Wall Street

Wall Street vs. Main Street

By David Stockman  |  June 14, 2018

“The minute you get away from fundamentals – whether it’s proper technique, work ethic, or mental preparation – the bottom can fall out of your game, your schoolwork, your job, whatever you’re doing.” – Michael Jordan

On Tuesday, the Russell 2000 Index (RUT) hit a new all-time of 1,686.37. Yesterday, it closed at 1676.54, just 0.6% below that high-water mark.

What does it all mean?

Well, there are the traditional methods…

The math tells me the RUT is now valued at more than 90 times earnings reported for the 12 months ended March 31, 2018. And it sports a diminutive dividend yield just north of 1%.

But simple experience tells me it doesn’t get more “irrationally exuberant” than this. Indeed, we’re in the realm of flat-out insanity.

Prevailing methods are unsound.

In some sense, of course, the RUT’s stratospheric price-to-earnings ratio (P/E) is fully consistent with current manic valuations.

What we have, in fact, is the “Everything Bubble.”

Of course, it’s great for Wall Street. But what about Main Street?

There’s virtually no asset class where valuations haven’t been drastically inflated by nine years of egregious central bank money-pumping. And, still, incomes for working Americans stagnate.

The Russell 2000 Index is a particularly interesting study. It includes small- and mid-cap companies whose operations are focused in the U.S.

So, it’s supposed to be a bit of “window” into smaller-town America.

It surely stands at the very front of this inflated assets parade.

Even compared to its own previous bubble peaks, the RUT is just plain off the charts.

That 90-odd current P/E we talked about? It towers above levels seen at prior peaks, including 60 in December 2007 and 55 in December 1999.

The RUT collapsed by 55% when the economy tanked in 2008 and 2009. And it didn’t surpass its 2007 peak on a sustained basis until 2013.

That’s six years of dead money… six years of heartburn for investors who jumped on the bandwagon near the top… like they always do.

The U.S. economy is into Year 10 of what’s now the second-longest “recovery” in history.

All that means is it’s weak and old.

The lunacy of current valuations compared to prior cycles alone is obvious. There’s a recession coming – and soon. That means earnings are headed lower.

The “correction” will be unlike anything the current generation has experienced – including the last two bubble collapses.

The Federal Reserve’s three bubble cycles since the Greenspan Era began in 1987 have compounded upon one another.

Equity valuations at nosebleed levels are in no way the product of a stable and rational capital market, even one that’s gotten a little frisky.

What we see is the build-up of speculative price action over three decades. Stock exchanges have finally morphed into purely momentum-driven casinos.

Paying more than 90 times for small-cap stocks is crazy beyond words.

But none of the valuations – stock, bond, or otherwise – can be explained by economic or financial fundamentals.

The entire financial narrative has been corrupted by Bubble Finance.

Nothing illustrates that better than looking at the Russell 2000’s 22-year journey since Alan Greenspan dropped his infamous “irrational exuberance” catch-phrase.

In basic terms, the RUT is up 345%. Even if you adjust the RUT for inflation, the increase amounts to 200%.

Since December 1996, Main Street incomes grew only 9%. In fact, incomes are up less than 1% from the prior peak in 1999.

It just doesn’t compute.

It’s the result of massive monetary expansion and financial asset inflation.

And it illustrates the radical disconnect between Wall Street and Main Street.

David Stockman

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR