The following article was originally published by Michael Snyder at The Economic Collapse.
Have We Just Reached Peak Stock Market Absurdity?
Have you ever wondered how tech companies that have been losing hundreds of millions of dollars year after year can somehow be worth billions of dollars according to the stock market? Because I run a website called “The Economic Collapse“, there are naysayers out there that take glee in mocking me by pointing out how well the stock market has been doing. This week, the Dow is flirting with 21,000 and the Nasdaq crossed the 6,000 threshold for the first time ever. But a lot of the “soaring stocks” that have been fueling this rally have been losing giant mountains of money every single year, and just like the first tech bubble this madness will eventually come to an end in a spectacular fiery crash in which investors will lose trillions of dollars.
Anyone that cannot see that we are in the midst of an absolutely insane stock market bubble simply does not understand economics. Every valuation indicator that you can possibly point to says that we are in a bubble of epic proportions, and history teaches us that all bubbles inevitably come to an end at some point.
Earlier today, I came across an article by Graham Summers in which he persuasively argued that the price to sales ratio indicates that stock prices are far more inflated than they were just prior to the great stock market crash of 2008…
Sales cannot be gimmicked. Either money comes in the door, or it doesn’t. And if a company is caught messing around with its sales numbers, someone is going to jail.
For this reason, Price to Sales is perhaps the single most objective and clear means of measuring stock valuations.
This metric, above all others, you can point to and say, “this is definitively accurate and has not been messed with.”
On that note, as Bill King recently noted, today the S&P 500 is sporting a P/S ratio that is massively higher than it was in 2007 and is only marginally lower than it was during the Tech Bubble (the single largest stock bubble of all time for most measures).
To me, looking at profitability is even more important than looking at sales.
Large tech companies such as Twitter certainly have lots of revenue coming in, but many of them are deeply unprofitable.
In fact, Twitter has never made a yearly profit, and over the past decade it has actually lost more than 2 billion dollars.
But despite all of that, investors absolutely love Twitter stock. As I write this article, Twitter has a market cap of 11.5 billion dollars.
How in the world is that possible?
How can a company that has never made a single penny be worth more than 11 billion dollars?
Twitter is never going to be more popular than it is now. If it can’t make a profit at the peak of its popularity, when will it ever happen?
And guess what? ABC News says that Twitter actually just reported a decline in revenue for the most recent quarter…
Twitter has never turned a profit, and for the first time since going public in 2013, it reported a decline in revenue from the previous year. Its revenue was $548.3 million, down 8 percent.
Net loss was $61.6 million, or 9 cents per share, compared with a loss of $79.7 million, or 12 cents per share, a year earlier.
The only reason why financial black holes such as Twitter can continue to exist is because investors have been willing to pour endless amounts of money into them, but now that bubble is starting to burst.
In his most recent article, Simon Black discussed how Silicon Valley investors are starting to become more cautious because so many of these “unicorns” are now going bust. One of the examples that he cited in his article was a company called Clinkle…
(Given that investing in an early stage company is high-risk, investors might provide a few hundred thousand dollars in funding, at most. Clinkle raised $25 million.)
The company went on to burn through just about every penny of its investors’ capital.
There were even photos that surfaced of the 21-year old CEO literally setting bricks of cash on fire.
At the end of the farce, Clinkle never actually managed to build its supposedly ‘world-changing’ product, and the website is now all but defunct.
Most of you may have never even heard of Clinkle, but I bet that you have definitely heard of Netflix.
Netflix has revolutionized how movies are delivered to our homes, and that revolution helped drive movie rental stores to the brink of extinction.
There is just one huge problem. It turns out that Netflix is losing hundreds of millions of dollars…
Netflix might be my favorite example.
The company’s most recent earnings report for the period ending March 31, 2017 shows, yet again, negative Free Cash Flow of MINUS $422 million.
Not only is that a record loss, it’s 62% worse than in Q1/2016, and over twice as bad as Q1/2015.
Netflix just keeps losing more and more money.
But even though Netflix is losing money at a pace that is exceedingly difficult to imagine, investors absolutely love the company.
I just checked, and at this moment Netflix has a market cap of 68.4 billion dollars.
Sometimes I just want to scream because of the absurdity of it all.
Companies that are losing hundreds of millions of dollars a year at the peak of their popularity should not be worth billions of dollars.
Nobody can possibly argue that these enormously inflated stock prices are sustainable. Just like with every other stock market bubble in our history, this one is going to burst too, and I have been warning about this for quite a long time.
But for the moment, the naysayers are having their time to shine. Despite the fact that U.S. consumers are 12 trillion dollars in debt, and despite the fact that corporate debt has doubled since the last financial crisis, and despite the fact that the federal government is 20 trillion dollars in debt, they seem to be convinced that this irrational stock market bubble can keep inflating indefinitely.
Perhaps they can all put their money where their mouth is by pouring all of their savings into Twitter, Netflix and other tech company stocks.
In the end, we will see who was right and who was wrong.
This article was written by Michael Snyder and originally published at the Economic Collapse Blog.
Michael T. Snyder is a graduate of the University of Florida law school and he worked as an attorney in the heart of Washington D.C. for a number of years.
Today, Michael is best known for his work as the publisher of The Economic Collapse Blog and The American Dream.
If you want to know what is coming and what you can do to prepare, read his latest book [amazon text=Get Prepared Now!: Why A Great Crisis Is Coming & How You Can Survive It&asin=150522599X].
POP!
Many of my coworkers have either retired recently or are going to soon. They all brag about the million plus dollars they have in their investments. I hope they are screwed royally??
Look if you want to understand listen: banks lend each other phony money and then use it to buy everything. Then they hire Feds to murder any tax slaves that try to do the same thing or print their own money. Trump needs to make sure all his pals are positioned correctly in the market. Then he will attack his friend in North Korea and crash the market. That is when you will lose all of your savings. Understand? Because you are a cowardly slave you will die poor.
When this all goes down I want to be a poor starving priest.
Time to open a liquor store. They always thrive when the economy tanks. And yes, AZcats, and Zeus or whatever you call yourself this week, I’ll gladly accept your gold “money” in exchange for a bottle of booze in my store.
Ha… of course you will accept gold. Because everyone has accepted gold going back centuries and centuries. WHY? Because gold is money.
I will say it again….what in the world is the POINT of buying gold and silver if it is going to be worthless in an economic catastrophe?
That is the WHOLE point in buying gold and silver. So when paper dies, YOU WIN owning gold.
“Gold is money, everything else is credit.” JP Morgan (testimony to congress 1913)
“In the absence of a gold standard there is no way to protect savings from confiscation through inflation. There is no safe store of value.” – Alan Greenspan 1966 (before he had the levers of power, of which he never publicly mentioned gold when Fed Chairmen.)
Ok, haha, you stack up the gold for me, I’ll stock the tequila, whisky, and rum for you. An even trade, one ounce of your gold for one bottle of my booze. Hehehe I’m going to strike it rich off your “gold-is-money” idea. I like it.
It is almost like you think there is a law stating that if you buy ammo or tequila that you can’t buy gold also.
Guess what? You can prep with food, ammo, tequila, med supplies….and you can ALSO buy gold and silver as well to protect your wealth.
AZcats, now you’re getting it. “Buy gold and silver to protect your wealth.” That’s correct. It’s not money for day-to-day transactions on the street or grocery store or insurance company, but is indeed useful for wealth preservation. I’m glad you’re finally getting it.
Gold’s natural role is that of money.
“Gold is money, everything else is credit.” – JP Morgan
People have been transacting with gold and silver for thousands of years! Just because the corrupt govt SAYS fiat is money, doesn’t make it so.
Heck I would settle for just being reincarnated as a duck. I may not have silver. I may not have gold. But I do have lead and I practice about once a week and go to pistol and rifle matches quite often. I have “won” the last five matches I competed in so I am willing to bet I have one thing that most people on this site don’t have: a high score.
Yesterday Cavuto or one of his guests said everyone on Wall Street knows a massive correction is coming. It could be as much as a 20% drop in the market and everyone is milking all they can before it happens.
Most of my retirement money comes from 401ks and other stock market dividends. I’m getting by OK on 50% of my monthly check so I can take a pretty good hit. A lot of people have no margin and will be hurt.
what makes you think it won’t be more than 50% decline? SOMEbody been sugar-coatin’ YOUR information.
You think it’s going to be 50%. Fine. Plan your finances accordingly. I’ll worry about mine.
If it is more than 50%, I will deploy the cash I have sitting on the sidelines. As (((Rothschild))) said, the time to buy is when there is blood on the streets.
Smart man buttcrack. 20%?!?!?!?! HA…if it is ONLY 20% I’m selling all my preps gold and silver and going out to party!
More like at LEAST 50% AT LEASSSSSSSST!
The world is printing Trillions of dollars to keep the market going. It wont stop in our lifetime until money is meaningless. The people seem to be happy with this.
you plannin’ on dieing tomorrow? maybe you should look at that chart again…or a chart of the debt….it’s going parabolic, you know….the gubmint’s OWN WEBSITES can be used to verify.
If you are in stocks or PM’s you may as well be gambling in Las Vegas. The markets are rigged like slot machines. I invest in my land and preparations for the big blow-out that is coming soon
(hopefully not in my lifetime).
How in the world is being in PM’s gambling? Gold and silver have been money for 6,000 years for a reason.
The fiat value of gold is literally the most pointless barometer of gold. Gold didn’t all of a sudden become valuable when America and the dollar were born.
Gold could drop to 100$/ounce tomorrow and it wouldn’t phase me one bit! In fact, I HOPE gold goes down to 100$/ounce, because that means our govt has become responsible and isn’t spending like drunken sailors.
GOLD is not like STOCKS. Stocks are stocks, and gold is money. Two completely different things!
When you buy stocks…..you are doing so for a 1000000% different reason than when you buy gold. You buy gold because you doing trust fiat and govt. You buy stocks to get back more worthless fiat.
This economy works for about one third of the populace. Most people exist just to pay
rent or mortgage. After thats out of the way they divy up the crumbs and try to hold on
until next payday. Heaven help us should the vehicle break down. A car note nowadays
might as well be a 2nd mortgage. These new vehicles are grossly overpriced.
Rich top third here. Don’t worry I buy my neighbors cars all the time. Notcheap ones either cause they would expect no less.
That bubble may get nuked!
GDP 1st quarter was a disappointing .7%. That’s less than 1%. Where are all these new jobs that are creating money flow into the market?
This 2017 first quarter GDP spending is the slowest since the last recession in 2009.
What the hell is a Clinkle?
This article tells a little, plus it has the money-burning photo:
ht tps://www.forbes.com/sites/ryanmac/2016/01/22/clinkle-up-in-smoke-as-investors-want-their-money-back/#2d56146138d5
Conservos always blaming Obama. Typical. Trump owns any economic mess that is coming.
Never seen anything like it. LOL.
Inflation is just about to hit, Wall Street will finish the year gaining 10% more than today’s prices as the bottom line of corporations increase and the FED will have to sit on their arses, no more rate hikes this year. Wall Street will love Trump as he renigs on all of his campaign promises and falls in love with globalism, regional wars, and NAFTA/TPP. Good news for social security recipients and all welfare entitlements, they will get a huge raise next year as the gov can no longer hide the 6% annual inflation. The bad news for all you legal citizen working wage slave taxpayers is all these handouts will push the annual social programs closer to $2 Trilli0n for the 2018 budget. Like I wrote many times before, the US gov must inflate the economy to cover the $75T social security/medicade shortfalls by 2060. 2060 US population 450million [half Hispanic], DOW 500k, national debt exceeding $125T, labor participation rate under 40%, 300 million people in 2060 will never work a job in their entire lifetime because there are no yobbs other than cleaning toilets and repairing robots.
