"There Will Be No Place To Hide" - Markets Are Over 50% More "Exuberant" Than In 1996

Tyler Durden's picture

"It is really going to end badly," is the ominous warning that Damien Cleusix has issued to his clients as he believes we are now reaching the top of the secular bull market. Crucially, he sees US stock markets as "grossly over-valued" but that it is hidden from most people's perceptions because (just as in 2000 and 2007) there are marginal sectors that make the 'aggregate' seem reasonable (not to mention the dreams of forward earnings.) His novel approach of a point-in-time Price-to-Sales comp shows the median valuation its highest in 23 years.. and Alan Greenspan's infamous "exuberance" valuations in 1996 were 40% below current levels of elation. Today, the big difference with 2000 and 2007 is that government and central banks have already spend a lot of firing power to "make believe" that everything is fine again. He concludes, "there will be no place to hide when the tide turns."


Via Damien Cleusix,

It is really going to end badly...

What if we are indeed only now reaching the top of the secular bull market... What if

It is no secret that we view the US stock markets as grossly over-valued. In recent meetings, as in the Spring of 2007, we have insisted that not only are markets more overvalued than what they seem, the overvaluation is also general. Ed Easterling wrote a provocative article not long ago on the subject. Those who have read his two books, "Unexpected Returns" and "Probable Outcome" know the quality of his research.

  • In 2000 while TMT companies were reaching absurd valuation, small caps and quality value stocks where cheap. Remember that Berkshire Hathaway made its low the same day as the Nasdaq made its top or the same month as Julian Robertson, one of the best value stock picker of history, liquidated his fund.
  • In 2007, the overvaluation was general but here again you had a sector distorting the various valuation ratios - financial companies. In the bear market that ensued, nobody who was long, even the best conservative value stock pickers, made money if they were long-only. There was carnage.

Today our contention is that markets are more overvalued than in 2007.

There will be no place to hide when the tide turns. No place. The best value managers will lose a lot of money, factors which have historically worked well will suffer a lot too (small caps will be crushed and could lose more than 60% from current levels, high dividend paying and shareholder yield stocks too as they are expensive relative to an expensive markets, quality stocks will outperform but not by much and given the concentration of hedge fund investors in some of them, they will be liquidated without mercy when blood will run in the street).

Margin factors are also the highest against the markets they have been since we have data in the early 90's (and we doubt they were more expensive on a relative basis before).

In the graph below you can see 3 different valuation ratios where we try to remove the margin and sector overvaluation effect.


Data is based on Point in Time S&P 500 constituents since 1990. The red line is the median Price-to-Sale (P/S) ratio. The light blue line is the average of each components PS (an equal weighted P/S if you want) where the overvaluation of 2000 still stands out because of the SUN Micro of the time. The dark blue line is the average of the and and third quartile PS (we used Bloomberg for the components and the P/S data).

Remember Alan Greenspan's irrational exuberance? It was in December 1996 and at the time it was indicating that the market were extremely expensive compared to history. Well in December 1996 the 3 ratios where 40% below current levels.

Today, the big difference with 2000 and 2007 is that government and central banks have already spent a lot of firing power to "make believe" that everything is fine again.

The current environment is structurally deflationary and real trend growth is much lower than what the Fed and most analysts are believing. For many, many years we have talked about this (demography, overindebtness, oversupply,...).  It means that inflation rate will be lower and unemployment higher than what the Fed is predicting. It also means that this is structural and not cyclical. It also means that the Fed, as long as it does not realize this, is going to continue what it has been doing for a very very long-term.

We have long said that investors bias causes them to sometimes struggle to see the world as it is and instead prefer to see it as it should be. Investors are too naive. Current policies are not what they should be (productive investment, deleveraging to move away from this culture of speculation and easy money) and we need a trigger to make this change. Could it be a more hawkish Fed with new governors nominated next year and/or realizing that they have created a fantastic bubble in the equity and corporate bond markets (both linked as most of the borrowing is done to buyback shares or other companies and hence the productive capital base is not increased further lowering long-term growth potential ceteris paribus).

With regard to the short-term markets movement we can only repeat what we said recently:

"Market short-term volatility (intra-day) has increased markedly in the past few weeks. Important tops (cyclical) are made when valuations are extended (check), important divergences are forming (check), market uniformity decreasing substantially (check), exuberant optimism (check and congrat to R. Shiller...), markets overbought (check but could be more extreme on the daily time frame) and, finally, increased short-term volatility (check). You can use some pattern (serie of small range days) if you really want to be cute.


The only ingredient missing here is a sell signal from our cyclical models which have stayed stubbornly positive since 2009 with the exception of a  short-lived sell signal during the  2011 route. By definition, those cyclical signals will miss the first part of the decline which make a 10-12% drawdown at the beginning of an cyclical bear market a rule rather than the exception. The above checks are all warnings that cyclical signals could turn down during the next correction (or at least in the near-term)."

