Einhorn Vents his Frustrations about the Crazy Markets

Why trying to bet against this madness is a widow-maker trade. Logic has nothing to do with it.

Investors who’ve approached this stock market and its ludicrous valuations over the past few years from a point of view of fundamentals and “value” – thus, often on the side of short-selling those stocks – have gotten clobbered, or were at least left in the dust by buy-buy-buy fundamentals-don’t-matter automatons.

This has become an exercise in frustration-management for many – including, apparently, David Einhorn, founder and president of Greenlight Capital, a $7 billion hedge fund that became successful by searching for overvalued and undervalued companies and betting one way or the other. This strategy has hit the rocks in recent years. So far this year, the fund is up 3.3% while the S&P 500 is up 14%.

In a letter to Greenlight’s clients, reported by Business Insider, he unloaded his frustrations about this crazy market.

“The market remains very challenging for value investing strategies, as growth stocks have continued to outperform value stocks. The persistence of this dynamic leads to questions regarding whether value investing is a viable strategy.

“The knee-jerk instinct is to respond that when a proven strategy is so exceedingly out of favor that its viability is questioned, the cycle must be about to turn around. Unfortunately, we lack such clarity. After years of running into the wind, we are left with no sense stronger than, ‘it will turn when it turns.’”

On the short side, he cited Amazon, Tesla, and Netflix, whose ludicrous valuations are glaring examples of what a good short-target looks like, but so far, most of those daring souls who tried to follow logic and profit from shorting these stocks over the past few years have gotten their head handed to them.

Here’s what Einhorn said about the three heroes that he considers “our three most well-known ‘bubble’ shorts”:

Amazon: “Our view is that just because Amazon can disrupt somebody else’s profit stream, it doesn’t mean that Amazon earns that profit stream. For the moment, the market doesn’t agree. Perhaps, simply being disruptive is enough.”

Tesla: “Tesla had an awful quarter both in its current results and future prospects. In response, its shares fell almost 6%. We believe it deserved much worse.”

Netflix: “On the second quarter conference call, the CEO stated, ‘In some senses the negative free cash flow will be an indicator of enormous success.’ To us, all it indicates is that Netflix is capable of dramatically changing the economics of stand-up comedy in favor of the comedians.”

Yet Amazon is up 30% this year, Tesla and Netflix 58%! This market simply doesn’t tolerate logic other than buy, buy, buy – until something changes.



Einhorn goes on to muse about the “alternative paradigm”:

“Given the performance of certain stocks, we wonder if the market has adopted an alternative paradigm for calculating equity value. What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss?

“It’s clear that a number of companies provide products and services to customers that come with a subsidy from equity holders. And yet, on a mark-to-market basis, the equity holders are doing just fine.”

This “subsidy” from equity holders and creditors to customers has become a common theme on WOLF STREET, including earlier today concerning Netflix. How long are stockholders and bondholders willing to subsidize the prices that consumers pay for goods and services? Netflix thinks forever. Rational brains think not. But so far, rational brains have lost nearly every time.

These companies fight for market share with bleeding-edge pricing to “disrupt,” but equity holders and creditors, instead of punishing companies for it, fall all over them and bid up their shares and bonds, and thus encourage them to do this.

The most glaring example is Tesla, a tiny automaker that’s now bleeding billions of dollars a year in cash and whose vehicle production is so minuscule it’s not even a rounding error in total global production of 94.6 million vehicles. And yet, it has a market capitalization of $56 billion. This disconnect is inexplicable for rational minds – and makes Tesla a very juicy target for shorting the shares.

But shorting crazy stocks in a crazy market is a widow-maker trade; once shares have reached crazy heights, there is no longer a rational limit, by definition, to how much crazier the already crazy shares can get. Someday, those bets will be correct. But in the prevailing market insanity, it’s impossible to divine when exactly that will be.

I find it interesting that Einhorn, after these years of punishment, is now contemplating the existence of an “alternative paradigm” to explain the craziness. And I find his doubts enlightening. As he pointed out himself, the very existence of these doubts and his consideration of an “alternative paradigm” give me the feeling – and that’s all it is – that the turning point in this madness, wherever it is, is now just a little closer.

Netflix, rated four notches into junk, just sold $1.6 billion in junk bonds at a yield of only 4.875%. It was its largest bond sale in a series of ever larger bond sales in a bond market that lives in a fantasy world. Read… What Junk-Rated Netflix just Said about the Bond Market




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  64 comments for “Einhorn Vents his Frustrations about the Crazy Markets

  1. JB
    Oct 24, 2017 at 8:57 pm

    The feds relentless ZIRP policy has actually caused deflation by enabling these types of companies to proffer below cost investor subsidized products. I don’t think in the history of MMT this has been the case .

