22/04/2016

On The Impossibility Of A Soft Landing - by David Stockman

Jeff Fitchett: Well said Mr Stockman!

Courtesy of David Stockman's Contra Corner


While the robo-traders play tag with the chart points, it is worth considering how it will all end. After all, at today’s close the broad market (S&P 500) was valued at 24.3X LTM earnings per share. That is, valuations are in the nosebleed section of history, but financial history has tumbled into the sub-basement of future possibilities.

Stated differently, every first year spread-sheet jockey knows that what drives LBO models and NPV calculations is the assumed terminal year growth rate. Get imaginative enough about the possibilities out there, and you can come up with a swell return on today’s investment even if the next few years look a little rocky—-or even alot so.
So never mind that earnings have fallen five straight quarters and at $86.53 per share are now down 18.5% from their September 2014 LTM peak. Also ignore the fact that this quarter will be down 10% and that there is no rational basis for a rebound any time soon.

But somewhere behind the robo-machines which line the casino there is a corporals guard of carbon units buying what Wall Street is dumping. And whether they know it or not, at 24.3X they are betting on one whopping big terminal growth rate on the far side of the deflationary turmoil now afflicting the global economy.
Here’s the thing, however. The current deflationary wave is not a one-time detour which will pass in due course. Per the above analogy, we do not have merely two years of bad numbers in a 10-year LBO model with a robust terminal value at the end.

What we have, instead, is merely the initial shock waves from the actions of central banks which are trashing the joint. Lurking on the other side, therefore, is unfathomable risk, not extraordinary growth.

In a word, the stock market is not worth even 15X its current earnings or 1300. At length, the carbon units out there catching today’s bouncing dead cats will thank their lucky stars if their losses are only 40% from here.


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