Noah’s Stock Market
“And God said to Noah… Build thee an ark.” Genesis 6: 13-14.
Quite a guy, that Noah. Building an ark is hard work. Big boats like that — many cubic cubits, as it turned out — require significant resources like lumber and tools, which are hard to acquire in a Bronze Age world.
Meanwhile, ark-building is a speculative venture.
Nobody really knows what the future holds. An ark is quite a statement to your neighbors.
Then again, Noah had inside information from the ultimate insider, God.
Think about the skeptics back then, though. Imagine the scene: “Hey! Who told you to build that ark, Noah? C’mon, man… Seriously?”
Still, it’s worth noting that even today, some people actually do ambitious things like build arks.1 Good for them. Perhaps they know something.
But many other people with assets — people with something to lose — just dump their entire life’s savings into the stock market: a taxable stock account or a tax-sheltered retirement account; or a 401(k) managed by someone else; or mutual funds; whatever…
The idea for most investors is to put their money into the Wall Street machine. Then an ever-rising tide of valuation should — yes, should — lift the proverbial boat.
In that case, ark-schmark… Who needs a boat? Especially when there’s electronic trading?
Just look at the markets in recent years. Up-up-up. What can go wrong?
Sure, in many cases valuations are currently little short of crazy. But God works in mysterious ways, they say. Ask Noah.
At the same time, though, it seems that many people and institutions are projecting their fear of the future onto the stock market.
I’ll describe more in a moment. But the short point is that, in many respects, the stock market has become the modern equivalent of Noah’s ark.
We should all hope it doesn’t leak.
Let’s dig in…
Far be it from us here at St. Paul Research or Agora Financial to be alarmist about Wall Street. That’s not who we are! (Okay, just kidding…)
But let’s follow conventional wisdom. Perhaps everything really is just fine on Wall Street.
Markets are rising nicely, which reflects the sturdy, underlying, robust strength of the super-duper American and world economy. It’s all ticking like a Swiss watch.
Along those lines, here’s a 1-year chart of the Dow Jones Industrials ($INDU), Nasdaq Composite ($COMPQ) and Apple (AAPL) just for good measure.
A year of growing steadily. StockCharts.com.
Who can complain? There was that COVID-related unpleasantness last March. But after that, the market-train went back on the tracks.
Over time, there were up-days and downers. That’s the nature of the game. Overall, though, these graphs are the very picture of progress. It’s all groovy.
But wait; it gets even better!
Toss in a couple of hot-running outliers like Tesla (TSLA) and the New York Stock Exchange Bitcoin Index ($NYXBT).
Holy smokes! StockCharts.com.
Compared with even mighty Apple, Bitcoin and Tesla are starships. Or as Borat might say, “Verrrry nice!”
Bitcoin is way up in just a few months, trading at over $40,000 a pop. This is for a computer-crunched number that’s so massive you need a storage device to hold it.
And Tesla? After its recent rocket-like rise, the company has a market cap in the range of $800 billion. This for a firm that manufactures a computerized battery with wheels attached.
Tesla sports a market cap about 4-times that of gasoline refiner Exxon-Mobil. Because petroleum products are the new buggy-whips of our time, right?
In fact, Tesla’s market cap is greater than the combination of the 9 largest automakers in the world in terms of production.2
Again, c’mon, man. Why build an ark when you can buy Tesla?
The thing is, though, Tesla trades at about 1,200 times earnings. I’ll go out on a limb here and opine that perhaps Tesla has pulled out just a little bit ahead of its true inherent value.
And how about Bitcoin? I remember the good old days, a few months back in October. It traded for a mere $10,000. Now it’s at $40,000. I’ve heard numbers like it’s going to $200,000.
For certain investors, there’s a certain kind of psychology at work here.
Begin with a classic point. Many people chase momentum in a market. That is, people can be greedy (shocking, I know). They see a fast-mover and jump onboard to catch a ride. The more people jumping, the faster the idea moves. Until… well… yes.