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Cult_of_Reason's picture

What is there to stop S&P 500 from having P/E above 100?

King_of_simpletons's picture

But no one is seeing it come or "But no one saw it coming". It will end badly after Obama's 2nd term ends. The next el presidente is screwed.

Cult_of_Reason's picture

Even Netflix CEO suggested today that NFLX is a bubble (momentum-investor-fueled euphoric bubble); yet the stock continues moving higher, up almost 20% just today.

fonzannoon's picture

Zirp has created a tsunami of  digital money looking for a home.

lotsoffun's picture

and as faber pointed out in other article, and i've pointed out to friends for 2 years - there's you massive inflation.  in stocks.  because the money didn't trickle down to consumers, and it won't unless people sell their stocks and spend the money, and they won't do that (except for a few like lloyd and jamie) until it is too late.


Bunga Bunga's picture

For every seller there is a buyer, money just changes hands, some get richer, some poorer, that's it.

Fredo Corleone's picture

"The market is grossly overvalued, and it is really going to end badly - it's true. My surprises, they are rarely unexpected."

- Damien Clouseau, CFA


Nothing but the truth.'s picture

The Zombies march on relentlessly , upward to outer space and beyond.

Dr. Engali's picture

Sellers will be punished without mercy.

The Bernank

fonzannoon's picture

Alpo for Granny will be leasing a Tesla before the bubble pops.

Hughing's picture

the tide will never be turned. It really is a choice to these lunatics.

King_of_simpletons's picture

In 2024 we will look back and see that we are Japan and that nothing ever changed. Our debt will be 54 Trillion. Congress will still be fighting over the debt ceiling. Republicans cave at the end. Life goes on. The top 1% is  top .001% then.

Truther's picture

Yellen.... " I didn't see it coming till it happened!!!!".

I am a bitch, so what?

Haus-Targaryen's picture

Does anyone think this can go on another 5 years or so? 

Dr. Engali's picture

This can go on as long as TPTB want it to go on. Until then I just grab up as much free digital market currency as I can, and take the proceeds to keep stacking and prepping.

wisehiney's picture


Hide out with Hi Yo SILVER and Johnny CASH!

TLT  for fund raising.

hairball48's picture

"This can go on as long as TPTB want it to go on."

I respectfully disagree. If real GDP(however you want to measure it--real incomes?) continues to decline, as I believe it has for years...there will come a point where there will be revolt of some sort. TPTB will lose control. Fascism will be a real danger.

I haven't a clue what form the revolt will take, but I'm certain it will be ugly--and violent.

Meanwhile I continue  to keep on stacking and prepping--just as you are :)

Dr. Engali's picture

We are talking two separate things here. I'm referring for the markets. As far as a revolt, there will never be one. The masters of division and distraction have a plan for that. They are pitting us against us, and it's playing out right now.

hairball48's picture

I fear you may be right about revolting. That's what my reference to fascism was about. Fascism is TPTB's "plan" for anyone thinking about revolt. 

Col_Sanders's picture

In some ways, that could be worse than a plain old run-of the-mill revolution...

andrewp111's picture

It can go on as long as no surprises upset the apple cart. Surprises like $300 oil for instance. I would watch oil as the most likely skunk at the QE party.

Popo's picture

Economists knew the USSR was fucked in the late 50's / early 60's.

But many of those who were waiting for a collapse got old and grey before they got what they wanted.

fonzannoon's picture

I can easily see the dow at 30k and the 10yr at .65% in 5 years. Instead of twerking video's we will watch people light themselves on fire or jump off a bridge. Most of the people on here will be in a room with rubber walls by then.

Dr. Engali's picture

Only the people who can't cast aside logic and accept the fact that TPTB have things firmly under control for now will be driven mad. Others will enjoy life and use the time wisely to prepare for something that may never happen in their lifetime.

lewy14's picture

I lived through the slow grind into abject (but non-apocalyptic) crappiness from 1969 through to the early 80s. Feeling similar. No end of the world, but by 2020 things will be pretty crappy.

Hedgetard55's picture

Gas at $100/gallon, steak at $500/lb, coffee at $100/lb, Teslas at $750K, gold at $900/oz.   :~)

ParkAveFlasher's picture

I'll be wandering onto Yahoo threads like Dennis Hopper wandered onto the basketball court in Hoosiers, screaming "gold bitchez!"

insanelysane's picture

I think it can go on for a loong time as well.  There are actually very few players in the market and all of the players need this bitch to stay afloat.

Landrew's picture

I am not a gold investor, but, what you just wrote is beyond idiotic! If any one to the commodities you mentioned achieved anywhere near the prices you quote, gold would be 10k an ounce sold by the gram if you could find it for sale at all. How very  bizarre, unless of course you are just trying to get a rise out of gold investors. 

PhilB's picture

Seems like he did....gosh you buggers are sensitive!

