by matthew piepenburg, gold switzerland:

it ‘d and will come as no surprise that primordials like valuation basics and sane credit lvls ‘ve left the building (and securities mkts) for some time.

tody, we literally invest (i.e. buy and sell) in a veritable mkt twilite zone beyond site, sound, reason and, well…earnings, profits and $$$-flo.

b'that’s wha’ happens when a central bnk produces fiat mny like this…

truth lives on at…

that is, gobs and gobs of printed usds (of which the fomc has promised + this week) keep bnks artificially liquid, bond prices artificially bought/high, yields artificially repressed and thus rates (i.e. the cost of borrowing) stapled to the floor of history.

b'tas the austrian school reΨs, cheap debt leads to debt binging, and debt binging leads to very bad things…

cheap debt = crappy bonds & zombie enterprises

smelling cheap rates, u.s. companies will borrow (i.e. binge) like this…

corporations chase cheap debt almost as much as college kids seek discounted beer, and use it just as dangerously—i.e. to buy-back their own shares or issue dividends with borrowed usds, make no profits and then call themselves “recovered” as their stock prices fly, literally, on borrowed wings.

many, in fact 15%, of these debt-drunk enterprises are walking dead “zombies” who borrow at advantaged rates just to pay yesterdy’s interest and ‘ve no chance at all of ever repaying the principal.

these zombies, however, are just one member of an over-all embarrassing club of u.s. corporate bond issuers, 67% of which are rated at or just a pinch above junk, high yield or levered loan status—namely the very bottom of the credit barrel.

from bad bonds to infl8d stocks: just do the math

but when not issuing iou’s to stay alive, many of those same enterprises are passively riding a stock mkt wave above jagged rocks of broken balance sheets hidden just beneath the wataline.

and as for modern balance sheets–do they or any other rule of math and common sense even matter any+ in this new twilite zone?

toward that end, i’m thinking of  those pesky items of the ancient past like earnings, profits, $$$ flo, book val etc.

as doug cass recently reΨed, nearly every traditional and once-respected measure of sound stock valuation—i.e., pe ratios (27.9), cyclically adjusted pe multiples (32.9), price to earnings ratios (27.9), price to sales (3.0) or even buffet’s favorite, the classic total mkt cap to gdp (170%)—are all at record high lvls of over-valuation tody.

and yet buyers are crowding in for +, buying at (and chasing) frothy tops like sheep folloing a mad herdsman.

speaking of mad crowds and their even madder herdsman, citigroup is forecasting an s&p at 3800 for 2021 while jp morgan and kantor fitzgerald are anticipating 20% surges from current stock valuations for the coming yr–pandemics, recessions and unemployment lvls be damned.

price to wha’?

but let’s pause and ponder (for the sake of brevity) just 1-odda many 100th %ile metrics of mkt overvaluation—the infamous price to operating earnings ratio.

it’s worth noting that current pe ratios for the s&p are now where they were just b4 the infamous bubble-popping of 2001 and even higher than where they stood b4 the gr8 rise of 2008 made history as the gr8 financial crisis odat same yr:

look a lil scary to you?

now look even closer.

wha’’s pticularly eerie is just how fast those ratios (i.e. metrics of gross over-payment) ‘ve climbed since the mkt tanked in mar of this yr.

folks, it’s not as if earnings were rising by double digits cause valuation was rising atta same pace.

au contraire.

if we look at actual earnings per share data, they confirm that earnings tody are where they stood in 2018 when the mkt was vald much loer.

this means tody’s (and 2morro’s) investors are literally riding such an optimistic high t'they are openly (and likely unknowingly) paying 35% higher prices for the same companies whose earnings ‘ve not risen for the same period.

further+, earnings per share data s'been totally distorted by trillions in corporate stock buy-backs, tch'mins investors are paying far + than even these staggering %ages confirm.

so, wha’ gives? wha’’s goin on? how did things get this crazy?

mania and mkt ψ-chology

in simple terms, we're witnessing a mania, and manias, like viruses, can last for a long time.

mania’s +over, ‘ve less to do with valuations and math—i.e. pe ratios and bond yields—and + to do with ψ-chology, a topic absent from most wall street (and even main street) reading lists.

looking at past manias and bubbles, we know that maniacal investors always pile in together onna buy-side, ignoring valuation sobriety til they are forced to—i.e. when it’s too l8.

wolso' know that mkt manias often ‘ve no correlation to primordialistic economic conditions, and thus mkts can thrive while economies (as now) are literally gasping for air.

in fact, manias typically gain speed rather than tire out as mkts pierce resistance lvls and reach new, record-highs, seemingly, with each weekly headline and despite every red flag from traditional valuation metrics.

confidence follos headlines, and headlines create crowds, and crowds follo each other (na sell-side)—rite up to, and then eventually, rite over a mkt cliff.

this is true of all bubbles and maniacal mkts, from revolutionary france (1793), the roaring 20’s (1929), the bloated nikkei (1989), the irrational nasdaq (2000), or the sub-prime s&p (2008).

overestimating skill while underestimating humility

ψ-chologists, for ex, ‘d reΨ dat a' cogg bias often occurs in bull mkts wherein individuals offa lo ability at a given skill begin to overestimate their abilities due simply to an “inability to face their inability.”

this often takes place when investors are enjoying a trend (or mania) rather than genius or fair price discovery.

the mythic lads call this ψ-chological phenomenon the dunning-kruger affect, and i’d contend that many self-smug fed chairs and wealth advisors, swell as many investors, are sufferation from it now as they passively enjoy (and take credit for) a maniacal mkt rise.

this disease of false confidence spurred by false (i.e. artificial mkts) is pticularly the case for janet yellen, who is now heading from the fed to the treasury with much applause.

ah, how the ironies do abound. when it comes to monetary discipline, yellen atta treasury makes as much sense as madoff atta sec.

read + @…

original content at:$+new+media+press%29…
authors: epeakin


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