Historians will look back on this period with awe and wonder. Somehow, three generations of economists and policy-makers have convinced themselves of things that can’t be true.
“Not enough demand,” they say, in penetrating analysis of today’s lackluster economic growth rates.
“We need to provide demand,” they add, as though demand were like oranges. You just pack up the truck in Florida and deliver them to New York. Easy Peasy.
But it almost seems as though the world were created just so its creator could have a good laugh at simpleminded economists.
“Look at them now,” we thought we heard a stentorian voice proclaim from the heavens. “They’re adding demand that doesn’t exist so that people will make products for people who can’t pay for them. Hardy har har!”
Ben, the Hero
We bring this up because the newspapers are beginning to opine on Ben Bernanke’s legacy. To make a long story short, they have forgotten that when the merde hit the fan in 2008, Ben Bernanke had no idea what was happening.
They overlook that he not only encouraged the mortgage bubble (as the right-hand man of his mentor, Alan Greenspan), but also he thought the resulting subprime bust was “contained”… and that the economy would continue to hum along nicely, even as real estate prices collapsed.
The newspapers are also willing to ignore that their hero presided over the weakest recovery in postwar history. Instead, they see silver linings and miss the clouds altogether.
The most popular summation of Bernanke’s time at the head of the Fed is: He saved us from another Great Depression.
No one seems to care – at least at this stage – that he did it by causing a worse problem. Or that his experiments have coincided with a 13% unemployment rate (using the Bureau of Labor Statistics’ U-6 measure, which includes short-term discouraged, other “marginally-attached” workers and those forced to work part-time)… negative real GDP growth (based on the CPI as measured in 1990 and tracked by John Williams at ShadowStats.com), negative real interest rates (ditto), and a Fed balance sheet that now tops $4 trillion… and that will have to be reckoned with sooner or later.
These numbers are probably a surprise to you. The popular reading of unemployment has it at around 7% – not 13%. But you would be wrong if you thought that only 7% of the potential workforce lack jobs.
Nope, that’s not the way it works in Washington. Instead, if you lose your job and are unable to find a new one, you are deemed “discouraged” and plucked out of the labor pool.
Put back in the people who have given up, and the monthly headline number is six percentage points higher.
Bernanke’s Real Legacy
We just completed a report for our Bonner & Partners Family Office members. It details how much of what we take for granted as GDP growth over the last 30 years didn’t really happen.
It was “phantom growth”… caused by distorting the tracking of price inflation and economic output.
It’s impossible to know exactly how much real growth there was. (It depends on your assumptions.) But take out all the tricks and distortions, and real wealth, in terms of GDP per person, has been negative for the last 10 years… and probably negative since the day President Reagan entered the White House.
If that’s so, asset classes that depend to a large extent on economic output – US stocks, for instance – are greatly overpriced.
Current stock prices, and much of the demand for goods and services since 1980, have been made possible only by ballooning debt levels – something that can’t go on forever.
The next bear market will sort it out. US stocks will go down – hard. Standards of living, buoyed by a 30-year tide of rising debt, will sink.
That will be Ben Bernanke’s real legacy.
6 Reasons to Steer Clear of US Stocks
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
As our friend Rick Rule puts it, “Always buy straw hats in winter.”
This is another way of saying, “Buy low, and sell high.”
Another aspect of Ben Bernanke’s legacy is that there are now few opportunities for value-minded investors to apply this basic principle of successful long-term investing.
Most investors cheer rising asset prices. What they don’t understand is that the higher valuations that have accompanied the recent rally in the US stock market act as a cap on future returns.
Again from Rick (one of the savviest contrarian investors we know):
Financial assets are among the few commodities that increase in popularity as the price increases. Imagine being encouraged at the grocery store, as you are at the checkout stand, seeing your bill increase significantly week after week. Imagine cheering your service station owner for increasing the price you pay for gasoline. Imagine complaining to a plumber because he lowered his rates. Think about this phenomenon as you analyze potential investments.
Thanks in no small part to the effects of negative real interest rates, courtesy of the Fed, US stocks are now trading at valuations near to… or in excess of… previous market tops.
Here are six reasons to avoid buying US stocks now (credit to Bill’s old friend Mark Hulbert for the historical comparisons):
1. Price-earnings ratio – On a 12-month “as reported” earnings basis, the S&P 500 trades on a P/E ratio of 18.6. This is a higher P/E ratio than that of 24 of the 35 bull-market tops since 1900.
2. Shiller P/E ratio – This measures stocks’ price-earnings multiple using average 10-year inflation-adjusted earnings. The S&P 500 now trades on a Shiller P/E of 25.6. This is a higher Shiller P/E ratio than that of 29 of the 35 tops since 1900.
3. Dividend yield – The S&P 500 has a dividend yield of 2%. This is lower than the dividend yields of all but five of the bull-market tops since 1900.
4. Price-sales ratio – The S&P 500 now trades on a price-sales ratio of 1.6. This is higher than that of all but two of the bull-market tops since 1955 (which is how far back data is available).
5. Price-book ratio – The S&P 500 now trades at a price-book ratio of 2.7. This is higher than all but five of the 28 bull-market tops since the mid-1920s.
6. Tobin’s Q – This indicator looks at the combined market value of all the companies on the stock market relative to their replacement costs. The Q ratio is now higher that it was at 31 of the 35 past market peaks.
Of course, this time could be different. US stocks may deliver decent long-term returns despite high valuations.
Just don’t count on it…
P.S. Don’t forget that you can put your name on a special circulation “priority list” to hear more about how to apply to become a member of Bill’s family wealth advisory, Bonner & Partners Family Office. To put your name on the list, just fill out this brief Declaration of Interest.