Alarming Similarities to the Dot com Bubble of 2000, and Present Day Stock Market Conditions...
There are a number of alarming similarities to the bursting of the dot com bubble in the year 2000, and the high risks with popular stocks of today, like with Amazon and Apple -- one important reason to be concerned about rich valuations. Trouble also exist with respect to rising interest rates and the growing mountain of debt around the world.
The Internet bubble peaked and proceeded to brake in March 2000, with the NASDAQ at 5132, and all those crazily valued dot com stocks crashed. The other stock markets followed suit, all within three weeks, even as investors rotated into what they perceived to be safer big Tech names like: Intel, Cisco, Microsoft, Nortel, EMC, and Sun Microsystems. Unfortunately, that is what we are seeing today, in a similar way, but with stocks like: Amazon, Apple, and, once again, Microsoft.
Investors were chasing momentum, just like what they are doing again today. In 2000, Intel dropped 45% in just one month, which, at that time, was the second largest company in the world. It was the equivalent of Amazon today, which means Amazon's market cap would go from around $1 trillion to $550 billion in just one month. This is a shockingly large move, but the difference is that Intel's price-to-earnings (PE) ratio was 55 back then, whereas Amazon's PE is a whopping 155 today.
Those bullish on the stock market will argue that interest rates are very low; therefore, they think the coast is clear, but here's the real problem: central banks have encouraged the whole world to take on an enormous amount of debt, by dropping rates to zero percent or even lower. Global debt amounts to $245 trillion, and it's up 40% since the credit crisis of 2008.
Central banks have tried to correct a debt crisis with much more debt. The US, for instance, has more than doubled its debt, up to $21.2 trillion, and has added $1.4 trillion of debt in just the last 12 months.
Therefore, the US is heading into severe problems, even with interest rates for US treasuries still at historically very low levels. The interest expense for the US government is going to skyrocketing in the coming years, even if rates stay where they are today.
Reason being, huge amounts of debt is causing all kinds of other problems. We're probably looking at another emerging market crisis, with rates now rising around the world. There are some twenty countries whose currencies have fallen by double digits against the US dollar.
In the US, it's not just the government that has borrowed heavily, but consumers and corporations have borrowed records amount of debt. This means that higher interest-rate expenses will more than offset or at least equalize the positive affects from Trump's tax cuts, and these tax cuts -- supposedly economic incentives -- are going to increase the deficit even more.
Yet, the countries that have funded the US deficit are reducing or completely eliminating their US treasury holdings, with Japan, China, Russia, and Mexico all selling a lot of US treasuries. The only countries remaining that are now funding the US, in a big way, are the Europeans, because they still have negative interest rates; however, that support could go away as well, as rates in Europe eventually rise. Investors, who are piling into these big-name tech stocks, are not thinking about this eventuality.
The most elusive objects of speculation, the crypto-currencies, have broken, the situation in the emerging markets are getting worse, interest rates are rising, the Federal Reserve is scaling down its balance sheet, and consumers are in financial trouble. We are already seeing indications of weakness in the housing market as well as in auto sales.
It's just a matter time, unfortunately, since each time the fed raises rates further, it's an added strain to the overall global economies. The Fed knows that this is in an extremely difficult situation, even though they will never admit it. Recessions and overall bear markets have been led by interest-rate hiking campaigns, almost every time. It is uncertain if history will repeat itself exactly, but we are in a similar situation today as we were in 2000.
The overall PE ratio's may not be as high as they were in 2000, but other indicators confirm major concerns. For instance, the median price-to-sales ratio for the S&P 500 is two times higher than it was in 2000, and the medium price-to-book value is just as high as it was back then -- showing that this bubble is much broader than it was in 2000.
In addition, think about all the measures that corporations have taken in order to pump up their earnings, which includes a record number of corporate stock buybacks, and non-GAAP earnings numbers -- doing everything they can to make earnings look better than reality.
The PE ratio's would probably be just as insane as 2000, if you removed all of these "gimmicks", confirming the dangers of this stock market bubble. Unfortunately, there is no rationalization in the stock market today, just like there wasn't in 2000 of the dangers that were lying ahead.
Investors have always counted on the Fed the step in, when economic conditions deteriorate; however, there is going to be a lot of pain, unless the Fed comes in and prints a lot more money. They are not going to be able to lower rates much more, with interest rates still at very low levels. In fact, when they tried to lower rates in 2007 and 2008, it didn't have any impact -- the markets just kept plunging, so they had to launch quantitative easing programs (QE).
This time, it's going to be another round of QE, which will hopefully indicate to investors that the central banks have lost control, and are never going to be able to get us out of this problem -- money printing never works. Everybody, over the past thousands of years, would've used some form of money printing, if it actually worked over the long-term.
A lot of governments have tried it, in their own way, and every time it has failed, ending up with malicious investments, over-capacities, asset bubbles, and other unexpected as well as undesirable consequences.
The Fed and other central banks around the world are essentially out of control. Investors probably would have never imagined that there would be trillions of dollars around the globe yielding negative rates or printing $15 trillion to support global economies, because it had never happened before in human history.
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Tuesday, December 4, 2018
Posted by Private Wealth Management at 6:43 PM