  2. Petunia
    Oct 24, 2017 at 9:07 pm

    Einhorn is probably too young to remember the biotech era in stocks of the 70’s and 80’s. Some of those stocks didn’t make money for a decade or more. I remember, back then thinking, I should buy some shares of Genentech and forget I owned them. I never bought them, but I should have. Nobody was sure anything would come of those stocks. Some turned into big winners and others didn’t.

    Tech stocks are like that now. I like all three of the stocks in the article. Amazon is the most reliable retailer in America, Tesla has his finger on everything cool and eventually will hit it big, and Netflix will be the beneficiary of the cable companies losing every last customer they have.

    • Justme
      Oct 24, 2017 at 9:40 pm

      If internet neutrality gets repealed then Netflix will be toast.

      • Petunia
        Oct 25, 2017 at 8:07 am

        If internet neutrality gets repealed than you will only have google and facebook on the internet. The rest of us will be doing something else.

        • TJ Martin
          Oct 25, 2017 at 8:53 am

          … and I’ll be resorting solely to my CH anonymous email and VPN regardless of the diminished speed and inability to open certain websites … along with ceasing all my online comments activity … which sadly will hurt the sites that I enjoy and appreciate … but given a choice between my privacy and helping to keep someone else afloat … sorry Wolf etc .. but its my privacy .. hands down

          All of which should errr …. give sites like Wolf’s a whole lotta motivation to get into the fight .. both personally and financially

    • gary
      Oct 25, 2017 at 9:29 am

      Petunia, I’m not sure if I agree with your comment on biotechs.

      From what I recall, Genentech makes much-needed medicines using recombinant-DNA. I also know that it takes a few years to clear the regulatory process, so that would help explain the time lag.

      Also, r-DNA is the ONLY way to bring many medicines into the market (it is completely infeasible to extract from live animals). So, overall we have a very efficient manufacturer in a high-demand market for some very, very important products. This is quite a different ball of wax than the tech stocks that Wolf mentions.

      • Petunia
        Oct 25, 2017 at 12:12 pm

        In the early 80’s Genentech was a concept company and didn’t have any real products. The markets were divided on how to value their ongoing and seemingly endless research. It took a lot of money and faith to get them where they are today.

    • Beard681
      Oct 27, 2017 at 6:43 am

      You could possibly right about Amazon and Netflix, but Tesla is a ponzi stock. The world auto market is highly competitive, and Tesla doesn’t even own the battery IP it relies on.

  3. Craig
    Oct 24, 2017 at 9:13 pm

    I guess I’m just not that smart.
    These hedge fund managers and owners, dozens of them, the masters of the universe brainiac tribe, cannot figure out how to trade the market when the FAANGS are up 50% and S&P up 15%.
    I don’t trade stocks normally but even a caveman can figure out this market. Just buy when the central banks buy. They control the FIAT and QE and thus control the markets.
    And how did Einhorn not get into Bitcoin 4 years ago?

    • John
      Oct 24, 2017 at 10:37 pm

      LOL just wait till the central banks are selling those stocks. You’ll still be thinking you’re not that smart. At some point that’s what’s bound to happen with this market. Make hay on the way up and make it on the way down. Tree’s don’t grow to the moon.

  4. Josh
    Oct 24, 2017 at 9:39 pm

    It would be one thing if Tesla, Amazon and Netflix were performing this way while the market as a whole was doing fair-to-middling.
    But when momentum stocks are soaring against a background of extreme median S-P 500 valuations, one immediately thinks of precedents like the nifty fifty.
    Its in the very nature of business cycles that the older an expansion gets, the more bloated stock p/e’s become. Investor complacency and overconfidence lead to rationalizations justifying the bubble (‘this time is different’).
    With an unemployment rate at 4.2%, we’re just now approaching the peak of the current cycle. Assuming this time is in fact NOT different from every other stock market bubble in history, high flying tech stocks are likely to fall even harder than the market as a whole.

    • Paulo
      Oct 25, 2017 at 10:18 am

      If one is to believe unemployment is at 4.2% in the US, then why have wages continued to remain so flat? The following stats have led me to believe that the US unemployment rate is simpy bogus.

      I looked at various Canadian stats for comparison sakes and came up with a few nuggets as the exercise unfolded.

      From recent news stories north of 49, (quote)

      “Canada’s GDP grew at a 3.7-per-cent pace in the first three months of 2017, more than tripling the U.S.’s 1.2-per-cent pace, StatsCan reported on Wednesday.”

      In the second quarter it was at 4.5% growth rate.
      Yes….4.5% rate!!!! (I saw this on the news last night and was astounded.

      Yet the Canadian unemployment rate is far higher than US. From Stats Can:

      “Statistics Canada says last month’s increase of 22,200 jobs also helped nudge the unemployment rate down from 6.3 per cent in July to a nine-year low of 6.2 per cent.

      So my question is, what gives?

      Canadian wages grew at just over 1% this past decade.
      American wages grew at over 2%. Yet, statistically Canada is growing at the highest rate of the G7. But, our unemployment rate is higher.

