Peak Prosperity - Mike Maloney: These are the Most Overvalued “Markets” in History

Episode Date: September 13, 2024

Would it be foolish to think ‘this time is different?’ Of course! It’s never different. There has to be a balance between claims on the economy and the real economy’s outputs. Today those are historically stretched beyond recovery. It’s time to plant a garden – or start a farm!

Nothing in this program should be considered investment advice. It is for educational purposes only. Please hit pause and read this disclaimer in full. When the next crisis happens, it could turn into the greatest crash in history, which would then turn into a currency crisis. The following is the audio version of a video released at peakprosperity.com. Visit peakprosperity.com to watch the video and to find other insightful content,

such as articles, discussion forums, and exclusive subscriber-only content. Hello, everyone. Chris Martinson of Peak Prosperity. I happen to be at Limitless. It's an expo. Ken McElroy's amazing thing he does with Tarl. It's just astonishing. We're here in Dallas, and look who I'm sitting here with.

It's none other than Mike Maloney himself. Mike, it's so good to see you here. And I was sitting in, and there were incredible, incredible presentations. Yours was amazing. I was really blown away by the charts you had. And I just wanted to give people a chance to sort of understand and get a taste of what you were showing us because it's just so important. Four most dangerous words in investing. This time, it's different, right? Yeah. And you know what? When I try and present this to somebody that's

got a certain investment that's been very successful. They try to deny this, and all bubbles burst throughout history. All bubbles burst. And they try to come up with a justification of why it won't affect them, why they are right before a force of action. Then you talk to them a few years later, and they going, oh, why were you buying it? So, yeah, go ahead. Oh, well, so it's never different this time, right? I mean, because ultimately a stock, it should represent something, right? It represents a share in a company that's doing

something productive. Yeah. It's taking some raw material or something and transforming it and creating a higher value. And then investors get some sort of a stream off of that, which is this value that we can hopefully spend on something we want. So I want you to take us through just a couple of charts. Would you be willing to do that? Sure. And add a silver baby. I love this one. Okay. Tell us about this chart. This is an amazing chart here. This one I really had to dig deep for. Actually, actually was my research. And I want to thank Tim Luris especially because it took him, I don't know, a month or so digging through the Internet to find this very obscure paper called the Big Bang that came out, I believe, in 2018.

It was 2019 that it was published. The data actually ends in 2016. And what it was showing us is that we were in the greatest bubble in history all the way back in 2016 already. If you could see this chart updated for today, it would be way off the top of the charts. But what they've done is taken the Buffett Indicator, which is a comparison of the value of the stock market compared to the entire economic

output of the country that that stock market is in. Now, we normally know as the Buffett indicator as being for the United States. It would be all of the couple of new estate stocks times the price of those stocks divided into the GDP or the economic output of the country. Right now, it was historic. I mean, it dwarfs 2008. It dwarfs the NASDAQ moment. If we're at 200%, the value of the stock market is double the entire economic output of the United States. So what these two economists did,

Dmitry Kuchinov and Kaspar Zimmerman in Europe, is they recreated a Buffett indicator for 17 advanced economies, and then they made the typical data, and you're probably familiar with an interquartile chart. So they take the data and there's four quarters of data and they eliminate the top 25% and the bottom 25%. They focus on the middle 50% and that gets rid of market closures, wars, hyperinflations, all of the outlier events. So you've just got this middle data that means it's very, very conservative and very accurate.

It's not being exaggerated and underrated. And in this chart, the highlight of the gray area is the extremes of the most overvalued country and the most undervalued country. For that various time right yeah we go from 1880 1870 1870 all the way through here to you said 2016 exactly that's a lot of data right so this is in global but this is the high and the low so that's the most extreme 1960 there's some outlier right right and and so this is stock market capitalization divided by GDP. Yeah, for each of these 17 countries. And where's this red line?

Just by eyeball, it looks like around 25%-ish. Yeah, it's about 23%. I put that on there just as a sort of mean. Definitely. And that is what was established as fair value all the way from 1870 to the 1990s. And then suddenly, everybody went insane. What happened here? Take us through this. What is that red dotted line? What happened?

