The Credit Strategist - February 2023
The most newsworthy event in January was not the messy election for Speaker of the House of Representatives, or the discovery of classified documents at President Biden’s homes and offices, or the obsession about the debt limit. Nor was it the latest bear market rally that ignores the benchmark interest rate in America approaching five percent (500 basis points higher than a year ago) with little prospect of decline or that corporate profits are falling rapidly, leaving stocks overvalued and overhyped again. All of that was basically noise.
And before moving on to what was important, let me just repeat that a 4000 level on the S&P 500 is inconsistent with 5% nominal interest rates and the current earnings environment. As Jim Chanos reminds us, no bear market since 1980 has traded above 9-14x previous peak earnings yet the S&P 500 is currently trading close to 20x (falling) earnings. Just because stocks are cheaper than at the peak of the bubble doesn’t make them cheap. There are plenty of signs that the bubble is still alive as previously overvalued stocks lead the rally despite little if any substantive evidence that their underlying businesses are improving or remotely worthy of the inflated valuations they carry (in fact, quite the opposite is true). The rally is technically and structurally driven, which is another way or saying it is bereft of substance and almost certainly unsustainable.
But back to what is important. By far the most significant news of the month was the report that China’s population is declining. The Chinese government disclosed that deaths outnumbered births for the first time since the Great Leap Forward, Mao Zedong’s failed experiment that caused widespread famine and death and the first of a series of epic policy failures that led China to what experts believe is an irreversible demographic crisis. And most likely the actual numbers are worse than the official figures since China rarely tells the truth. This demographic trend has been building for years and will reshape global politics and economics for generations.
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