There is a huge shock in store for those who have been lulled to sleep by a stock market that has become accustomed to no volatility and only an upward direction. And that alarm bell can be found in the price action of Bitcoin, which recently tumbled over 40% in less than a week. For the implosion within the cryptocurrency world foreshadows what will happen with the major averages as the Federal Reserve futilely attempts to stop monetizing the exploding mountain of U.S. debt.
I am fond of quoting the figure of total market capitalization as a percentage of GDP in order to illustrate the overvalued state of the equity market. That level has now surged to 145% of GDP; while history shows that stock values should represent just 50% of the underlying economy. In that same vein, another eye-popping figure compares global asset prices to GDP. Global asset prices (stocks and bonds) back in 1980 were only 110% of global GDP. Today, they have soared to an incredible and unsustainable 350% of the economy, according to data compiled to by Morgan Stanley.
Which also means due to the massive $3.8 trillion counterfeiting spree from the Fed since 2008, the S&P 500 dividend yield has now plummeted to just 1.8%. But then again, due to the delusion that the Fed can normalize interest rates, there have been five rate hikes on the shortest end of the curve since December of 2015. This means the 3-Year Note once again has a yield that is higher than the S&P 500 dividend yield. This also means that if the Fed follows through on its three rate hikes penciled in for 2018, the dividend yield on the S&P 500 would be less than a “risk-free” 1 month T-bill, which has not been the case since the great panic of 2008 began. The reemergence of this phenomenon could surely launch a barrage of daggers upon Wall Street’s latest and greatest bubble.
The most important point I can make about this insanely overvalued stock market is that its linchpin—that is, what’s holding the entire charade together–is the worldwide bubble in the bond market. As long as interest rates behave, the rally can continue. And by behave I mean that long-term rates can neither fall or rise by more than a relatively small number of basis points without sending the market into a tailspin.
