The broad market (S&P 500) is trading at the highest forward PE multiples since November 1999, but the financial press is rife with mendacious piffle claiming there is no bubble. For example, in celebration of Tuesday’s all-time high on the S&P 500, one James Mackintosh of the Wall Street Journal minced no words:
Except,
the Everything Bubble is in the imagination of the many investors complaining
about it. First, it isn’t everything. Second, it isn’t a bubble….
Right. Supposedly, the above
statement is true because energy sector stock prices are in the tank, but the
market is being rationally led by the tech giants where allegedly solid
prospects for earnings growth are being rewarded with higher PE multiples owing
to ultra-low interest rates.
…. Lower
rates mean profits further in the future matter more to the share price, so
companies with steady earnings no matter what the economy does are worth more.
Those that are sensitive to the economy are worth less, because future earnings
are expected to be hit. Growth stocks do incredibly well, because their
future earnings are expected to be higher and, at least for those thought
immune to economic weakness, worth more as well thanks to lower rates.
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Apply this framework and there’s no bubble. U.S. stocks are more highly valued than in the past because they are dominated by big growth stocks, themselves justifiably more highly valued thanks to low rates.
The sheer laziness and
conformism of today’s so-called financial journalists is a wonder to behold.
When the leader of the tech growth stocks, Apple, crossed the $2 trillion
market cap barrier for the first time today, thereby embodying more market cap
than the entire Russell 2000 of small cap US companies, Mackintosh’s colleague
at the Wall Street Journal spewed the same groupthink:
The
stock has more than doubled from its March 23 low, boosted by steady demand for the company’s devices and
better-than-feared results in its core iPhone business as millions of Americans
work from home.
Steady
sales growth is driving the string of achievements. Apple’s
sales rose to $260 billion in the fiscal year ended in September from $216
billion three years prior. The company has even grown sales during the
pandemic: For the quarter ended in June, they rose 11% from a year earlier to
nearly $60 billion, exceeding Wall Street expectations. Earnings surged
to $11.25 billion.
Apple is not a growth stock. Period.
The
three-year sales gain cited by the WSJ amounted to
only 6.4% per annum, but also reflects what amounts to journalistic
malpractice.
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That’s because the starting figure of $216 billion for Apple’s FY 2016 sales actually reflected a 7.8% decline from sales of $234 billion in FY 2015. So the four-years growth rate of sales through FY 2019 was, well, a mere 2.67% per annum.
Likewise,
the 11% sales gain during the June 2020 quarter versus prior year is completely
misleading. During the past four quarters, the year-over-year sales gains have
been all over the lot, posting at 10.9%, 1.0%, 8.8% and 1.8% respectively.
Accordingly, for the LTM period ended in June, the sales gain was just 5.7% – hardly a barn-burning growth figure.
Likewise,
the purported June quarter earnings “surge” to $11.25 billion was nothing of the kind. During
the 2018 June quarter, for instance, net income posted higher at $11.52 billion. The surging at issue, therefore,
was one of backward motion.
In fact, the only thing about Apple which has been in a growth mode during the last five years is the company’s PE multiple, which has essentially doubled from 14X to 35X at today’s record share price.As to the actual 5-year trend of sales and earnings growth, not so much.
Back
in June 2015 Apple was valued at $715 billion on
the strength of its unparalleled tech product franchise, which was reflected in
$224 billion of annual sales and $50.7 billion of
LTM profits.
Still,
there was a reason for the modest implied PE multiple of 14.1X: Namely, the tech behemoth’s growth rate was
rapidly slowing – freighted down by the inherent limits embedded in its
enormous scale and the then modest expectations for earnings expansion in the
immediate years ahead.
Those
modest expectations were accurate. Five years later, the LTM figures for June
2020 came in at $273.9 billion of
sales and $58.4 billion of net
income.
Yes,
the latter figure represents a lot of profits, but it embodies hardly a modicum
of growth. In fact, Apple’s five-year sales growth rate was just 4.1%, while its net income growth rate clocked in
at only 2.9% per annum.
Moreover,
there has been no recent growth spurt to accelerate these five-year trend rates
of growth. The two-year growth rates are even slower, with sales posting
at 3.6% per annum and net income rising by
just 2.03% per year.
Needless to say, the doubling of Apple’s PE multiple has nothing to do with its punk five-year net income growth rate of 2.9% per annum; it’s about the Fed’s radical repression of interest rate and the resulting diversion of trillions of borrowed capital into the inflation of risk asset capitalization rates.
