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Guest Post: A Funny Thing Happened On The Way To The Next Bull Market
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Giddy "buy the dip, the Fed's got our back" participants tend to forget that major players profit from going short when all the other shorts have been terminated with extreme prejudice.
A funny thing happened on the way to the next Bull market: the price-earnings (P/E) ratio has entered bubble territory--again. Courtesy of frequent contributor B.C., here is a chart of the average P/E for the S&P 500 (SPX). Note the P/E soared to bubble heights in the early 2000s, which set up the epic collapse of stock valuations in 2008-09.
Thanks to Federal Reserve manipulation/goosing/QE, the SPX P/E has once again reached bubble levels:
If we consider average P/E's, it's clear the SPX is extended far above what can be considered historical fair valuations:
So what if the Bull market is already 4+ years old--no reason it can't run another four years. Or 40 years. The Fed has found the key to a permanent Bull market. Dow 36,000 is for pikers: Dow 400,000, baby!
Here are B.C.'s notes:
During the previous unreal estate and stock echo bubble I, the SPX rose 14 out of 17 months from Jun '06 to Oct. '07, 8 months in a row during the initial increase.Leading up the the tech bubble high in Mar. '00, the SPX rose 12 out of 19 months from the Sept. '98 low, 8 out of 10 months during the initial increase.
The SPX rose 12 months into the '87 high, 10 of 12 months being higher.
From the low in Nov. '71, the SPX rose 13 months into high in Jan. '73, 11 out of 13 months being higher.
Into the 1937 high, the SPX rose 21 of 25 months from the low in spring 1935.
The blow-off move into the 1929 high was up 16 months in a row and 18 out of 20 months.
We're in the 12th month of an uptrend since Jun '12, 11 of which have been up.
It's been 20 months since the Oct. '11 low, 16 of which have been higher.
The current bull market move is among the strongest, most persistent in US history, rivaling the increases into the 1929 and 1937 highs.
The SPX is 65-85% above implied fair value based on the 6-year change of reported earnings and the avg. P/E of 13-15.
The central banks have yet again created a stock market bubble rivaling or surpassing the most overvalued secular bull market peaks in history, and this time they REALLY mean it.
Thank you, B.C. Another funny thing might happen on the way to Infinite QE Nirvana: giddy "buy the dip, the Fed's got our back" participants tend to forget that major players profit from going short when all the other shorts have been terminated with extreme prejudice, and then taking the market down. Once they've driven the market down and taken out all the stops, then they can buy back in and launch the next melt-up.
What's more profitable, a slow melt-up or a panic sell-off and sharp rebound? Definitely the latter, if you're heavily short, the market is teetering on record margin debt and you can kick out the critical 2X4 holding the whole contraption up.
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Short this bullshit party. 1630 just will not be breached. Even the buy-side morons see it has gone too far.
Timing is a bitch. I have a feeling we can go sideways till October or so.
So maybe a mini crash or headfake along the way.
A big crash here and now in May... Is almost too predictable.
How about a nice sharp correction than off to greater heights again.
No fucking shit captain obvious, the CBs are bidding everything with free money, they make the "markets" move and are always on the right side of every fucking trade. It's called a fucking monopoly on credit creation, which in a debt-based system allows you to front-run, yourself. Shit, just look at the Greek ten-year, up 330% in one year. Who in their right fucking mind would have bought that? Well JPM and Golman did < surprise surprise > These paper-pushers add nothing of real value, but extract real fucking wealth and resources/assets. Common fucking sense and history should tell you how that will end.
You just know they are going to lend Greece the money when the principal comes due for those bonds... As long as that debt isn't superceded or defaulted on, any way...
ah but we will just move the russell 2000. hop on baby
ICEBERG DEAD AHEAD!
"Captain, may I ask what that infernal shudder is all about?"
"Not to worry, Mrs. Crumbworthy. Just a routine bump at sea. This ship is unsinkable. Please go back and enjoy your foie gras. May I be so bold as to ask to have the first dance after dinner, Ma'am."
