Did the investing public in the US and around the world learn anything from the financial disaster in 2008? Recent news shows that we are on the verge of repeating the same mistakes, so buckle up for another ‘Great Recession.’
We start with an article by Karl Denninger about the current precarious position of the market explaining in detail how some of the biggest and most valued stocks in the US market are grossly overpriced.
You see, when people are buying stocks of companies that have nothing but negative free cash flow as far as the eye can see or sky-high P/Es of 60, 80, 100 or more they’re betting with their eyes taped over on exactly one thing: Indefinite exponential growth of the business and, of course down the line, profits.
The problem is that this is an impossible premise. There is no way for that to ever happen because it is mathematically impossible.
Today we have Amazon, Facebook and Apple all priced in this way. Of the three only Apple has some argument for its valuation, but even there given the recent run of almost 50% it’s priced for indefinite exponential growth of a saturated product — iPhones.
This highlights the biggest problems with all the modern business and investing thought: infinite growth, with no consideration of market saturation. At some point, no matter how big the company, you’ve sold your product to nearly all the people in the world who are going to buy it.
And then what?
Here’s a little bit more about the Apple problem, along with others:
Every morning some percentage of people wake up with a raging hard-on and then buy stock. They believe. They believe that a company that already has 2 billion of the 7 billion people on the planet can “grow to the moon” and can increase the amount of advertising on the site without limit and not suffer a revolt [Facebook]. They believe that a company that is cutting prices on what feels like a weekly basis while dozens of competitors seek to (and in many cases do) eat them from the bottom can somehow increase margins [Amazon]. They believe that a company that went from a diversified computer and software company into one that is 90% one product, has found the saturation point on that product and in fact is seeing declining sales numbers in China, will reverse that trend immediately and go back to double-digit sales increases [Apple]. They believe that a company that has negative free cash flow, forward commitments to spend billions not reflected on their balance sheet and has a saturated US market with all growth coming from international consumers who need even more and different content due to demographics, language and cultural differences will manage to indefinitely get Wall Street to continue pouring water into a flushing toilet [Netflix]. And finally, they believe that a company that has never turned an actual stand-alone profit, grabs tens of thousands of dollars per unit sold in tax subsidies from the taxpayer and also has convinced Wall Street to throw $100 bills into a roaring bonfire on an every quarter or two basis will continue to be able to do all of the above [Tesla].
Did you catch that? Apple used to have multiple products on a relatively level playing field within their portfolio. Now they live and die by a single overpriced product which is approaching market saturation – i.e. the point at which everyone who would buy one has bought one. Apple has for years been effectively putting all their billions of eggs into one basket called “iPhone.” And the basket is in a cart hurtling toward a cliff called “market saturation.”
And Denninger says Apple is the best of these doomed stocks.
Denninger opened with a flashback to warning signs in 2000 about the dotcom bubble and crash, then goes on to argue how these various overpriced stocks (Amazon, Apple, Facebook, Netflix, Tesla) indicate we’re back at that point again, just waiting for the bubble to burst.
Real Estate Warnings and Woes
Second up is an article from ZeroHedge about the current collapse of Canada’s mortgage lenders.
Basically, there was evidence back in 2015 that the largest mortgage lender (that now plummeting red line) was breaking the law and lying about its actions in order to get away with looking more profitable by issuing “liar loans.” Yeah, ’cause that worked out great for the USA. Actually, it DID work out great for the US mortgage lenders, who were either bailed out or fined pennies on the dollars they stole. Just didn’t work out so well for everyone else involved in the economy.
ZeroHedge concludes with the analysis:
Canada’s entire mortgage lending market is tumbling.
What Should I Do?
I’ve written about this before. Maybe you remember this graphic the video works through? I’ve added a red arrow to help understanding.
The US and global economies are basically at the peak of the long term debt cycle, which Dalio tells us not to worry about because the US government, which succeeds in everything it touches, is going to perfectly balance the economic factors on the big downslope to prevent anarchy in the streets and instead have a “beautiful deleveraging.” Hogwash. It’s a pretty-sounding fairy tale and one needs to be highly educated to be daft enough to believe in it. Either that or they place faith in every utterance from the mouths of “experts.” Don’t bother to think or make your own decisions! Experts will do your thinking for you!
The only reason we’ve not had the big drop is that all those invested (especially big government and big business) keep finding more outrageous and more dishonest ways to keep the debt economy on an upward trend. But it is a LAW of economics that it WILL come back down equal and opposite to how high it climbed. Do you want to be on that ride?
If your wealth, net worth, or retirement plans are tied up in the market, then you have paper assets, and they are sitting on the curvy lines pictured above. That stuff you own is only worth what someone else is willing to pay for it. And as soon as its clear to everyone that the market has feet firmly planted in thin air, no one will want to buy and the value of your paper assets will be worth less than the paper that just came out of your printer.
The solution is in capital assets:
- Land or Facilities
- Raw Materials
- Tools, to convert raw materials into finished product
- Knowledge or skills, to put the first three assets together
If your the purpose of your capital assets is to produce something you can directly benefit from (almost anything associated with homesteading) rather than to resell the asset itself someday, then it will be valuable to you no matter what happens.
For example, if you bought a piece of land in Detroit at market peak, it is probably near worthless now. Reselling it will result in a huge net loss. But if you bought land in Detroit and use it to produce a product which you can also use for yourself and reduce your cost of living, then it doesn’t matter if you ever sell it. It provides constant value to you while you own it.
Of course, there are dozens of other reasons you’d have to be mad to try and set up a homestead in Detroit. The point is that even in such an impacted place, your purpose in the land will either let you ignore an economic crash, or else cause you to weep for your loss of fortune.
If your capital assets are designed to produce something of use to you, then those assets reside on the straight line pictured above, and you won’t even know about the economic crash other than the weeping of your big-city acquaintances.
I recently heard the response of a Boomer’s parent as to what it was like living through the Great Depression. She had been a farm girl in the northern US, and explained that other than her Dad having a little more concern about what price he’d get at market for his produce, they didn’t even notice the Great Depression. They always had food on the table, and a means of making money by selling the surplus from the farm.
A year ago, I took the same advice I’m giving you, and life is much better since I no longer need to care about the rat race and keeping up with the Joneses. I liquidated all paper assets and used them to buy productive capital assets: land, skills, tools, and raw materials. This will be my retirement. There’s still an element of “work” involved so it’s not like I can retire to a beach and put my feet up for the rest of my life. But I do have views like the scenes we post on Sundays here, my cost of living is about 1/6th of what it was in the big city, and I am building something that will directly benefit my descendants for generations to come.
What are you waiting for? Flee The City, before it’s too late.