By Charles Biderman
Stock prices are near record highs despite the fact that the U.S. economy is barely growing. So it is highly unlikely stock prices will keep going up without the tail wind of massive money printing. Which means this stock market bubble will pop when the Fed announces that it will start slowing the new money game.
Yes, despite all the hopes, prayers and rhetoric, the U.S. economy is barely growing. Forget about GDP. GDP is a useless government stat that when first released is a nothing more than a guess. Instead, I look at withheld income and employment taxes reported in the Daily Treasury Statement. Adjusting for the changes in tax rates, what is really going on is that since March, year over year wage and salary growth before inflation has grown between 2.8 percent and 3.7 percent. That growth rate is down about a percentage point this year from 2011 and 2012 primarily because of this year’s boost in employment taxes. In other words, the underlying U.S. economy has been growing very slowly with no real change up or down over the past three years.
What does three to four percent wage and salary mean in the real world? Well, three percent wage and salary growth translates into $200 billion plus or minus in higher incomes each of the past three years. Is that good? Consider that we had wage and salary growth of about five to six percent annually during the mid 2000’s and that was before the hundreds of billions that came out of real estate each year from 2003 to 2007. That is why to everybody other than stock holders the US economy sucks.
Despite such a weak U.S. and even weaker global economy, would you believe that the market value of all global stocks is $54.5 trillion today? That’s not far from the $61 trillion market cap peak record reached in October 2007. From that $61 trillion high the value of global stocks plunged by more than half to $25 trillion by early March 2009.
In other words, despite a slow or no-growth global economy, the value of all stocks are up by $30 trillion over the past three years. Even more interesting is that the market cap peaked at $58 trillion on May 21, the day before Fed Chairman Bernanke first said the Fed will slow its money printing sooner rather than later.
What this means is that stocks globally have still not recovered from the May 22 Taper announcement. Right now, Fed officials are saying that no tapering will happen unless the U.S. economy improves. Maybe, but remember, the Fed controls the game and can change the rules for any reason. Perhaps Mr. Bernanke wants to leave office at the end of this year with an exit strategy in place regardless of whether the economy is rising.
Look, obviously for as long as the Fed keeps creating $4 billion of new money each day, $85 billion a month and $1 trillion a year, stock prices should keep rising. But when the market becomes convinced that the Fed will taper at some specific point in time, and that might be sooner than later, stocks will start to sell off.
Globally, portfolio managers feel very smart because stock prices have more than doubled since 2009. To justify current prices many PMs say U.S. stocks are not overpriced because the trailing 12-month price earnings ratio is only 15 times. What those PMs do not seem to want to know is that a 15 p/e is reasonable when incomes are growing by over 4% adjusted for inflation, such as between 1983 and 2007. During slow growth times the average p/e has been under 10, such as between 1969 and 1983.
If Tapering becomes the name of the game, I would expect US stock prices to trade down about one third to 10 times earnings, or back to around 10,000 on the DJIA and1100 on the S&P 500.
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