The Market’s Climax — Faking The US market Growth

In the movie When Harry Met Sally, there’s a great scene in a restaurant when Meg Ryan’s character (Sally) demonstrates to Billy Crystal (Harry) how women can fake an orgasm.

Sally’s performance was so convincing, the lady at the next table wanted whatever Sally was eating.

The US market is doing a Sally — pounding the table, tossing its hair around, and making all the right ‘ooh and ah’ noises — but it is fake.

Investors are looking on and they want whatever it is the market is having.

The hoped-for ecstasy is going to end up being a sustained period of agony.

The so-called ‘stellar US economic growth’ is a fraud.

From Q1 2020 to Q1 2021, total US debt rose a staggering US$7 trillion. Over the same period, US GDP increased a mere US$600 billion.

Think about it. It took almost US$12 of new debt to generate US$1 of GDP. That’s madness on a massive scale.

Federal Reserve Economic Data

Source: Federal Reserve Economic Data

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Yet, this passes for sound financial management.

Spinning this as a great recovery story AND just as importantly, having the people believe it, is right up there with Sally’s performance.

Wall Street loves it.

Just as long as the market continues its head-tossing and table-thumping performance, that’s all that matters.

And while the party continues, you cannot ignore the fact there is money to be made.

Which is why Ryan and Murray, co-editors of Australian Small-Cap Investigator, have been scouring the small-cap sector to identify tomorrow’s potential outperformers. Ryan and Murray have identified seven stocks they think have the prospects to deliver outsized gains. To learn more about Ryan and Murray’s research, please go here.

Have We Hit the Bottom? Financial Expert Warns Not Yet. Learn More.

The US market is overvalued by 91%

The following chart is a composition of four long-term valuation indicators dating back to 1900.

These old-fashioned valuation metrics may appear to be irrelevant in this new world of Fed-sponsored markets, but this is more of a temporary rather than permanent shift in fundamental analysis. Common sense and maths eventually prevail.

The meandering journey of the US market is a reflection of investor mood…agony to ecstasy to agony and back to ecstasy.

Advisor Perspectives

Source: Advisor Perspectives

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This historical vantage point enables us to see the trends quite clearly.

Each high and low point aligns with important historical events…

The First World War, the Roaring Twenties, the Great Depression, post-Second World War industrial production, 1970s oil crises, dotcom boom and bust, the US housing boom, the GFC, and now the Fed’s fake recovery.

Note, each previous market climax ended with the market falling back to or below the mean.

The current reading of investor sentiment — 166% above the mean — is the highest ever recorded…exceeding the historically significant market peaks of 1929, 1987, 2000, and 2007.

And we know what followed each one of these previous ‘Sally’ moments.

Today, the US share market has moved into an overvaluation league all on its own…almost four standard deviations away from the mean.

Investors are not buying value, they’re buying an illusion.

An illusion that can only be sustained by an endless supply of bigger fools…and logic tells us that queue has a finite number.

Markets in terminal phase

The higher this market goes, somehow, investors think the safer it is to invest. History shows us quite clearly this is not the case. The further away from the mean, the meaner that once oh-so sweet market will get.

We are currently in that blissful stage where no one can see what’s going to bring this extraordinary period of asset price inflation to an end.

The sentiment of ‘if you can’t beat ‘em, join ‘em’ has taken hold…creating a bullish momentum.

The higher the market goes, the greater the velocity of the momentum.

For me, watching the Dow’s effortless climb to record highs is a source of fascination, rather than one of frustration.

It intrigues me as to why people fall for the market’s head fake over and over again. Do they never learn from history?

The Dow’s repetitive record setting action is an indication of a market in its terminal phase.

The majority don’t see they’re being lured into one of the greatest bear traps in history.

When the trap is sprung, the fallout will be as far-reaching as it will be devastating. That’s what happens when you find out the relationship you bought into is not all that it seemed to be.

As a sobering reminder of how the cycle plays out, this is an extract from a speech given by former RBA Governor, Ian Macfarlane, in late 2006 (emphasis added):

any boom built on rising asset prices financed by increased borrowing has to end.

The further asset prices rise above their intrinsic value, the more likely it is that a reassessment will be made and they will stop rising. At this point, there is a “rush for the exits”, as everyone wants to sell before prices fall.

Macfarlane’s advice may seem prudish by today’s standards, but it is just as relevant.

Sadly, the modern-day central banker no longer champions these old-fashioned values.

Today’s good-time Charlie bankers have an embraced economic model that needs — no, demands — more and more debt to continue functioning.

The Fed’s grand experiment in asset price inflation is reaching its climax.

As the market cycle turns from bullish to bearish, fake gains are going to turn into real losses…unless, of course, you have cashed out.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

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