Hopium: How Far Can Irrational Optimism Take The U.S. Economy?

by Michael Snyder, The Economic Collapse Blog If enough people truly believe that things will get better, will that actually cause them to get better?  There is certainly something to be said for being positive and thinking that anything is possible.  And as Americans, optimism seems to come naturally for us.  However, no amount of positive thinking is ever going to turn the sun into a block of wood or turn the moon into a block of cheese.  Any good counselor will tell you that one of the first steps toward recovery is to stop being delusional and to come to grips with how bad things really are.  When we deny reality and engage in irrational wishful thinking, we are engaging in something called “hopium”.  This is a difficult term to define, but the favorite definition of hopium that I have come across so far goes like this: “The irrational belief that, despite all evidence to the contrary, things will turn out for the best.”  In hundreds of articles, I have documented how the U.S. economy is mired in a long-term decline which is about to get a lot worse.  But most Americans see things very differently.  In fact, according to a brand new CNN/ORC poll, 52 percent of Americans describe the U.S. economy as “very” or “somewhat good”, and more than two-thirds of all Americans believe that the U.S. economy will be in “good shape” a year from right now.  But if you asked most of those people why they are so optimistic, they would probably mumble something about “Obama” or about how “we’re Americans and we always bounce back” or some other such gibberish.  Well, it’s wonderful that so many people are feeling good and looking forward to the future, but are those beliefs rational?

We witnessed a perfect example of this “hopium” on Wednesday.  Sales at McDonald’s restaurants have been in decline for quite a while, and the numbers for the first quarter of 2015 were just abysmal

The ubiquitous burger-and-fries chain said US sales, the largest share of global income, fell 2.6 percent from a year ago for comparable outlets.

Sales in the Asia-Pacific and Middle East region dropped 8.3 percent, helping bring overall global sales down 2.3 percent, “reflecting negative guest traffic in all segments,” the company said.

Total revenue sank 11 percent to $5.96 billion in the quarter to March 31, and net income plunged 32.6 percent to $812 million, or 84 cents a share (-31 percent).

So you would think that the stock price would have tanked on Wednesday, right?

Wrong.

Thanks to news that a “turnaround plan” would be announced on May 4th, McDonald’s stock actually skyrocketed

McDonald’s closed up 3.13 percent after spiking more than 4.5 percent in early trade as investors cheered a turnaround plan expected on May 4. However, the fast food chain’s earnings missed on both the top and bottom lines.

This is pure hopium.  Why don’t McDonald’s executives just tell us what the plan is now?  But instead, the mystery of a “secret turnaround plan” gives people just enough hope to keep the stock from tumbling – at least for the moment.

And of course there are all sorts of other stocks that are being massively inflated by hopium right now.

Many years ago, when I was an undergraduate, I was taught that a price to earnings ratio of more than 20 was really, really high.

But these days that is the norm on Wall Street, and at the moment there are quite a few stocks that actually have price to earnings ratios that are greater than 100

There are 10 stocks in the Standard & Poor’s 500, including industrial giant General Electric, video-streamer Netflix and oil and gas explorer Cabot Oil & Gas that are trading for 100 times their diluted earnings the past 12 months excluding extraordinary items, according to a USA TODAY analysis of data from S&P Capital IQ.

And if you can believe it, General Electric has a PE on its training earnings of more than 200

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