RuleNumberOne

Credit risk doesn't exist anymore in Europe. Greece 10-year yield at 2.14%. The same as the US 10-year. BofA CEO says US yields are low because Europeans are buying up all the US bonds to escape negative rates. Can't blame them. Germany applied retroactive rent freezes to control inflation in Berlin (aka wealth confiscation)

The problem in Europe is the absence of a free market. - Bad borrowers never punished - Bad lenders never punished - Bad regulators never punished - Bad politicians never punished. Monte Paschi bailed out: - 17% non-performing loans - accounting for same collateral with different values multiple times - complex derivatives to hide losses. What do we have now: - Retroactive Rent freezes in Berlin (Wealth confiscation) to stop raging housing inflation in Germany - Banks continue to make interest only loans, don't compensate for credit risk. - ECB covers up insolvency, investors don't trust bank numbers. It is like trying to generate inflation in Alabama with negative rates, regardless of how much capital gets misallocated. It would eventually work, but only after we have created a bubble that is as big as 1929 + 1999 + 2008. There is no escape from that box.

Yeah, good point Spekulatius. If the bubble is in bonds or cloud stocks (i.e Russell 1000) or housing, no point in looking at the S&P 500. Italian 2-year at 0%! https://www.bloomberg.com/opinion/articles/2019-07-02/italy-proves-how-markets-have-abandoned-logic?srnd=premium "Let this sink in for a minute: Yields on two-year Italian government bonds briefly fell below 0% on Tuesday. That's right - for a moment, investors decided it was just fine to pay Italy for the privilege of lending it money, even though barely a month ago the country was on the verge of a fiscal crisis so bad some wondered whether it would be need to leave the euro zone. It matters little that yields ended the day on the right side of zero at 0.02%, but even that shows how the “greater fool” theory in markets has gone too far. What makes the developments in Italy’s bond market even more shocking is that at Baa3, its debt is rated just one step away from junk status by Moody’s Investors Service."

https://www.ft.com/content/c060e162-98c1-11e9-8cfb-30c211dcd229 "In Frankfurt, Germany’s financial centre, prices have doubled since 2010... ...real house prices in Amsterdam rose 64 per cent in the five years to September 2018, but real disposable household income grew just 4.4 per cent in that time, despite ultra-low unemployment." Klaas Knot, head of the Dutch central bank who also sits on the ECB governing council, said low interest rates “are a contributing factor”, with mortgage rates “down to levels where I don’t think we’ve seen them before in the Netherlands”. Bloomberg claims the same Klaas Knot thinks inflation is too low https://www.bloomberg.com/opinion/articles/2019-07-01/stock-market-can-t-be-fully-brain-dead-right "Dutch Governor Klaas Knot, typically considered on the hawkish wing of the Governing Council, said it was “indisputable” that inflation is too low. "

https://www.bloomberg.com/graphics/2019-opinion-monte-paschi/?srnd=premium To get an idea of what the ECB is capable of and why they need zero rates for at least another year (or maybe for the next 100 years), these are some quotes from the article. Draghi was chief of Italy's central bank before he became ECB chief. "The bank took to masking its burgeoning losses with a series of complex derivatives deals. Those transactions were hidden from public view until I later reported on them. Once they were disclosed, Monte Paschi had to restate its accounts twice." To pass muster with regulators, firms need a ratio of at least 4.5%—or more than seven times what the report estimated Monte Paschi had at the time. In short, the ECB knew in 2016 that the Italian lender appeared to be insolvent. Neither party disclosed this critical assessment, even as the bank’s bonds and shares were trading publicly It looks like Monte Paschi had a severe capital shortfall around the time of its bailout. EU rules should have disqualified it from getting the so-called precautionary recapitalization it received. But 17% of its loans are still classified as nonperforming, a figure that is almost twice as large as the average for Italy’s top nine banks, according to Bloomberg data. "State and nonprofit ownership had made the bank vulnerable to local political interference. It frequently lent money to court power. In doing so, it tended to overlook credit risk." Monte Paschi’s failings included: • Accounting for collateral twice, or even multiple times, with different values;

