Stocks in the US According to the 2008 Scenario?

NEW – July 3, 2022

For the first half of 2022, the market value of US stocks on average fell by 20%, falling back to the positions of the beginning of 2021. Investors also lost money in purchasing power due to inflation, which officially reached almost 9%. The top five IT giants, which account for a third of the US market capitalisation, lost from a quarter to half of their value due to doubts about the realism of their profits.

The stock market is the primary measure of US economic success, more important than oil prices for the Russian economy. Falling or even uncertain growth in stock indexes is fatal for evaluating the performance of specific presidents. Trump “burned” $3 trillion to support the economy at the expense of a record budget deficit in 2020, about 80% of which ended up in the stock market, but was never re-elected for a second term. Bush Sr. fell into the trap of stock indexes and also failed to get re-elected for a second term, even despite the successful end of the Cold War for the United States. Now Biden faces the same challenge.

The American S&P500 stock index (five hundred largest companies) reached its historical maximum at almost 4800 exactly at the annual reporting date at the beginning of 2022, so that professional market participants and ordinary taxpayers recorded good results at the end of 2021, and on the last day of June 2022, the index fell below 3,800 points. In its decline, the index went through several waves, including local lows in mid-February, March and May and small recoveries in late March and May, which led to the fact that the masses of investors were lost relative to the medium-term trend of the stock market.

The 2022 trend is still very similar to the 2008 trend. In that year of the Global Financial Crisis, the stock market also experienced several waves of corrections. Then there were local falls in mid-January and March, with recoveries on the monthly reporting dates given at the end of February, March and May. In the dynamics of the index in the third quarter of 2008, the waves and downward trend of the first and second quarters continued, and then there were disastrous October and November. Overall, the S&P500 stock index lost 39% in 2008.

Formally, the most acute, October phase of the 2008 crisis is associated with the bankruptcy of one of the largest American banks, Lehman Brothers, the largest insurance company AIG, as well as a number of smaller financial institutions. In reality, after three quarters of poor stock performance, more and more investors were selling out of their portfolios. It triggered a self-replicating phenomenon of stock sell-offs and falling stock prices, culminating in a stock crash in October 2008.

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In 2022, investors who are more and more pessimistic are selling off stocks, thereby provoking a drop in prices and new sales. The financial system tried to resist the fall, temporarily pulling up quotes, especially on monthly reporting dates. But many investors remember 2008 and also compare the performance of stocks for that and for the current years, fearing the worst in the coming autumn. Although the financial system knows these fears, the big question is whether it will be able to curb them or whether it will be forced to lead the fall in stocks in order to make something out of this fall.

Under the Russian scenario, the United States will not be able to introduce currency controls or restrict the issuance of dollar deposits in excess of a certain amount. In Russian legislation, such norms have been spelled out since the beginning of the 2000s, according to the results of the dashing 1990s, they were just dormant, and now they were quickly activated. For the United States, the introduction of currency controls is unthinkable, since the free conversion of the dollar and the largest stock market in the world are national pride and the basis of an economy of large trade and debt imbalances. But they may well try to replace currency control with political sanctions and asset freezes, with a hypothetical non-public replication of the Russian experience to other countries.

Fundamentally, the US stock market is in a colossal bubble, where stock prices are too far removed from the profits of issuers. The parity between the S&P500 stock index and corporate earnings was in 2014, which is historically considered the year of full recovery after the 2008 crisis. The S&P500’s performance in terms of points and earnings in billions of dollars differed slightly in 2014, averaging 1,800 (points or billions). By the end of June 2022, corporate profits are at $2,800,000,000, and the equity index is at 3,800, even taking into account the impressive drop in the first half of 2022. For comparison, the depth of the stock market decline in the COVID 2nd quarter of 2020 was exactly before the forecast profit for the 3rd quarter of 2020.

Based on historical comparisons between the S&P500 stock index and corporate earnings, especially during the crisis years of 2008 and 2020, we can predict that before the US stock market bubble completely collapses, the stock market should fall by another second 20% to the level of 2,800 points.