I think everybody, you've got the entire baby boom generation worried about retirement. And in Waterloo-S of them this is a period of time where their kids were growing up and they can now start to put a little bit of this away and uh you know and we my father's generation was savings accounts this generation hits the stock market so they're they're investing for their future. But they were paying multiples of the, you know, we skipped the price earnings chart because people have seen the P.E. ratio a long time before. But P.E.s, it's how many times the earnings per share, the cash flow that you're going to get off of that stock, are you willing to pay? And fair value was always considered around 12 or 15 times earnings was a fair value for stocks

until this century. We went into what I call the bubble century, and now it's like 30 times earnings or more. And what's interesting is in the crash of 08 we only visited fair value we didn't visit undervalued like these things periodically do throughout history we visited fair value and then ben bernanke created a whole bunch of currency and to create the currency uh they buy an asset and it was through these broker dealers dealers that has to go into the markets. And so that currency, all Federal Reserve currency, except for the base currency,

the currency in circulation, $100 bills go to a bank. But all of the rest of base currency goes directly into the financial markets and bonds and stocks. And so he didn't allow the markets to actually clear in 2008. He didn't allow the markets to go undervalued where it was a good thing to buy stocks.

Let's talk about that because we see here, here it is running up to this extreme, and then we have this crash here in 2000. It doesn't even get back undervalued under this red line somewhere. it doesn't even get back under value it's under this red line somewhere exactly it doesn't even get close to that right before a u-turn and goes back up and this is global right now i let me get let me so you you want to know one thing i would place on this chart i'd love to get your point of view on it cal and greenspan uh-huh that's where he starts so as goes to the Fed, so goes the world. He was the guy who first introduced this idea of the Greenspan put.

I'm going to put a floor under this market. I'm always going to make it go higher. I'm going to mumble and name things and pretend I'm smart. I think he introduced the world to a new style of very interventionist central banking, and that's what we're seeing here. These are all interventions. All of them. Yes, they are.

I think it's multiple effects. Like we were talking about the retirement of the baby and the retirement. And so I think it's just a combination. But this data stops in 2016. And we kept on going from there the entire world is in this gigantic bubble point on this chart where would 2024 be on this chart right off the top of the screen way up here somewhere yeah exactly and so oh my god what i see is we're in when the next crisis happens yeah it could turn into the greatest crash in history, which would then turn into a currency crisis.

You could see currency failures. When investors have all been taught to rush toward U.S. Treasuries as a safe haven. I think that'll happen at first. And usually like 98% of the safe haven seeking capital that goes toward those treasuries, maybe only 95%. And then 5% goes to things like cryptos and gold and other financial assets and the other safe havens. But this turnaround, I'm expecting people to rush toward treasuries first,

except with our debt-to-GDP of 120%, and with all of the chaos that's going on in the world, you know, there's 2, 5, 7, 10-year, 20-year, and 30-year treasury bonds. Are investors going to think, well, if I loan my currency to the government for 10 years or 20 years, am I going to get paid back? And I believe the answer is no. You might get paid back in a different dollar. Well, in 30 years, will the United States insist?

It's actually a big question right now. All right, so what's the implication of this chart? Have we reached a new permanently high plateau of prosperity, as Irving Fisher might say? Or anybody that doesn't know, that was in 1929, I believe. You know, he's a professor at Leuco-Nahum, so I believe he made that statement the day before the markets crashed, bringing on the great, the fresh. Yes. So is that what we've achieved here? Or if not, when this corrects, what does that mean to the average investor?

Well, all bubbles burst. And I think it's going to be a rude awakening. People don't know we are living in the bubble century. And everybody lost their minds in the 90s and they're when you're paying these multiples of 40 and higher than the cash flow so that means you buy a stock and it takes 40 years to pay you back you know and you've you've made your investment back and now you're actually in profit it could be worse if you go to finviz.com, they've got a stock screener there. And I do this from time to time. And I say, nothing small.

Only market caps of a billion or higher, right? And P.E. of 200 or higher. And it's page after page after page. Six pages last time I checked. Amazing. I mean, and these are big companies. 200. I'll wait 200 years.

Exactly. Okay, that's insane. So what you're betting on then is that these companies, you're not betting on the cash flow of their earnings. You're betting on the idea that they've got. And hopefully they've got an idea that's going to set the world on fire and their stock price is going to go way up. Because it's not something you can count on. And a lot of times you're going to set the world on fire and their stock price is going to go way up. It's not something

you can count on. And a lot of times you're going to be wrong. And so that is speculation, not investment. And it's what's been driving the stock market. And it's what all of these people that want to retire soon have been betting on. And it's a shame because I see a lot of retirees are going to get wiped out. Should we go on to the next chart that you have in mind? Absolutely. So, Mike, where can people find this chart if they want to? These are actually in chapter five of my book, The Great Golden Silver Rush of the 21st Century. That's actually in the book. But chapter three is the most fun chapter. It's the shortest.