      At + 6% unemployment Canada should expect a lower wage growth rate, and it does.

      But, US work participation is only 67%.
      Canadian is almost the same at 66%

      The reason for this is demographic, retiring boomers leaving the workforce.

      If the US unemployment rate mirrored the other stats I would estimate it to be well over 7%. Not in the low four percents, which is virtually full participation. Actually, the real unemployment rate (U6) is 8.3%., according to a quick Google search.

      I think we all need to take a big breath and follow our gut instincts and not listen to experts. This is what Einhorn is musing in his article. And what are the conclusions? They are the same almost everyone makes on this site:

      *There are no more fundamentals available to understand the markets, economy, or political trends. Black is white, good is bad, and wealth continues to grow.

      *Individuals must chart their own unique course going forward in order to ensure the financial security of themselves and loved ones.

      *People should look at their own biases to understand who they are listening to and how they invest, (or not).

      I grew up listening to my parents talk about being children during the Great Depression. Both of my parents were WW2 vets. Many of their friends suffered the displacement of WW2 and emigrated out of Europe to the US and Canada. The following is what I have in my veins from the above.

      * We have lived in a time of unimaginable wealth, opportunity, and comfort in North America.
      * It most assuredly has not always been this way.
      * Things may remain good for a long time, or they may not. There are no guarantees for anyone.
      * Be prepared for unexpected problems and setbacks.
      * Hold wealth and assets in enduring vehicles. (It isn’t paper)
      * Develop tangible skills that other people need.
      * Belong to a community.

      regards

      • JulianOG
        Oct 25, 2017 at 10:45 am

        There are many factors that influence GDP growth (which is itself a crap metric imo) other than the unemployment rate.

        One can even make the case that the unemployment rate is a weak predictor of GDP growth quite easily so don’t get hung up on it.

        • Robert T.
          Oct 25, 2017 at 7:20 pm

          The reported GDP statistics are grotesquely distorted by deficit spending, every single dollar of which is counted as as a dollar of GDP- and just during Obama’s administration, $10 trillion of was added, with further distortion in that the spending was directed by government and not the free market. And yet, the stock market tracks the artificially juiced GDP. In Venezuela which can only be called an economic disaster, the stock market is up over 600% in one year (they recently knocked three zeros off the main Caracas index, and it continues to roar), and the U.S. deficit, surprising some who thought having a “real businessman” in charge might rein in spending, has been accelerating, so it would hardly be far-fetched to think that the Dow and S&P could also continue to rise indefinitely.

        • Oct 25, 2017 at 8:52 pm

          Just one thing: Venezuela’s stock market is denominated in bolivares, whose value has been collapsing. This stock index is a measure of hyperinflation and nothing else.

      • Agnes
        Oct 25, 2017 at 3:38 pm

        I think criteria for employment statistics are determined by each individual country so they don’t compare easily. If I’m not mistaken, Canadian statistics include farm labor; American statistics do not. Also, I think, Canadians include domestic workers. Check it out, I may be wrong, but it is certainly another case [there are so many] of comparing statistics that use different bases.

      • Beard681
        Oct 27, 2017 at 7:03 am

        Your advise is OK, but it is a strategy that requires hard work and will likely be ignored by young people. Etrade is running a bunch of commercials on MSNBC extolling the virtues/ease of getting rich in the stock market. They are actually pretty funny, (my favorite is “the dumbest guy in high school just bought a boat”) but the implications for US Society are ominous.

        My advise is simpler – forget the private sector, by hook or by crook get a secure (i.e. a sector like safety, security, or regulation that has not competition) government job.

  5. michael
    Oct 24, 2017 at 10:43 pm

    He needs to get in line.

  6. Nick Kelly
    Oct 24, 2017 at 10:47 pm

    The fact that Einhorn has capitulated (or at least talks that way) is a major signal we are near the crash.
    The Bitcoin frenzy is another signal.

    That people can accept that losing billions is excusable for an investment because its ‘cool’ is similar.

    To think that we laugh at those stupid Dutch folks who circa 1650 bid up certain types of tulip bulbs until a single bulb could be worth a house.

    And then suddenly they were almost worthless.

    Plus ca change…

    • akiddy111
      Oct 25, 2017 at 12:26 am

      “The fact that Einhorn has capitulated (or at least talks that way) is a major signal we are near the crash.”

      I don’t think any one individual capitulating makes any difference to anything.

      Margin debt is $550b right now. It peaked at $381B in July 2007 and $250b in February 2000.

      The p/s ratio of the S&P 500 is currently 2.20. The first time (since records began in 1940) that it went ever above 2.0 was in 1998. It peaked in April 2000 at 2.44.

      I am quite confident that if the S&P rallys to 3000 (about a 20% gain from today) in the next 12 months, then it will be the most overvalued in history by almost all metrics.

  7. Maximus Minimus
    Oct 24, 2017 at 11:04 pm

    Raise the interest rate (cost of money) to 4-5%, and value investing will be back with a vengeance. No need to muse about an new paradigm.

