to by BullyBearish

Oldwood FactDog Sat, 10/14/2017 - 19:04 Permalink

Everyone has their strategy. I choose to invest in myself. MY businesses, NOT the liar corps who manipulate their books, buy back their stocks, suck from the infinite government tit. What happened to the world? When did we collectively decide it was safer, better to invest with someone else other than ourselves? How can we simultaneously believe that we are too stupid to make it on our own yet smart enough to out guess every other dice pitcher on the planet.Says a lot about us. The entrepreneurial spirit is dying in lieu of the gambler. What possibly postive can come of an economy that simply seeks successful redistribution over productivity?

In reply to by FactDog

overmedicatedu… Sat, 10/14/2017 - 12:45 Permalink

if you trust the markets and finance, well you just have not been paying attention..the fed and central banks ...or  your own hard cash and PM's ..invest in yourself- or go to vegas, oh wait maybe not vegas..

Muppet Sat, 10/14/2017 - 12:47 Permalink

Years ago, I started selling.   Years ago, I ran out of things to sell.   Of course, I wouldn't re-buy.   So I sit in cash and fixed income....  waiting forever it seems for a reversion that never seems to come.   Its maddening.  Everyday, the algos look at their AUM and the leverage rules.  Whenever the algos see room, they buy.  Every algo does this.   As a result, prices rise and the cycle begins again.   It operates as one giant machine that has taken over the worlds assets.    Humans and money are meaningless.  Its just ones and zeroes with no appreciation for the money or humans involved.Greed.   One of the deadly sins. .

Oldwood Muppet Sat, 10/14/2017 - 19:08 Permalink

Rather than seeking safety by choosing an alternative speculation (which is what gold is as much as any stock) and invest in yourself. Your own business, even tangible real estate that actually provide returns.I too have set on cash since 2010, but I have used that cash as an investment cushion for investments in rentals as well as personal businesses.

In reply to by Muppet

ScratInTheHat Sat, 10/14/2017 - 12:53 Permalink

I wish I had not sold out when I did. But I know that pigs get slaughtered so I bailed out early. I’ve made better returns with silver limited edition coins in the meantime.

balanced Number 9 Sat, 10/14/2017 - 13:22 Permalink

I'm not gonna lie, I've taken a beating with PMs. I still believe in their value, so I'll hold on to them as long as I can, but it hurts. I was stacking for years until my situation changed, and I actually had to sell some metals for a loss. The worst part is that my "friends" who used to laugh at me when I warned them to get out of the market and into metals are now flush, while I cling to my remaining metals - close to broke in the mean time. I used to say that it didn't matter, that I knew I was right, and they were wrong. It's not that I question that now - I just don't care. My only saving grace has been the small amount of bitcoin I picked up a few years ago. I'll continue to hold my PMs as long as I can, as I still believe that things will shift eventually. But I've lost the enthusiasm that I used to have. This shit just isn't fun anymore./venting

In reply to by Number 9

balanced Consuelo Sat, 10/14/2017 - 15:10 Permalink

Consuelo,I suppose that everyone is looking to increase their buying power, but that was not my main motivation. When I saw central banks printing dollars like crazy, and in so doing, stealing value from every holder of fiat, I began stacking. Then I saw MF Global and the Cyprus bail-ins, and realized that financial institutions had begun openly stealing from their clients. I realized that PMs (at the time) were the only viable store of wealth which 1. cost me nothing to hold, and 2. had no third-party risk. Not to mention the fact that I didn't want to support the criminal bankers by "lending" them my money anyway.As I'm sure you know, once you realize that the entire financial system was designed to steal value from it's users, you start looking for a way out. PMs (and now cryptos) are really the only wealth assets that you can buy and sell person-to-person without licensing being required by one of the parties or a broker. Even buying/selling a car to an individual requires papers to be filled and fees to be paid. Given that federal taxes end up going to the Fed, central bank owners essentially get a cut of every monetary transaction made. Which is to say that they steal from us every time we transact. PMs were the only exception until cryptos... or so I thought. I have since come to realize that as long as they can suppress the prices on the Comex by naked shorting metals with impunity, they can prevent metals from keeping up with real inflation, thus stealing from everyone who holds and sells PMs. The only way to beat them is to hold the PMs until after something breaks. This "something" will be a game-changer, because higher PM prices mean more power to Russia and China. This is why PMs will be suppressed as long as the western financial system survives.All that to say that I see the entire financial system as a huge scam, and I simply want to participate in it as little as possible.

