- Mark Yusko, the CEO and chief investment officer at Morgan Creek Capital Management, thinks the stock market is inching towards disaster.
- His forecast rests upon several variables including a highly concentrated market, stretched valuations, piles of corporate debt, a Federal Reserve that’s running out of ammo, IPO exuberance, and unrestrained investor sentiment.
- Yusko says “debt is the only thing that’s supporting” stocks, and thinks it will play a principal role in the impending unwind.
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“Could we get a repeat of 1930, 31? Yup, I think we could.”
That’s what Mark Yusko, the CEO and chief investment officer at Morgan Creek Capital Management, said in a recent webinar, comparing today’s stock market environment to that of the Great Depression. For the uninitiated, the 1930-1931 time period that Yusko references coincided with a nearly 70% plunge in the Dow Jones Industrial Average.
“Bottom line is: The S&P is a money supply story,” said Yusko, whose firm manages close to $2 billion in assets. “We basically increased the money supply; that got stocks to go up, but now money supply growth can’t grow as fast as it was — that’s just math. The rate of change is not as high, and the Fed’s got to lower their balance sheet at some point.”
For context, here’s a look at the explosive increase in the M2 money supply, which has been fueled by recent changes in Federal Reserve policy. Much like today, in the years leading up to the Great Depression, the Federal Reserve implemented stimulative policies. Those policies helped stimulate an asset bubble that would soon collapse.
But that’s not where Yusko’s worries end. Far from it. Before the market’s pandemic-induced crash and its subsequent comeback, Yusko called for a lost decade for stocks.
He now strings together his ominous forecast with an array of adversarial variables, including a highly concentrated stock market — one in which just a handful of stocks make up about 20% of the entire S&P 500 index — waning earnings, piles of corporate debt, sky-high valuations, IPO exuberance, and unrestrained investor sentiment.
Of the bunch, one variable in particular really irks Yusko.
“The biggest problem, though, for stocks, is debt,” he said. “Debt is the only thing that’s supporting.”
Yusko notes that corporate earnings as of late have been flat to negative, buoyed primarily by increases in leverage.
Here’s a look at the rise in the corporate-debt load, which has been powered in recent years by historically low borrowing costs. It’s an important aspect of Yusko’s big-picture outlook that we’ll revisit a little later on.
To him, the idea that equity markets are being upheld solely by accommodative Federal Reserve policy and increases in debt-loads is cause for caution. It’s creating an environment in which “zombie companies” — businesses that can barley service their outstanding debt balance — proliferate.
According to the Financial Times and The Leuthold Group, zombie companies now account for close to 15% of The Leuthold 3000, a proxy for the Russell 3000 index. The last time the reading was this high was in the midst of the tech bubble.
When this notion is coupled with exuberant market sentiment, stretched valuations, extreme concentration, and IPO zeal, Yusko’s fearful forecast becomes all the more clear.
Recently, Bank of America compared today’s equity market valuations to those of the past. Which ever way you divvy it up, the conclusion is the same: stocks are overvalued.
And here’s a look at the level of concentration in the S&P 500. Increasingly, investors have had to rely upon a handful of issues to energize the entire index. If those issues stumble, the entire market is likely to follow.
In Yusko’s mind, this confluence of variables is setting the stage for a meltdown where stocks can fall “a lot.” And he thinks he’s spotted the canary in the coal mine: the recent Snowflake IPO.
Yusko says that “every bubble has a poster-child.” And to him, it’s Snowflake.
“But the snow storm on Wall Street — I think this is the bubble,” he said. “This is just a wow … just wow. I mean, 227-times sales. Cisco peaked in 2000 at 226-times earnings. 227-times sales is absolutely incomprehensible.”
Yusko’s anxieties are echoed by David Rosenberg, the famed economist and founder of Rosenberg Research. In a recent client note, Rosenberg referred to IPO action as a “frenzy” reminiscent of the dotcom bubble, adding, “As the first day of trading in Snowflake’s recent listing indicated (doubling its IPO price in one day!), the appetite for newly listed shares is insatiable at the moment.”
With all of that to ruminate over, Yusko thinks that the problems in the stock market are just the tip of the iceberg. The way he sees it, the mounting corporate-debt load will serve as the principal factor when the rubber eventually meets the road. In his mind, investors will have to liquidate just about every asset under the sun to meet margin calls when the stock unwind begins. And that will cause an across-the-board meltdown.
“And I think now what’s happening is we’re going to have another deleveraging,” he said. “And so, everything is going to go down. And the stuff that’s the most levered, will go down the hardest. And the people who have the most leverage will be forced to sell not what they want to sell, but what they have to sell, which means the most-liquid stuff.”