Deutsche Bank Calculates How Much Of The S&P's Value Is Due To Central Banks

Tyler Durden's picture

It is no secret that earnings have gone nowhere over the past two years (and are set to decline for 6 consecutive quarters), while on a GAAP basis earnings as of 2015 were the lowest since 2010...



... which means that earnings growth has not been a factor behind the stock market's recent ascent to all time highs. As a result, the conventional explanation to justify the S&P trading just shy of 2,200 is that the market has been the beneficiary of unprecedented multiple expansion. To be sure, as Goldman recently opined, the median stock multiple has never been more overvalue.

Indeed, if one left it at that, the answer would not be exactly wrong, however there is one more factor which is rarely discussed, and which - according to Deutsche Bank - explains virtually the entire equity rally of the past four years: the collapse of the equity risk premium as a result of plunging bond yields, which as a reminder, is the direct pathway by which central banks operate, by monetizing government, and now corporate, debt.

As Deutsche Bank's Dominic Konstam writes over the weekend, "various Fed officials have raised the issue of financial stability in the context of the reach for yield and riskier products to make up for low rates. This is part of financial repression. The logic might be that once the Fed has normalized, elements of that reach for yield and risk would be unwound and this could lead to disruptive financial market volatility."

Put in the simplest possible word, this means the Fed is worried that once rates go up as a result of renormalization and the lack of a central bank to frontrun, stocks will crash. As it turns out the Fed has ample reason to be worried. As Konstam explains, here's the reason why:

We can illustrate this aspect of financial repression in terms of the equity market. In the post crisis world, all assets seem closely correlated to breakevens and real rates but with varying betas. We note that the equity market recently looks very expensive even to these rates through the shift in the beta on inflation expectations – so despite low inflation expectations, equities have done even better than otherwise warranted by low real rates. This shows up as a fall in the equity risk premium and defines well the hunt for yield in a repressive financial regime.

How does the decompsition of performance look visually: we can illustrate the extent to which this is unprecedented with the historical performance of the equity market. Decomposing equity returns into earnings growth, changes in P/E and changes in the risk premium shows that the bulk of equity performance is best captured by the shunt lower in equity risk premium.

In turn, this means that every push higher in yield, whether orchestrated by central banks, or due to exogenous events like a "taper tantrum" risks upsetting this precariously compressed ERP "spring", leading to a violent market crash. Because if the ERP is responsible for 92% of the S&P500 move since 2012, or just over 800 points, that would suggest that central bank policies are directly responsible for approximately 40% of the "value" in the market, and any moves to undo this support could result in crash that wipes out said ERP contribution, leaving the S&P500 somewhere in the vicinity of 1,400.

In retrospect, it becomes obvious why the Federal Reserve is petrified about even the smallest, 25bps rate hike.

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Bush Baby's picture


Looney's picture


S&P at 1,400 would still be overvalued by about 800 points. I think?   ;-)


Pure Evil's picture

I thought at the last Janet Stanky Hole FOMC meeting they were planning on raising rates while conjuring up 4 trillion to keep this magic carpet levitated.

Ya know, throw the proles a few measly basis points to keep the common trash from building guillotines while handing out champagne, caviar, hookers and blow to their friends in the Wall Street Casino.

Or, did I somehow misread the chicken entrails?

GernB's picture

The question is: without central banks setting interest rates what would bond rates be. If they were significantly higher then investors would prefer them for thier safety. However as central banks supress interest rates successively more marginal companies become attractive investments. It seems likely to me if central banks didn't exist and free markets decided the cost of money, 1400 might be too high.

mikla's picture

Central banks are nationalizing (seizing) all companies, worldwide.

It doesn't matter what the dollar is worth.  They will own everything.

And, the people will cheer.

SoilMyselfRotten's picture

Ive been thinking of exactly that lately. If the CBs are actually private, they are stealing the stock market, which will have them being majority shareholders as are the Japanese in their stock market. and all being purchased with ficticious money, created out of thin air. Great gig if you can get it.

curbyourrisk's picture

My Fair Value sits at 975 currently.



PlayMoney's picture

Historical GAAP is just under 15x.....applied to todays market puts it around.....1400. Imagine that. Kind of hard to find a fair value when the Pavlov bots just lather waiting on the VIX bell to ring.

ChooChoo's picture

Funnily as it is coming from DB is still some sort of political propaganda towards the Americans, i mean... it's fairly obvious that they're right but the reasons behind this is not so simple anymore! /grabs popcorn

SpanishGoop's picture

If the people from the DB could calculate they wouldn.t be in the shithole they are in now.


jewish_master's picture

whats shithole? the one with half a million bonouses?

neptune-klm's picture

Anyone think that maybe TPTB will let Trump win so they can crash the market and then blame it on him??? 