Hulk's picture

LOL !!! This shit has 3 days left...

Running On Bingo Fuel's picture

Were back at the baseline. Now is the time for real growth.

random shots's picture

Being right and making money seems to mutually exclusive these days.  Sit out and be left behind or stay in and wait for the decline.?

Landrew's picture

What you state is the trap that is set. Trading for many years, I learned that when I started feeling I was being forced to trade rather than  discouraged  from trading was the trap set by Sachs, etc. They are distributing their profits as I write. Anyone feeling like they have to buy or be left behind will be the sucker at the end of that trade when Sachs buys it back for a dime. That's how it's worked since my first trade in 1976. Relax, there will be an opportunity of a lifetime shortly. It's not the return on investment, it's the return of investment.

MilwaukeeMark's picture

@random shots.
Or take your beyond reasonable faux profits, prep and forget about losing anything to a continuing faux upside. Those extra few faux dollars wil not feed nor shelter you if you call it wrong. And I think calling the next one is life or death this time, not a simple "self ass kicking" around the card table with golfing buddies.

ArmyofOne's picture

The Fed and government will never let the market crash again period.  It will close it first.  Confidence must be maintained at all cost. The are to many cards in the pyramid stacked to high. 

SunRise's picture

We already know the Fed is not omniscient - an essential component of omnipotence; therefore, the Fed is doomed to fail.  Nothing less than omnipotence could stop this ebb tide from going out.

Landrew's picture

Wow, that sounds so clueless of how markets work. You do know there is profit in the downside of any market right? The smart money is already in the downside of this bubble. Go long, and sell it back for a dime on the dollar. Read Jesse Livermore's little book on investing before stating something so counterproductive to many here. Jesse made money in 29, why because everyone was already a holder and buyer. He was the seller. Betting with the heard gets you slaughtered. Buying the opposite trade may not make you rich in one trade, but a very nice living is not so bad? Be patient walk down and FUCK them ALL!

Kirk2NCC1701's picture

99% of Sheeple will have no place to hide.  But the Top 1% in Damien's 666 Club will hide well.  Why?  Because...

The 1% get their investment portfolios filled by their company, as part of their "Compensation Package".  Its' "free money"* for the execs and some middle-management types.  When the markets tank, they won't feel the pain like the rest will, because they will still own sizable shares of top companies - companies that will pay them a nice revenue stream, called "Dividends".  Which are taxed at "Mitt Romney rates" (Investment Income), not "Joe Sixpack rates" (Earned Income).

* If it isn't a "Store of Value" and not depreciate over a long period of time (like Gold & Silver), it's not "Money".  It's "Currency", dammit! 

"Only gold is Money.  All else is Debt" - JP Morgan

BullyBearish's picture

When stocks get crazy...the crazy get stocks!

CharliePrince's picture

itll go farther  and higher  than anyone expects

Julian's picture

21600 by this time next year after QE increases to $100B + from Dec

Landrew's picture

What the fuck is wrong with you? So your claim is a market that is 10x what the bond market is and a bond market 10x what the stock markets are has nothing to say about printing money? I have a clue for you, print a 100billion a month and oil will be 300 a barrel and equities will be 100 on the S.P. The dollar would die in a TRILLION dollar a day FX market, be flushed by the bond market. 

zhandax's picture

Landrew, they don't 'print' $85B a month.  They credit the PD accounts who take their bonds $85B a month.  And the PDs (or ESF, or BIS, it's all one big circle-jerk) can do the exact same thing with oil futures as they do with gold futures with those kind of electrons.  China can afford to buy all Iran's oil for gold, cause they know they get it all back in trade, and everyone else will take 'petrobuck' electrons.  Real assets are what brings the truly profligate to account, and as long as there is sufficient debt-based 'liquidity' to paper it over, there will be an abundance of paper 'equivalents' to hide the crime.  You are waiting for the 10-sigma credit event which will trigger a cascade of margin calls, and, having been chastened, I can tell you that trying to guess that the day before it happens is a fools errand.

Landrew's picture

Buying creates price increase! Buying bonds from second tier U.S. Treasury is printing money. You can flavor it any way you like the world will not allow excess printed money for less value. You dream of a world that loves dollars. I am in Chile now where they just cemented a deal for DIRECT currency swap not millions TENS of BILLION with CHINA! Argentina, Brazil, Peru are all on the direct swap. You are a fucking idiot if you think I am waiting for 10 sigma when a 3 sigma event fucks the Treasury along with bonds, equities! Proof, a 2 sigma event inverted the yield curve 1 month to 1yr.! Go ahead print see what happens as U.S.T. is sold to the toilet!

SunRise's picture

until everyone expects it, then the fuel gauge will read Empty and she'll come tumbling down faster than a man jumping off a space balloon.

Wahooo's picture

Yep, another f'n short. BTFD.

CheapBastard's picture

"Stock prices never go down."


Another Mantra for the Hoodwinked investor.