An Ominous Warning Sign for US Stocks

Wow! Peace for our time, the media reported yesterday.

The stock market celebrated with a 227 point jump in the Dow. Gold slouched away.

We would have thought that every possible stock buyer had already placed his order. Where did the money come from to push the indices even higher yesterday?

It was borrowed. That’s another record that has been broken lately: margin debt. Never before has so much money been borrowed specifically to buy equities.

As a ratio of GDP, margin debt only saw these heights twice before in recent history: in 2000 and in 2007. In dollar terms, total margin debt stood at $481 billion at the end of January – 20% higher than it was at the peak of 2007…and nearly 3% of GDP.

But be warned: Hearts and records break from time to time, but never without some pain. The crying begins immediately after a broken heart. After a record high S&P 500, on the other hand, it can take some time.

So many records are breaking in the tech sector it sounds as though a beer truck smashed into a recording studio. Facebook set the pace. First, with its own public offering; and then, with its purchase of mobile text messaging outfit WhatsApp.

Who would have thought that a free app – used by young people to send insipid messages to one another – could fetch $19 billion?

Now, anything seems possible. Maybe trees really do grow to the sky. Maybe there are silver linings without clouds. Maybe biotech stocks, recently priced at 700 times earnings and up 16% so far this year, are still bargains.

And maybe…just maybe…Janet Yellen knows what the hell she’s doing.

Speaking of earnings, they too are in record territory. Recent earnings reports for S&P 500 companies showed profits at their highest level since 1946 – 30% above the postwar average.

Earnings went up about 10% over the last 12 months, while sales went up hardly at all. This, too, must be a record of sorts; for the first time ever US businesses seem to be able to produce immaculate earnings, unsullied by actual sales growth.

Reported on the front pages of the Wall Street Journal and the Financial Times (the two journals of record for the late, degenerate capitalism of the 21st century) is another record…

From the Wall Street Journal: ‘Blowout Haul for Buyout Tycoons

The nine founders of the four listed US private equity groups took more than $2.5 billion between them last year, both papers reported…with Apollo Global Management’s Leon Black alone receiving $546 million.

This surely must be a record. More than half a billion in compensation for a single year. And what a business model! Sharp private equity firms buy lame companies, borrow beaucoup money in their names, and then resell the debt-saturated companies to naïve investors!

Oh…did we forget something?

Oh, yes…Ben Bernanke and another world record! Without record intervention – including more than $3 trillion in liquidity from the Federal Reserve’s inexhaustible well – poor Mr. Black might have found few takers for his stray cats and dogs.

Meanwhile, consumer price inflation has set a record of its own. Not by going up, mind you, but by going nowhere. Bloomberg reported last month:

‘The personal consumption expenditures price index, minus food and energy, rose 1.2% in 2013, matching 2009 as the smallest gain since 1955.’

Consumers, without the pressure of a rising CPI behind them, have shown little ability to join the party. Instead, they shiver in their rooms and wonder how to pay the electric bill.

As reported in the Wall Street Journal yesterday, they spend more on what they need than on what they want. Spending on health care and fuel rose in January, as consumers ‘cut back on discretionary products.

That makes us think that something else is broken – not a record, but the economy. And with so many things broken, we can’t help but wonder when the whole shebang falls apart.

Regards,

Bill Bonner
for Markets and Money

Join Markets and Money on Google+

Claim your FREE Special Investor Report…

How to Know if a SMSF is Right for You…
Markets & Money Free ReportNot sure whether a self-managed super find is right for you? Let award-winning wealth manager, Vern Gowdie, show you everything you need to know before making a decision.

Download this free report now and discover:

  • Why you could lop 31.5% off your annual tax bill by contributing more to your super…and why paying less tax could help your retirement savings compound more quickly…and help you retire sooner.
  • The definitive list of pros and cons for going self-managed: most investors don’t understand the hefty fees associated with running a SMSF — until it’s too late…if you don’t want the ATO to freeze your SMSF — read this…
  • Seven checks to see if it’s worth you setting up a SMSF: including the amount of money you have to invest…your investment history…what kind of insurance cover you need…whether you’re good at keeping records…pay attention: this is the small print stuff you need to know…

To download your free report ‘How to Know if a SMSF is Right for You…’ simply subscribe to Markets and Money for FREE today. Enter your email in the box below and click ‘Send My Free Report’.

We will collect and handle your personal information in accordance with our Privacy Policy.

You can cancel your subscription at any time.

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and MoneyDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

To have Bill's reckonings delivered straight to your inbox subscribe to Markets and Money for free here.

Read more

Bill Bonner

Latest posts by Bill Bonner (see all)

Leave a Reply

3 Comments on "An Ominous Warning Sign for US Stocks"

Notify of
avatar
Sort by:   newest | oldest | most voted
slewie the pi-rat
Guest

we’re fighting a war on terror.
our leaders have chosen to wage it in the Hall Of Mirrors.
quicksilver tranche warfare:
a high-stakes game of bluffing.
we’re so post-modern,
we’re betting big that we can bluff ourselves out for the win.

Ross
Guest

Once upon a time the little Aussie bleeder pillars showed Wall St how to use subsidiaries to generate off balance sheet offshore debt and blow bubbles in NZ.

Wow! We could make something of this said the wolves of Wall St…

http://www.bloomberg.com/news/2014-03-07/emerging-world-poses-more-danger-than-in-1990s-cutting-research.html

Ross
Guest

I should correct that, the 4 pillars used the branch office off the AU balance sheets before working out how to make the subsidiary run. Branches or subsidiaries, look for triple twist with pike over smoke for collateral and swaps.

wpDiscuz
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@marketsandmoney.com.au