Nor is Apple some kind of
outlier, albeit it is the monster of the tech midway. Overall, the so-called
Fab Five (Amazon, Apple, Microsoft, Facebook and Google) reflect the same
multiple inflation story; and they are obviously the pile driver that is
pushing the heavily ETF and indexer-driven stock market up into the nosebleed
section of history.
Thus,
back in June 2014, the Fab Five’s combined market cap weighed-in at $1.63
trillion and accounted for 9.5% of the
overall S&P 500’s market cap of about $17.0 trillion.
Fast
forward six years, and the Fab Five were valued at today’s close at $7.1 trillion, which accounts for 26% of the $27.7
trillion total market cap of the S&P 500.
So,
yes, the term “pile-driver” is probably an understatement. Fully 50% of the S&P 500’s $10.7 trillion market cap gain since June 2014
is attributable to the Fab Five.
At
the same time, the combined net income of the Fab Five has risen from $76.3
billion to $170.7 billion, meaning that the already frisky PE multiple of 21.4X for the group as a whole in June 2014
has now stands at 42.0X.
Obviously,
averages can be misleading, but they do not lie. The composite net income
growth rate of the Fab Five “growth stocks” has been just 14.4% over the past six years.
In a
world which is literally unwinding at the seams owing to the Covid pandemic and
a $260 trillion burden of debt, a valuation multiple equal to 42X or nearly three times the trailing growth rate makes no
sense whatsoever.
That’s because the James
Mackintosh groupthink cited above is marred with a mighty flaw. To wit, you
can’t value earnings into the indefinite future owing to today’s ultra-low
interest rates that are definitely not sustainable.
The Fed’s policy of radical
interest rate repression simply defies the laws of finance and common sense
because real yields are negative, and in the long-run negative real yields are
an oxymoron.
The chart below is the
smoking gun. Once upon a time there was meaningful daylight between the brown
line (nominal yield on the benchmark 10-year UST) and the purple line (running
inflation rate measured by the 16% trimmed mean CPI).
That
is, even so-called risk-free US Treasury debt had a real yield of 200-400 basis points to account for taxes and
a real return on investment.
But after the final leap into
monetary madness commencing with the financial crisis of 2008-2009, the real
yield had virtually disappeared; and then after the massive $3 trillion Fed
bond-buying spree commencing in mid-March, the benchmark security of the entire
global fixed income market went deeply negative in real terms.
As of
the latest month, the running inflation rate clocked-in at 2.27% (June LTM) compared to an all-time low
yield on the 10-year UST of 52 basis points a
few weeks back.
Needless
to say, when the real cost of risk-free benchmark debt is negative 175 basis points, you are
not in an indefinitely sustainable steady state. You are actually courting
financial disaster.
That’s especially because
fiscal policy in the US and elsewhere around the world has become completely
unhinged.
So unless the Fed and other central banks continue their massive bond
purchases in response to this tsunami of public debt, the bond pits are heading
for a train-wreck sometime soon; and if the central banks continue to print at
current lunatic rates, the monetary system itself will go into meltdown.
Still, the misbegotten idea that the stock market isn’t overvalued because bond prices have been massively inflated by central bank money-pumping is just one instance of the present tyranny of groupthink – called to attention by Apple’s crossing the $2 trillion market cap barrier.
In fact, groupthink is omnipresent in the mainstream narrative and
so-called news. The nearly universal belief that the Covid-lockdowns were
necessary and effective and that the coronavirus can be stopped by brute-force
economic and social regimentation is another case in point – underscored by a
new analysis of the Swedish outcome.
The mainstream narrative, of course, is that Sweden’s no lockdown
policy – the schools, restaurants, movies, gyms, malls etc. remained open – was
a disastrous failure, thereby vindicating the universal quarantine approach of
Dr. Fauci, Governor Cuomo and the rest of the Blue State Virus Patrol.
But that’s based on the
irrelevant observation that Sweden’s overall WITH-Covid mortality rate of 56
per 100,000 is far higher than that of Norway, Finland and Denmark.
The truth is, Sweden’s
mortality rate happened in the long-term care facilities, where 75% of the
country’s 5,800 WITH-Covid deaths to date (August 18) have occurred, and which
is neither here nor there when it comes to lockdowns of the non-elderly
population.
Fortunately, a breakdown of
Sweden’s WITH-covid deaths by detailed age brackets is readily available and it
puts the kibosh on Dr. Fauci’s Lockdown Nation folly.
