S&P500 Valuation Risk
Updated
The S&P500 has made a very large run up starting with the coronavirus liquidity crisis dump, and the entirety of that run up has been in an ascending wedge.
This run in my mind has been mainly fueled by capital flight away from the dollar due to rampant inflationary activities at the Federal Reserve that go beyond the observed prior trend of the M2 supply. The fundamental situation of the economic strength (more specifically lack thereof) of the US does not warrant record high valuations, I believe this has only happened because of a combination of the uncertainty of the buying power of the dollar combined with the unprecedented low federal funds rate (interest rate for large institutions) of 0.05% and the recent rules change completely removing any reserve ratio requirement. TLDR: Infinite free money season for Vanguard, State Street, Black Rock.
The key driver of this monetary expansion is likely to be found in the Federal Government balance sheet, They are increasing their debts rampantly beyond the point where it could ever be reasonably collected via even the most oppressive taxation. The way they intend to collect the bill for what they are buying is to make the paper currency worth SIGNIFICANTLY less.
Trade deficit is enormous. Raw material shortages. Unemployment booming. Experimental drug mandates for workers. Nothing about the current situation points to a healthy economy, yet the valuations of stocks in relation to the total monetary float are enormous even after correcting for that expansion in monetary float.
We have all seen bailout after bailout of unstable companies, and market segments over the last two years and I do not think these market segments are all of a sudden healthy (relative to their valuation). I think it would be almost nonsensical to think that more bailouts and more new issue currency being sprayed out by washington and their banking allies will not happen as a result of the downturn. Nobody seems to mind PE ratios in the hundreds or thousands, and they just keep buying, but will the institutions continue buying forever or will the straw break the camels back?
This is quite troubling as the S&P is currently sitting at a ratio that has held for at least 60 years as the top with the sole exception of the 2000 dotcom bubble. I think we on or near the cliff edge of a very different kind of crash than we normally see.
What I am suggesting is not that the S&P will drop, but I am also not suggesting that it will not drop. What I am suggesting is that either it will drop or inflation will kick in to a greater degree than ever before. I think it is very possible for the buying power of the S&P to go down at the same time as the numerical price going up. Likely price would go down at first which would result in a reaction from the federal reserve to accelerate our favorite printer. HOWEVER: I think the gains will never make it to the dining room table as those gains will be nothing more than inflation taxed away as capital gains, resulting in a massive bleed of buying power.
I urge the reader to take caution and consider the possibility and real risk of making huge profits on paper but ending up in a worse financial situation as a result.
I do not think that selling assets will help in any way. I do not think that going for the assets with high PE ratios and hoping for them to go even higher will help either. I do not think that gold or silver will save you as they are easy to counterfeit as paper, and impossible to shove down the internet tubes (unless counterfeit). I think the natural response to this should be to take all bets off the economy and move heavily into the competitors to Fiat currency. Bitcoin was specifically designed to consume money markets in times just like these, it is the Great Consumer, and its dinner time.
PS: In the linked Ideas I have included a monthly candle chart with the same lines, and the M2SL monetary supply chart with some information.
This run in my mind has been mainly fueled by capital flight away from the dollar due to rampant inflationary activities at the Federal Reserve that go beyond the observed prior trend of the M2 supply. The fundamental situation of the economic strength (more specifically lack thereof) of the US does not warrant record high valuations, I believe this has only happened because of a combination of the uncertainty of the buying power of the dollar combined with the unprecedented low federal funds rate (interest rate for large institutions) of 0.05% and the recent rules change completely removing any reserve ratio requirement. TLDR: Infinite free money season for Vanguard, State Street, Black Rock.
The key driver of this monetary expansion is likely to be found in the Federal Government balance sheet, They are increasing their debts rampantly beyond the point where it could ever be reasonably collected via even the most oppressive taxation. The way they intend to collect the bill for what they are buying is to make the paper currency worth SIGNIFICANTLY less.
Trade deficit is enormous. Raw material shortages. Unemployment booming. Experimental drug mandates for workers. Nothing about the current situation points to a healthy economy, yet the valuations of stocks in relation to the total monetary float are enormous even after correcting for that expansion in monetary float.
We have all seen bailout after bailout of unstable companies, and market segments over the last two years and I do not think these market segments are all of a sudden healthy (relative to their valuation). I think it would be almost nonsensical to think that more bailouts and more new issue currency being sprayed out by washington and their banking allies will not happen as a result of the downturn. Nobody seems to mind PE ratios in the hundreds or thousands, and they just keep buying, but will the institutions continue buying forever or will the straw break the camels back?
This is quite troubling as the S&P is currently sitting at a ratio that has held for at least 60 years as the top with the sole exception of the 2000 dotcom bubble. I think we on or near the cliff edge of a very different kind of crash than we normally see.
What I am suggesting is not that the S&P will drop, but I am also not suggesting that it will not drop. What I am suggesting is that either it will drop or inflation will kick in to a greater degree than ever before. I think it is very possible for the buying power of the S&P to go down at the same time as the numerical price going up. Likely price would go down at first which would result in a reaction from the federal reserve to accelerate our favorite printer. HOWEVER: I think the gains will never make it to the dining room table as those gains will be nothing more than inflation taxed away as capital gains, resulting in a massive bleed of buying power.
I urge the reader to take caution and consider the possibility and real risk of making huge profits on paper but ending up in a worse financial situation as a result.
I do not think that selling assets will help in any way. I do not think that going for the assets with high PE ratios and hoping for them to go even higher will help either. I do not think that gold or silver will save you as they are easy to counterfeit as paper, and impossible to shove down the internet tubes (unless counterfeit). I think the natural response to this should be to take all bets off the economy and move heavily into the competitors to Fiat currency. Bitcoin was specifically designed to consume money markets in times just like these, it is the Great Consumer, and its dinner time.
PS: In the linked Ideas I have included a monthly candle chart with the same lines, and the M2SL monetary supply chart with some information.
Note
UBS seems to be having similar ideas: secure.ubs.com/public/api/v2/investment-content/documents/2aD-i4IASAGWqohTeuB9gA?apikey=Y8VdAx8vhk1P9YXDlEOo2Eoco1fqKwDk&Accept-Language=de-CHNote
And thus it begins.Note
It appears that the federal reserve is now taking action to curtail inflation by cutting asset purchases (buying the bonds that the federal government issues) and soon raising rates.I do not think this strategy that they are taking is sustainable. The inflation is the only way the tax that the federal government needs to levy can be done without causing significant economic downturn.
My guess is they get partway through with this and then abandon their efforts and turn back to loose policy to counteract the economic failure that they create.
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