    • Jon
      Oct 24, 2017 at 11:12 pm

      That’ll never happen. It’ll go negative before it will ever hit 4%

    • MD
      Oct 25, 2017 at 5:01 am

      Central banks stuffed with alumni of investment banks…corporate capture of our financial system by speculators…low IRs are here to stay.

      That’s why we’re ALL going to be FORCED into speculating in real estate and on the stockmarket in order to get the returns we need to retire.

      The danger in this is something that the political class appear to be completely oblivious to. I guess by the time the results of this capture by the speculator become apparent, they’ll be comfortably retired (and doing nicely on the board of several of said investment firms).

      Bizarre times. Never before has there been so much money – and never before [in the west] has it been used so badly.

      • Maximus Minimus
        Oct 25, 2017 at 10:57 am

        There will be nothing comfortable about the state the global economy
        is in. This bunch (without remorse) has brought the world to the brink, and it is on a knife’s edge ever since. You cannot balance on a knife edge, and be comfortable.

      • Gershon
        Oct 25, 2017 at 5:20 pm

        That’s why we’re ALL going to be FORCED into speculating in real estate and on the stockmarket in order to get the returns we need to retire.

        Only fools “invest” in asset bubbles and Ponzi markets. No one “forces” them except their own greed and hubris. Some of us refuse to play the Wall Street-Federal Reserve Looting Syndicate’s rigged game and will not be shy about saying “I told you so” to the Bubbleonians who are going to get their heads handed to them. But I’ll be happy to hand out pitchforks and torches when millions of burned retail “investors” decide enough is enough.

  8. akiddy111
    Oct 24, 2017 at 11:59 pm

    The billionaire investor David Einhorn’s Greenlight Capital lost 15% in 2015, gained 9.4% in 2016 and was down 2.8% in H1 2017.

    Obviously he is a very good asset gatherer like his peers, Bill Ackman, Ray Dalio and Bruce Berkowitz.

    • wkevinw
      Oct 25, 2017 at 12:17 am

      Being old enough now to have lived through a few market cycles, I think most of these “superstars” flame out in ~10-15 years. The statistics catch up with them. They are basically “longer term beta players”. In other words, they find a “system” that works for about 10-15 years, then it stops working. When it works it’s spectacular.

      In the long term there are only a few enduring variables in investing. Value, for example is one of them. If you pay too much eventually you will not do well. There are a few other variables, but the list is short.

      When these quants put together multi-variate systems, they find a good combination that can work for that 10-15 years. Then it stops working. It’s pretty much that simple.

      Remember that with billions of investors, somebody is going to flip heads 10-15 times in a row- against big odds. That’s these guys.

  9. Yancey Ward
    Oct 25, 2017 at 12:26 am

    I think it is possible that we have crossed the Rubicon. It is entirely possible that the nominal value of the markets will continue to accelerate skyward while the real value at some point begins its death plunge to zero.

    I say this because it is becoming apparent that the major central banks across the world are buying the stock markets and bond markets directly and indirectly. They may be at the point that it is no longer possible to stop and reverse course.

    • Kent
      Oct 25, 2017 at 5:54 am

      It’s not central banks (well maybe the BOJ) but regular banks. The central banks are the enablers by keeping interest rates so low and reserves so high.

      • Oct 25, 2017 at 10:41 am

        definitely the BOJ, and the SNB are buying stocks.

        • Tim
          Oct 29, 2017 at 1:11 pm

          yup. SNB, BOJ in equities,+ ECB buying corporate bonds, and price making. Invincible, almost. And the Fed not really ending QE, like it said it was.

          But now, with corporate leverage at all time highs, a pull back in consumer spending would probably cause some distress in high yield, and equities could come to their senses. “Nah, it’ll never happen.” Yes, the market is an operant conditioning device too.

  10. JR
    Oct 25, 2017 at 1:01 am

    The bruising of investing luminaries is endlessly entertaining. Hugh Hendry has been knocked out of the ring, Kyle Bass is bruised but still swinging – and is still willing to talk about his latest special situation. Gundlach says that he is still in the game “to see how it ends”. After watching this show for a while – it appears to boil down to a “Keynesian Beauty Contest” (see wikipedia) crossed with Career Risk – having to beat the market if you are different.

    All of this suggests that the beauty contest will continue, and silicon-infused FAANG winners continue to climb the risers on the stage, until psychology changes. My guess continues to be that China will suffer a monetary crisis of confidence, and resulting “Bass predicted” recap of their banking system with a much cheaper monetary unit. The reverberations of that reset should provide enough pins to pop many a psychological bubble. Good luck to all.

    • Drango
      Oct 25, 2017 at 8:56 am

      A monetary crisis in China would definitely bring the markets back to reality. And the bigger the Fed allows the bubble to get, the worse the consequences.