"Oh Captain, but of course you may."
And what they didn't realize is they should have rammed it head on and only compromised the first 2 compartments, thus staying afloat. They'll try to port around it, sink the ship and killing everyone else, while boarding the lifeboats themselves. Any questions?
No Shit? This market is overpriced? I would never have guesses it. I always thought double digit multiples were the norm for decelerating earnings....go figure.
Bitchez.
https://www.youtube.com/watch?v=aadGZ-UwvoQ
No problem-o. Just use forward projected earnings and everything is AOK.
(Psst: pay no attention to the 200-day SMA)
Stansbery Disagree
http://www.stansberryresearch.com/dailywealth/
Your "analysis" of the "market" will hold so long as "mark to fantasy" accoutning does, so I guess it could be a while. 85 billion per month, indefinitely...
Plus $75B from the BOJ, and who knows how much from Korea, Australia, Switzerland, China, etc... And just wait until the ECB is forced to start printing from the Yen devaluation pressure. Then the party will really get going.
Entering the "market" no problem. But try and exit when the algos are selling. No bid for your position - you fucked but good.
And that is "their" plan. I once saw a graph on-line that I can't find now that showed who benefits from bubbles and busts by income range. The top percentages of income ramped up with every bubble and bust, the slope of their wealth curve averaging steeply upward. Not so for everyone else whose curves either trended downward or remained level.
Nervous Bernanke Warns Of Excessive Risk (Dollar Rises, Commodities Plunge) |Confounded Interest
May 10
Fed Chairman Ben Bernanke was nervous as he answered questions at his speech in Chicago today.
“In light of the current low interest rate environment, we are watching particularly closely for instances of ‘reaching for yield’ and other forms of excessive risk-taking, which may affect asset prices and their relationships with fundamentals,” Mr Bernanke said.
I was waiting for questions or hints as to if or when will take their foot off the monetary accelerator, but NADA.
Global sovereign yields rose across the board this morning (except for Greece).
http://confoundedinterest.wordpress.com/
It is better to exit 6 months early than to be one millisecond late.
Be aware...when bulls blow bubbles from one end, its not long before the BS comes from the other...
there is no historical precedence to this QE business, nor has there been such a level direct involvement by CBs' and sheer manipulation to prop up markets. So using charts and historical data to make assumptions about the future is pure fodder. the CB's have removed any fear of downside and therefore there will be no correction of meaning until the fed is out of their bubble making business. fundamental and technical analysis is dead. Long live btfd!
True, but simply analyzing the absurd concept of "printing, borrowing, and leveraging your way to prosperity" enabled by a highly erroneous (but convenient; see below) economic theory upon which such ridiculous claims are based, used to develop models that can't even see bubbles in progress let alone foresee their bursting (see YouTube for consistently incorrect Greenspan and Bernanke predictions), will lead one to the conclusion that this will all eventually end very, very badly.
Here's why, as revealed in the above article, that garbage economic theory is conveniently held onto so vigorously and never allowed to be seriously challenged:
"participants tend to forget that major players profit from going short when all the other shorts have been terminated with extreme prejudice, and then taking the market down. Once they've driven the market down and taken out all the stops, then they can buy back in and launch the next melt-up.
What's more profitable, a slow melt-up or a panic sell-off and sharp rebound? Definitely the latter, if you're heavily short, the market is teetering on record margin debt and you can kick out the critical 2X4 holding the whole contraption up."
Another reason that crap economic theory, obviously shown to be incorrect via much worldwide economic experience, is still desperately clung to: it provides pols with an erroneous green light to borrow trillions while predicting no negative repercussions.
Lose your savings to inflation in safe investments that pay virtually nothing (by Fed design) or invest it in risk assets and eventually lose your ass (again). Suckers!
After a trip to the barbershop this morning, I can confirm that everything is fine, business is recovering and the markets are going gangbusters and I'm just a nattering nabob of negativity who obviously can't see what's in front of my eyes.
