by David Stockman, David Stockman’s Contra Corner:
Nearly everywhere on the planet the giant financial bubbles created by the central banks during the last two decades are fracturing. The latest examples are the crashing bank stocks in Italy and elsewhere in Europe and the sudden trading suspensions by three UK commercial property funds.
If this is beginning to sound like August 2007 that’s because it is. And the denials from the casino operators are coming in just as thick and fast.
Back then, the perma-bulls were out in full force peddling what can be called the “one-off” bromide. That is, evidence of a brewing storm was spun as just a few isolated mistakes that had no bearing on the broad market trends because the “goldilocks” economy was purportedly rock solid.
Thus, the unexpected collapse of Countrywide Financial was blamed on the empire building excesses of the Orange Man (Angelo Mozillo) and the collapse of the Bear Stearns mortgage funds was purportedly owing to a lapse in supervision.
So it boiled down to an injunction of “nothing to see here”. Just move along and keep buying.
In fact, after reaching a peak of 1550 on July 18, 2007, the S&P 500 stumbled by about 9% during the August crisis, but the dip-buyers kept coming back in force on the one-off assurances of the sell-side “experts”. By October 9 the index was back up to the pre-crisis peak at 1565 and then drifted lower in sideways fashion until September 2008.
The bromides were false, of course. Upon the Lehman event the fractures exploded, and the hammer dropped on the stock market in violent fashion.
During the next 160 days, the S&P 500 plunged by a further 50%. Altogether, more than $10 trillion of market cap was ionized.
The supreme irony of the present moment is that the perma-bulls insist that there is no lesson to be learned from the Great Financial Crisis. That’s because the single greatest risk asset liquidation of modern times, it turns out, was also, purportedly, a one-off event.
It can’t happen again, we are assured. After all, the major causes have been rectified and 100-year floods don’t recur, anyway.
In that vein it is insisted that U.S. banks have all been fixed and now have “fortress” balance sheets. Likewise, the housing market has staged a healthy recovery, but remains lukewarm and stable without any signs of bubble excesses. And stock market PE multiples are purportedly within their historic range and fully warranted by current ultra-low interest rates.
This is complete daytraders’ nonsense, of course. During the past year, for example, the core CPI has increased by 2.20% while the 10-year treasury this morning penetrated its all-time low of 1.38%. The real yield is effectively negative 1%, and that’s ignoring taxes on interest payments.
The claim that you can capitalize the stock market at an unusually high PE multiple owing to ultra-low interest rates, therefore, implies that deep negative real rates are a permanent condition, and that governments will be able to destroy savers until the end of time.
The truth of the matter is that interest rates have nowhere to go in the longer-run except up, meaning that the current cap rates are just plain absurd. Indeed, after last’s week’s “bre-lief” rally the S&P 500 was trading at 24.3X LTM reported earnings
Moreover, the $87 per share reported for the period ending in March was actually down by 18% from the $106 per share peak recorded in September 2014. So in the face of falling earnings and inexorably rising interest rates, the casino punters are being urged to close their eyes and buy the dip one more time.
And that’s not the half of it. This time is actually different, but not in a good way. Last time around the post-August 2007 dead-cat bounce was against $85 per share of S&P LTM earnings, meaning that on the eve of the 2008 crash the trailing multiple was only 18.4X.
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