Believing The Impossible Is Necessary to Rationalize Today’s Bubble Markets

By Chris Martenson and cross-posted from Peak Prosperity

“Alice laughed: “There’s no use trying,” she said; “one can’t believe impossible things.”

“I daresay you haven’t had much practice,” said the Queen. “When I was younger, I always did it for half an hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.”

~ Lewis Carroll, Through The Looking Glass

To borrow from Lewis Carroll: To have confidence in today’s central bank-created bubble markets, we have to believe in six impossible things.

Thing 1: Fundamentals Don’t Matter.

In our brave new world of money printing to infinity, we’re supposed to buy into a “new paradigm” story. You know, that It’s different this time.

Spoiler alert: It never is.

Companies either make money or they don’t. They’re either good investments or they aren’t. They’ll either return risk-adjusted cash to you over time, or they won’t.

Here’s a simple exercise. Using a publicly available stock screener at Finviz.com, a favorite site of mine, I set two filter parameters to obtain a list of companies that have::

A market cap of over $2B
A P/E ratio in excess of 50x
These are the biggest companies that, in theory at least, require investors to wait 50 years (or more) to be paid back in profits for each dollar invested.

236 companies fit this description right now. 236!

Here’s a screenshot of page 11 of the results. Every company listed here has a P/E multiple of over 190(!).

(Source – here’s the exact screen I used, so you can troll the results for yourself)

Again, these sky-high ratios mean that investors are willing to wait more than 190 years for these companies to earn back their principal at current stock earnings prices.

In a word, folks, this is nuts. Not even during the height of the 2000 and 2007 bubbles could we find such an enormous number of extreme results spread across every sector as we see today. The small selection in the table above includes companies from the stodgy food, machinery, energy, and insurance sectors, also joined by traditional high-fliers like biotech and internet.

This is exactly the sort of indiscriminate optimism that identifies a late-stage classic bubble market. Nothing can ruin the party vibe. Anything and everything is priced beyond perfection. Each sector has its own story to rationalize the exuberance. “Oh, energy is poised to rebound soon, and Amazon has monopoly pricing power that will never be challenged, and Netflix is investing in premium content, and food, well, uh, food…you know, this particular company is special…maybe a takeover target?”

In the table above, I’ve highlighted a few companies in yellow just as conversation starters.

Let’s start with Yelp. I don’t even grasp how Yelp deserves a P/E of more than 15, let alone 192. Its business model of using crowd-sourced reviews to drive eyeballs/traffic to sell advertising against is facing competition from every possible direction. Google is squeezing them on every front, and new apps come along daily to parse the same review & locator territories.

Schlumberger is not a soon-to-recover story. Even if it were, that doesn’t help to justify the 21 other oil & gas companies returned for this particular filter I ran. Taken together, seeing so many super-high P/E companies from this sector is difficult to explain — outside of the markets throwing all caution to the wind.

Netflix is almost a special case of willful investor denial, similar to Twitter, Uber, and Amazon. In each case “investors” have waited year after year after year for earnings to finally materialize, but none do. Worse, it’s been nothing but a steady parade of red ink.

Does this look like the sort of explosive earnings growth you’d want to see to justify a P/E of 220?

(Source)

And those are “earnings”, which are easily doctored by accounting gimmickry into telling a picture rosier than true reality. Netflix’s cash flow burns are much better at showing how colossally this company loses money:

Quarterly burn rates in excess of $500 million are not the sign of a maturing, successful company. This is a company that is completely dependent on continued access to new inflows of funds from generous suckers — ahem!, investors — in the capital markets.

If those inflows stop and the company have to actually earn positive results from what it has already built, then Netflix would have to abandon its current cash-bleeding business model. In a more normal market environment, such pause would justify a P/E ratio of perhaps 1/10th the current ratio of 220.

And one last example to show that stocks are not the only asset class experiencing a price bubble. Without getting bogged down too much into the details of bonds, seeing Greek 2-year debt trading today with a lower yield (i.e. a higher price) than US 2-year Treasury debt tells us that similar massive price distortions exist in the bond markets as well.

The bottom line here is that fundamentals have been entirely tossed out the window. To believe in today’s asset prices you have to believe in a future so bright and full of explosive growth that it’s literally going to eclipse every other growth period in all of modern history.

In other words, you have to believe that This time is different

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