Trump is making America greedy again. Investors have bid up equities to unsustainable valuations, but what else is new? We can see that greed trumps fear so far in 2017, and that trend is likely to continue until it ends, suddenly.
Or, as the title to my next article puts it, "it goes up till it blows up." It seems investors have completely forgotten the lessons from 2000, let alone 2008 or the Great Depression. Indeed, with $20 trillion of debt on the books, and trillions more in off-balance sheet liabilities, this time the bubble truly is different.
In 1929, the nation had very little debt. We had buying power in case things went wrong. We didn't spend the wealth of three future generations trying to reflexively pump up the economy. That said, today, we have some banking regulations in place, less margined speculators, and a slightly better backdrop - even though stocks are bid, the rally has only brought the Nasdaq 100 to around 8% above the 2000 top. In the 1920s, the markets went straight up. The "upcrash" took about eight years. It started with a CAPE ratio of around 6X and ended with a CAPE of 30X.
In 2000, the U.S. was running a surplus. The Soviet Union had just collapsed, and it appeared to many that technology stocks would lead us into a "new era" of permanently high valuations. Part of that thinking was true - valuations have remained historically elevated for more than 20 years now. The rally started in 1982 with a CAPE of around 6X and ended in 1999 with a CAPE over 40X - clearly, more expensive than today's market, but not by that much when considering record profit margins. Also, today, we are trading for a 29X CAPE, 11.8X EBITDA (not even getting into EV/EBITDA), and for 2.5X the median S&P 500 (NYSEARCA:SPY) company's sales. In essence, I think it's a tie with 2000 for the worst bubble in our nation's history.
The real bubble exists in small and mid-cap index funds. The Russell 2000 (NYSEARCA:IWM) doesn't have a P/E multiple. Like the late 1990s technology index, the index is basically a conglomeration of strong growth businesses and failing "non-profit" companies running a loss. Overall, the Russell doesn't have a P/E multiple. If you strip out all of the businesses making a loss, that number is still 20X projected earnings. All in all, not a good deal for widows and orphans. The Mid-cap Spyder (NYSEARCA:MDY) is equally frightening to value guys, with a P/E multiple of around 40X, and a free cash flow yield of around 5% - mind you, that's still better than five-year bonds, but it carries headline risk.
When the next bubble bursting occurs, the FED and the Treasury will be largely out of bullets. That's why today's ramp-up on low volume will either be reversed, or you will be locked out of your account before a crash and will not be able to access your funds. Jim Rickards, who was the CIA spook in charge of financial warfare, thinks that our nation's position is so dire soon you will be unable to get into your brokerage account. All you will be able to do is "see" your balance, but you won't be able to withdrawal your money. Now, I'm not suggesting that you should panic. I simply think keeping some portion of your investible assets outside of the banking system is a must. I also think that spreading your exposure across many different banks makes sense - $250K deposited in several institutions will help mitigate your "bail-in" risk. Bail-ins are the Fed's plan for the next financial crisis - the taxpayer won't be on the hook next time. The depositor/investor will be the one to lose out.
With the change in laws allowing "bail-ins" investors must consider buying that second home, farm, gold bullion (NYSEARCA:GLD) (NYSEARCA:PHYS) (NYSEARCA:PSLV), diamonds, tractors, etc... or hoarding cash under the mattress. Personally, I think business assets like a backhoe make way more sense than buying the Dow (NYSEARCA:DIA) or Caterpillar stock (NYSE:CAT). Investors may be better off with the machinery.
Listen, one of the best arguments for owning stocks versus treasuries is that bonds are in a bubble. Back in the late 1990s, shorter-term treasuries yielded over 4% and a 10-year bond paid around 6% - today, the 10-year pays a paltry 2.5%, which means that the argument for holding more cash is relatively less attractive.
Disclosure: I am/we are long STOCKS (INCLUDING MDY) WITH MARRIED PUT OPTIONS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: stuck long against my will.... But happy to be wrong about it.