Submitted by QTR’s Fringe Finance
I can’t imagine how any sane person would take a look at this article I published last week and conclude anything other than that the stock market is extremely overvalued.
And I mean, heading into nosebleed, unprecedented territory.
Yet the market continues to rage higher, and nobody seems concerned. To me, this means there is only one legitimate question investors should ask themselves heading into 2025.
To put it simply, that question is: “Is it different this time?”
Investors often joke about the phrase “it’s different this time” as a way to ironically note that it is never different and the market always winds up puking back bad investments and healing itself of speculation, euphoria, frauds, and all the other wonderful things that come with perpetual bull markets fueled by money printing.
But I think that’s the legitimate question investors need to meditate on heading into the new year. Because if it really isn’t different this time, and all the laws of economics and historical market norms of the past apply, we’re undoubtedly due for a catastrophic crash in the stock market at some point. I can’t pinpoint which hole on which balance sheet will catalyze it, but I’m certain there is more than enough detritus and buildup floating around out there to light multiple crash fuses at once.
I’ve often said on this blog that institutions are panicking, businesses are imploding, frauds are running out of runway, and massive write-downs are being pushed off for just one more quarter right now, as you read this very sentence. We just won’t find out about them until further down the road.
Not unlike monetary policy and the effect of interest rates, there is always a lag in reality making its way to the surface in financial markets. The trillion-dollar question is how long it’ll take, what means it will rear its head through, and what the public reaction will be.
Let’s take a step back and examine a couple of the historical indicators that were pointed out last week.
How about the Buffett Indicator (market cap/GDP) nearing all time highs?
How about the S&P deviations from its historic value also nearing all time highs?
How about the U.S. at 75 year highs against the rest of the world?
How about all time highs in stock concentration in the Top 10 S&P 500 names?
Now, looking at these figures, how can anybody conclude that valuations will stay where they are in perpetuity?
After all, if you are bleeding bullishness at this point and throwing money hand over fist at a market with a Shiller price-to-earnings ratio of 38x (second highest in history, second only to the dot com bubble), you essentially are voting with your capital that valuations will stay this extended—or get more extended—over time.
Certainly, one could theorize that earnings growth over time will make up the difference, but that’s a really tough scenario to seriously entertain with positive real rates and interest rates still near historical highs.
There is the unrelenting reality that high rates are going to continue to slowly and steadily chip away at the American consumer’s discretionary cash, and this is starting to be reflected in macroeconomic data like dwindling savings and increasing delinquencies across all types of credit. There’s still no doubt in my mind that the math underlying the entire economic picture guarantees we are going to have a larger hiccup down the road and significantly more volatility for markets at some point before the Fed reacts.
So what could the bull case possibly be if I still believe that? Well, take a look at what happened heading into COVID. We essentially shut down the entire economy, and while the market crashed temporarily, the Fed quickly threw $5 trillion+ on its balance sheet and printed enough money to paper over the actual economy with a fake fiat substitute, disguised as “economic stimulus.” A ton of this money then poured into capital markets and continues to do so. As everybody witnessed, stock indexes—let alone innumerable individual stock examples — increased by multiples off their lows hit back in 2020. GDP increased less than 20% since 2020 lows, yet the NASDAQ – an index – fucking tripled in 5 years. Louder for people in the back.
The NASDAQ – an index – has f*cking TRIPLED in just 5 years.
Not. Normal.
It has been a straight-up, full-force gale rocket launch into the stratosphere, without any rhyme or reason, in stock markets over the last five years, and we have our insane, flawed monetary policy to thank for it.
The point I’m trying to make is not whether or not we should be comparing fundamental crash apples to fundamental healthy economy and consumer oranges; it’s simply a broader question of whether our stock market is permanently broken as a result of a backhanded embrace of hyperinflation or if we will ever return to historical norms.
The real fly in the ointment is going to be when inflation does not come back to expected norms—or if it does and then immediately skyrockets higher once the Fed starts printing again. At the risk of sounding like a broken record, I think the market will eventually correct at some point, and the only question then is how the Federal Reserve reacts to it.
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If inflation is still at 2.7%, how is the Fed going to justify a return to quantitative easing and lower rates? They’ll need a public PR campaign that essentially convinces the American public that more inflation—say, a 3% target for “temporary” purposes—is acceptable. This is essentially the public accepting another step toward hyperinflation.
If the Fed chooses not to immediately jump to the rescue of markets during a correction, the issues are going to compound, and all of the economic filth that has been swept under the rug over the last five years is going to start rearing its ugly head. And instead of a rocket ship heading to the stratosphere, we’ll have a snowball made of economic dog shit rolling down a hill, forcing more fraud and bad investments out of the woodwork as it picks up steam until it eventually starts to look like something out of the Book of Revelation. The Fed’s hands are going to be tied in this instance.
