The Market Is Broken
This is a column that I wrote in March of 2021. If a yokel down on Main Street like me could see this coming why couldn’t the Fed, the politicians and the financial analyst community?
Since the days of trading under the buttonwood tree stock valuations have been the meat and potatoes of the stock market. But in the 21st century they have become completely untethered from any possibility that actual company earnings would repay the prices paid. Buying a stock that is trading at 800 times earnings means that even if 100% of the money the company earned was distributed to shareholders, which of course it isn’t, it would take a holder of the stock 800 years to recoup the purchase price. Even Methuselah didn’t live that long. Although this is an extreme example it is not an unheard of valuation. The average S&P price to earnings ratio is in the mid-twenties now so it would take 20+ years to recoup. These numbers make it clear that people are not investing, they are buying chips in a casino.
Much discussion has taken place about the so-called “wealth gap”. It is quite real and I believe that some structural issues in the financial markets have contributed greatly to the imbalance. The top 10% of Americans by net worth own 88% of the stocks with the wealthiest 1% owning about half of all the trading shares. This suggests the chicken-or-egg conundrum. Are they rich because they own stocks or do they own stocks because they are rich?
The Dow average has doubled in the last eight years, the S&P in the last five. The NASDAQ has doubled in the last four. Does anyone think that the earning potential of the companies comprising these indexes has doubled in that period? If so, what do they base it on? The GDP has only grown at between 2 and 3% per year during the same period. The work force has only grown incrementally. Exactly where will the buying power come from to support this kind of increase? It won’t, of course.
The Fed will print more dollars and the artificial value that is suggested by arbitrary money creation will go directly into the accounts of the richest ten percent of investors with a sizeable rake-off for the financial industry. But I repeat myself. They are often one and the same. IPO’s, SPAC’s and direct stock offerings have long since become methods for transferring wealth into the pockets of venture capitalists, hedge funds, investment banks and a handful of software inventors who spend far more time figuring out how to “monetize” their creations than providing any real product or service. Their main goal is often to supply eyeballs to advertisers who are actually selling a product. Can this really be called “productivity”?
The other huge recipient of the glut of fresh dollars is the Federal government. Foreign governments, investors and banks who have historically bought U.S. Treasuries can seemingly do math better than our own politicians (which could also be said of a typical third-grader). With the ridiculous spending that has occurred and is now being contemplated, especially with the self-inflicted Covid “emergency”, the rest of the world is showing much less interest in buying U.S. government debt. And who can blame them? With 11,862 registered lobbyists in 2019 wining and dining and donating and badgering 535 members of the House and Senate for boondoggle spending and crony tax carve-outs, does anyone think we will discover fiscal reality any time soon? So the Fed has become the “buyer of last resort” in what can only be described as a Ponzi scheme that absolutely devalues the currency over the long term.
The statistics that we are fed tell us that inflation is low, less than 2%, but I live in the real world and go to the grocery store and pay my bills with actual checks. My internet and cable connection has increased $35.00 a month in the last five years. My property taxes have increased 25%. A pound of hamburger has gone from four bucks to six bucks and on and on. As one of our elected officials said recently, “Don’t pee on my leg and tell me its raining.” So who gets hurt by this closet devaluation? Everyone but the richest twenty percent or so, the ones who have a significant portion of their wealth in financial assets which always go up in value at least on pace with inflation. And, of course, the poorer you are the less you can afford to participate in the asset bubble or withstand the higher prices. So even if the statistics say your wages are rising your standard of living is in a steady decline. No wonder the peasants are getting the pitchforks out of their toolsheds.