As the old saying goes, good days tend to reward cheap assets, especially when things start on a wave of mysticism and end up as politics. Furthermore, when we look at the fundamentals of equities in the US, a signal of overvaluation jumps out that may be calling for some trimming and/or trailing stops, especially when we take into account the fundamentals, as discussed below, and the fact that next year the US will need to sell over $10 trillion in bonds due to forthcoming maturities and a budget deficit of over $1.4 trillion. Such a figure represents close to 30% of the current outstanding debt, and the bond sale is supposed to be taking place at a time of declining rates, unless something happens that keeps rates higher than normal.
In 1576 in Paris, Jean Bodin published his book titled De la Republique. It was the first book in the history of modern political thought that introduced the idea of political sovereignty. Neither Hobbes, nor Rousseau, nor any other later philosopher was able to improve on it. As a member of the group that called themselves the Politiques – a term that has nothing to do with what we call nowadays politicians – he sought to identify a foundation and the necessary base for stability, unity, and order in Western society. Christendom had been torn by deeply rooted doctrinal hatreds and could no longer supply that base. The only possible alternative for Bodin and his fellow politiques was the political nation which could be given legal force by the recognized sovereignty. The idea of the nation turned out to be the most vital unit that has ever been spawned by Western society. Two hundred years later, Adam Smith will write about an invisible hand that nowadays appears (or distorts as some would say) as the paternalistic visible hand of central authorities nurturing and nudging the markets (via money supply and budget deficit infusions, see figure below from Pantheon Macroeconomics), whether in the West or in Asia.
As the following graph shows, the top ten stocks in US equity markets have surpassed 30% and resemble the days of high concentration before corrections and market bursts. When a limited number of stocks represents most gains in an index, a systemic risk arises for the whole market. Expectations of rate cuts, accommodative fiscal and monetary policies, optimism about AI, and a strong economy add fuel such concentration and overvaluation.
As recently reported, Microsoft’s market cap is twice the size of the entire energy sector in the S&P 500. However, the energy sector generates double Microsoft’s annual free cash flow ($67B vs $135B). Without implying that Microsoft is overvalued, we question if the fundamentals justify such valuation, not only for Microsoft but also and primarily for other stocks.
Let’s look at another example: Nvidia’s market cap is higher than all of the companies in the S&P 500 energy sector combined ($1.7T vs $1.6T). Knowing that Nvidia’s top four customers account for 40% of revenues, and every one of them is actively working on their own custom AI silicon, how can we justify Nvidia’s long-term valuation? Moreover, how can we justify the total market cap of the Magnificent 7 when we know that their market cap exceeds the GDP of every country in the world (excluding the US and China)?
Prior to the modern era, i.e. prior to the 16th century, there was no clear notion in Europe of England, France, Germany, or Russia. Such territorial divisions did not matter to the European mind nearly as much as did divisions in terms of peoples (the Franks, the Normans, the Slavs, the Saxons, etc.). These people lived in their respective areas of the continent. Consequently, territorialization dominated prior to the modern era, as in the case of the Greek city-states, or took an imperial turn as in the cases of the Persian or Roman empires but had no national connotation.
However, following Bodin, almost everything of importance (politics, finance, religion, science) has risen and assumed prominence within the framework of a nation. It is interesting then to note that several recent conflicts are with non-nation actors or with proxies of nation-states (ISIS, Al Qaeda, Houthis, Hezbollah, the Wagner Group). This intermediate state of warfare is also reflective of Bodin’s toils of conflict between the values he espoused from medievalism and those of modernity that he was engineering with his writings. Bodin seemed to be trapped, but following him other “philosophers of suspicion”, who attempted to unmask the idols of their days and liberate the world from unconscious imprisonment, failed in their liberation attempts as they were also trapped. So, whether we are talking about Marx and his teachings that materialistic relations are the only determinants in historical development, Freud and his emphasis on buried subconscious instincts, or Nietzsche and the catastrophic consequences of his teachings about the will to power, we are dealing with a confused state of affairs that is reflective of today’s economic, political, and geopolitical landscapes.
Imagine now a box of matches. No matter from which angle you see the box, we can never see more than three sides at any one time. The reality is, however, that there are six sides. What does that mean? Oh, simply that the reality we see rests on a foundation of invisibility. The hidden transcendence may be the one giving essence to the visible reality.
When we are looking at the market reality of stratospheric valuations or at down beaten assets and stocks, should we start questioning which could be the invisible sides that we cannot see which could bring down those valuations or uplift (especially with the assistance of powerful nation actors) “uninvestable” stocks? Is it time then to start contemplating buying Chinese stocks whose valuations are the lowest in the last 15+ years, recalling that good days tend to reward cheap assets, especially when things start on a wave of mysticism and end up as politics?