More Internet searching found: ECB covers up banking problems at Monte Paschi: https://www.bloomberg.com/graphics/2019-opinion-monte-paschi/?srnd=premium "The manner in which the ECB tackled the Italian lender’s problems, its first big test as a banking regulator, threatens to undermine its credibility. ECB President Mario Draghi has yet to win over the many analysts, politicians and others who remain skeptical of the authority’s ability to act as a strong, strict and independent supervisor. To restore investor faith in Europe’s banks, the regulator needs to be more accountable and transparent. This bailout suggests that the ECB may not be up to the task." IMF warned that Portugal has a real estate bubble again. https://www.theportugalnews.com/news/imf-warns-of-risk-of-real-estate-bubbles-in-portugal/46330 Dutch central bank warns housing market is a risk https://nltimes.nl/2019/06/05/dutch-housing-market-biggest-stability-risk-netherlands-central-bank-warns-hard-brexit Spain property prices tripled between 1996-2003. Needs more reflation before recapturing the peak https://seekingalpha.com/article/4266705-busted-housing-bubble-1-morphs-housing-bubble-2-spain ECB says it will keep rates low for another year. I think the re-bubbling will continue for a while even as they pretend there is no inflation. The ECB is a banana central bank.

Aren't home prices in Denmark going up a lot though? Netherlands has issued a lot of interest-only mortgages over the last few years and home prices are going up 10% a year. The central planners claim inflation is low in Germany. Yet, Berlin passed a five-year rent freeze a few weeks ago because rents were going up a lot (7-10% a year for the last few years.) http://www.bbc.com/capital/story/20190226-berlins-radical-plan-to-stop-rocketing-rents Insurers and other such bondholders are the ones who are getting robbed by the central planners. It is safe to say nobody from the Bundesbank will ever be the chief of the crooked ECB, poor Weidmann. We had negative amortization and interest-only mortgages in 2007 in the US too. But we haven't had them for the last 10 years, US regulators have been very strict.

I went into a Fidelity branch yesterday. There was a 70-year old woman waiting in the lobby. A financial adviser came out to greet her. She told the adviser that he could tell her whether she would be solvent when she was 90. I had always wondered what sort of people pay for a financial adviser. If these advisers put old ladies into index funds - as in the Russell 1000 index, starting next week they would be putting their money into the new IPOs. There is a long list of IPOs aimed for the rest of this year. There is disbelief in Silicon Valley at the valuations. The feeling is, "if we had known the IPO market would change so suddenly, we would have IPOed already. Wait for us." Just a year ago, none of these companies thought they could ever IPO.

Bundesbank is the only honest central bank, every other central bank is crooked. One thing that has juiced US stocks is the negative rates in Europe. If the ECB is forced to raise rates to pop their housing bubble, there will be an earthquake. Searching for "European house prices" at ft.com: "Soaring German housing costs leave Merkel vulnerable" - October 25 2018 https://www.ft.com/content/8f96a698-d82d-11e8-a854-33d6f82e62f8 "Eurozone housing prices rise at fastest pace since crisis" - July 10 2018 https://www.ft.com/content/d5a3dae4-843f-11e8-a29d-73e3d454535d Home prices over the last year. Ireland - up 12.3% Portugal - up 12.2% Latvia - up 13.7% Slovenia - up 13.4% Slovakia - up 11.7% Netherlands - up 9.3% "Germans warn on high property prices" - March 12 2018 https://www.ft.com/content/3cf612aa-1642-11e8-9c33-02f893d608c2 Nationwide rents rose 7.2% over the last year

10% home price rise with an 80% mortgage, is a 50% return on investment within one year. Draghi wants to ease even more. Volcker has a simple suggestion: if you don't want deflation, don't blow bubbles.

https://www.cnbc.com/2019/05/31/european-real-estate-bubble-a-real-possibility-commerzbank-says.html European home prices have been going up for the last 5 years, and the increase is accelerating. Price increases are in the high single digits in some EU countries. Negative rates and "low inflation" are the only things we hear out of Europe. What about home prices? Are we already in a bubble? Or when would it be called a bubble? When will it pop? Housing is over 40% of the US CPI. The usage of "imputed rents" masked the US housing bubble. "Slovenia and Latvia saw double-digit rises. Portugal, the Netherlands and Luxembourg all rose at almost 10% rates."

