BALTIMORE – Not much action in the stock market last week.

A few little steps ahead… over the 18,000 line for the Dow. Then a few little steps back. At writing, the index sits at 17,865.

Fed chief Janet Yellen has made it clear she won’t do anything to disturb investors’ sleep.

But that doesn’t mean they won’t have nightmares.

Downside Risk

Our research department – headed by Nick Rokke and Chad Champion – reports that you get less for your money in America’s capital markets today than at any time in history.

This is not good news. It tells us there is far more downside risk than potential upside.

Meanwhile, the U.S. economy continues to slow.

From the high-water mark of 3.9% annual GDP growth in the second quarter of 2015, the latest figures (for the first quarter of this year) show the economy expanding at an annual rate of just 0.8%. [See today’s Market Insight below for more.]

And last week, we learned job creation tumbled in May… with just 38,000 new jobs added versus the 162,000 new jobs Wall Street was expecting.

It was the worst report in six years. And it took the labor participation rate – the percentage of the working-age population either working or looking for work – back to a level not seen since 1976.

These things do not justify high stock prices. Instead, they buzz in your ear like mosquitoes at an evening picnic. The Zika virus cannot be far off.

Most likely, the economy has already begun to get the shakes. If not, the recession will probably begin sometime in the next 12 months.

Nick checks the netting:

Measured by EV/EBITDA, the Russell 2000 Index – which tracks stocks of small U.S. companies – is the most expensive ever.

EV stands for enterprise value. This tracks the value of all shares plus all debt. EBITDA stands for earnings before interest, taxes, depreciation and amortization. It’s considered the purest measure of company’s earnings.

EV/EBITDA is a common multiple when discussing takeover targets. If this measure is low, the company becomes a takeover target. This creates a floor and keeps prices from falling. When it reaches all-time highs, the floor is far below current prices.

Past Patterns

The EV/EBITDA ratio for the Russell 2000 is about 19. This is only slightly below its all-time high of 21 set at the start of the year.

Typically, the index trades on a ratio of about 12. That suggests a fall of 38% for U.S. small caps… a plunge equal to the fifth worst bear market in the past 90 years.

Of course, we’ve been wrong before. And whatever youthful bravery might have accompanied our earlier guesswork, it left us when arthritis moved in.

Now, we make no predictions and offer no forecasts. We simply note that based on where valuations are, now is unlikely to be a good time to increase your exposure to U.S. stocks.

Remember, our investment strategy is based on ignorance, not knowledge. We have no knowledge of the future. All we have is some dim awareness of the past.

What we see in the past are patterns. And since those patterns can be seen in many different markets over many years, we presume them to be fairly reliable.

So, although we can’t predict that the stock market will go down… or when… or to where… we can still note that it always has in the past, though not according to any reliable schedule.

Maybe this time is different. Most likely, it’s not.

U.S. stocks are expensive. The best bet is probably that they will be less expensive in the future. Then they will be expensive again.

Note that these cycles are extremely long. The U.S. stock market hit a high in 1929. It didn’t do so again until 1954. There have been a couple of highs, in 2000 and 2007, but this is higher than any of them. 

That’s right. While this could be the big one!

Coming up this week…

It was 50 years ago last week that we graduated from high school. What has happened since?

We review the play Arguing with God.

And we continue to wonder who the real cowards are…




Market Insight


As Bill reports, current growth numbers don’t bode well for the economy…

As you can see from today’s chart, U.S. GDP growth has been shrinking since the second quarter of 2015.

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On Friday, Bill asked whether it was our duty to fight whenever the Deep State asks.

Today, Diary readers share their thoughts on the subject…

I signed up and paid money [as a Bill Bonner Letter subscriber] to read your thoughts on subjects you choose.
Am I to cancel the relationship, because I don’t agree with you all the time?  If I have to have communication only from and to one with whom I agree 100% of the time, I guess I can go lock myself in the bathroom with the wall mirror. And even then, it’s not a sure thing. 

— Paul M.

You’re right: Vietnam was a terrible idea. America hasn’t fought a legitimate war since the Revolutionary War. So stand your ground.
All those idiots who want to back a meaningless war… let them go and die and leave the rest of us alone. I’m as patriotic as they come, but I don’t believe in UNJUST wars like America has been fighting for centuries now.

— Bramble B.

Southeast Asia is predominantly free today because of the efforts made by our soldiers in the late 1960s early 1970s. To argue otherwise would be foolish.

— David K.

Old saying… “Don’t have to know the reason why, my country do or die.”

— Nancy M.

It is more than slightly discomfiting to me that the Deep State can send me or anyone in my family to kill and die in some useless war, started with a false flag or any other reason.

Maybe those who think “my country right or wrong” feel more comfortable being owned than being free.

Let me know when the enemy shows up on our shores.

— Jim K.

I was in that conflict in 1968 and 1969. I received all the medals that went with being in action in Vietnam.

Reflecting back on the “American War,” as the Vietnamese call it now, it was definitely BS. Before enlisting, I never saw a clear reason for being there. After being there, I still had the same conclusion – the difference being I lost all confidence in the heads of state within our government.

I will be a bitter man and will never trust the jokers for the rest of my life. I hope God has prepared a special place for people like these foolish heads of state. So, no, it is not our duty to fight the corrupt wars of the Deep State.

— Michael T.

Regarding the Vietnam conflict. For all those who think it was a mistake, please ask the opinion of a rescued Vietnamese family. Your forum has not had a letter expressing their opinion.

— Glenn D.

Concerning the war in Viet Nam, even a fool can make the right call looking at history in the rearview mirror. We make decisions based on the information we have at the time, knowing full well that information is usually not perfect.

To call those who served in Viet Nam stupid for not having done whatever was necessary to avoid serving is a disservice to those who returned… and an insult to those who died.

— Tom S.

The self-proclaimed patriots who have been yelling, screaming, and tossing tantrums Bill’s way seem to be geographically challenged. These folks need to look at a map and attempt to sort out what type of threat that countries the size of Vietnam, Afghanistan, Yemen, Pakistan, and Iraq actually pose to the United States.
Combine that with the idea that the self-centered politicians and bureaucrats that have been sending our young men to be killed tend to lead the league in bad decisions – whether it be militarily, economically, financially, fiscally, or politically.

Marching off to war because some ego-driven old men want to play bully hardly seems like a prudent choice. Muhammad Ali had the right idea: look the commander-in-chief in the eye and say no.

— Al D.

It’s interesting how much different life looks to me today – now in my 80s – versus when I was in my 20s and still drinking the Kool-Aid.

My reaction to Cassius Clay when he changed his name to Muhammad Ali was sheer disgust… which then compounded when he refused to serve. Today, my response is the exact opposite. I used to think the government wouldn’t lie to me. Now, I know they can’t force themselves to tell me the truth no matter what.

— Tex N.

In Case You Missed It…

Our colleagues at Agora Financial took to the streets of Baltimore to demonstrate how easy their newest investment strategy is.

In this entertaining video, they show two people with absolutely no investing experience how to make $127 in the market in less than three minutes.