  11. raxadian
    Oct 25, 2017 at 2:46 am

    Want to know when Unicorns go bankrupt? When they can’t get credit anymore and their investors run away like the rats from a sinking ship.

    The stockholder bots can’t ignore that data and even then it took Juicero months to go bankrupt. Why? Even a company going under is filled with bureaucracy these days.

    Sure, big and fast crashes still happen but Unicorns/Tech companies die a slow dead. Yahoo being dying for years same for HP. Why are they still around?

    I have no idea, someone please explain it to me.

    • Oct 25, 2017 at 7:50 am

      Normally, Unicorns (and smaller startups too) are funded by equity capital — a lot of it. This capital doesn’t ever have to be paid back to investors and carries no interest. So if the startup doesn’t have debt, it can just use up the considerable amount of cash it has, cut some costs, never sell anything, and go on simmering for a long time… until the last dime is used up. Often they don’t even file for bankruptcy if they can negotiate an exit to their leases. They just quietly shut down as the money runs out.

      Once a company has debt that must be serviced and it doesn’t have a lot of cash, the end comes when it cannot make interest or principal payments. This can happen very quickly. When creditors move to exert their rights, the company seeks protection from them in bankruptcy court to have a judge preside over who gets what. A company with a lot of debt can topple very quickly.

      • raxadian
        Oct 25, 2017 at 2:09 pm

        * Normally, Unicorns (and smaller startups too) are funded by equity capital — a lot of it. This capital doesn’t ever have to be paid back to investors and carries no interest. So if the startup doesn’t have debt, it can just use up the considerable amount of cash it has, cut some costs, never sell anything, and go on simmering for a long time… *

        And who is dumb enough to give them that “equity capital” in the first place?

        Never give loan you know for sure you won’t get paid back is the basic rule of loaning money after all.

        And that still does not explain yahoo, the company been a zombie for over a decade by now.

      • kevin
        Oct 26, 2017 at 12:56 am

        Wolf, that is an excellent explanation, on a technically complicated issue especially for large companies.

        I use this visualization of flying machines for the entire debt vs equity growth equation to illustrate the history of all publicly listed companies.

        Debt is the weight of your flying machine (it may be a rocket/jet aircraft/glider/balloon/helicopter etc.)* including the weight of your crew, passengers as well as any payload.

        *Whether you like it or not, ALL companies have debt, be it short-term, medium or long-term debt. Even a company with no major bank borrowings still has to “owe” weekly/monthly salaries to her employees. A contract to pay your employees for their time/work rendered is by definition a debt or future obligation on the company’s books; in exchange for hopefully more productivity than the amount the employer pays out over every remuneration cycle.
        Thus, each and every company has to ensure their (near-term) cash ratio and (longer-term) liquidity ratios matches up to their expenses/debts. Any mismatch in duration or amounts means a likely default event, leading to even more borrowings, equity sales (i.e. getting more jet fuel) or jettisoning of aircraft weight (i.e. restructuring) or throwing out cargo to reduce weight (i.e. firing employees by throwing them out of the aircraft literally, some individuals may get golden parachutes though ;-) just to keep the rest of the enterprise airborne.

        Equity is the rocket or jet (kerosene) fuel for each aircraft type.

        These 2 factors plus the structure of the aircraft determine how high each can fly and their trajectory (i.e. their share price history).

        – A balloon vehicle may rise vertically, and then plateau, without anything much interesting happening thereafter or burning much fuel at all.
        – A jet fighter, is a like those hot new startups, which may go up fast and down and do all sorts of heart-stopping maneuvers like your high-Beta volatile stocks/companies. Its (share price) flight usually does not last that long and often crashes to the ground if it cannot do an airborne refueling exercise or transform itself mid-flight into something else.
        – A commercial airliner 747, may burn huge amounts to get airborne but once it does, it can also cruise along quite comfortably, until it runs out of fuel and lands back down to earth eventually. Yahoo and HP are such examples, they started out wanting to be rockets to fly to the moon, but for various (known and unknown) reasons, they became huge jetliners at some point. Sometimes these vehicles throw out passengers and crew or even unwisely jettisoning an engine or two just to lighten its weight or fuel-burning (e.g. spinning-off parts of itself into separate entities) or attaching a new engine mid-air (i.e. buying over some new start-up in the hopes or boosting its future altitude/ share price performance). Note however, that these airliners will NEVER reach space orbit, so eventually, theses big aircraft will still come back to ground in their share prices (i.e. zero), they can certainly cruise along longer than our lifetimes but unless an aircraft can reach deep space orbit, it will eventually have to crash and die.

        – A rocket can burn through huge amounts of equity fuel and even jettison parts of itself in order to reach escape velocity.

        Amazon and Tesla are fine example of rocket-ships, they burns huge amounts of fuel, issues more debt (ignites secondary rocket boost stages) or sells more shares (to get more rocket fuel) and sometimes even jettisons parts of itself to reduce weight; so that hopefully it can get into Earth orbit and then with her satellite view, dominate all below without ever falling down to earth.

