The end of the S&P 500?
“There are three types of large corporations: those about to go bankrupt, those that are bankrupt and hide it, those that are bankrupt and don’t know it.” Nassim Taleb, Twitter, Sept 22, 2019.
“The US markets will not come back in my lifetime,” Jeffery Gundlach, Yahoo interview. Dec 4, 2019.
In the bottom of the 2009 market crash, I was sitting in my office and a guy I’d met several years ago walked in. The conversation went like this.
Him: Paul, I’m here visiting family and wanted to stop in and shake your hand.
Me: “Okay, what did I do?”
Him: “When you wrote that article saying GM and GE would go bankrupt, I thought you were out of your mind.
Predicting the bankruptcies of GM and GE in 2007 wasn’t hard.
The companies had no chance of survival. There wasn’t a rat’s ass chance in hell they were ever going to pay their debts.
The difficulty wasn’t predicting it, it was in timing it.
The same is true of the markets today, which is what Taleb is saying.
I’ve never met a money manager that had any respect for accounting. It’s a massive pile of ass-smooching bullshit.
Accounting is a social science with levels of error that make psychology look accurate. It’s based on long term estimates of things like interest rates and investment decisions that can’t be estimated in the real world. This is something almost nobody gets.
It’s not just next year that’s an estimate, it’s last year and the year before!
Simply because nobody is going to tell you. This is why the S&P 500 falls off a cliff when in falls.
S&P earnings have two phases. First the buy phase. This is when the shit hits the fan and the S&P falls. Corporate executives use this opportunity to stuff all their losses in a single quarter. This is also where they reprice their incentive stock options. (It also comes when a company hires a new CEO.)
The second phase is when they’re selling their options to you. At this point they artificially inflate earnings to inflate the price. “S&P non-GAAP adjustments to earnings have soared,” Wall Street Journal, Dec 16, 2019.
It’s not just the S&P that’s going to get demolished. The biggest losses could be in the corporate bond market.
For the last 10 years, most S&P companies have been taking out huge loans to buy their own stock back. Many if not most of these loans will never be paid back. A loan that won’t be paid back is worth zero.
The reason I knew GM would go bankrupt is that in the prior year they took out a $20 billion loan to fund their pension plan. This payment was due to the underperformance of the pension against their benchmark. This $20 billion “payment” was not yet recognized on their financial statement.
In the case of GE, they were financing long-term assets using commercial paper, something they started doing under Jack Welch.
Oh, and to answer your question, no, CEO’s aren’t stupid.
They’re greedy. This is another reason for the end of the S&P 500.
In my opinion, there are markets that will fare worse than stocks. The biggest is real estate, especially office space.
Not far behind is single family suburban homes.
The argument is simple. When a country goes into recession, money is destroyed, which leads to higher interest rates. Real estate has a 1 to 1 relationship to interest rates.
If you buy a house with a $500,000 mortgage and the interest rate is 4%, that loan is worth $250,000 when the rate goes to 8%. That means the secondary market for mortgages is in default. When the market for loans defaults, housing isn’t worth anything. This is what happened in 2009.
In my opinion, commercial real estate will fare even worse than the S&P 500.
In economics, trends don’t reverse for a single reason, but multiple reasons working together. Markets create stability by being able to absorb shocks. This is referred to as a market’s robustness.
Commercial real estate is valuable because it’s used in two primary areas. Retail and financial services. Retail is collapsing under the weight of Amazon.
Financial services are all bubble related. As countries and businesses borrowed more money and central banks created fiat currency, money became an export.
The US exports $600 billion per year in the trade deficit.
This money bounces all over the world as it’s re-used by third world countries that don’t have stable currencies of their own. It all has to make its way into dollar priced assets like stocks, bonds, mortgages and bank reserves. These dollars have to be counted, (banks) accounted for, (accountants) invested, (stockbrokers), sued for (lawyers) and laundered. (High end real estate markets.)
When this resource is gone, all that office space will be empty.
In capitalist countries, there are always places to invest.
You just have to change your mindset. Most investors are caught up in the “savings” mindset.
In this, you put away small amounts of money and it grows over long periods of time.
This isn’t investing it’s saving.
There are a few places (As Jeffrey Gundlach mentions in his interview) that are great investments when they fall.
In my opinion, the best are bond funds. In the early 90’s, at the height of the junk bond collapse, you could buy bonds for 25 cents on the dollar. It’s hard to lose money when you’re buying a bond find with a 35% interest rate.
You just have to have the brains to know what you’re buying and have the balls to do it.
Most people don’t think of the evolutionary reason for jokes.
Here are a few of my favorite ethnic jokes.
A waiter walks up to three Jewish American princesses sitting in a café and asks, “is anything okay here?”
Two Irishmen walk out of a pub three hours before it closes. (That’s the punchline)
If I came out and said Jewish American princesses are spoiled brats, that would be an insult. But as a joke it’s, well, a joke!
Jokes are funny because they reveal absurdity. Absurdity is a way of wiping the slate clean of bullshit. It’s clearing the air of political correctness and exposing lies, deceit and stupidity.
As I say in my series Joseph Schneider, Traitor Patriot, “The clown stands on the bottom rung of the ladder and looks us in the eye.”
It’s the emperor with no clothes and why the best comedians are people on the bottom shelf.
The end of the S&P 500 won’t be the end of the world, but it will seem that way.
The solution to our problem will be a return to conservative Christianity.
I know. You probably don’t believe that either.