Since the Anti-Christ left the White House I've been avoiding politics. Nowadays both sides believe that every election is an existential ideological battle. One side wants to return to the glory of the past by recycling the exact same mistakes that led down the path of squalor. The other side, "the progressives", want to cancel the past entirely, while ignoring the fact that economically the past was better for the majority of people. There is no ideology of compromise. All of which means this new permanent plateau of Wall Street Utopia will have to explode before anything gets better.
It's my own opinion that we will be worse off if conservative values are entirely destroyed in this impending meltdown. I'm not talking about these scam-riddled corrosive values that are destroying society. I am talking about old fashioned conservative values of honesty and thrift which were supplanted by base opportunism years and decades ago. Social Justice Warriors will never admit that unless the economy is reformed to provide a broad-based path forward for socioeconomic self-improvement, then no amount of protests and transfer payments will make a lasting difference. What they could do however is create a permanent underclass subjugated by economic rules that will always be biased towards the wealthy, regardless of color. Without substantial economic reforms the scheme for buying off the past will backfire.
So from an historical standpoint we know what will happen next: When this experiment in maximum idiocy explodes, we will go too far to the left, which will not be accretive to profit. What we've witnessed for the past four decades is the ascendancy of capital over labor. Now, that will go in reverse. Therefore we are witnessing peak corporate profit of our lifetime.
Going forward, we can expect that wages will become a larger share of GDP, and profits will become a smaller share of GDP. We can expect that corporate taxes will be higher, and personal taxes on the wealthy will be higher as well. We can expect substantial re-regulation of Wall Street and financial institutions, reducing their profitability. We can likely expect stock buybacks to become illegal again. IPOs and SPACs will be re-regulated making capital less abundant to start-ups. In addition, Globalization will collapse along with "free markets". Meaning trade wars, tariffs, and economic nationalism will be the new world order. The WTO need not apply. And of course a corporate debt crisis is in no way priced into today's markets. Despite the fact that corporate debt is at a record (% of GDP) and lending standards have collapsed over the past year.
In other words, fair value for the S&P 500 will be somewhere in the range of 50-75% lower than these current levels. Throw in the high potential for much higher interest rates and the 75% haircut becomes the realistic figure.
How do I arrive at my drawdown figures? Suffice to say this is not a scientific process, and neither are Wall Street's forward earnings estimates. However, here in this chart we can see the valuation premium on the S&P 500:
Here is the stock market divided by Federal debt to give an idea of the sustainability of mass layoffs covered up with massive Federal stimulus:
Not to say this is the end of the world. However, one must factor all of this into their "buy the dip" strategy.
What COVID did was it put the system at risk. Why? Because the usual psychopaths took full advantage of the monetary-induced stock market recovery to con the masses into believing this was an entirely new cycle.
In summary, the lack of a true conservative movement threw conservative values of honesty and thrift under the bus. In the process the land of opportunity became the land of opportunism. Many alt-right pundits will blame the left for what comes next, but history will say they should be blaming themselves for de-regulating corruption every chance they got.
Until it all exploded totally unexpectedly.