Number
of WITH-Covid deaths/ Population/Rate per 100,000 by age cohort:
- 0-9
years: 1/1.22 million/ 0.08 per
100,000;
- 10-19
years: 0/1.19 million/ 0.0 per
100,000;
- 20-29:
10/1.31 million/ 0.77 per
100,000;
- 30-39
years: 16/1.37 million/ 1.16 per
100,000;
- 40-49
years: 45/1.31 million/ 3.42 per
100,000;
- 50-59
years: 162/1.27 million/ 12.8 per
100,000;
- 60-69
years: 398/1.14 million/ 34.8 per
100,000;
- 70-79
years: 1,250/.917 million/ 128.7 per
100,000;
- 80-90
years: 2,408/.425 million/ 567.0 per
100,000;
- 90
years plus: 1,512/.119 million/ 1,271.0 per
100,000.
So,
yes, Sweden has a WITH-Covid mortality rate of 56 per 100,000 for the entire
country. But 26% of those deaths
occurred among the population 90 years and older, which accounts for just 1.1% of Sweden’s population.
Similarly,
67% of the deaths were among the population 80 years and older and 93% were among those aged 65 or more. By
contrast, persons 65 and older account for just 19% of Sweden’s population, and the
preponderant share of the latter, who have suffered serious illness or death
from the Covid, were already in long-term care facilities and programs.
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Needless to say, locking down the schools, gyms, restaurants and malls does nothing for the institutionalized population of the vulnerable elderly and co-morbid. Sheltering and treating the latter in place, rather than quarantining the younger, healthier populations, is the self-evident answer.
Indeed,
the virtue of Sweden’s anti-lockdown strategy virtually screams out from the
schedule above. Sweden did not close its schools, yet there has been just one WITH-Covid death among its 2.4 million
school age children under 20 years.
Likewise, there have been just 71 deaths
among its 4.0 million prime working and consuming age population (age 20-49).
That’s a rounding error mortality rate of 1.77 per
100,000. Who in their right mind would want to shut down the economy based on
such infinitesimal risks?
Stated
differently, the risk of death from Covid in Sweden has been 720X higher for the largely institutionalized
90 and over population compared to the prime working age group (20-49 years);
and has also been 157X higher
for the entire population 65 and over than for prime workers and the population
that is the preponderant patron of the social congregation sectors of the
economy.
Fortunately, Sweden also has
readily available data on normal, year-in-and-year-out mortality, which rate is
about 862 per 100,000 for the total population. But when you breakdown these
normal mortality rates by age cohort and cause of death, the insanity of
Lockdown Nation become all the more apparent.
Specifically,
there are about 3,429 deaths
per year in Sweden from auto crashes, falls, drownings, electrocutions,
poisonings and other accidents, and these account for about 4% of Sweden’s 2019
death total from all causes of 89,000.
However, when you look at
mortality rates per 100,000 from accidents alone, the starling result is that
the existing risk of death from accidents is far higher than from the Covid for
the entire 8.4 million population under 65 years of age, and for the young and
middle-aged decidedly so.
Mortality
rates per 100,000 for accidents versus Covid and ratio of
accident/Covid risk:
- 0-14
years; 1.38 versus 0.06=25X;
- 15-44
years: 12.3 versus 1.2=10X;
- 45-64
years: 20.6 versus 15.4=1.34X;
- 65
years & older: 115 versus 257=0.45X.
In
short, when the ordinary risk of death is 10-25X greater for
accidents than from the Covid for the young and working population, you don’t
shutdown the economy and the main avenues of social congregation.
Due to enlightened
leadership by Sweden’s health professionals and leading epidemiologists, they
got it right, and now both new cases and WITH-Covid deaths have virtually
disappeared.
And that’s to say
nothing of the fact, that Sweden’s Q2 GDP decline of just 8.6% was far better
than the double digit declines in the US and most European countries, which
imposed far more draconian lockdowns.
In America, by contrast, the tyranny of groupthink on the
matter has become so great that college football and in-person college classes
are being closed from coast-to-coast when the risk of serious illness or death
among the college age population here, like in Sweden, is virtually nil.
PEAK TRUMP, IMPENDING CRISES, ESSENTIAL INFO & ACTION
Reprinted
with permission from David Stockman’s Contra Corner.
Former Congressman David A. Stockman was Reagan's OMB director,
which he wrote about in his best-selling book, The Triumph of Politics. His latest books
are The Great Deformation: The Corruption of Capitalism in
America and Peak Trump: The Undrainable Swamp And The Fantasy Of MAGA.
He's the editor and publisher of the new David Stockman's Contra Corner. He was
an original partner in the Blackstone Group, and reads LRC the first thing
every morning.
Copyright
© David Stockman
https://www.lewrockwell.com/2020/08/david-stockman/the-tyranny-of-groupthink/