Jean Bodin, Valuations, and the Invisible Foundations of the Market
Author : John E. Charalambakis
Date : February 13, 2024
As the old saying goes, good days tend to reward cheap assets, especially when things start on a wave of mysticism and end up as politics. Furthermore, when we look at the fundamentals of equities in the US, a signal of overvaluation jumps out that may be calling for some trimming and/or trailing stops, especially when we take into account the fundamentals, as discussed below, and the fact that next year the US will need to sell over $10 trillion in bonds due to forthcoming maturities and a budget deficit of over $1.4 trillion. Such a figure represents close to 30% of the current outstanding debt, and the bond sale is supposed to be taking place at a time of declining rates, unless something happens that keeps rates higher than normal.
In 1576 in Paris, Jean Bodin published his book titled De la Republique. It was the first book in the history of modern political thought that introduced the idea of political sovereignty. Neither Hobbes, nor Rousseau, nor any other later philosopher was able to improve on it. As a member of the group that called themselves the Politiques – a term that has nothing to do with what we call nowadays politicians – he sought to identify a foundation and the necessary base for stability, unity, and order in Western society. Christendom had been torn by deeply rooted doctrinal hatreds and could no longer supply that base. The only possible alternative for Bodin and his fellow politiques was the political nation which could be given legal force by the recognized sovereignty. The idea of the nation turned out to be the most vital unit that has ever been spawned by Western society. Two hundred years later, Adam Smith will write about an invisible hand that nowadays appears (or distorts as some would say) as the paternalistic visible hand of central authorities nurturing and nudging the markets (via money supply and budget deficit infusions, see figure below from Pantheon Macroeconomics), whether in the West or in Asia.
As the following graph shows, the top ten stocks in US equity markets have surpassed 30% and resemble the days of high concentration before corrections and market bursts. When a limited number of stocks represents most gains in an index, a systemic risk arises for the whole market. Expectations of rate cuts, accommodative fiscal and monetary policies, optimism about AI, and a strong economy add fuel such concentration and overvaluation.
As recently reported, Microsoft’s market cap is twice the size of the entire energy sector in the S&P 500. However, the energy sector generates double Microsoft’s annual free cash flow ($67B vs $135B). Without implying that Microsoft is overvalued, we question if the fundamentals justify such valuation, not only for Microsoft but also and primarily for other stocks.
Let’s look at another example: Nvidia’s market cap is higher than all of the companies in the S&P 500 energy sector combined ($1.7T vs $1.6T). Knowing that Nvidia’s top four customers account for 40% of revenues, and every one of them is actively working on their own custom AI silicon, how can we justify Nvidia’s long-term valuation? Moreover, how can we justify the total market cap of the Magnificent 7 when we know that their market cap exceeds the GDP of every country in the world (excluding the US and China)?
Prior to the modern era, i.e. prior to the 16th century, there was no clear notion in Europe of England, France, Germany, or Russia. Such territorial divisions did not matter to the European mind nearly as much as did divisions in terms of peoples (the Franks, the Normans, the Slavs, the Saxons, etc.). These people lived in their respective areas of the continent. Consequently, territorialization dominated prior to the modern era, as in the case of the Greek city-states, or took an imperial turn as in the cases of the Persian or Roman empires but had no national connotation.
However, following Bodin, almost everything of importance (politics, finance, religion, science) has risen and assumed prominence within the framework of a nation. It is interesting then to note that several recent conflicts are with non-nation actors or with proxies of nation-states (ISIS, Al Qaeda, Houthis, Hezbollah, the Wagner Group). This intermediate state of warfare is also reflective of Bodin’s toils of conflict between the values he espoused from medievalism and those of modernity that he was engineering with his writings. Bodin seemed to be trapped, but following him other “philosophers of suspicion”, who attempted to unmask the idols of their days and liberate the world from unconscious imprisonment, failed in their liberation attempts as they were also trapped. So, whether we are talking about Marx and his teachings that materialistic relations are the only determinants in historical development, Freud and his emphasis on buried subconscious instincts, or Nietzsche and the catastrophic consequences of his teachings about the will to power, we are dealing with a confused state of affairs that is reflective of today’s economic, political, and geopolitical landscapes.
Imagine now a box of matches. No matter from which angle you see the box, we can never see more than three sides at any one time. The reality is, however, that there are six sides. What does that mean? Oh, simply that the reality we see rests on a foundation of invisibility. The hidden transcendence may be the one giving essence to the visible reality.
When we are looking at the market reality of stratospheric valuations or at down beaten assets and stocks, should we start questioning which could be the invisible sides that we cannot see which could bring down those valuations or uplift (especially with the assistance of powerful nation actors) “uninvestable” stocks? Is it time then to start contemplating buying Chinese stocks whose valuations are the lowest in the last 15+ years, recalling that good days tend to reward cheap assets, especially when things start on a wave of mysticism and end up as politics?