Hockey Sticks In The Matrix

If you’re a bear, the funny thing about this market is that pullbacks don’t feel like they should. That is, when stocks close red, you don’t feel vindicated. In fact, it’s the opposite. When you hear the closing bell you almost feel like maybe you should have bought the dip.

It’s like we’ve reached a point where we need to redefine the parameters for what counts as a correction or a bear market. Corrections are now days when the Dow is down more than 50 points. Bear markets are entered when there’s a triple digit decline. And everyone knows those losses will be recouped within 48 hours right before new all-time highs are made. Was there a geopolitical catastrophe in there somewhere? Even better. More stimulus. More rate cuts. More asset monetization. More. More. More.

The stock market has begun to resemble the same type of confidence game that makes fractional reserve banking possible. Allow us to explain. Banking is ponzi scheme. You deposit money, the bank loans it to someone for 30 years. Your money isn’t there. Yes, some money is there, but it’s a tiny fraction of the deposit base. The term “bank run” doesn’t exist in the absence of fractional reserve banking. So the system depends for its very survival on you not withdrawing your money at the same time as everyone else. It’s a confidence game. As long as you’re confident, banks stay in business.

It’s now the same thing with the market. Everyone with a clue knows this isn’t tenable. And that’s not us just parroting the bear case. We’ve had four quarters of declining earnings growth, multiples are stretched to historic extremes, vol has been run over by a central bank Mack truck, and the geopolitical landscape is littered with so many landmines that you dare not even move. And yet stocks go higher. Why? For the same reason there won’t be an angry mob at the bank on Monday morning. It’s become a confidence game. Central banks, corporate buybacks, the return of the elusive “sideline” money that’s always “right around the corner” - there’s always an excuse to buy. There will always be a greater fool buying higher. You know it’s ridiculous just like you know the bank has loaned your deposits out to someone in the form of a 30-year fixed, but you’re not going to put your money in the mattress. And you’re not going to sell stocks. Better to stay in the Matrix.

Well since it’s Saturday, let’s take a fresh look at what the Matrix looks like these days in terms of US equities. We’ll start with a bit from Goldman:

“Since the start of July, major global equity market indices have climbed higher, shrugging off any post-Brexit uncertainty. Global stock valuations appear stretched while volatility has fallen. The S&P 500 (17.2x) and STOXX 600 (14.9x) both trade at forward P/E’s one standard deviation or more above their 10-year averages. As noted, stock valuations stand at historical extremes. The median S&P 500 stock trades at a forward P/E of 18.2x, ranking in the 98th percentile since 1976.”

Ok, got it. Now let’s look at some pretty (or “not so pretty”, depending on how you look at it) pictures. Here’s what multiples look like across markets:

(Chart: Goldman)

Now take a look at Goldman’s rotation index:

(Chart: Goldman)

And the market has stopped rewarding the buybacks:

(Chart: Goldman)

But don’t worry, because as Goldman puts it, “despite our unattractive short-term view, we expect equities will return to current levels in the next 12 months.”

Why do they assume that, you ask? Simple: hockey sticks folks. Hockey sticks.

(Chart: Goldman)

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