After another wild trading week in global markets, today one of the top economists in the world sent King World News an incredibly powerful piece warning that the global collapse is now accelerating. Below is the fantastic piece from Michael Pento.
“The Most valuable commodity I know of is information” — Gordon Gekko (Wall Street)
The major indexes are up nearly 200% since the March 2009 low. Today Wall Street has plenty of cheerleaders, but a lot less to cheer about: Stocks are far less attractive than they were on that day in 2009 and this bear has a lot longer to run…
Continue reading the Michael Pento piece below…
First, stocks that were over-hated in 2009 are now over-loved. This is evidenced by margin debt which is at all-time highs (notice extreme negative credit balance shown in red for the years 2000, 2007 and the extremes of 2015!).
Earlier in the year margin debt had risen over $30 billion or 6.5% to $507 billion and was equal to a record 2.87% of U.S. GDP. This surpasses the previous all-time high of 2.78% set in March 2000 – the top of the last largest stock market bubble in history.
And despite the assurance of every mutual fund manager on TV that they have boatloads of cash ready to deploy at these “discounted” levels, in early August cash levels at mutual funds sank to their lowest level in history, 3.2% (see chart below). As a percentage of stock market capitalization, fund cash levels are also nearing the record low set in 2000 when the NASDAQ peaked and subsequently crashed by around 80%.
Next, stocks are overvalued by almost every metric. My favorite metric, the Price to Sales Ratio, estimates the price of stocks over sales of the S&P 500 for 2015 at 1.66. In 2006 the Price to Sales Ratio was 1.49 and in 2007 it was 1.43. Compare this to 2008 when the ratio was .87 and in 2009 when it was 1.23.
Adding to this stock price overvaluation is the lack of revenue growth for S&P 500 companies and the negative effects of the rising dollar on multi-national companies.
China’s Downturn Has Created Worldwide Deflation
Then we have half of the developed world either in or teetering on the brink of recession. In 2009 China was in the infancy of a huge stimulus cycle that would lead to the largest misallocation of capital in history.
Empty cities don’t build themselves; they require an enormous over-demand of natural resources, which leads to an over-build in natural resource-rich countries such as Brazil, Australia, Russia, and Canada. Now those economies are in recession, painfully working down that over-build, and Japan and the entire European Union appear poised to follow.
China’s downturn has created worldwide deflation as seen in the Core PCE index and the CRB Index.
But the bulls on Wall Street would have you to believe that the cratering price of oil is a good thing because the related “gas tax cut” will drive consumer spending. Unfortunately we have yet to see the positive effects of falling oil, but the Dallas Fed has recently made us aware of the negative effects
Disastrous Economic Readings – Global Collapse Accelerates
The Dallas Fed’s Manufacturing Report showed its general activity index fell to -15.8 from an already weak -4.6 reading in July. Adding to this weakness were deflationary readings in raw materials at -8.0 and finished goods at a reading of -15.7.
Energy and the related fracking had been one of the few bright spots on the US economy since the Great Recession and has been the main impetus of jobs creation.
However, many Wall Street charlatans contend the United States is immune from deflation and a global slowdown and remain blindly optimistic about a strong second half.
Unfortunately we are already two-thirds of the way into the third quarter and the Atlanta Fed is predicting GDP will grow at an unimpressive rate of 1.3%. Furthermore, the August ISM manufacturing index fell to 51.1 from 52.7, its weakest read in over two years and the ADP private sector jobs number came in at 190,000, the market was expecting 220,000.
And speaking of GDP (gross domestic product), as second quarter GDP came in at robust 3.7 percent annual rate, due in part to a huge inventory build, GDI (gross domestic income) increased at an annual rate of only 0.6 percent.
GDP tracks all expenditures on final goods and services produced in the United States and GDI tracks all income received by those who produced that output. These two metrics should be equal because every dollar spent on a good or service (in GDP) flows as income to a household, a firm, or the government (and therefore should show up in GDI). The two numbers at times will differ in practice due to measurement errors. However, this is a fairly large measurement error, and it leads one to wonder if something else is going on.
Yet despite all this Fed Chairwoman Janet Yellen appears determined to board the USS Abraham Lincoln and hang the “Mission Accomplished” banner. She is desperate to claim victory and move off zero.
“What’s going on Bud? Do you know something? Remember, there are no shortcuts. Quick-buck artists come and go with every bull market, but the steady players make it through the bear markets.” — Lou Mannheim (Wall Street)
“You Are On Your Own Now”
In 2009 the Fed was willing to provide all the wind for the markets’ sail. And despite lackluster worldwide growth the stock market surged forward on zero interest rates and Federal Reserve money printing. For seven years there has been a huge disparity between economic fundamentals and the price of stocks.
Now Yellen and the Fed are determined to remove the final monetary accommodation — the zero interest rate policy. Even if they don’t get far off zero, they have given a clear message to the markets: “You are on your own now.” That means the bear market in stocks has just begun. ***KWN has now released the extraordinary Marc Faber interview, where he discusses why this global collapse will be much worse than 2008 – 2009, what investors can do to protect themselves, what to expect in major markets, including gold, and much more, and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
***ALSO JUST RELEASED: Marc Faber On The Next Terrifying Crisis CLICK HERE.
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