In all my decades following the stock market, I have never seen so many predictions of a market crash.
Don’t get me wrong. There are always super bears. I have correctly predicted 12 of the last three recessions.
But the bear roar has never been this loud. Economist Gary Shilling wrote in April that the market looks like that of the Great Depression. Since then, the market is up another 10%.
The “Buffett Indicator,” which measures the stock market’s capitalization against Gross Domestic Product, is now at 1.48. That’s higher than it was when the dot-com bubble burst in 2000. At the start of the year it was at 1.55, and we did indeed have a crash in March.
But the quick recovery, spurred by the Federal Reserve’s money creation has many believing there’s no longer any risk to investing.
Stocks vs. The Market
The stock market is not the economy. But it should reflect the economy.
Right now, it doesn’t. The Trump tax cut promised to increase economic activity. The same was true for the Federal Reserve capital injection and the CARES Act. They didn’t. Instead the money went into assets. Money went into making money rather than work. The tax rate is lower.
The problem is that the market has been politicized, like everything else. You, Mr. Investor, are a big part of the Trump base, which I’ve dubbed “mullahs and moolah.” The CEO of Intercontinental Exchange (NYSE:ICE), owners of the New York Stock Exchange, now has his wife in the U.S. Senate. The prospect of Democrats controlling Washington would wallop the market even harder than the dreaded “second wave.”
This is especially true for Big Tech, the companies I call “Cloud Czars.” As trade opened June 22, these five stocks — Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook (NASDAQ:FB) — were worth a combined $6 trillion. Their combined sales last year were $898 billion. That means they’re selling at 7.8 times revenue.
The same is true for what I call their “retinue,” suppliers like Nvidia (NASDAQ:NVDA), which sells at almost 21 times sales, and big users like Netflix (NASDAQ:NFLX), which sells at 10. These are bubble valuations, and these are the biggest stocks in the market.
Tech has some losers. International Business Machines (NYSE:IBM) sells for less than 1.5 times revenue. Dell Technologies (NASDAQ:DELL) is worth $36 billion on 2019 revenue of $92 billion. But are these bargains, or are the czars overpriced?
Tech Doesn’t Like Trump
With the Czars worth so much, you might think they’d love them some Trump.
They don’t. Apple is run by a gay man. Google and Microsoft are run by immigrants. Jeff Bezos owns The Washington Post. (I don’t know about Mark Zuckerberg. Is he an android?)
Their long-term interest lies in spreading the wealth, investing in human brains, which are the gating factor for economic growth. The more trained, motivated, empowered people a company has in the cloud, the more money it can make.
Tech wants immigration. Tech wants education. Tech wants free trade. Every tech center today votes Democratic, from Seattle to San Francisco, from Austin to Atlanta.
If tech gets the politicians it wants in office, the bubble holding today’s valuations will burst. But the people running tech don’t much care. Does it matter if the Czars are worth $3 trillion instead of $6 trillion? It doesn’t if they have policies that let them grow into a $6 trillion market cap.
The Bottom Line on the Next Market Crash
Ever since Alexander Hamilton’s policies led to the creation of the New York Stock Exchange and Bank of New York, America has been run by the golden rule.
He who has the gold makes the rules.
Tech has the gold. But tech wants that gold to be in the form of hard assets, and in people, not just stock market valuations. Tech will get what it wants, whether that’s good for the market or not.
I still have money invested in the Cloud Czars. But nearly half my money is now in cash. After this bubble pops, I’m going to get some bargains.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in AAPL, MSFT, IBM, AMZN, NVDA and FB.