Free Markets In This Country? ROFLMAO

Investment Research Dynamics

There are no free markets in this country anymore, only interventions – Chris Powell, Treasurer of GATA

The latest sell-off from last week has resulted in a 3-day, 100+ point move in the S&P 500 (click to enlarge):

Take a look at that graph for a moment.  It would be considered the 9th wonder of the world if it had been the result of true, laissez faire, interevention-free stock market.  I posted a graph of the S&P 500 going all the way back to 1971 which shows how absurdly off the rails this current stock market has become.  You can see that graph here:  ROFLMAO.

The current stated p/e ratio of the S&P 500 is around 20.   The current stock market, by many metrics, is among the most overvalued stock markets in U.S. history.   The long term average p/e ratio for the SPX is around 14.  However, that only tells part of the story.

The problem comparing today’s S&P ratio with historical points in time is the same problem with comparing prime grade rib-eye with fried liver.   Generally Accepted Accounting Principles (GAAP) have been completely sabotaged over the last 20 years.  What this means is that a dollar of earnings today probably would translate into about 30 cents of earnings – at best – in 1980.

Just one example of this is the “mark to fantasy” accounting standards that were implemented right after the systemic collapse in 2008.  This enable banks to mark illiquid garbage up to “theoretical” market levels, enabling them to generate billions in non-cash, non-operational GAAP income.   This revised GAAP standard is blatant fraud – but it’s legal now for the banks.

I could ramble on all day discussing the difference in accounting standards now vs. 1980 and the manipulative, fraudulent effect the differences have on reported bank/corporate earnings.   The off-balance-sheet accounting abortion alone could take up more than a day.  Suffice it say that I read an analysis back in 2002 in which the author had applied 1980 GAAP standards to the then-current (2002) S&P 500 earnings.  He concluded that the 2002 SPX earnings per share would have translated into about 40 cents of earnings in 1980.

The bottom line is that today’s stock market – on an “apples to apples” comparison basis – ceteris paribus, if you will – is the most insanely overvalued stock market in history.  The only thing keeping this market from collapsing is Federal Reserve and its vassal banks, which have $2.5 trillion of printed money sitting – unencumbered by reserve requirements – in the Fed’s Excess Reserve Account.

When this market manipulation fails – and it will eventually just like every other market intervention in history – the collapse will be worth sticking around to watch.