It's the easiest to read. And it's all about, it's a primer on how to read charts, how to tell if the author, the producer of that chart is lying to you or trying to skew your perception. And it is so easy to make a chart that makes it look like something has just crashed. But the range of the chart was from 99 to 100. If you make the chart go from 0 to 100, you can't even see. It's crashed.

Chart crimes. Chart crimes. It is a chart crime. They're trying to lie to you or skew your perception. And if it's got more than one set of scales on it, time and magnitude, then it's really easy to manipulate a chart and make it look like something has a correlation when it actually doesn't. All right, then remind me, what's the URL for people to get that chapter for free?

It's ggsr21.com. It stands for Great Gold and Silver Rush was the 21st century. That's the book. These charts are actually in Chapter 6, I believe, and now 5. So 3 and 4 are free. 3 is this chart, remember? 4 is how currency is created and how important the banking system and the federal reason the world's central banks

actually enslave you and how they steal and transfer wealth from the average person to the wealthiest people on the planet and so those chapters are free don't even ask for your email address just please get for your random mistake download and email them to everything you can. I just need you to know this. Please do. All right, next chart. I can't wait to take people to this chart. This one's amazing.

This one, they're both amazing. So, hours worked to buy the S&P 500. What do you mean, hours worked? Well, the average person that is not a blue-collar, high-management, high-salary type of person. The average person in the United States, I believe that data, the hours worked, comes from the BLS. So sort of median income on an hourly basis, right? Yes, exactly. I forget what the number is but all you've got is that divided by the points on the s and d if you

can buy a share of the s and d which you can through the spiders they're called it's a derivative of the s and d but but what you see here is going back to 1860 that's the year before the civil war started this and and you've got this this mean here going across. It looks like 23 again for some reason. Yeah, it's 23, and now we're at 123. And the funny thing is, you know, most stock market. It doesn't show it as an all-time historic high that dwarfs everything else in history. There's never been an overvaluation in likeless. The P-E ratios show us at the third largest bubble on the mystery.

Much higher than 1929, when Irving Fisher made that statement, they were on this permanent plateau of prosperity. Well, I love how you have a little mean here, but this is insane. This last part right here is absolutely insane. So I actually think a lot of this has to do with, I know there's other factors maybe, but we have to understand the Federal Reserve in particular, what I consider to be decrepit leadership, right? So we went from Alan Greenspan, we go to this guy, Ben Bernanke, who I think was a vandal, a monetary vandal.

He was. And did this incredible damage. And then he's followed by Janet Yellen, whose incompetence might only be exceeded by her venality as a human being. Yes, she looked like Grandma. But she did the horrible apple pie. Yeah. She was just horrible at her job.

And now I'm a little undecided about our current guy, Jerome Powell, because sometimes he feels like he understands he's trying to do the right thing, but he's at the tail end of, I think, two decades of monetary vandalism. He's trapped in a box that we're're under Bernanke-nomics. Bernanke-nomics, yeah. He ruined a lot. The whole monetary system changed in 2008 when Ben Bernanke introduced all of these new ideas. QE is the main thing, the main culprit.

But when they went from $40 billion to $50 billion of bank reserves, which was enough to do the end-of-day settlement for the entire financial system of the United States of America, and they did not pay interest on it, Q&E, the process, traps all of these bank reserves because they've got to buy through the open market, but the Federal Reserve created its own open market. It's not the same stock market you and I...

It's somewhere between 18 and 30 primary dealers, and those primary dealers are the largest brokerage houses in the world. But the Federal Reserve, they don't have... They're not banks. They have an arm under their corporate

umbrella. J.P. Morgan has J.P. Morgan Chase, which is a bank. J.P. Morgan Securities. B of A Securities has Bank of Americas under their corporate umbrella. Excuse me. So they're connected with a bank, but they aren't the bank. When the Federal Reserve buys a trillion dollars worth of bonds from J.P. Morgan, the way they pay them is to type up base currency, bank reserves, a trillion bucks,

but they can't pay. There's no account that J.P. Morgan has at the Federal Reserve. J.P. Morgan Chase. There's this special monetary system at the back of the banks, between the banks and the Federal Reserve, that you and I do not get to touch or see. This is a separate monetary system only for the banks. And when they pay that bank a trillion dollars of bank reserves, but the bank reserves never get out into the public. So today, the primary dealer, J.P. Morgan Securities, J.P. Morgan Chase Bank, is instructed to create a trillion dollars worth of bank credit. So actually, for every quantitative easing dollar that was created,

