Column 462      July 5, 2024Streched Rubber Band

Markets are like rubber bands. They can be stretched to nearly the breaking point and then snap back. That’s because human emotions can swing from wildly enthusiastic to very depressed then back to over-the-top euphoria. My last market column (Mean Reversion) was on March 22, 2024 when the NYSE Composite Index (NYA) closed at 18,112.04. Today the NYA is 18,091.65. During those 95 days we had one of the greatest mania events in the stock market’s history. The AI boom drove an over-priced NAVIDA from $94.29 on March 22, 2024 to $135.58 on June 18, 2024 where its $3.34 trillion valuation made NAVIDA the most expensive company in the world.1

On June 20, 2024, two days after NAVIDA peaked, Bespoke Investment Group provided a quick look at trailing 12-month price to sales ratios (P/S) over the last five years for the large-cap S&P 500 and small-cap Russell 2,000 along with each index's respective Technology sector. While the ratios in most sectors have been relatively flat for the past five years, the S&P 500 Tech sector's price to sales ratio pushed all the way up to 9.8 times, which is 2.5 times higher than in March 2020. Bespoke’s assessment was that, “A 9.8x multiple is attractive if you're looking at price to earnings (P/E), but for Tech stocks to be trading at 9.8x annual sales, that's just a remarkably high number.”

In spite of the wild speculative enthusiasm for stocks that was generated by the AI hype, most stocks, as represented by the NYA, at best went sideways. The daily measure of advancing and declining stocks peaked in mid May and has actually tapered off as major stock averages such as the tech loaded S&P 500 and NASDAQ advanced. When major stock indexes are rising for weeks while most stocks are declining or going sideways that’s a dramatic sign of internal market weakness that often precedes bear markets.

So the question is, just how big a drop is in the cards?

Stocks have been climbing since 1932 based on actual economic growth, innovation, population growth, and money printing. The M2 money supply bottomed at $32.22 billion in 1933. Today M2 is $20.96 trillion which is 650 times more than during the 1933 “bank holiday.” The population in 1933 was 125.58 million. Today’s population is 341.81 million for an increase of only 2.72 times. In 1932 the DJIA bottomed at 41.22 and today it’s 30938—up 750 times.2

Obviously, the national debt and dollar debasement are big factors behind our nation’s “growth.” The national debt was $23 billion in 1933 making it 40% of the $57.5 billion GDP. Today the national debt is 1,516 times higher at $34.868 trillion with a $28.5 trillion GDP. This national debt load figure is 122.3% of GDP which is too large for the taxing structure to support much less pay off.3

Compounding the national debt issue is private sector debt. It has increased too. Because of the massive consumptive debt issuances over the years and the money printing required to pull it off, price inflation has been very persistent. According to the “official” price index, it takes $24.16 in 2024 to purchase what $1 bought in 1933. In other words the dollar lost 95.9% of its purchasing power based on the government’s “conservative” data.

At some point debt must be addressed head on. Currently, it’s not growing quite as fast as it was earlier this year. But it increased $174 billion in June after no change in May following an increase of $156 billion in April. So far this calender year it has increased $841 billion—an annual pace of $1.68 trillion. This is insane since there’s no economic emergency driving the deficit. It’s purely reckless spending partially caused by manufacturing munitions to blow things up. It’s like burning money.

Early indications are that if Trump is elected he will try to rein in spending while reducing regulations and taking other measures that will help businesses. But by reducing government spending when consumers are trying to recover from the sharp rise in prices for basic necessities, the odds of a recession increase significantly.

So this brings us back to asking what will happen when new leadership takes the punch bowl away. The overly optimistic valuations and investor complacency for stocks, housing, and even commodities could be in for a drastic change. For instance, instead of tech stocks selling at a ridiculous 10 times sales, they could drop to a more modest four times sales—which is still a rich valuation. That alone projects a 60% decline in tech stock prices without any decline in sales.

Fifty percent plunges in stock prices have occurred numerous times since 1932. When excessive debt levels and rising interest rates leverage downside action, stock prices can drop even more than merely 50%. As Trump said recently, the time between now and January 20, 2025 is a high risk period because we have no idea what the current administration will do as it tries to hold onto power. And even if Trump wins, we do not know how the economy will react when government spending is reined in.

In my opinion this is an excellent time to accumulate cash and store it away in three-month treasury bills currently yielding about 5.47%. Then sit back and relax while eating lots of grass-fed meat while watching the action. After stock prices give up their wild premiums, there will be many buying opportunities for good dividend paying stocks that will provide lower risk financial comfort in the years to come.

When the rubber band is fully stretched, that’s not the time for complacency.

To your health.

Ted Slanker

Ted Slanker has been reporting on the fundamentals of nutritional research in publications, television and radio appearances, and at conferences since 1999. He condenses complex studies into the basics required for health and well-being. His eBook, The Real Diet of Man, is available online.

For additional reading:

1. Mean Reversion by Ted Slanker

2. US Money Supply M2 (USCB) 1929-1939 by Christopher Chantrill from his website

3. Debt to the Penny Daily Data from U.S. Treasury