The Russell 1000 is updated just once a year. That is why all the IPOs of the last year are missing. Getting updated next week. I think the cutoff date is May 10, some recent IPOs may not make it into the Russell 1000 this year. https://www.barrons.com/articles/uber-lyft-beyond-meat-stocks-will-join-the-russell-1000-next-week-51561736049?mod=md_home_pan_mkt_news

In Europe, home prices have been on a tear for years. They are going up faster than Silicon Valley. Though housing is 40% of the CPI, disgusting governments and central bankers have created negative mortgage rates in Denmark, 0% 10-year in France, 0.5% 10-year in Portugal and Spain. All these countries have zooming house prices. Faked inflation numbers have given central bankers an excuse to blow a housing bubble, just like they did in the US in 2008. How do they report 0.5% inflation when the biggest CPI component is climbing 7% a year? "Imputed Rents"

@jschembs Thanks for that spreadsheet. The P/FCF multiples are what I expected. Looks like there have been many IPOs over the last 9 months that have not yet made it to the Capital IQ database. The newer the IPO the greater the current P/S multiple. Pager Duty, Crowdstrike, and so on. Zscaler IPO'ed in early 2018 but is also missing from Capital IQ. It trades at 50x 2018 sales. https://www.iposcoop.com/last-100-ipos/

If you were to screen the Russell 1000 for unprofitable companies trading at a P/S of 10 or more, my guess is you would get a number higher than in 1999. For example, ServiceNow with a $50 billion market cap has been excluded from the S&P 500 even though most S&P 500 companies have a smaller market cap. Any SaaS IPO of the last 8 years would fit in the S&P 500 if we were to look at market cap alone, but they have all been excluded. Comparing today's S&P 500 with 1999 would require the S&P committee to use the same membership criteria today that it did in 1999. It is comparing two very different things. Maybe in 1999 S&P just used the market cap. Now it requires a track record of profitability instead of market cap.

S&P 500 does not have the cloud stocks. For example, ServiceNow has a market cap of $50 billion, the smallest S&P 500 companies have a market cap less than $5 billion. Russell 1000 is a better index to look at because I think market cap is the only criterion for entry. S&P 500 requires profitability for entry. The bubble lies outside the S&P 500. Uber, Lyft, WeWork, Crowdstrike, Zoom, Slack, along with FT's list of cloud stocks do not exist in the S&P 500.

I think more "tech" money will be lost in the next bear than in 1999. WeWork has a private valuation of $47 billion, which is 39 times the peak market cap of WebVan. There was outright fraud in 1999, but the market caps involved were a fraction of what we have today. What was the peak market cap of pets.com? People have become inured to the lack of earnings in cloud stocks. In lieu of a P/E, those stocks have traded on a P/S basis for the last several years. The P/S multiple keeps climbing year after year. Anything less than 20x is cheap, i mean P/S, not P/E. The "tech" is not ground-breaking either, it is just built on AWS.

Helicopter money will not generate inflation in Alabama, it would just be a one-time event. Meanwhile even fast food workers in Silicon Valley have seen their wages more than double over the last 9 years. https://www.bloomberg.com/news/articles/2019-06-12/top-u-s-inflation-hot-spots-clustered-on-west-coast Seeking Alpha article today says the peak valuation for Siebel in 2000 was 27x sales. 60x sales is very normal today. https://seekingalpha.com/article/4271574-upon-time-tech Even a year ago, an IPO was unthinkable for some of the companies going public now. At least in 2000, Greenspan set the Fed rate at 6% to break the bubble. Kashkari and Bullard want to cut right away to 2%.