Although many corporations expect to increase profits against the backdrop of a jump in inflation and thereby support the index from a further big fall. The profit jump has already occurred in the first inflationary year of 2021, from about $2,150,000,000 to about $2,750,000,000. Hypothetically, frontal inflation means an overall price increase, including revenue and profit growth. After a few years of open inflation, wages are beginning to be indexed and government tax revenues are also increasing, and this will reduce the relative size of debt and start spending more.

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If we take into account the official underestimated consumer inflation of 9%, then the fall of the S&P500 can stop at 3100 points, repeating the 40% fall of 2008 for the year. Based on a more realistic industrial inflation rate of 19%, the S&P500’s decline may stop at 3,350 points, which means it will still fall by a relatively moderate 9% to the decline that has already taken place since the beginning of the year.

An interesting conflict with accusations against Russia and Putin has happened. Biden directly blamed Putin for doubling the price of gasoline at American gas stations and for the record for the last 40 years of American inflation. Although Russian oil accounted for only 3% of the US energy balance, and the trade turnover between the US and Russia is even smaller. “Putin’s” inflation will support the performance of the largest American corporations and lead the United States away from the harsh scenario of the financial crisis, since the consequences of the crises of 1929 and 2088 were compounded by prolonged deflation, especially strong in 1929-1933.

In the short term, prices for different goods grow differently, faster for essential goods and slower for durable goods, faster for monopolistic goods and slower for competitive ones. Therefore, in the short term in the United States, the stratification of society will grow along the lines of those who benefit from inflation and bear a greater burden of inflation. Such stratification will occur both in parts of the largest corporations (some shares are in the green, plus zone), and in the masses of ordinary American workers and consumers.

Long-term inflation is complemented by the issue of potentially rising interest rates. In particular, the yield on US 10-year bonds rose from about 1% in COVID 2020 to about 3% in June this year. The US Federal Reserve is forced to respond to rising bond yields by raising its interest rate barometer. As long as inflation is significantly higher than nominal interest rates, this makes real interest rates highly negative, adjusted for inflation, and smooths out the debt problem. But it is not known how long it will be possible to keep interest rates strongly negative without investors fleeing.

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An interesting question is whether the profits of the largest American corporations are realistic as a measure of the potential depth of the decline in American national pride. Every major crisis highlights a lot of accounting abuses. The biggest problem is intangible assets (brands, trademarks, patents, etc.). The largest corporations seem to invest in intangible assets, instead of writing off many types of expenses. The five largest American IT giants, with tangible assets worth $4 trillion, drew in their statements intangible assets worth $21 trillion back in 2018 (in the amount of annual GDP of that year).

The wealth of investors in the shares of only five IT giants, corresponding to the annual GDP of the United States, is largely inflated, not even corresponding to the practices of the United States itself in the 1970s and 1980s. Shares of these five companies have the largest weight in the S&P500 index and are falling noticeably more than the index as a whole, which shows the market’s concern about excessive drawing of such assets.

Even now, Biden and American propagandists are not quite able to fool their investors and voters with the “Putin” origin of inflation and stock market problems. There will be a growing search for domestic culprits for the excessive stock bubble and the consequences of its collapse, as well as for the uneven distribution of the corresponding benefits and problems between different groups of investors and voters.

Bush Jr., in his last presidential year in 2008, turned not just into a “lame duck”, but into a public outcast with a poorly functioning administration, although he had very impressive electoral results in the 2004 election. Let’s also recall the American proverb about “privatising profits and nationalising losses”, formulated after the 2008 crisis, or rather, huge budget support for the economy, in fact, by tightening the belts of ordinary Americans in the 2010s.

In conclusion, we can recall two previous publications of the author of these lines in the newspaper with a prediction of the fall of American stocks. The article “Search for the Extreme: the Stock Bubble and US Foreign Policy” was released on December 18, 2021, that is, a week and a half before the historic peak of the S&P500, followed by a six-month decline. Video clip “The stock bubble is about to burst” was released on June 17, 2021, with the S&P500 index at approximately 4,200 points, with a demonstration of the last opportunity for investors to sell off US stocks in the fall of 2021 against the backdrop of local growth waves in August and October.

Sergey Anureyev

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