I think we all know that the heavy favorite in a situation like this is the Fed trying to calm markets and thereby embracing more inflation. If that happens, and they somehow get the public to acquiesce to the idea that more inflation is OK, or is going to be the norm, or is necessary to prevent the collapse of the economy, then there really will be a case for stocks trading at insane historical valuations. The case will essentially be that the entire United States economic system as we’ve known it over the last hundred years is now fundamentally broken.
If I’m right, there’s a greater than 0% chance that we may never seen 2% inflation again.
In other words, we will have gone from a normal, rational market with sound money and consequences for bad investments to a central-bank-socialized fiat money inflation machine. In circumstances like that, why would anybody worry about valuations? Why would anybody worry about how much a company returns to shareholders in net income? Not trying to be hyperbolic, but why would anybody worry about anything? For all intents and purposes, if the markets become a full-on socialized subsidiary of central banks—even more so than they already are—there will be no guardrails or fundamentals left to even cling to. We’ll talk about P/E ratios and generating profits the way people talk about the phonograph nowadays.
One thing that’s fun to do is look back at countries that have experienced hyperinflation and see what their stock markets have done. Take a look at Venezuela’s stock market as the country suffered from inflation: it’s done nothing but rage higher.
Holy sh*t, we’re all rich!
Of course, these gains have all come in nominal terms and mean nothing because each country’s entire respective economy has entered into full collapse, completely destroying its middle and lower classes while barely allowing its upper class to maintain some semblance of wealth.
For the love of God, won’t someone tell this kid he’s a trillionaire?
At that point, nothing will matter because society will be in such disarray that stock valuations will be very low on the pecking order of priorities for most Americans.
I see these signs out there now for the U.S.
There is endless hubris and arrogance on social media as it relates to the stock market. I have watched dozens of obvious frauds called out over the last few years with little or no consequences. We have an entirely new, perplexing asset class in cryptocurrency, which has amassed a multi-trillion-dollar market cap, despite continued questions about what most of it will ever be used for. The introduction of a new generation of retail stock market investors over the last 10 years has diluted the pool of market participants, who once, on average, at least had a shred of sophistication about what they were investing in and why. Now, our stock market has become nothing more than a glorified, digital roulette wheel, with clueless teens and 20-somethings placing bets and simply hoping that they score big – then posting their wins and losses on r/WallStreetBets.
Similarly, as investing has evolved, so has online gambling. On my Instagram feed, I frequently see people live-streaming their gambling on online casinos. Many of them aren’t playing slots or online poker; instead, they’re literally playing games that simulate coin flips, repeatedly mashing a button until their account balance goes up or down. As the gambling industry has devolved, so has the stock market, which isn’t far removed from the coin-flip game I’m describing.
These investors are the highly volatile super short chain hydrocarbon gasoline fueling much of the euphoria in markets now. The kind of gasoline that catches fire when you just look at it the wrong way. People feel like they cannot lose and they’re dumbfounded when they do:
And when you don’t consider nominal gains (Venezuelan stock market) versus real ones, and when you have a Federal Reserve whose unwritten third mandate is to protect equity markets, the people who feel like they “cannot lose” might be “right” all the way to hyperinflation.
The question I’ll be trying to handicap going into the new year is whether or not this time really is different. Because the difference between reverting to historical averages on stock indexes or multiple expansion into the 40x to 50x territory is the $100 trillion question. And while I don’t have the answer today, I will be doing nothing but looking for clues as to which direction we are heading in as time progresses. Spotting these waypoints before the rest of the market will be the name of the game in 2025, if you ask me.
As always, I’d welcome your thoughts over at Fringe Finance in the comments.
QTR’s Disclaimer: Please read my full legal disclaimer on my About page here. This post represents my opinions only. In addition, please understand I am an idiot and often get things wrong and lose money. I may own or transact in any names mentioned in this piece at any time without warning. Contributor posts and aggregated posts have been hand selected by me, have not been fact checked and are the opinions of their authors. They are either submitted to QTR by their author, reprinted under a Creative Commons license with my best effort to uphold what the license asks, or with the permission of the author.
This is not a recommendation to buy or sell any stocks or securities, just my opinions. I often lose money on positions I trade/invest in. I may add any name mentioned in this article and sell any name mentioned in this piece at any time, without further warning. None of this is a solicitation to buy or sell securities. I may or may not own names I write about and are watching. Sometimes I’m bullish without owning things, sometimes I’m bearish and do own things. Just assume my positions could be exactly the opposite of what you think they are just in case. If I’m long I could quickly be short and vice versa. I won’t update my positions. All positions can change immediately as soon as I publish this, with or without notice and at any point I can be long, short or neutral on any position. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates. I did my best to be honest about my disclosures but can’t guarantee I am right; I write these posts after a couple beers sometimes. I edit after my posts are published because I’m impatient and lazy, so if you see a typo, check back in a half hour. Also, I just straight up get shit wrong a lot. I mention it twice because it’s that important.
