The Market Ticker
Commentary on The Capital Markets- Category [Market Musings]


The S&P 500, and most of the DOW, garner a lot of their revenue (and earnings) overseas.

The Dollar has been on a tear for the last several months (since August, roughly) and is now trading at levels it has not since 2002 (!)

Said currency translation means that those foreign earnings are depreciated since foreign currency buys fewer dollars.

The S&P 500 is trading at historic highs on a cyclically-adjusted P/E basis, and well into "overvalued" territory even on simple trailing earnings. In fact on a CAPE basis the S&P is trading at a higher multiple than either 2000 or 2007!

In other words the entire market is priced for perfection -- higher earnings in the future, a softer currency and no increase in operating -- that means borrowing, given the last few years of history -- costs.

None of those things are likely to be true.

It is an effective impossibility that all of them will be true.

How overvalued is the market?  That depends on where you look in the market but 25% overvalued is in fact quite conservative.

This, of course, assumes no shocks.  No problems with debt load.  No runaway inflation, or worse, a runaway budget deficit (caused by tax cuts and Trump's refusal to address medical monopolies, which I remind you, he has struck from his transition web site and made not one mention of since the election.)  It is thus extremely likely, in fact bordering on certainty that runaway medical costs in the federal government will destroy the federal funding model within the next four to five years.

It assumes no serious terrorist incidents that disrupt transportation occur; for example, a "rogue" MANPAD attack on a cargo airliner (or worse, a passenger jet!)

It assumes the dust-up in Turkey doesn't spread (which could lead to a global conflagration.)  I remind you that Europe, including Germany, has invited millions of jihadi-sympathizing "refugees" into their nations over the last few years.

It assumes that the inexorable home price destruction that comes from higher interest rates (which is a simple mathematical formula) doesn't result in either a collapse in home sales or possibly worse, a re-emergence of zero-down liar-loan style "financing" that (again) blows up in everyone's face, threatening the destruction of the financial system -- when neither The Fed or the Government has the ability to once again double federal debt to bail them out.

The TNX (10 year Treasury) has already broken the declining trendline from 2009.  But far more-importantly it has also decidedly broken, on a monthly closing basis (and will almost-certainly do so on a yearly closing basis) the bond bull-market trendline dating to 1983.

Almost exactly none of the so-called "market mavens" that are out there today have any memory of market conditions prior to that bond bull market as none of them were in the market 30+ years ago.  Many younger professionals weren't even alive back then.  Nobody under the age of 50 was an adult when that last secular change took place and almost nobody under the age of 60 has any sort of experience managing wealth in such an environment because few people under the age of 30 have any wealth to manage.

In other words everything you, your broker, the media and everyone else thinks they know about markets is wrong because the predicate on which all of it has been founded for the last 30 years has, in the last two months, been ripped out from under you -- and them.

In 1999 despite it being obvious that the tech wreck was going to occur the market continued upward and in fact the Nasdaq doubled during that year before it all blew up and crashed -- entirely on "animal spirits", or more-accurately the greater fool was out in force.

Said fool then lost nearly all of his money.

Cramer's Winners of the New World portfolio lost very close to all of its value -- something that even today he refuses to talk about.

But this time there is no place to go for a "reflation" of those assets.  The government cannot "print debt" into a rising rate environment as doing so causes instant insolvency through unpayable interest expense as the current debt load makes materially adding to said federal debt, certainly in the amounts required to stop such a collapse, impossible.

In short the game of "turning the leverage crank" to bail people out and continue the rise in asset prices has ended.  I have been warning for the last several years that this was inevitable but the question is always a matter of timing.  It went further than I thought it would (by quite a bit) but that's not unusual at all, since the break-point is almost always a matter of psychology rather than hitting a hard limit somewhere.

We now have the timing, however, with a solid and violent monthly break of the 30+ year bond trendline and a nearly-certain annual (and equally-violent) break of that same trend.  It's over, and this means that whatever you think you know about the investing world that has been predicated on ever-cheaper credit is wrong and in fact exactly backward.  It is now merely a function of when psychology catches up with reality -- and it will, because on the math it inevitably must.

Time's up.

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