By the way, Obama has done a fine job of digging us out of the hole that Bush got us in.
Guess what financial network was on the TV in the corner.
It was like "Welcome to the Stepford Barbershop".
I feel like I'm taking crazy pills.
ZH can you please debate this post by Stansberry Research; its the exact opposite of what this post is saying.
http://www.stansberryresearch.com/dailywealth/
take the average of both posts
Which "expert" is right more than 50% of the time?
Answer: neither.
So touting decreasing marginal earnings in spite of exponential revenues per share as a reason to invest and telling you margins are at their highest and will go no higher didn't convince you this was a momo piece for chasers?
As for the PE ratios not matching up, he wasn't specific on which he used so I don't know how to compare it to the above.
@mattdubz86
If you watch this video from them, they speaketh out of both sides of their mouth. Kinda of Goldmanesque.
http://www.youtube.com/watch?feature=player_embedded&v=RN5BLQLA4FA
What a TOOL. This quote says it ALL:
"Conservative investors just want to be sure to own only the best names with the best prospects. This means world-class U.S. blue chips, like Wells Fargo, Microsoft, and Intel."
Those three f#@ked up companies are "WORLD CLASS"...?? Yeah, listen to this Douche..!! This is what Ben Bernanke and the Fed are facilitating...!! To Mom and Pop, no less...!! DISGUSTING...!! We're DOOMED...!!What the central bankers’ actions are telling me is that there is an incredible, impending crisis below the surface. You don’t take extraordinary chances with your own banking system like Bernanke takes every day, unless your face is against the wall. You don’t threaten depositors with a Cyprus template every day if you care about the economic health of a nation.
The overwhelming reason for holding the interest rates at zero in negative territory while prices surge because of inflation is that that and QE are the only tools Bernanke’s got to keep one of the indexes up, and that’s the stock market. And when that’s gone, he knows it is political suicide -- for Congress, for the Fed, and for the financial oligarchs’ debt-based monetary system and their dream of an international socialist one-world state.
Alcoa, Proctor & Gamble, Microsoft and Caterpillar are all saying revenues were lower than expected last quarter. GE says conditions are actually worse than it expected. Goodyear’s been hurt with a drop in tire sales, Apple feels the impact of the global slowdown, but, according to NPR, “paradoxically a lot of these companies are often earning bigger profits than they expected because they ‘ve become so good at cutting costs.”
Said NPR: “Dow Chemical, for instance, says its net sales fell compared to the same time last year, but its overall profits rose. Here was Chief Financial Officer Bill Weideman talking to investors last week. ‘In total, we have already shut down 17 sites and the remainder progressing according to schedule. In addition, our workforce reduction targets are progressing ahead of schedule.’”
Compare that, then, with the information you cite by Dr. David Eifrig, editor of Retirement Millionaire: “Remember... we're in the midst of an economic recovery with historically low interest rates. In that environment, stocks (especially ones returning cash to shareholders) should command a significant premium over their historical valuations. Given that... stock valuations are on the cheap side…… sales are growing steadily again, lending more proof to the sustainability of this recovery. The profit margins for companies in the S&P 500 stock index have reached around 13.5%. That's about as high as they get. Companies are operating at peak efficiency…”
And, “Despite all the negative stories you read in the mainstream press, the U.S. economy is gradually improving... stocks are still relatively good values... and earnings are growing. That's why it still makes sense to ignore the doomsayers and stay long U.S. stocks.”
So, whom do you trust? We trust ZH to identify the numbers that come in. When the numbers come in and they are suspicious, ZH says so. And ZH has said many times that the megatrends show an economy that does not have the look of a recovery, or if it does, it isn’t going anywhere. And the debt gets deeper and deeper.
With companies reporting the kinds of earnings Eifrig suggests, it is very suspicious. They’re buying back their own stock with money they’ve borrowed at record low rates, Bernanke’s bond buying, dubbed Quantitative Easing, has reduced the supply of risk-free assets (USTs) while pushing up the price of equities, corporations are laying off people right and left by the thousands, they’re hiring cheaper and cheaper labor from the foreign market, and squirreling their profits in tax havens while leaning on the American taxpayer. What a racket. It may be a recovery for them but it sure doesn’t look like a recovery for the country.
Mike Whitney gets it: “Bernanke doesn’t even try to hide it anymore. He just dumps the money in on one end, and then watches as stocks float higher on the other.” On the other hand, Charles Hugh Smith has proven to be honest and forthcoming, with a lot of A+ savvy, and he’s not selling anything.
As Mike says, ‘It’s a ripoff system run by crooks and charlatans.” Which means the fix is in, and it's a gamble either way unless you're in on the fix.
All of this messy trading stuff just gets in the way. The Fed should just set the price of companies in the same manner as the London gold fix, or LIBOR. It would be far more efficient, and eliminate all of this messy free-market stuff.
Or is that how it's being done already? /sarc
Compare apples to apples. Subtract bond interest rates from PE ratio and add in inflation. I think you find that we're way beyond bubble territory.
George Costanza market.
http://25.media.tumblr.com/tumblr_mceua23qlI1rcaovvo1_1280.jpg
(Hey Tyler, give me the Embed tag--jokes fall flat when links are involved)
This House of Card will collapse and I hope it collapses while Daddy Bernanke is sitting in the chair. He, much more then any other person in this world, is responsible for this world-wide printing of fiat currecy, because he is THE authority of the Great Depression.
History will name this current financial collapse as The Greatest Depression assuming the world does not re-enter a Darkest Age or worse. Bozo Bernanke discusses risk management and fails to address the greatest financial risk in the system---The FED!!!
This is all interesting - and we may CRASH this afternoon - but the truth is, had you been basing your trades off of the uber bearish threads on ZH over the past 2-3 years - you would be flat broke. I agree with almost everything that is posted here - we are in a "New Normal" and this market has completely decoupled from reality - but as long as the FED has a computer with a key board - and congress is not going to stop them from interviening in markets - we are not going to crash IMO. It will only be when - and probably event driven - the FED is rendered unable to save this PIG that we will see any meaningful decline. JMO - and I am about as bearish as one can get - but don't be stupid and let your emotions and what you "Think" should happen get in the way of the reality that the markets are broken and being controlled by a VERY Select few.
The FED has been intervening since 1912, and we've had many crashes. The level of intervention is just a ratio with desperation in the denominator, making what seems like massive intervention now relatively normal. That is, they need this much intervention just to maintain normal stock prices.
That may be so - but never before has the FED beenso "Involved" directly in the markets and the manipulation of EVERYTHING! When i fist got invlved in trading in the late 80's - it was widely believed that the FEd could not actually buy stocks or S&P Futures contracts - and the mention of it was laughed at. Now, not only do they buy virtually the entire Bond offeings back from PD's - but they also have a bigger prop trading desk than virtually every other Wall Street Firm. There will be a day - and as stated earlier - probably event drive whether real or false flag that causes the market to get away from them - but until that happens - trying to fight them is financial suicide.
trying to fight them is financial suicide.
Not participating isn't financial suicide, but trying to short, yes (though, you can still short individual stocks, just not any basket)
I participate with 401k money since I know it will be taxed away or taken in some way or another. If it gets large enough I'll pull out and put it into metals, then bury them for 30 years until friendlier times. I would normally want land or property, but I don't even trust that land is safe. Maybe in ten years this comment looks like the people paranoid about y2k, but something feels way off to me, and I'm trusting instincts.
You are correct to the point you believe the Fed IS in control. Actually, Daddy Bernanke pointed to the straw that could break the camel's back. Daddy reminded us that he no longer backs the Money Markets if they break Par.
As long as the ALL people believe their Daddy, Daddy will protect you; however fear and greed are uncontrollable once triggered.
It is hardly news to anybody that it is bubbling everwhere. However what is also commonly known is 'dont fight the FED'. Knowing this you must ask yourself a question 'Do they feel lucky...?' And yes there is no way they will let the system collapse. The only exit is hyperinflation which will eventually realise.
The only exit is hyperinflation
It's likely, but I don't think it's the only exit. What I think they'll try to do is token rate hikes randomly to keep people on guard. That could go on for decades...where people believe a large spike is around the corner, then the fed eases, etc etc. Market has much more wealth than the FED, so they just need to call its bluff and have the FED react to the market instead of visa versa. It'll take more of this crying wolf by the FED for that to happen.
The odds for hyperinflation is likely to be 1:100 if we look at the history. Once the public sector approaches critical mass relative to private reverse is not possible and things will get out of hands. Reckless spending to low productivity projects with money printing is a deadly combination. Ask Mr Mugabe for further reference.
That would have nade sense before 2012 when the FED wasn't the largest player in the market with the ability to move it any way it chooses.
gold's P/E is infinity. the only difference from stocks is that it can not go negative
Gold can go negative with taxation... or to zero with confiscation. So much for the wealth preservation.
That's only if you're stupid and sell it. If you hold it until friendlier times you'll make out very well.
Also, clarification: even under confiscation, people were allowed 5 ounces and all collectibles. I think numismatics are a good hedge.
Well you might run out of wealth to support the taxation in conditions like that... and in jail not paying the taxes or 'losing' the gold. Yes that was in the US but things could be rather differently if the political system is changed. You might want to look for examples from regimes like DDR.
I agree completely, things can change, all I am saying is if they reenact past law you can still hold some gold. Most people don't have more than 5 ounces, so it might not effect many.
I personally think we're entering a phase like Europe in the 20s-40s, where you're best off burying wealth and digging it up at a later date. Any surplus (i.e. savers) that can be tracked will be taken in some form or another as the debt machine eats itself into starvation.
But this time it is DIFFERENT. The FED is printing money to drive inflation!
You mean inflation in Stocks and Bonds only. Bubblemaster Ben Bernanke knows what he is doing. It is the ultimate pump n' dump.
http://www.safehaven.com/article/29772/the-us-indices-the-reality
Since the financial crash of 2008 the western economies (US, Euro zone and Japan) have been using quantitative easing (QE). QE is not new. It was also used extensively in the 1930's. Japan has been using forms of QE for over a decade. But when one looks at the velocity of money and the money multiplier the money is not getting into the broader economy. But it is getting into the stock markets largely through the large money center banks that are the major beneficiaries of QE. Rising stock market valuations help the money center banks balance sheets. It is believed for the US at least that QE is primarily to help prop up the banking systems in the US, the Euro zone and Japan. The banking system remains saddled with huge amounts of debt that is either toxic or uncollectable.
http://uk.reuters.com/article/2013/05/09/uk-g-idUKBRE94817U20130509
G7 looks to central banks to prop up growth
(Reuters) - Many of the world's most powerful finance chiefs will meet at an English stately home later on Friday to discuss if central banks can do more to bolster a fragile global recovery.
The finance ministers and central bank governors from the Group of Seven industrialised economies look unlikely to break new ground on fixing the weak world economy, as a meeting at the International Monetary Fund took place just three weeks ago.
But Chancellor George Osborne, who chairs the talks, is keen for his peers to focus on what more central banks can do to help growth at a time when most governments are trying to cut spending and raise taxes.
"(This is) an opportunity to consider what more monetary activism can do to support the recovery, while ensuring medium-term inflation expectations remain anchored," Osborne said.
Central banks have ramped up their actions in recent weeks, helping to propel a share price rally in many countries. The European Central Bank cut interest rates and may boost small business lending. The Bank of Japan turned much more aggressive to shock its economy back to growth. And the U.S. Federal Reserve is also continuing its bond purchase programme.
While the Bank of England kept its policy on hold on Thursday, it has recently expanded a credit scheme. Moreover, Osborne has tasked the next BoE governor, Canadian central bank chief Mark Carney, with finding new ways to boost growth when he succeeds Mervyn King in July.
Britain's finance ministry said the talks over Friday and Saturday at a 17th-century country house 40 miles northwest of London were also likely to focus on bank regulation, tax avoidance and free trade.
Dow 36,000, eggs $5, milk $8, gas $8.50 and bread $4.50. Cool! hujel
http://www.xe.com/news/2013/05/10/3346029.htm
LONDON, May 10 (Reuters Breakingviews) - Global monetary policy is going wrong. Quantitative easing has become a tide that is raising all ships, but with a disappointing impact on the growth vessel that central banks had in mind when they started their experiment in massive money creation.
The market flotilla is buoyant. U.S. stocks have hit new all-time highs and yields on U.S, European and Japanese government bonds are at ultra-lows. U.S. junk bonds yield less than 5 percent - a pre-crisis return on Treasuries. Commodities have participated less in the latest bull phase, yet Brent oil is still over $100 a barrel - a level that would normally be deemed high enough to cause recession.
Some corporate profits are coming in above expectations, but the best explanation for high prices in so many markets is the relentless flow of additional liquidity. The Bank of Japan’s new monthly infusion is almost as big the U.S. Federal Reserve’s monthly $85 billion.
In theory, the new money should lead to higher asset prices, which then inspire more confidence and speed up GDP growth. In practice, only the first part is clearly working. About half of the Fed’s monthly QE dose feeds into the housing market, lifting the very sector whose bubble helped precipitate global crisis.
But growth proves reluctant. Part of the reason may be commodity inflation. The U.S. Energy Department says American households spent 4 percent of their pretax income on gasoline in 2012, the most in 30 years. Europeans will spend 500 billion euros on oil imports this year, about 200 billion euros more than average, according to the International Energy Agency.
Investors are intoxicated by the liquidity binge yet should be fearful of the hangover. Central banks’ claim that they can exit their exceptional policy safely looks doubtful. Global markets are vulnerable to a strengthening of U.S. economic growth, which would lead to a tapering of Fed policy. The more markets rise on the liquidity glut, the larger the potential future asset price falls.
The past two decades have shown that too much money can do as much damage as too little. Central banks do not appear to have learned that lesson.
On my commute this morning I had an epiphany....my problem has been that I still invest using obviously outdated methods, such as value. I admit that I actually glance at balance sheets. While such a method at one time in the past produced good results, under our new era economics, it is a disaster.
What one needs to do today is really the opposite: find a stock at a silly P/E, one with no real assets, one with a high beta, and one with a large short position. That is what you want to own today, if you want to make money...in other words look for the inverse of what used to be the criteria for selecting a stock. Or, stick to the old practices, but short the names meeting that criteria.
Robert Shiller's 10-year average P/E peaked at 44 in early 2000, and now is about HALF that level. Data is posted here:
http://www.econ.yale.edu/~shiller/data.htm
Charles Hugh Smith's 6 and 12-year average P/E ratios are flaky. Something is wrong with his data.
Stick with Shiller's data.
Let's eyeball some numbers on Smith's second chart:
2000: S&P 1500; 6-year avg. earnings 30; (1500/30) = 50 P/E
2012: S&P 1500; 6-year avg. earnings 60; (1500/60) = 25 P/E
The first chart showing the 6-year P/E as a red line is simply fucked up. It doesn't match the second chart, and the values are wrong.
Math, Charles. You missed your true calling at the IRS.
Why a 6 or 12 year average? If you go by trailing 1 year P/E, the market doesn't look all that bad. Of course profit margins are at record highs because the Federal Deficit is driving profit margins in the current environment. Those margins are likely to remain high until the Federal Deficit is cut, wages are forced up, or soaring oil prices kill the recovery.
don't you get it? the authaor wants to make a point. So, he looks for the least favorable comparaison ..."et voila".
You can say that corporation margin are at high unstainable level, that wage increase could eat them up at some point but stop publishing this garbage.