Wall Street

In Plain Sight

By David Stockman  |  May 2, 2019

Potyomkin indeed decorated existing cities and villages, but made no secret that this was a decoration.

– A.M. Panchenko,
“Potemkin Villages as a Cultural Myth” (1983)

That seven-year period from the end of the first quarter of 2012 through the fourth quarter of 2018 that we’ve been talking about should have been the sweet spot of the recovery from the Great Recession.

It made some bit of sense to pay 14.6 times reported trailing-12-month S&P 500 earnings as of March 31, 2012. The recovery had plenty of life left.

What’s happening now is absurd.

Wall Street is pricing trailing-12-month earnings through December 31, 2018, at 25.5 times. And, judging by the historical standard, this is the end of the cycle.

And we can look back at months No. 30 through No. 114 and see that apples-to-apples earnings grew by just 3.8% per year.

It’s actually worse than that…

Pre-crisis earnings peaked at just under $85 per share for the trailing 12 months ended June 30, 2007. The S&P 500, at 1,503.35, was priced at 17.7 times those earnings.

Over the next 11 and a half years, the annualized S&P earnings growth rate was a pitiful 2.58%. That’s peak-to-peak over an entire business cycle.

And we must account for the 1.75% average annual gain in the Consumer Price Index.

What we have is a 50% increase in the price-to-earnings over the cycle on average annual real earnings growth of less than 1%.

That’s just a symptom of the intellectual corruption embedded in Wall Street after decades of coddling by monetary central planners.

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The Bubblevision narrative is a timeless 24-month future. It denies the history of business cycles. And it’s decoupled from the dismal trends recorded on Main Street.

When economies are always growing, profits are always rising, and share prices are always climbing, there’s no need to reflect on divergences from reality.

That’s why CNBC can say “U.S. retail sales soared in March at the fastest pace since late 2017…” and keep a straight face.

In fact, the first-quarter 2019 seasonally adjusted average of $200.988 billion per month was 0.2% lower than the $201.317 billion average for the fourth quarter of 2018.

Even the one-month March 2019 blip to $202.269 billion was below the $202.385 billion posted last October at the post-tax cut sugar-high for consumers.

Retail sales for the first quarter of 2018 averaged $198.540 billion per month. So, year-over-year growth was 1.23% – in nominal dollars.

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Inflation-adjusted retail sales in the first quarter were actually down by at least 0.4% from last year, probably more based on what consumers actually pay at the cash register.

There’s nothing “soaring” about that. It suggests that, after 117 months of debt-supported spending, the consumer is running out of gas. And it implies that recession may be closer than Bubblevision would have you believe.

The Main Street economy is failing. But the Wall Street fantasy is thriving. You can lay responsibility for this dangerous disconnect at the doorstep of the Eccles Building.

The Federal Reserve’s extreme monetary central planning regime long ago disabled capital markets and destroyed price discovery.

Bubble Finance has euthanized workers and savers and lobotomized traders and speculators.

And our monetary central planners know it.

Fact From Fantasy

Desperate times call for… “common sense” measures.

And these are desperate times… Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.

We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”

All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…

To common sense,

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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