by Michael Snyder
In recent months, we have witnessed one of the best stock market rallies in the history of the United States. The S&P 500 is gone 70 days in a row without a loss of 1 percent, and most weeks we have seen a daily increase after another. If stock prices were exploding because the underlying US economy. UU. It worked extremely well, we would have reason to celebrate. Unfortunately, that is not the case at all. In fact, last week I shared 12 signs that the economy is actually slowing substantially. Instead, this stock market "melts" is being driven largely by the reckless intervention of the Federal Reserve. The Federal Reserve balance has skyrocketed once again, and investors know that stock prices tend to rise significantly when that happens. So right now Wall Street is in the middle of a raucous party, and everything will be wonderful as long as stock prices continue to move in the right direction.
Unfortunately, no recovery of the stock market lasts forever, and an account adjustment day is approaching. At this point, stock prices have become so absurd that even the New York Times He is saying that we should "worry" about what is to come.
We also witnessed dramatic "melting" of the stock market before the stock market collapse of 1929, before the bursting of the dotcom bubble and before the financial crisis of 2008.
If you are not familiar with the term "melt," here is a pretty good definition. of Investopedia…
A merger is a dramatic and unexpected improvement in the return on investment of a asset class, driven in part by a stampede of investors who do not want to miss their rise, rather than by fundamental improvements in the economy. The gains that a merger creates are considered unreliable indications of the direction in which the market is heading. Melts often precede melts.
That definition accurately describes what we are witnessing on Wall Street at this time. There has been so much euphoria and, of course, many of the wild-eyed optimists seem to think it can last indefinitely.
But how much can share prices rise? After all, they are already the most overrated that have ever been in the entire history of the United States.
A very simple way to judge whether stock prices are overvalued or undervalued is to look at the price / sales ratio for the S&P 500 as a whole. At best, it should be somewhere between 1.0 and 1.5, but thanks to the absurd rebound that Wall Street has been enjoying the price-sales ratio for the S&P 500 has now been pushed above 2.4. If you want to see how this looks yourself, just take a look this Zero Hedge graphic.
Stock prices should never have reached this point without sufficient underlying sales to justify such high valuations. If the S&P 500 fell 50 percent from the current level, that would put us at a point that is relatively "normal" for good economic times.
But, of course, our financial markets could not handle a 50 percent decrease in stock prices because the system is highly leveraged. It would be a disaster different from everything we've seen before, so the Federal Reserve feels that there is no alternative but to continue pumping this absolutely absurd bubble.
Another very simple indicator that shows that stocks are now more overvalued than ever before is "the Buffett Indicator". As Harry Dent has pointed, the relationship between total market capitalization and US GDP. UU. It has never been as high as it is now. You can see this for yourself looking at this picture. The stock market would have to fall a third to return to the ridiculous level we witnessed just before the financial crisis of 2008. We really are in an unprecedented territory, and any other stock market bubble of this nature in our entire history has ended very, very badly. .
If you want to blame someone for taking us to such a precarious position, you must blame the Federal Reserve. And at this point, even Fed officials are recognizing what is happening. For example, just look at what Dallas Fed president Robert Kaplan said recently…
At least it was a bit refreshing to hear Dallas Fed Chairman Robert Kaplan spoke openly about this in an interview.Wednesday. Although he expressed it in terms that implied he was worried. But, of course, he continued saying: "So far we have done what we have to do."
"My opinion is that it is having some effect on risk assets," Kaplan said. "It is a derivative of QE when we buy tickets and inject more liquidity; it affects risk assets. That is why I say that growth in the balance sheet is not free. It has a cost."
The Fed is desperately trying to maintain control of interest rates, but in the process they are creating the ideal conditions for a stock market crash.
As 2019 came to an end, even Wolf Richter He admitted that "there has never been a better configuration" for a major market crisis …
In my decades of looking at the stock market, there has never been a better configuration. The exuberance is pandemic and very high. And even after today's fall, the S&P 500 rose almost 29% during the year, and the Nasdaq 35%, despite mediocre growth in the global economy, where many of the S&P 500 companies get the most your income
The megaweight in the indices, Apple, is a good example: the shares skyrocketed 84% in the year, although their revenues increased only 2%. This is not a growth story. This is a story of exuberance in which nothing that happens in reality, such as lack of income growth, is important, as enthusiastic crowds everywhere tell us now.
Meanwhile, the real economy has continued to deteriorate.
While stock prices rose in December, the volume of US cargo. UU. was actually plummeting…
The volume of shipments in the US UU. By truck, rail, plane and barge collapsed 7.9% in December 2019 compared to the previous year, according to the Cass load index for shipments. It was the thirteenth consecutive month of falls year after year, and the strongest fall year after year since November 2009, during the financial crisis.
As I have warned so many times, stock prices have completely divorced from economic reality, and this is preparing us for a big financial crisis.
But for now, the party continues and the wild-eyed optimists tell us that this is only the beginning of a new golden era of prosperity.