Bust warning

‘Big 5’ tech giants predict the crash

By Mark Luedtke

Friday, June 9 was a bad day for tech giants and therefore everybody in the stock market. Yahoo writes, “The so-called ‘big five’—Apple, Alphabet [Google’s mother company] Class A shares, Microsoft, Facebook and Amazon [FAAMGs]—lost more than $97.5 billion in market value between the close on Thursday and the close on Friday, according to FactSet, dragging the Nasdaq to its worst week of the year.”

Tech giants Netflix and Nvidia fell, as well. It might seem that it’s not a big deal or it was a minor correction, but it is a big deal. CNN explains, “The top five techs today account for 13% of the market value weighting in the S&P 500, even though they are only 1% of the companies in the index. The top five techs made up about 16% of the S&P 500 in 2000.”

While all these stocks remain up for the rear, this is a warning of things to come. Much like the dot.com bubble, which popped in 2000, money-printing by the Federal Reserve (Fed) has created another tech bubble that will pop. The only question is when.

Two weeks earlier David Stockman, Ronald Reagan’s former budget director, issued a prescient warning: get out while you can. Stockman explained that the significance of these stocks is even greater than it seems. “In fact, the market cap of the S&P 500 has risen from $19.5 trillion to $21.3 trillion during the last 29 months. But just five NASDAQ stocks (‘Big 5’) consisting of Microsoft plus the FAANGs (less Netflix) account for 56% of that $1.8 trillion gain,” Stockman writes. “Stated differently, the combined market cap of the NASDAQ ‘Big 5’ has soared from $1.9 trillion to nearly $3 trillion since early 2015, or by 55%. That compares to just a 4.5% gain in the aggregate market cap of the other 495 S&P 500 stocks during that period.”

These companies, riding the biggest bubble in history, are the biggest beneficiaries of the funny money printed by the Fed. Their stocks are in an extreme bubble. When that bubble collapses, the broader bubble will collapse with it.

Nobody can predict with certainty what will trigger the crash and when it will happen, but the crash is inevitable. The Friday sell-off was blamed on a Goldman-Sachs analyst who questioned the valuations of the FAAMGs. Stockman bases his warning on politics.

“Washington will soon become a three-ring circus of investigations of Russia-gate and the ‘hidden’ reasons for Trump’s action. The Imperial City will get embroiled in bitter partisan warfare and the splintering of the GOP between its populist and establishment wings,” Stockman warns. “In that context, what passes for ‘governance’ will be reduced to a moveable Fiscal Bloodbath that cycles between debt ceiling showdowns and short-term continuing resolution extensions.”

It’s not necessary to be a Washington insider to predict that, but Stockman’s point is rulers will derail Trump’s economic growth agenda—tax cuts, stimulus, and replacing Obamacare—and it was that agenda that spurred the stock market rise immediately after the election. Stockman cautions derailing that agenda will trigger a crash.

If he’s correct, in our upside-down world, Trump will be blamed.

Stockman believes the fundamentals are staged for a crash. Along with the Fed tightening the money supply, he observes, “China is on the brink of a massive credit implosion and has already cranked back on debt growth, which hit an insane $4 trillion annualized rate (33% of GDP) in the first quarter. Accordingly, global trade and commodity prices are heading for a deflationary relapse—as sinking oil, iron ore and copper prices are already attesting.”

Worse yet, Stockman notes, “During the last 70 days, the FAANGs have gained $260 billion in value, while the other 495 companies in the S&P 500 have lost an identical amount. And on that utterly unmistakable pattern history is absolutely clear.”

The market is already crashing, but it was masked by the bubble in the giant tech stocks. The drop in those stocks on Friday unmasks that collapse. “In short,” Stockman concludes, “these five giant companies essentially account for the last spasm of a monumental financial bubble that has been building for nearly three decades.”

Because this bubble is the biggest in history, the crash that follows will be the worst in history. It will hit all market segments and every region of the world. Beware of the banks, rulers, and their socialist armies, foreign and domestic.

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Reach DCP freelance writer Mark Luedtke at MarkLuedtke@DaytonCityPaper.com.

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