        Once they reach orbit, they will not need to burn that much fuel, if at all, and with their lofty dominance high above all competition, can charge like a monopoly and hence payback shareholders via its stratospheric margins for a long time, and that will be difficult for the rest to ever reach. That is what Jeff Bezos, Elon Mush etc. and all her shareholders are betting on.

        Historically, this is also what had happened with Microsoft. Bill Gates and his Microsoft rocketship will be in space orbit for a long time, because no one else can compete with them in their core products with MsOffice applications. They are unlikely to ever fall back down to earth and they can easily shoot down the competition from their high orbit. Any upstart competitor such as maybe a new Lotus-notes like software company will be out-competed by Microsoft giving out near-free software temporarily. These companies can do that because they have reached beyond the constraints of gravity and can float quite effortlessly without burning any fuel in space. Hence, their share prices trajectory will never fall back down to earth unless some accident in space occurs like some disruptive comet accidentally hits them and causes them to crash back down to earth in a huge flaming ball of fire.

        More often than not, most rocketships (like Unicorn startups wanting to dominate the world) burns out and comes crashing down in share prices. Only the rarefied few can ever reach orbit, but boy oh boy, the God’s-eye view is great up there.

        • Beard681
          Oct 27, 2017 at 7:11 am

          MS dominates because it was, if not first, then quickly dominant, in a new technology – personal computing. What is Tesla first in other than hype?

        • Oct 27, 2017 at 9:07 am

          Beard681,

          Raising money and burning it?

          :-]

      • Tim
        Oct 29, 2017 at 1:14 pm

        “A company with a lot of debt can topple very quickly.” And corporate America has never been more leveraged. Pull back in consumer spending???

  12. Lee
    Oct 25, 2017 at 4:02 am

    With QE many stocks have been able to achieve high prices as a result of PE multiple expansion or ridiculous values based on hype and hope.

    The market in the USA is even more ridiculous than that of Japan during their bubble because at least those companies were producing real goods and making real profits.

    When QE unwinds I wonder what kind of negative multiplier will come about….

    Maybe a cascading effect as ‘money’ is pulled from the market and the effect made worse as interest rates increase.

    With all the bots and algos trading the market the most liquid assets will be hit first and less liquid ones such as RE
    last.

  13. MD
    Oct 25, 2017 at 4:55 am

    Didn’t Marx have something to say about what happens when the financiers take over and money – rather than products – becomes the economy?

    An environment in which a company is deemed as ‘doing well’ because it uses cheap credit to buy its own stock and make the value of each share look better is one which has nothing to do with anything other than financial alchemy.

    And yet…up we continue to go, based on nothing more than ‘momentum’ (ie computers trading patterns) it seems.

    Madness.

    What is the point of a system that no longer indicates the true health of a company, but merely is the product of speculation predicated mostly on the availability of cheap credit?

    • James Levy
      Oct 25, 2017 at 6:49 am

      Marx worried about this trend (the Dutch economy being the most obvious example before his eyes) but the thing was he lived in a world of wealthy rentiers who lived off of return on investment (interest and dividends), and selling your capital was a sure sign of disaster. Now, everything is predicated on pump and dump. You buy stocks and bonds not to live off the interest, but to make a killing on the sale. It’s a totally different mentality, and pushes forward a different type of wealthy elite (the frenetic, short-sighted, grasping kind).

    • Beard681
      Oct 27, 2017 at 7:25 am

      Marx predicted the collapse of capitalism with the idea that it was inevitable that as capital concentrated, competition would be eliminated by the largest players, less labor would be needed (i.e. the robots got all the jobs) and the workers would revolt. What we have now is that wealth has been concentrated into the financial sector and there is NO capital investment (CAPEX is less now than in the 80s – below replacement costs). It all goes into Financial Engineering (M&A, Stock Buybacks and Financial Instruments). Marxism has nothing to do with it.

  14. Oct 25, 2017 at 5:32 am

    Shades of The Great Crash of 1929 described amusingly by JK Galbraith. The markets are walking on thin air, kept up by sheer faith.

    • Gershon
      Oct 25, 2017 at 5:27 pm

      Shades of The Great Crash of 1929 described amusingly by JK Galbraith. The markets are walking on thin air, kept up by sheer faith.

      Not faith – hubris. These Ponzi markets are levitated solely by central bank QE-to-Infinity, HFT algos, endless shilling by the financial media touts, and bagholders-to-be scrambling for “yield” out of frustration or greed.

      The coming Great Crash will be worth it, if we can finally put an end to the greatest swindle ever perpetrated against the middle and working classes in America: the Federal Reserve. We will not have honest markets or sound money until we heed Thomas Jefferson’s warning and take our money issuance out of the hands of these counterfeiters and racketeers.