two dollars were created, a dollar of bank reserves and a dollar of bank credit that then goes into the checking account of the brokerage house, and the brokerage house pays for that trillion dollars worth of bonds into the market. And so every dollar that the Federal Reserve creates, it is typing that currency into existence at the very moment that it is buying. So the dollars spring forth as it's buying our future debt. All of these financial securities that they are handcuffed, the Federal Reserve Act says that the Federal Reserve is only allowed to buy securities that are guaranteed by the U.S. government as to the principal and

interest. And so that means, used to mean, U.S. treasuries. After they nationalized Fannie Mae and Freddie Mac, it meant mortgage-backed securities as well. And what are those? They're debt instruments. How are they paid back? From your future taxes. So all of this is an enslavement tool, and we work for where we're enslaved, by the Federal Reserve and by the banking system. But the most immoral part is the Federal Reserve. It's making, when they do this quantitative easing, all of those dollars flow into the stock market, and then the stock market's going to leave.

So if your wealth is determined by the size of your stock portfolio, then all of that dilution of the currency supply is causing inflation in the style it transfers wealth from one group of people to the richest people on the valley and then uh if you see the lower interest rates down to zero what happens well mortgages become real affordable and any of these lose wealth is determined by the size of their real estate portfolio, they boom. It's at the expense. This purchasing power doesn't just come from nowhere.

It's coming from somewhere else in society. And so it's a transfer of wealth, and it's creating this bifurcating society where the ultra-rich are getting ultra-richier. And the poor, if you look at what's actually happening, everybody is getting richer. Before are getting richer, but they're getting richer and richer at different rates. Well, yeah.

So what this chart is telling us is that for 130 years, you had to work about 23 hours. You could do that in like a half a week, and you could own a piece of America, a representative share of the S&P 500. But now you have to work 123 hours, which is three whole weeks of your life, right? Right. Which is a totally different, you know, you're not working two and a half days or you're working, you know, three weeks. So that's all this. This just means that the average person is getting locked out of the American dream. You can't participate.

This is the wealth of the nation. It's not being parceled out anymore. So this is why I object. People are like, oh, Chris, you're too harsh when you say we're becoming communist. Well, stop me if you've heard this story before. A small, unelected group of people set a decision about where the economy should go and what the right price is for things on that's the federal open market committee right right or the united uh soviet socialist republic right yes right right they had their crop reports we have uh we should set interest rates at zero

it's the same process right it's saying we decide that the steel makers should be the recipients of our of our attention right now and these guys are saying oh it should be capital should be treated better right yeah so that's the oldest story that the federal reserve has been very clear it's a private cartel it serves the interests of its main cartel members very well i think there's no complaint um you know stock you get paid a six percent dividend you know it's yeah you know what i found out last year i'm sure its main cartel members very well. I think there's no complaint. They own stock. They get paid a 6% dividend. You know, it's nice.

You know what I found out last year? I'm sure you know this, but maybe other people are interested. So the Federal Reserve is a private corporation. It has stock. Now, who owns the capital stock is actually fairly well-guarded secret, but it's every bank in the system. They try and say, oh, all the member banks own some. Well, I found out that from a FOIA request in 2018, this is as old as current as my data gets,

that two banks, J.P. Morgan and Citi, owned 76% of the stock. Just two. So when they say, oh, Jerome Powell's going to be replaced by, here's a nominee, you know, who's an elected nominee? The chairman. But he's presented with, what, is it three or eight nominees that are all vetted by the banks that own the central bank?

Well, let's be clear. J.P. Morgan picks the person, and then that's the person who gets picked. Right, so that's the system. That's our banking system. I don't think it matters who they pick. When the president picks out of the nominee, it's the nominee, but yeah, you're probably right. Now, I would not care.

If they were just keeping the system going, I'd be like, okay, but something broke here, and then you can clearly see this blast breaking right here. Very bad. And this is now, this feels destructive to me, because remember, it was Plutarch said, the oldest and most fatal ailment of all republics is a gap between the rich and the poor. That's what this is.

Yes. I feel like this is a very dangerous policy and it's also immoral. Yes, I judge it. Come back to our census, and the stock market has a crash in forex. What type of crash does it take to get from 123 down to 10 or less? This is a greater than 92% crash. The crash in 1929 was 89%. So this would be the greatest crash in history for it to revisit undervalued, which has fall many times in history, and that is the time you should make mind size.