You forgot to provide a forecast for the price of an ounce of gold in 2060. $10,000 an ounce?
Don’t worry WW3 the tri- bulation will fix everything . If you live through it? Fill your lamps?
Something ive been contiplating. Dosent it say something about not worshiping graven images.What is the most popular graven image on this planet? And why are we displaying it everywhere? Is it true that Satan rules this world and his greatest weapon is the lie ?And that pesky carpenter said lift up a rock and I am there, split a piece of wood and you will find me. And whip the money changers from the temple. But if we can’t worship the graven image of that carpenter on the cross. What will we worship ? Lift up a stone and I am there, Split a piece of wood and you will find me..What would He do ? At least whip the money changers out of the temple? And die for it… Who’s afraid of the big bad wolf?
An economic bubble of epic proportions. And who are the money changers? Couldn’t be the children of Satan? They are all so wonderfull? And for no reason demonized throughout history.
When you study the financials of any company, a positive value line item on every balance sheet is titled simply “Good Will”. It is the estimated value of a companies name and reputation alone.
For example: Apple computer can walk into any bank in the world and say “I want a million dollar loan right now, not based on anything but their name and reputation. Apple Computer would likely get that loan and on very good terms.
Analysts place a dollar value on every public companies “Good Will”. Add up the good will for every company on the three major exchanges and you are talking a lot of value, that doesn’t really exist, it’s actually less real than an over printed currency.
It would be interesting to have a year by year chart of the combined “Good Will” value for all publicly traded companies on US exchanges. It really is a measure of the Wall Street bubble. We all know that the moment a big crash hits Wall Street, this number will shrink fast, and it won’t recover quickly.
“Good Will” is subject to manipulation through propaganda. A great bull sheeter of a CEO can sometimes bluff his way out of bankruptcy. While the wrong CEO can destroy a company by being a bit too honest.
My whole point, there is a hidden value to Wall Street that should not be overlooked and that is the fact that most will lie and cheat to keep it afloat until they just can’t anymore. The more truth that lie contains, the more likely they can keep the bubble going.
As much as many think there is a great conspiracy by the powers that be, to crash the economy, I have to say, by their nature the world banksters will kill the goose that laid golden eggs, but they really didn’t want to, their greed just drove them to steel a little more money than the system could afford.
We live in a time where many families have substantial debt. Most families can’t raise $500 for a crisis need. The largest financial savings are in retirement funds which are tied to the stock market. The stock market goes up, people feel richer and spend more. It is a house of cards. More and more like Wonderland every day.
I hope my rich coworkers get screwed.
Pension funds are often times under funded. Then the pension funds are heavily invested in the stock market. The money in those pensions may just go down the tubes. Prepare for this. Good luck.
Saying that there is too much money in an economy, is like saying there are too many beads on an abacus, or too many 1’s and 0’s, in your computer; they are just placeholders, used for purposes of entrapment, or, at best, a frivolous medium of exchange, no more libelous than the dots and dashes of Morse code.
I think, poor people see a work ethic and an honor code, where rich people see an abstraction or a points game, like the pocket pets toy, in which a sort of virtual animal is fed — on an LCD display.
I remember a Milgram experiment, and episode of Beavis and Butthead, in which they don’t realize they are piloting an actual drone, or shocking an actual person, and I think of people being sheltered from the consequences of their choices. The rich are possibly more innocent than they are conniving.
Power-of-positive-thinking and rags-to-riches stories are rationalizations, made by moral masochists.
For the person who has no 401k, no mortgage, no pension, no money in the stock market, how will they be affected if this bubble pops?
They are not loseing anything because they weren’t worth much to begin with . Numbers on paper that’s all
Debt is often good for many stocks, there is no magical formula but addicts always try to find one similar to casino mavens.