  15. Dave
    Oct 25, 2017 at 5:38 am

    My best guess as to when a correction will hit is before the next presidential election. There are a lot of powerful players in the private sector and public sector who do NOT want another 4 years of Trump ( I did not vote for him or Hillary).

    Keep the bubble going until we are around a year out from election, then semi controlled demo of the bubble. Unfortunately once this bubble starts hissing their control will be lost.

    I know my theory sounds a bit conspiratorial, but I have a gut feeling about it. And that is my only source.

    • Mike R.
      Oct 25, 2017 at 8:41 am

      Dave,
      I think your gut felling is spot on but I would suggest an earlier timeframe. I think the Fed will continue to raise and put the economy in recession. I think the Fed has been tasked with getting rid of Trump. I predict he will self destruct (figuratively) once things start going south.
      Trump is considered dangerous by the ruling elite, and probably rightly so. I belive he is pretty much shadowed by Pence, Flynn, and other stalwarts to make sure nothing happens with the nuclear trigger finger. I think it is that bad, at least in their minds.

      I think the stock market is going up as a result of people moving out of bonds and the prediction that once the economy tanks, the Fed will have to move towards more QE. Like you, just a gut feeling.

      • Smingles
        Oct 26, 2017 at 3:10 pm

        “I think your gut felling is spot on but I would suggest an earlier timeframe. I think the Fed will continue to raise and put the economy in recession. I think the Fed has been tasked with getting rid of Trump.”

        The Fed started raising under Obama and was committed to raising them further, even when everyone assumed that Hillary was going to win. So that narrative doesn’t really make sense.

        “Trump is considered dangerous by the ruling elite, and probably rightly so.”

        He’s considered gullible by the ruling elite. And rightly so.

        “I think the stock market is going up as a result of people moving out of bonds and the prediction that once the economy tanks, the Fed will have to move towards more QE.”

        Money has flown OUT of equities and INTO bonds this year.

      • Thrasymachus
        Oct 26, 2017 at 6:18 pm

        >I think the stock market is going up as a result of people moving out of bonds<

        There is a flight from public debt to private equity for sure. But the individual U.S. retail investor has watched from the sidelines for the most part. A vertical market in which the vast majority have been left behind, not really believing in the rally. Watch the rise when the individual retail investor hops in. Smart money hops out.

  16. Oct 25, 2017 at 7:33 am

    This notion that “Disruptive-ness” is the new metric reminds me of the late 90’s when it was “clicks” that were the new metrics. Pets.com anyone?

    I worry about all the positive feedback loops in the current meme – “momentum” investing is a big one. It buys when stocks go up (accelerating the rise in price) and sells when they go down (causing a crash).

    Combine that with ETF/index investing, where the high-value stocks have a higher percentage of the index, and so get bought in higher percentages when the ETF gets bought. This contributes to the “winner take all” nature of the FAANG stocks. They have a high percentage of the index, so they get bought more, so they get a higher percentage of the index, wash, rinse, repeat.

    Positive feedback loops are inherently unstable. All it takes for this pig to stop flying is for currents to reverse. Since money isn’t following fundamentals, that has nothing to do with profits or P/E ratios. It will stop once the upward momentum falters. The same positive feedback that drove the market to nose-bleeding heights will crash it just as completely.

    That crash could happen today, tomorrow, or ten years from now. It’s impossible to predict. Personally, I think it will be within the next 24 months.

  17. Wilbur58
    Oct 25, 2017 at 9:04 am

    Why doesn’t Einhorn show some conviction and pull out of every long position in his portfolio? And then if his buddies do the same, the correction begins.

  18. walter map
    Oct 25, 2017 at 9:15 am

    The FIC will continue to surge so long as it can continue to bleed the real economy.

    There are many ways it can do that, and it is already doing most of them on a scale that is suboptimal: tax cuts for the rich, abolition of social programs like SS and Medicare, privatisation of public services, reduction of worker wages, underinvestment of infrastructure, military Keynesianism, natural resource overexploitation, and so forth. It should be clear that they will continue to pillage the real economy until there is nothing left to steal.

    But just as a horde of locusts dies off only when it runs out of countryside to strip, eventually the FIC will run out of resources to pillage. Then the markets will collapse, and with little left to revive them, they will likely stay collapsed.

    In the meantime, you’d be amazed at how much blood you can get out of a corpse.

    • Beard681
      Oct 27, 2017 at 7:39 am

      What a Fantasy Land you describe. They can’t even get rid of Obama Care which is just a subsidy program for insurers and providers. If they cut taxes at all, it will be paid for with more debt.

      What we actually have is a failure of democratic government to manage even the simplest economic principles of paying their own way, and only borrowing to invest in something that will generate returns. Who do you think gets enriched when they lend money, or hold assets when currency is generated out of thin air?