Heterodox economics's picture

This is my take:  From here to election day, the market will be basically flat.

If Clinton wins, The Powers That Be will let the market slide gradually.  

If Trumo wins, The Powers That Be will crash the market.

There are two recent examples of The Powers That Be pushing markets down in response to something they dont like.  One example is Brexit.  World markets went south.  There was really no fundamental reason why markets went down. During that time, I bought stock (Charles Schwab), and am already up 20 percent.

The second example is during the financial/economic crisis of 2008.  The first bail-out bill failed in Congress, and in response the markets had a hissy fit.  A bailout bill passed Congress about three weeks later.

VWAndy's picture

 They lie every time. So how far off are they and guess what dirrection they are off in. Scary shit.

Rainman's picture

Here's a quiz : the 6 major CBs have a record total $17T on their balance sheets. How much of that amount has a value of zero +/-   ??

Citizen_x's picture

Allegedly 17 Trill....

Being honest isn't their

And Yes. How much TARP
and whatever else they've
said over the last 7 +

ejmoosa's picture

I can do a siimilar analysis of the Dow 30 with my fundamental stock analysis software.  It shows me the Dow is overvalued by 37%.


Not hard to believe at all.  I am probably light on that estimate as I look at the overinflated ranges of the last five years for my metrics.  Were I to go back ten or 15 years, 



zuuma's picture

Sounds reasonable.  I'd jump back into stocks if the DOW was around 10,000 (or whatevever number of $$$$ 7 - 7.5 oz AU is pegged at)

Might even hit 8-9000 on the initial post-panic bottoming out. 

LowerSlowerDelaware_LSD's picture
LowerSlowerDelaware_LSD (not verified) ejmoosa Aug 30, 2016 3:54 PM

So it will correct by 50 to 60 percent then come back up to nominal?  Or is the Fed bubble non-popable?

mo mule's picture

well this should get out hand fairly quickly.  Nukes in my backyard via hypersonic missles from the bear is not something I'm happy about but I think it must be what obama wants.  we have encircled them and moved our nukes from Turkey to Romania. That should be enough to really piss someone off. Trump is right Russia should be our friend, but it seems he may be to late.  Pray....

Wow72's picture
Article Title: "Deutsche Bank Calculates"

Does anyone really trust DOUCHE BANK to "Calculate" anything?  Failing banks making calculations...kind of a contradiction in terms?  Wow. 

ANestIOS's picture

quick, lets buy something, anything

khakuda's picture

No surprises here.  Look at a long term log scaled chart of the S&P and you will see trend is at least 500 or 600 S&P points lower than present levels.  The issue continues to be that CBs are insistent on pushing up financial market prices at any cost, even if the cost is ultimately devastating to the real economy.

Reichstag Fire Dept.'s picture

Don't you find it odd that this sort of truth is coming from Deutche Bank? It serves them absolutly no useful purpose to diseminate this information.

Are the powers that be setting DB up to take some kind of fall? Have the top dogs at DB figured out that they are the next to be sacrificed?

My bet is...yes.

ANestIOS's picture

the top dogs @DB have already taken the fall - these are the new lot trying to establish a lower baseline against their future bonuses

northern vigor's picture

Deutche Bank  said if they were going down they would take everyone with them.....Hey, the Germans did invent the word "schadenfreude".


peddling-fiction's picture

Germany and France are increasing the dissonant volume, by dissing the TTIP and taxing Apple and Amazon.

undercover brother's picture

Wow, that was unexpected.  I call DB's 40% CB related overvaluation assessment and raise it another 10%...

nakki's picture

So is Duetsche short US stocks and tell the CB'S that their derivatives are going to blow or are they long and trying to sucker in some shorts.

Hey Deutsche the CB'S are already devising their next 5 trillion dollar QE. Not saying the S&P isn't grossly over valued, just saying the CB'S have unlimited credit, and another 5 trillion is just a keystroke away.

BSHJ's picture

Let's see....if we sell off like we did today (every day), it will take about 700 days or two years to hit that target....omg, what a tragedy!

Bear's picture

Total Collapse today!!!!  ... ES down 3.75 pts

ChemtrailPilot's picture

In a sane world a "strong, healthy" market would be one that represents an accurate picture of investors' views, and a "weak, unhealthy" one would be one that is manipulated, opaque, or in an unsustainable valuation extreme. In a sane world.

In.Sip.ient's picture

S&P ~1400 ???


Let's get serious, markets don't dump 40% during a

"great" recession... they dump by 90%.  Once the CBs go,

so does everyone else.


Try S&P ~210