What do reputations, buildings and stock markets have in common?
They can take years to build, and can be torn down in a very short space of time.
And that’s certainly been the case with recent market action.
All of the Aussie market gains, dating back to March 2015, have been surrendered in the space of a couple of months.
And if we look back even further, we see the All Ords is now at a level it first breached in early 2007…a timeframe approaching 12 years.
Source: Yahoo Finance
What was that about ‘shares always go up in the long term’?
And this is only the start of things to come.
If, as has happened with previous bubble busting episodes, the All Ords will go back to where the bull market started back in 2009 — around the 3000 point level.
Should the pattern be repeated, then our market will be back to a level first breached in 2000. Nearly two decades of gains gone…vaporised into the ether.
As is customary when the market looks shaky, we’re told to ‘stay calm, this is only a correction and normal trading conditions will resume shortly’.
The narrative around why the market is falling and why it will once again rise is oh so predictable.
The market is going down because…‘fears over the trade war’; ‘rising interest rates in the US’; ‘doubts over the strength of China’s economy’; ‘the Saudi involvement in the killing of Jamal Khashoggi’; ‘the solvency of Italian banks’.
The REAL reason the market is going down and will go down much, much further is that it is…over, over, over-valued. Simple as that.
The most overvalued market in history
This is THE MOST EXPENSIVE US market in history. The good times have been had, now it’s time for the not-so-good times…deflating this bubble.
The US market is a disaster waiting to happen and what actually triggers its downfall is largely immaterial. Plenty of reasons will be given, but they matter for nought. The Fed — with its targeted/idiotic/irresponsible policies — have blown an asset bubble that’s without peer.
But as is the case with the vested interests of the investment industry, it’s all about ‘not letting the facts get in the way of a good story’.
The reasons being given as to why this predetermined outcome WON’T happen are…
‘Low unemployment’; ‘strengthening economy’; ‘green shoots of wage growth (in the US)’; ‘better than expected earnings’.
This is yesterday’s news…and most of it is a furphy.
The unemployment data — calculated on the most loosely worded definition of employment — bears no resemblance to reality.
John Williams of Shadow Stats provides an alternative source of data on US unemployment (amongst other economic indicators) based on the methodology that existed prior to 1994.
To quote from the Shadow Stats site (emphasis is mine)…
‘The seasonally-adjusted SGS [Shadow Government Statistics] Alternate Unemployment Rate reflects current unemployment reporting methodology adjusted for SGS-estimated long-term discouraged workers, who were defined out of official existence in 1994. That estimate is added to the BLS [Bureau of Labor Statistics] estimate of U-6 unemployment, which includes short-term discouraged workers.’
Since 1994, long term discouraged workers have been conveniently excluded from the unemployment data.
When you apply the pre-1994 definition of unemployment to the official numbers, you get a far better idea of why the US economy — under the surface — is struggling to make progress…
The red and grey lines are the official numbers on ‘un and under employment’.
The blue line is Shadow Stats estimate of ‘un and under employment’ in the US…currently at 21.3%
Source: Shadow Stats
Since the 2008/09 credit crisis, the ‘blue line’ has remained persistently above the 20% level.
The official data paints a far prettier picture…which suits the political agenda.
The same process of misinformation exists here in Australia
This is the definition of employment from the Australian Bureau of Statistics (ABS) site (emphasis is mine):
‘Paid employment includes persons who performed some work for wages or salary, in cash or in kind,…
‘Self-employment includes persons who performed some work for profit or family gain, in cash or in kind,’
What’s the ABS definition of ‘some work’?
‘The notion of “some work” is interpreted as work for at least one hour.’
Work at least one hour per week for cash or, wait for it, in kind and you qualify as ‘employed’.
This definition fails the pub test…yet it’s what’s used by politicians, media, economists and investment analysts as the benchmark on which serious decisions are made. A classic example of ‘Garbage in, Garbage Out’.
If it wasn’t so serious, it would be laughable.
The ‘strengthening economy’ story is another false narrative.
The reason we (Australia, US, China et al) have positive GDP numbers is because of the debt infusions — from household, corporate and government borrowers — into the economy.
This is not real growth…it’s simple putting more lead in our already overburdened debt saddle bags.
Earnings growth is ‘what’s happened’, not ‘what’s going to happen’.
There’s been plenty of one-off methods used — share buybacks, debt refinancing at lower rates, wage suppression — to boost earnings.
But this bag of accounting tricks is close to empty.
John Hussman (of Hussman Strategic Advisors) has been warning for some time about the coming contraction in US corporate profit margins.
US corporates have been enjoying the juiciest of margins — as measured by Corporate After-tax profits as a percentage of GDP — for several years.
Eventually, there would be a reversion to the mean…those fat profit margins would go through lean years. And when that happens, reported earnings will disappoint.
And, according to CNBC on 24 October 2018…
‘Profit margins at risk,
‘As they have all year, companies are reporting mostly good financial results for the third quarter. But this time around, executives have been talking about the challenges they face with rising production and materials costs and relatively new tariffs. Some of these executives say their profit margins risk getting squeezed by these factors, adding they might have to pass rising costs on to customers, if they haven’t already.’
Markets are not concerned about what has been earned, but what will be earned.
As the fat in profit margins is trimmed, earnings are going to start to disappoint.
We’re starting to see some early signs of this happening.
Corporates that took on way too much debt to boost the bottom line are now finding the ‘free lunch’ is over.
Bloomberg headline, 25 October 2018…
Here’s an extract (emphasis is mine)…
‘Anheuser-Busch InBev NV plunged after the world’s largest brewer cut its dividend in half as it seeks to pay down a $109 billion debt mountain swelled by the acquisition of rival SABMiller Plc in 2016.’
AB InBev is not some ‘two-bit fly-by-night’ tech start up…this is the world’s largest brewer.
All that cheap debt the company took on during the extended period of rate suppression, is now having to be repaid.
When that debt has to be refinanced, the company knows the rates are going to be much higher. How does AB InBev build a buffer for this eventuality?
Cut the dividend in half…ouch.
Those investors who went chasing yield are suddenly wondering ‘what the hell should I do?’
And the world’s largest brewer is not the only corporate with a mountain of debt to worry about. There’s a stack of them out there…and not all have the cashflow of a brewery.
All the ‘good’ news on why the market will once again resume its upward trajectory is nothing but ‘spin’…not the sort of credible information you would want to bet your retirement savings on.
The fact is markets never, ever fall from a position where the news is ‘bad’. When it’s as ‘good as it gets’, then you need to ‘get out for your own good’.
Markets crater from high points…not low points.
Editor, The Gowdie Letter