The robo-traders and Wall Street punters were busy painting the tape yesterday, and did bump the Nasdaq composite across the magic 5,000 threshold for the first time since March 2000. But even as Wall Street urged home-gamers to "return with us to the thrilling days of yesteryear", the caveats about this time is different were flowing with abundance:
This time, the Nasdaq at 5,000 is underpinned by substantial companies with strong sales and credible plans for growth, not wishful schemes to "monetize eyeballs" and sell pet food online.
Not exactly. This time is very different, but, as they say, not in a good way. Not even close.
Since the two days of March 9 and 10 in the year 2000 when the Nasdaq closed over the 5,000, the financial markets have been converted into central bank managed gambling halls and the global economy has bloated beyond recognition by 15 years of non-stop financial repression. Back then, a few hundred stocks were wildly over-valued based on monetizing eyeballs; now the entire market is drastically overvalued owing to the false financial market liquidity generated by $14 trillion of central bank asset monetization----mostly public debt--- since the turn of the century.
As a result, the global financial system and economy are orders of magnitude more fragile and vulnerable to collapse than they were 15 years ago. Indeed, nearly all of the tail winds which managed to quickly revive markets and economic growth after the dotcom crash have now played out, and, if anything, will morph into stiff headwinds in the period immediately ahead.
For better or worse, for example, China proved to be a powerful tailwind after the turn of the century. It functioned as an enormous global locomotive that generated hyper-growth in the energy and resource industries; and which also ignited a supplier boom in a whole variety of EM industries from Brazil's soybean and iron ore sectors to shipbuilding and semiconductor production in South Korea.
Yet this was accomplished not through healthy, balanced, market- driven investment and enterprise, but through the most spectacular credit bubble in human history. At the end of the year 2000, China's debt was about $2 trillion and its GDP was about the same.
By contrast, today its credit market debt outstanding is about $28 trillion or 14X greater, according to McKinsey's research. Notionally its GDP is up by 5X to about $10 trillion, but that doesn't really mitigate the debt explosion. That's because China's GDP growth was a force draft concoction of state directed credit spending that resulted in massive waste and unproductive investment. Rather than catalyze permanent gains in wealth and sustainable output, its erected a phony hothouse economy which will inexorably implode and crater.
So doing, China's imminent collapse will drive powerful waves of global deflation as its demand for iron ore, coal, petroleum, alumina, copper, manufactured components and intermediates and shipping and distribution services falters. In short, the world economy is drastically overbuilt owing to the "China bid" for materials and supplies----meaning that what had been a source of extraordinary profits and margin expansion in the world materials and industrial economy will become a sledgehammer on prices, margins and profits in the years ahead.
At the peak in 2012-2013, upwards of 23% of S&P profits were attributable to energy and materials. But the China deflation now gaining a head of steam will vaporize these bloated profits in the years ahead, taking a huge bit out of aggregate corporate earnings.
Or take the hapless case of Europe. At the turn of the century, the single currency was an economic supernova just beginning its eruption. As is now evident, Germany's credit rating was being seconded to inefficient, corruption-ridden welfare states all over the continent, but especially on the periphery. And for the first decade, the resulting one-time explosion of public and private credit generated by that false credit transfer did wonders for the reported GDP numbers and the profits of global corporations that answered the EU demand call. It was a tailwind on steroids.
But as is evident from the three charts below, the one-time credit boom that accompanied the euro is over and done. Public and private debt carrying capacity is tapped out. Consequently, eurozone growth hit a peak in 2008 and has flat-lined ever since. Now Europe's traditional welfare state and dirigisme headwinds to economic growth will be compounded by an endless struggle of aging, uncompetitive economies with peak debt.
Today every European country has a total debt-to-GDP ratio in excess of 300% and many such as Portugal, Ireland and France have debt burdens above 400% of national income. And that means that Europe too will be a deflationary headwind in the years ahead. They cannot stimulate with Keynesian fiscal remedies because the have reached peak public debt; and they cannot grow out from under their crushing public debt burdens through easy money and private credit expansion because households and business in most of Europe are already at peak debt.
All that remains is for the ECB to indulge in a final burst of QE style money printing in a futile effort to reignite growth. But the Draghi monetary tsunami is nothing more than a last incendiary hurrah. It will cause the Euro to eventually plunge through parity with the dollar, meaning that the tailwind of translation gains that flattered S&P profits since the turn of the century will turn into a ferocious headlwind in the years ahead as the euro stumbles toward its final demise.
Finally, consider the debt-bloated US economy. At the turn of the century total public and private debt was $28 trillion and it represented 2.6X GDP. During the next 15 years total US debt erupted to nearly $60 trillion and 3.5X GDP. That latter ratio is unsustainable and a measure of the false economy embedded in the GDP numbers. By contrast, during the pre-1970 era of healthy and sustainable US economic growth, the peacetime leverage ratio against national income was never much above 1.5X.
The bottom line is that corporate sales and profit growth in the US domestic economy after the last Nasdaq bust got a booster shot from the final burst of leverage reflected in the above ratios. Yet that means that some portion of business sales and output were being stolen from the future, not erected from enhanced enterprise and productivity. Accordingly, domestic profit growth will inherently slump in the years ahead---especially because profit margins have soared far beyond any prior historical experience and have already begun to rollover.
Needless to say, the nation's monetary politburo remains oblivious to these global realities of peak debt and the deflationary correction now emerging after nearly two decades of lunatic money printing by the central banks. The Fed's balance sheet did indeed explode from $500 billion when the Nasdaq last crossed 5000 to $4.5 trillion today. But even Yellen's merry band of money printers know that eruption was a one time parlor trick that has not worked. The jig is up, and the last 15 year's egregious inflation of financial assets by means of central bank monetary expansion cannot be repeated or even sustained.
So today what is different is not the Wall Street spiel that Nasdaq is anchored by the likes of Apple rather than Webvan. What is really different is that the broad market represented by the S&P 500 is trading at the tippy top of its historic range---- 20X reported earnings----in a world where PE multiples and profits are deeply imperiled. That is, the headwinds arising from the very central bank aberration that cushioned the collapse of Nasdaq the first time around will soon come to bear on the entire market, not just the narrow sector of high flyers that confused eyeballs with earnings.
This time is indeed different. Not in a good way. Not at all.