Janet Yellen Opens Mouth, Epic "Valuation" Fiasco Ensues

Tyler Durden's picture

5 Years ago, President Obama explained to the American public that "profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal" much to the chagrin of CPAs everywhere, stuck looking under every rock and cranny just what a profit and earning ratio was.

Today, none other than Janet Yellen created yet another imaginary metric to reassure the stock-buying-public that all is well as follows: "price equity ratios and other measures are not outside of historical norms." While she admits "some things may be on the high side," her credibility is entirely blown as a simple glance at the following chart shows that - as opposed to what Yellen says, none other than the ultimate establishment body JPMorgan shows that valuations in "price-earnings ratios" are higher now than at the peak of the bubble in 2007. To conclude, this is why the Fed should not enter the business of "valuing" stocks - it has NO IDEA what it is talking about.

To recap: five years ago, President Obama performed the first open-mouth operation for investors to buy stocks and made up a new valuation metric.

"what you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it"

Today, it was Yellen's turn to show her ignorance: fast forward to 1:32:44 in the clip below for the epic "Price-Equity ratio" reference.


Broadcast live streaming video on Ustream

"The Federal Reserve has been increasingly and  intensely focused on financial stability, and we understand that  maintaining interest rates at low levels for a long time can incent  reach-for-yield or asset bubbles.  So we are monitoring this very  closely, and that's in part why I reference some of these trends in my  opening testimony.

 

My general assessment at this point is that threats to financial  stability are at a moderate level and not a very high level.  Some of  the things that I would look at in assessing threats to financial  stability to see if they're broad-based, broad measures of asset  prices, of equities, real estate, of debt -- do they seem to be out of  line with historical norms?  And I think they are the answer is no.  Some things may be on the high side, and there may be some pockets  where we see valuations becoming very stretched but not generally.

 

The use of leverage is not broad-based.  It hasn't increased in credit growth.  It's not --you know, at alarming levels by any means.

 

So I don't have a view -- the Federal Reserve doesn't take a view as to what the right level of equity or asset prices should be, but we do try to monitor to see if they are rising outside of levels consistent with historic norms.  And as I indicated, in spite of the fact that equity prices, broad indices have risen substantially, price-equity ratios and other measures are not outside of historical norms.  And I don't know what the right level of prices is, but in that sense I'm not seeing alarming warning signals."

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The problem - aside from WTF is a "price-equity ratio" is that P/E ratios are actually higher now than they were at peak of the bubble...

  • Current forward S&P 500 P/E: 15.6x
  • Forward S&P 500 P/E on October 9, 2007: 15.2x

Needless to say, this assumes the current consensus for Non-GAAP earnings growth is accurate, which as we explained previously is driven almost entirely by "one-time charge" addbacks: addbacks which traditionally peak just before recessions strikes. That, and collapsing share counts due to endless buybacks of course, all of which is driven by cheap credit.

But all of the above is "noise" to quote Janet Yellen. One quick look at the chart below and it becomes immediately clear that the 190% surge in the S&P since the 2009 lows has been entirely on the $10 trillion (excluding China's $25 trillion in new financial debt) in central bank created liquidity.

And some additional equity valuation metrics now vs "then"

 

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Yet day after day, investors listen to The Fed, mesmerized by every word that comes out of their mouths, when in fact yet again it is all bullshit fluff and clueless textbook misunderstanding of the irrationality of markets rationally charged higher by the Fed's ignorance now laid out for all to see.