In reply to by Consuelo

moneybots Sat, 10/14/2017 - 13:07 Permalink

“The Cost of Missing the Market Boom is Skyrocketing”, says a Bloomberg headline today. I remember when the Nasdaq fell 76% and the Nikkei fell over 80%. The 1929 DOW fell 89%.So what is this cost of missing out on the stock market boom and how is the cost skyrocketing?

moneybots Sat, 10/14/2017 - 13:17 Permalink

“The markets are up in line with what the earnings have done, and stronger earnings helped drive a higher level of enthusiasm and a higher level of risk taking.”  Interesting fiction. 

CardiacTrader Sat, 10/14/2017 - 13:17 Permalink

This is the same type of articles and hype that are nothing new to the markets.  Investors as myself who have been in the markets for 50 or so years this is nothing new. I am surprised the Shepwave guys aren't on here today.  They are probably the only honest and reputable market analysts left.  Well, they are the only analysts who get the market direction correct without a lot of emotional trappings. 

illuminatus Sat, 10/14/2017 - 13:21 Permalink

The big boyz operate kind of like a commercial fishing operation. They see a school of fish on their instruments. They target it with their nets and when the nets are full they close it up and bring them on deck for processing. Sucks to be a fish.

gdpetti illuminatus Sat, 10/14/2017 - 13:33 Permalink

Nice analogy. As for selling at the top or near it, Mark Cuban, like him or not, is a good example of learning to get out as the opportunity presents itself.... never be afraid to take your profits and run away with it.The other point along this line of 'missing out' is that when the media push gets to the point that even the long holders feel angsty, that's the sure sign of the rug starting to slip out from under their feet.

In reply to by illuminatus

Consuelo Sat, 10/14/2017 - 14:13 Permalink

  “You’ve heard people being bearish for eight years. They were wrong,” said Jeffrey Saut, chief investment strategist at St. Petersburg, Florida-based Raymond James, which oversees $500 billion.  Here's a test for you hard-core 'old timers'... Does anyone here remember Jeffrey Saut being on Kingworld in say around 2009...?    Anyone remember what he was 'hawking' back then, or what his general economic outlook was...?Needless to say, that all changed in 2012 - and to his credit (for being able to spot what a deluge of cheap $money was about to launch), he got it right.   Like anyone else struck by an ever-rising market however, even a street-savvy type like Mr. Saut is no match for what a few years of cheap money-gains does to a psyche...And like all the rest, his comeuppance will be a market that changes so rapidly, he won't be able to change his story fast enough to escape the damage to his credibility when it hits. 

Anonymous (not verified) Sat, 10/14/2017 - 14:18 Permalink

Excellent article by Raul Illargi Meijer! Thank you Raul and Tyler! Why would the central banks expect people who have at least a dozen reasons not to part with their income or savings,  if in fact they even have anything to part with, to invest in these markets, ranging from the explosion of Super volcanoes, nuclear war, chain reaction catastrophe at the Hanford nuclear site, dysfunctional and corrupt banana republic governments, an economically unviable asnd predatory debt financed fractional reserve privately owned monetary system at the expense of sovereign nations?!Why would we even believe the prospectuses with all of the accounting gimmicks?!The media, as evidenced by the Bloomberg article cited has also lost all credibility in the eyes of any person with common sense, along with governments and central banks.Every day is more surreal than the last. 

quasi_verbatim Sat, 10/14/2017 - 14:41 Permalink

The QE blowoff has someway to go, between Monday next week and Monday next decade. Just be sure to hit the 'sell' button pne-tenth of a second before the thundering herd. Simple.

krage_man Sat, 10/14/2017 - 14:49 Permalink

Ok, this is the reality.It is not that equity valuation is too high, no. It is money valuation is too low!Think about it. Price of equity is expressed in unit of dollars. The value of the same unit of dollars is much lower now than, let's say, 20 yers ago.The unit of currency has never been so cheap! Yes, due to rates. That means the valuation in those cheap currency units will be higher than usual.But then, what is real expectation of currency value going up? not much...