That momentum-psychology dovetails with another classic concept, the fear of missing out (FOMO). That is, people see others sitting on sweet gains, and they’re fearful. They too want a piece of the action. Hence, there’s a semblance of piling-on at work.
That’s the basic “fear and greed” dynamic at work.
Now, let’s consider another angle…
Perhaps this particular take is not foremost in how people think. But allow me to suggest that this concept subtly pertains.
When markets explode upwards as they have in recent months, there’s a deep-seated, subliminal reaction to that mix of greed and fear.
Namely, people are slowly, surely recognizing that the U.S. monetary base is unhinged. The Fed is hemorrhaging dollars. Trillions here, trillions there. More trillions to come.
Many of those dollars have no good home in the real economy, so they migrate to assets such as shares on Wall Street.
This is how and why share prices for many companies are entirely divorced from near, medium or long-term earnings; looking at you, Tesla.
People are rapidly exchanging the Niagara of Fed-dollars for shares in publicly traded companies, or intangibles that promise to maintain value like Bitcoin. (Whether that’s true in the long term is another issue.)
It may seem strange, but Bitcoin, Tesla and many others offer a port in the monetary storm, so to speak.
This might be an element of what I called “seismic escape behavior” in a note last summer.
That is, people sense that there’s an ongoing, slow-motion collapse of the dollar underway. They can see the uncontrolled federal spending, backed by firehose-levels of money creation out of the Fed.
All these new dollars are swamping into a rather stagnant economy, at least in terms of the industrial base and the country’s ability to produce a wide array of real things.
Don’t discount gold, silver and other metals, either.
Metals have already shone, with more to come I suspect. They had a nice year in 2020, as this chart from our friends at Sprott shows:
2020 returns in the precious metals & mining sectors. Sprott.3
Gold and silver, etc. didn’t quite move like Tesla or Bitcoin, but they delivered outcomes that are more than respectable by market metrics. And no doubt, precious metals will continue to do well.
With metals, there’s the added upside of explosive moves if — okay, when — some of those many trillions of Wall Street’s wandering dollars come looking for a happier home.
That is, markets and supplies of gold, silver, etc. are simply too small to absorb the trillions of dollars that will, sooner or later, begin to exit dollar bonds and deposits.
Or look at it this way. Companies like Apple, Tesla, and many more may have relatively high share prices. But they are real entities. They make real things.
Throw in even the “old” economy guys like steel companies, equipment makers, etc. They are real.
Money is migrating to companies that make things. Companies that take inputs and add value, along with branding and ability to sell to a vast market.
The stock market denominates these “real” companies in dollars just now. But once the dollar begins to inflate into the inflationary ether, they can be denominated in anything.
Eventually (perhaps sooner than you think), we’ll have a dollar currency crisis, leading to a new monetary system for the U.S. and the world. It’ll be some basket of items like gold, energy, agricultural goods and maybe rare earths.
Stranger than fiction? Perhaps, although I discussed it last summer here.
This new currency will be recalculated from dollars and applied to company share prices, while dollar bonds and/or bank deposits are mousetrapped and wiped out.
After so many strategic errors over the decades, it’s no stretch to say that U.S. global credibility, and the dollar, are coming to the end of the shelf life.
In so many ways, the U.S. resembles a banana republic.
Not long ago, I explained how, in a figurative sense, the country is burning the furniture to keep up steam in the national boilers.
Indeed, based on current trends, can the nation even hold together? We discussed it here.
Last year, more than a few people lamented how 2020 was such a tough time. Well, yes. But beware what you wish for, meaning we’re half a month into 2021 and it’s already dicey.
Is this the year when the dollar finally blows up? We’ll see.
But just keep in mind that apparently inexorable stock market rise may not be the harbinger of better times ahead. It’s not necessarily a signal that the nation is getting richer.
Indeed, Wall Street may reflect how profligate money creation by the Fed makes us poorer. And the rising stock market may just be the result of big money seeking an ark, ahead of the storm.
On that note, I rest my case.
That’s all for now… Thank you for subscribing and reading.
Managing Editor, Whiskey & Gunpowder
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3 2021 Top 10 Watch List, Sprott