“… I get knocked down
But I get up again
You’re never gonna keep me down” – Chumbwamba
Was everybody wrong 45 days ago or are they wrong now?
The Nasdaq is up 6,000 points in the last 6 weeks and that’s a nice 26% – at this pace we’ll be up 225% in 12 months – what could possibly go wrong? Well, we KNOW what can go wrong but – WHEN? When is the big question because “it will all end in tears” but WHEN??? So, rather than repeating Michael Burry’s well-founded concerns(essentially the same as ours but he’s more famous) let’s consider WHY we are rallying and maybe we can figure out when that foundation begins to collapse?
With unemployment still in the 4% range (full employment) and wages running ahead of inflation for the third straight year, payroll-deduction flows into index funds are at all-time highs. Vanguard and Fidelity passively buy the index every two weeks regardless of valuation. This is the Dot-com era’s missing ingredient. In 1999 the 401K system was a fraction of its current size. Today it’s a structural, price-insensitive, $1T+ annual bid that lands disproportionately in the top 10 names – because that’s what the cap-weighted index is! This alone explains a huge chunk of the “concentration” Burry complains about – it’s not euphoria, it’s the plumbing…
Keep in mind the ENTIRE market cap of the US indexes is $70Tn and $60Tn (85%) is in the S&P 500 and 40% of the S&P 500 ($24Tn) is in the Top 10 stocks. The rest is in the Nasdaq and anything else (Russell) is a rounding error. The Dow is just 30 of the S&P stocks re-presented and the NYSE includes essentially all the stocks – so we don’t double count.
So a lot of the money repricing the indexes is money that has been SHIFTING from the bottom 70% (in Market Cap) stocks to the top 30% (10 F’ing Stocks!). Look at your own behavior – do you own more or less of the Mag 7 in the last few years? Hedge Funds have been pouring TRILLIONS into these stocks – in large part because other stocks are too small to handle the inflows.
And so the larger scale of the Mag 7 causes 30% of people’s monthly IRA/401K allocations to flow into them INSTEAD of the smaller caps and their losses are de-emphasized while mega-cap gains are being emphasized and there we have our Boom Loop perpetuating the rally.
The worker’s (dumb) money goes into SPY and QQQ and SPY and QQQ buy the disproportionately large Mega Caps which then causes hedge funds and individual investors to chase them (FOMO), which then causes SPY and QQQ to increase their allocations – and round and round we go!
Apple is the size of the UKs ENTIRE stock market. It’s the size of the UK’s ENTIRE Economy ($4.2Tn GDP). Apple was the first company ever to become a Trillion Dollar company, on Aug 2nd, 2018 and it’s gained $3Tn more in the past 8 years. NVDA essentially went from $0 to $5Tn during the same time.
John Rockefeller was the first Billionaire (Standard Oil/Exxon) back in 1916. Allowing for inflation and market gains, it’s estimated he’d have about $400Bn today. Musk has $673Bn and will soon be a Trillionaire (because it’s so easy to make another $327Bn?). Thanks to Google’s resurgence, Larry Page is second with $336Bn and only $30Bn of that is NOT in Google’s stock (and they told him to diversify!). Sergey also kept all his money in Google and he’s got $312Bn now. Bezos has slipped to 4th at $290Bn and 20% of his money is not AMZN and CBS gobbler, Larry Elison has $249Bn, 40% in ORCL – the most diversified of the group.
Reality check: As I’m writing this, 8:30, the PPI just came in at 1.4% vs 0.4% (not a typo) expected by leading Economorons and that’s up 100% from last month’s 0.7%, which itself has been revised up 40% from the “not so bad” 0.5% they originally told us (which we found hard to believe).
Core PPI is up 1% vs 0.2% expected (why do they even bother estimating?) and 0.2% in April which has been revised up 100%% from the 0.1% mis-reading that led to that market rally we saw last month. Everything is NOT awesome – everything is BULLSHIT!
IN PROGRESS