True. Nobody wants to hear about inflation. With a 4x increase in government debt since 1999, record corporate debt, fiscal deficits during record-low unemployment, the last thing anybody wants to hear is inflation. Inflation is the one thing that can blow this sky-high. Here is how it works. Suppose California's inflation is 8%, Alabama and Mississippi are at 1% inflation. National inflation = ( California inflation + Alabama inflation + Mississippi inflation ) / 3 = 3.3% Though computers and cellphones cost as much as ever, Internet and wireless bills as high as ever, there has been improvement in speeds. Therefore, we have actually had deflation! Say these categories are deflating at 20% per annum and take up 10% of spending. Final inflation = 3.3% - 2% hedonic adjustment = 1.3% What a great human achievement! 1% inflation year after year, decade after decade! The eighth wonder of the world! Now let us move over to Europe. You say Italy and Greece have too much debt? Lets tweak the inflation methodology a bit here and there, now Italy can borrow at 2% and Greece at 3%. Nobody can complain about the ECB bazooka when inflation is at 0%! "Whatever it takes!"

Where I live, services inflation, such as haircuts, carwash, healthcare, has been running at 10% per year. I wonder how the Bureau of Labor Statistics calculates inflation. Do they take a weighted average by population or is Alabama given the same weight as California. Politicians appoint "their people" to the BLS, the BLS reports a fake CPI that is always adjusted to 1% (hedonically or otherwise). Politicians then use this as evidence for low rates.

Did some Googling on 1999. QCOM was the best performing stock of 1999 reaching a market cap of $56 billion in November 1999. That was 14x sales, revenue had grown 10x over the preceding 4 years. QCOM was profitable all the time. 1999 AR: https://investor.qualcomm.com/static-files/df5fedaa-264d-4377-aa9a-e2916d572253 https://www.latimes.com/archives/la-xpm-1999-nov-18-fi-34813-story.html Webvan had a market cap of just $1.2 billion at the peak.

Corporate debt to GDP is higher. If you take the Enterprise-Value to GDP instead of market cap, you would perhaps beat 1999. But anyway that was not my point. Yeah the overall market P/E is lower. But that is like buying an IPO at 60x sales while pointing to Wells Fargo's P/E of 9. You cannot get to 60x sales for an unprofitable company without a bubble. In other words, you cannot deny there is a bubble in tech by averaging it out with the P/Es of banks. Yes, the dividend yield is higher. But that would be saying 60x sales for an IPO is fine because food companies are yielding more than they were in 1999.

Yeah, who knows. If Jim Bullard or Jim Cramer get appointed as the next Fed Chair, 100x sales may become the new norm. This is not euphoric enough yet ... Let me edit my comment. Just read that Kashkari announced on Bloomberg that he wanted a 50bp cut at this meeting itself. Kashkari is the new front-runner for the next Fed Chair and 150x sales may become the new norm.

Just a few months ago, people snickered that the stock market would never allow crazy unicorn valuations. They were so wrong. I can think of many private companies with revenue in the $100-$300 million range right now. Their venture capital valuations range from 10-25x sales. But the public market for such enterprise companies is right now 60x sales.

These companies are very very unexceptional in every respect. They all make losses, and will never make profits to justify their market caps. The only thing that distinguishes them from their neighbors in Silicon Valley is their IPO date. Consider Crowdstrike - IPO'ed last week and trades at 60 times trailing sales, market cap $15 billion. From where I sit in Silicon Valley, I see only such companies and their investors. This IPO market shows there is no fear in the stock market. There was no way you could get such valuations at any time since 2000. And the interesting thing is, there is no way a big tech company will buyout these IPO'ed companies at such crazy valuations either.