  19. MASTER OF UNIVERSE
    Oct 25, 2017 at 9:48 am

    Crazy Markets is an understatement, Einhorn. Frankly, we all know ‘the markets’ are fixed to Pump the markets infinitely higher and higher so that the feedback loop is fixed on ‘irrational exuberance’ ad infinitum rendering
    marcroeconomics defunct in the process. Clearly, all market players are contributing to the irrationality, and the Finance ‘Investigative Journalists’ are willingly going along with it so that they can continue receiving a paycheque. Low interest rate environment [money for nothing & the hookers for free] and low volatility stock market in conjunction with stratospheric high valuations means that Einhorn must be right that the cycle is on the precipice of turning due to decoupling & decoherence of the markets’ normally distributed wave function. Clearly, gravity must address the blatant irrational exuberance at some point in the very near future. Housing prices don’t rise forever, and neither do markets or stock markets. Moreover, a flatlined VIX has the corollary of Geopolitical volatility to contend with in terms of the start of Thermonuclear ‘Hot’ World War Three. The Russian Federation, China, and North Korea, as well as the Middle East, are anything but low volatility environments. In other words, a low reading on the VIX for the USA means that social manifestations of contagion & social chaos are more than highly likely to propel the VIX higher via exogenous shocks system wide.

    That central planning for you, ‘Merica!

    MOU

  20. -tz
    Oct 25, 2017 at 10:03 am

    As always, a very good comment. Thanks Wolf, for your work. BTW: do you know that “Einhorn” is the German word for “Unicorn”? So, quite some irony in the headline…

  21. Bread & Circuses
    Oct 25, 2017 at 10:30 am

    is the market simply experiencing runaway inflation? All that liquidity floating around in the world has no place else to go but in the market and assets. At what point does it become a real problem? 1000 points per month or 10000 points per month?

    • John (UK)
      Oct 26, 2017 at 5:47 pm

      The liquidity never left New York! The QE “money” went from the New York fed, to the New York banks, to the New York stock exchange. It’s not helicopter money, it’s penthouse money, and instead of dropping it out the window you hand the cash to the floor below you, who proceed to trade it between them, forever.

      And of course, holding all that money, that keeps increasing as it has nowhere to go, is causing local inflation. The New York stock exchange is experiencing the inflation from QE, and so are goods purchased with that money, like shares in tech companies, and things tech company owners and workers buy like houses in San Fransisco and digital assets that can be created endlessly and bought by as many people as want to be involved in the collective imagination game that is money itself.

      The money supply is out of control, at a national level, and it looks like government spending and taxation is rudderless, do the businesses that people rely on in their daily lives know what to do? Can they organise workers to the same extent, source materials at the same cost, deliver the same goods to the same people?

      So basically I have the same question, how is this surreal financial situation going to affect the production of American society?

  22. Oct 25, 2017 at 11:09 am

    Fallacy one to consider is that the CBs will never sell the stock they bought, they function like the company, (on behalf of the company) buying their own shares and defining them as “closely held” and controlling their own stock float.
    No fund manager wants to buy shares of a company with a small float, whether there is simply not enough stock, or the stock is not available. So public ownership falters. The other fallacy is that should the company (or the Fed) pursue this to its logical conclusion they will own all their own stock, and the benefits of their high market capitalization disappear, the value they gained buying their own stock.
    The individual companies are not relevant here unless of course they make some huge mistake, and there is always some other company to play the leadership role.

  23. Shane
    Oct 25, 2017 at 11:36 am

    ZIRP & QE = asset inflation, not inflation on the streets of fly over America…. GDP debt ratio climbs, deep state is drunk on free money and frankly is addicted to same…. continues to borrow at the expense of or rather to the detriment of the working stiff in America… the deep state sees increased wealth while the rest of the nation needs debt to just get by…

    I see America today on the same slope of decline as Rome in the day….. clearly different times, but parallels can be drawn and inferred.

    Media moguls are part of the deep state and the news is telling us not the whole story… only what the deep state wants us to know…

    IMO

  24. Thrasymachus
    Oct 25, 2017 at 12:34 pm

    Ah, trading in a *vertical market*. The market everyone loves and hates: the market takes off, leaving the vast majority behind because they cannot believe this sustained rally.

  25. ML
    Oct 26, 2017 at 1:45 am

    Anything anyone says about anything is a projection an expression of that anyone’s thiughts and feeling.

    Tald about the market as if the market somehow has a mind of its own is nonsense. It is our opinion that is being expressed so how we see and perceive the market depends upon where we are standing and our prejudices.

    An investment strategy that is not holistic is sure to fail.

  26. thatblackwoman
    Oct 26, 2017 at 7:17 am

    was eirhorn’s firm only watching the markets and not the fed, boj, or the ecb? the wacky stock markets are obviously distorted and aggressively manipulated. the markets decoupled from fundamentals 4 or 5 years ago. i find eirhorns frustration puzzling.

    • chris Hauser
      Oct 26, 2017 at 9:00 pm

      i don’t, he’s frustrated, that’s all.

      maybe he should not try so hard to be alpha.

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