The Stock Market Has Reached the Dotcom Peak. Why Would You Expect a Different Outcome?

Let me share something that I saw yesterday afternoon that really brought this home to me this morning.

Below are two graphs that show the tangible value of S&P 500 companies over past 45 years or so.  The notable thing is that we've had a complete INVERSION of value since the early 70's.

In 1975, most company's assets (83%) were TANGIBLE (meaning you can touch them). Tangible assets are real estate, machinery, equipment-- you know stuff you need to PRODUCE SOMETHING. Now, there's a novel idea: producing something! Intangible are such things as "Goodwill" which is what accountants call money spent in excess of assets to acquire a firm for company reputation, branding strength, etc.  It does represent value if you can make money from it.

In 1975, the stock market had already crashed due to rising inflation. This was due to the dramatic increase in the cost of Mideast oil (energy) as a fallout from the US abandonment of the gold-backed dollar in 1971. Immediately after 1971, the US dollar crashed and forced the Middle Eastern countries to hike the price of oil by 1974 along with an oil embargo. See 1971: The Beginning of the End--Massive Monetary Disorder for a good explanation of how this began 50 years of extreme monetary disorder and most of the problems that we have in our country today.

(The dollar is not crashing today, but suddenly, today in 2021, commodities and inflationary pressures are suddenly rising with interest rates at zero for 13 years now. There are gasoline lines in the US east coast this morning but only due to a pipeline outage. But it's curious timing.  Inflation tend to CRUSH stock market PE ratios, like they did in the early '70s to 1981. Is that what we're finally beginning to see today??? Anyway, back to the markets:)

Now, in 2021, a FULL 90% of S&P500 company valuations are INTANGIBLE. To some extent, this is because of big "Tech" companies like Facebook, Twitter, Microsoft and Uber often don't own the physical assets and big tech is about 25% of the S&P 500. In other cases, the giant companies of the S&P 500 keep acquiring companies by buying upstart companies. Since, these acquisitions have not generally been plant and equipment, most of the purchase price is "intangible" because the acquired company has a very high stock price (with few tangible assets).  A good example is that Facebook bought Whatsapp for $20 BILLION and it had essentially no assets,  It's just a popular internet app. That $20 BILLION is basically completely intangible.

All of this "goodwill" ends up as intangible assets. This process just keeps going forward to today where, today, only 10% of an S&P500 company's market value is tangible ON AVERAGE.  Obviously companies like Caterpillar and Archer Daniel Midlands, Dow Chem will have high tangible assets, so it offsets companies that have nearly ZERO assets. Remember, FB paid $20 BILLION for an "internet App" called Whatsapp which is all "goodwill" in accounting terms. 

Figure 1:
Tangible Vs. Intangible Asset as % of Market Value

Just for your consideration, take a look at the historical price chart of the S&P 500 with indication of Price-to-earnings ratios (based on trailing earnings) indicated. The intent of the graph is to show that Bull markets ensue from low market PE environments and poor performing markets emerge from highly valued (high PE) markets.

Figure 2:  S&P 500 Vs Indicated PE Ratios

  

The current PE of the S&P 500 is currently 44.5.   See Fig. 3 Below.  THIS MATCHES THE PEAK OF THE DOT.COM BUBBLE (SEE FIG.2).

ONLY ONE TIME IN HISTORY HAS THE MARKET BEEN SO PERILOUS.  The expected returns from stocks going forward is very, very low -- probably negative, with the likelihood of huge falls and huge recoveries with little net gain in the coming decade.

Fig 3:  Current S&P 500 Trailing PE Ratio as of May 10, 2021

Remember this commentary from Doug Nolan at Credit Bubble Bulletin from February 26, 2021. It's applicable in our discussion and observing the current state of our country and markets:

Inequality, speculative Bubbles and manias, resource misallocation, wealth redistribution and destruction, and deep economic structural impairment are all consequences of years of unsound money. And it’s back to this fundamental flaw I’ve been railing against for too long: it is impossible to resolve Monetary Disorder and the fallout from unsound money through additional monetary inflation. It’s destined for catastrophic failure, and it was another week when inklings of a failing system were observable to those with discerning eyes.

It may be archaic and relegated to the dustbin of history. But one cannot overstate the peril associated with entrenched unsound money. An insidious corruption of price mechanisms over time jeopardizes the very foundation of Capitalism. And as Capitalism decays Democracy flounders. Society frays, while insecurity, animosity, anxiety, and the forces of distrust are left to fill the void. And as we continue to witness, the consequences of unsound money incite only more perilous inflationism.