The bull climbs the stairs
Comment writer, Henry Hart, argues that the value of the US stock market has been overinflated for the benefit of the few, at the expense of the many
Stock markets rise and rise up until the point the bull jumps out of the window. US stock markets have been more expensive than now only twice in history: Black Tuesday of 1929, and the Dot Com bubble of 2000. Needless to say, both of those bubbles burst in spectacular fashion, and nothing helps to inflate a bubble like cheap-as-chips federal reserve dollar bills. What do I mean by an expensive stock market? The gold standard for investors in terms of measuring the value of a company is the price to earnings ratio, and this is simply the market capitalisation (number of shares x price) divided by the profits of the company. And the cyclically adjusted profit to earnings ratio of the S&P500 (the value of the 500 largest companies in the US) is now (at the time of writing) over 32.9, double the 140-year mean of 16.6.
As I write this, the US stock market has just broken the record for the longest bull run in the post-war era. The start of this bull run was in the aftermath of the 2008 financial crisis, subsequently to which some may remember our governments throwing taxpayer money at failing banks. Now, it is not just taxpayer money that has fuelled the rise of the stock market. In an attempt to quickly cover up the ineptitude of a cronyistic government hailed ‘end to boom and bust’, the central banks of the world are handing out money practically for free. Not to thee and me, of course; only to the institutions who have access to the inter-bank rate. The ECB famously had its interest rate at zero for a while, and even charged negative interest rates for depositing. This means that people and businesses with high net worth can use the free money to invest for themselves. They create jobs and prosperity in the process of course, but interest rates cannot remain low forever, not least because inflation starts to rise. And recently we see central banks around the world raising rates ever so slightly to combat this. This will be the needle that pops the bubble.
It is not just the manipulation of money’s value by the independant (read ‘unelected’) central banks that will send the stocks tumbling… Trump! Yes, the namesake of the 2016/17 ‘Trump bump’ that sent business confidence soaring with tax and regulation cuts will cause the next great depression, less than two decades after the last. Why? While tax and regulation cuts are generally good for business in the short and medium term, a government like the US cannot ceaselessly reduce its tax take without cutting down a little on some of the frivolous expenses like their huge armed forces, giant border walls and hush money to prostitutes. Ok that last one wasn’t technically the government but I can’t think of anything else on the order of walls and guns to complain about right now. So yeah, the government will probably have to shut down a few more times as the chaps and chapesses at the top debate whether they should continue to fund their debt problem… with more debt. And eventually, both sides will have to realise it is not sustainable. And there will be a levelling. P/E ratios will tumble back to usual levels, stocks will crash and the bear will jump out of the window. But one thing won’t change: the super rich will see this coming and get out before you, and lobby for their central bank friends to pump out even more cash to dilute your cash wealth while inflating their stock wealth. And we will go around again and again….
