Friday Haymaker
Milk of Amnesia
“As a rule, panics do not destroy capital; they merely reveal the extent to which it has been destroyed (by the taking on of excess leverage in good times)” -John Mills, the influential 19th century economist, as quoted in from Howard Marks’ May newsletter
“Deficit spending was the high-powered economic boost, and the rest of the QE/QT discussion is simply rearranging deck chairs on what will likely be a slowing submerging economy in the coming quarters.” -The MacroTourist’s Kevin Muir, from his 6/24/2024 issue
Brief Post-Debate Note:
We had originally planned to run a note in response to yesterday evening’s POTUS Debate, particularly if the candidates spoke in substantive terms on topics of economic relevance — you know, topics which we could ourselves substantively tie to frequent Haymaker themes.
Those of you who actually saw the debate know that the only takeaways of any significant importance to you and us have nothing to do with the economy. However, for now, the behavior of the two candidates last night once again underscores how vital it was for the No Labels’ alternative candidate to have been put forth. It is sad for America that none of the individuals approached were willing to run. At this point, the odds are higher that President Biden will not represent his party than Donald Trump will be dropped, despite the latter’s highly controversial felony conviction. We might now be looking at the ultimate political example of a Hobson’s choice.
We’ll leave it at that and follow up on this topic should it subsequently yield anything more germane to our respective arenas.
The Haymaker Team
Milk of Amnesia
When it comes to risk tolerance, it seems as though millions of investors have been drinking from a cup filled with a memory eraser. This is despite the fact that the wealth devastating year of 2022 wasn’t all that long ago. Yet, to be fair, when you look back at the last 15 years the duration of difficult markets has been remarkably short.
Similarly, the ability of the U.S. stock market to continue trading at unusually elevated valuations has also been stunning. This has been the case with the relentless “market share grab” America has enjoyed when it comes to its percentage of global market value. It seemed stretched when it hit 40% relative to around 24% of the world’s economic output or GDP. Now it is over 50% and America’s share of worldwide GDP remains just under 25%.
There are myriad ways to express the U.S. equity market’s disconnect with its historic valuation range. One of those that gets a lot of press is the so-called “Buffett Indicator”, comparing the market capitalization of all America’s stocks to its GDP. As you can see, it is well beyond where it was in early 2000. That is significant because that period marked the most overvalued point in U.S. stock market history, exceeding even 1929.
However, one of the most historically reliable metrics is price-to-sales (P/S), particularly compared to price-to-earnings (P/E). As many Haymaker readers are aware, that’s because it’s much harder to fudge revenues than profits. (For example, consider how tech companies are able to inflate net income by ignoring option expenses and by extending server depreciation, per Fred Hickey’s comments last week.)