With Godes, I think so. Do you think we're going to get to that point? I think I have no idea. I think what's going to happen is we're going to have a crisis. There's going to be massive currency we know the playbook. Massive currency

creation, zero interest rates. And debasement with the currency books. That is more of this wealth transfer to the ultra-wealthy. And so with the Fed so actively trying to prevent any type of correction back down to the normal valuations of anything in society, I really have no idea if by real it is going to be bad and it will lead to the global financial crisis 2.0, and I call it 2.0 because it's going to be at least two times as bad.

Yeah. There are people, I know what you're thinking. You're thinking, okay, a couple smart guys, they understand their economics and their charts, and we both look at this chart, and you peer at it, and you say, what could this chart possibly mean? We both have farms, okay? So I might have skipped a few steps.

We've created a plan B. We might have skipped a few steps in there, but this chart leads me to say I need a plan B. That's what I see when I think it through. But how did you get to that idea of plan B? Is it because you look at this chart and you think, oh, this could end bad, this could get ugly? You know, back in 2003, 4, 5, 6, 7, I've been presenting like Dr. Robert Schiller's real estate. Yeah. I've been presenting like Dr. Robert Schiller's real estate data since 2004 and warning people that we were going into this massive real estate bubble,

get ready for a correction, and everybody will justify why it won't affect them. Yeah, always. Yeah, right. And I was warning about it, and people got tired of the warnings because I was saying the same thing that I said in 2004 in 2005, and the same thing in 2006 that I said in 2005, and so on and so forth. So I was very roomy. But the thing there is all bubbles burst, period, and seek the natural equilibrium with the rest of the economy and when a bunch of currency flows into one area of the economy uh someday that is going to snap back it's it's uh central the free market trying to correct an imbalance that was

caused by some entity like the Federal Reserve. And I really think that we've got something horrific coming, but the Federal Reserve will rush into saying this, but do they do it at the expense of the death of the dollar? I mean, how many trillions can they create? How high can they pump the stock market up? And if the stock market is going up, that the person on Main Street is actually getting poorer because eventually stocks go up, people sell their stocks,

they've got cash, they go out to dinner, they buy things, and price levels go up. It leaks out of the stock market eventually. And so price levels go up. So it really is at the expense of the working men. Yeah. So when does all of that come to a head? And as they do all of this currency creation, it's based on buying treasury debt.

And when they buy treasury debt, the treasury, you know, look at the deficit spending that we're doing right now. And then when we get in a crisis, the Federal Reserve is going to be funding the deficit spending of the government. And when it does that, then you go deeper and deeper into debt, which means they can't raise interest rates because if they do, what are we paying right now? About $1.6 trillion run rate per year. So that's part of the deficit is paying back for what we borrowed in the past. And if you look back at the history of how much we spend as a percentage of the government's income, so it's the government receipts

divided by the expenditures, and under the Bretton Woods system, the government spent about 3% to 5% more than its income. When we got rid of the gold standard in 71, it jumped up to an average of about 20% more than it did. I mean, today we spend 35% more than our daily pay. Where does this end, and how much of that is interest payments on our recklessness of the past. And it's a lot.

All we can do is make it worse. When does the whole thing improve? I don't know. Well, it implodes, I'll tell you when. It's a math problem. Eventually, you hit the point where your interest payments exceed all of your income. That's a math problem. But it breaks before then because people catch on, right? So does it break at 40%, 37%, 60%? That's hard to know because that's sort of a human psychology thing, right? Right. And so we'll see where that goes. But I look at this chart, and I think, plan a guard here, right?

You're going to see. I said that a lot, but I really mean it. I think anybody— Get some solar panels. Get some solar panels, absolutely. Just, you know, self-sufficiency, right? Yeah, absolutely, all part mean it. I think anybody... Get some solar panels. Get some solar panels. Absolutely. Just, you know, self-sufficiency, right? Yeah, absolutely. All part of it.

Hey, I've been talking. This is a legend. This man right here has done more to educate people on financial history. If you haven't seen The Hidden Secrets of Money, you've got to absolutely do that. And, of course, everything you're doing now with your farm in Puerto Rico, just if you want to know where the fume, where the fuck's going be just follow this man i'll get you there all right so mike thank you so much for your time today and for all the work you do in the world i really appreciate it it was a pleasure chris and it's been a long time i hope we do this sooner rather than later again all right

thank you good all right see you later, everybody.